Breakingviews

Vivendi may be out of pocket on EMI by salving EU

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Things are going from bad to worse at Vivendi. The embattled French company’s Universal Music arm on Friday offered to sell over a quarter of EMI Music’s business to appease European trustbusters scrutinizing the $1.9 billion transaction. That could wind up more expensive than if the EU just blocked the acquisition outright.

Vivendi struck its unexpected deal for EMI last November under since-ousted Chief Executive Jean-Bernard Levy. It was so iffy competitively that Citigroup, which had seized overleveraged EMI from buyout firm Terra Firma, forced Universal to absorb the regulatory risk. Vivendi must fork over 90 percent of the price tag in early September, regardless of whether it has approval.

After months of haggling, Universal, already the world’s largest music company, proposed offloading EMI’s famed Parlophone label, whose artists and catalog include Coldplay, Lily Allen and Pink Floyd – though it wants to keep the Beatles. Classical music and operations in France and elsewhere also would go.

All told, Universal is willing to sacrifice some 360 million euros ($440 million) of recording, merchandising and other revenue. That’s 28 percent of EMI’s 1 billion pounds ($1.6 billion) of sales in the year to March 31, 2011. EMI’s EBITDA over the same period was about $260 million and Universal anticipated $160 million of annual cost savings. Assuming profit and synergies are proportional to revenue, the businesses Universal would retain are worth about $530 million less than the deal price.

Universal is paying about seven times EBITDA for EMI, or 4.5 times adjusted for synergies. If it could dispose of the requisite EMI pieces for 4.5 times EBITDA, it would recoup about $330 million. Net, Universal would be about $200 million out of pocket.

The downside for Universal, however, could easily be much larger. This is just the first pass with the EU and U.S. regulators haven’t weighed in yet. The envisioned cost cuts also are apt to be disproportionately in the operations Universal will have to sell. Should it end up shedding 40 percent of the EMI business and losing 60 percent of the synergies it hoped for, the hit would be well over $400 million.

China’s insider culture stains CNOOC foreign bid

By Wei Gu

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Chinese companies call for fairer treatment from foreigners. China’s critics say that these companies still don’t play by the accepted global rules of capital markets. The accusation of insider trading around the $15 billion bid by Chinese oil major CNOOC for the Canadian producer Nexen supports the critics.

The U.S. Securities and Exchange Commission filed a complaint on Friday against a Hong Kong vehicle controlled by Zhang Zhirong, China’s 26th richest man as ranked by the country’s New Fortune Magazine. The American regulator said that a purchase of 14.3 million Nexen shares only four days before the CNOOC bid provided an unrealized gain of $7.2 million. Zhang’s ship-building empire has a longstanding strategic cooperation agreement with CNOOC. In response to the accusation, share prices of the shipbuilder, and a property company also controlled by him, fell by double digit percentages in Hong Kong.

When capital markets are relatively unsophisticated, high-level insider trading hardly seems scandalous to those involved. French politicians and businessmen were genuinely surprised at the furore raised by their 1988 gains from buying cheap shares of a target of aluminium producer Pechiney. There was not even much indignation in Italy in 1995, when an executive at Italian glasses-maker Luxottica bought shares in an acquisition target.

Standards for propriety are higher now in Europe and in some Asian countries. In Japan, Nomura’s weak response to insider trading at the firm just cost the chief executive his job. But Chinese authorities will find it harder to reach such a high level of indignation.

In China, insider trading is just one manifestation of a widely accepted insider culture. The powerful, and their families, often use positions and connections for personal gain. The Chinese securities regulator is trying to crack down on insider trading, but a few prosecutions aren’t likely to change the culture.

Asian conglomerate owners owe Heineken a toast

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Fraser and Neave’s shareholders may wind up raising a glass to Heineken. The Dutch brewer’s $6 billion bid for their Tiger beer venture, Asia Pacific Breweries, should catalyze the independent directors of the Singapore drinks and property group to consider a full-blown breakup. Even after F&N’s recent stock run-up, its pieces are worth some 20 pct more than the whole.

Thai beer mogul Charoen Sirivadhanabhakdi got the party started with his $3 billion purchase of Singapore bank OCBC’s stakes in F&N and APB. That gives Charoen a roughly 17 percent interest in APB, but little chance of wresting control from Heineken. By shaking up F&N’s ownership, though, Charoen kicked Heineken into launching its bid to buy F&N’s 40 percent of the venture. The punch bowl now passes to F&N’s board, which has turned to Goldman Sachs for advice. Judging by Goldman’s work for Kraft, McGraw-Hill and other firms that have recently broken themselves up, it’s easy to see where this is going.

The numbers make a compelling case for F&N splitting and selling non-core assets. Heineken’s bid values F&N’s share of the beer business at $4.1 billion. F&N’s stake in its Malaysia-listed food and drinks unit is worth another $1.2 billion. A handful of other interests in private food and beverages firms in the region are worth about $1.3 billion if valued on the same multiple of earnings as the public company. All told that’s around $6.7 billion for F&N’s consumer businesses.

On top of that, the group has substantial property holdings in Southeast Asia. At a roughly 15 percent discount to stated book value, these are worth another $6.1 billion. All told, that gives an enterprise value of some $13 billion. Subtract net debt of around $2 billion and the company’s total assets should be worth around $11 billion, or S$13.5 billion – equivalent to around S$9.50 a share.

That’s almost 20 percent higher than the current share price – and some 50 percent above where the stock traded before Charoen fizzed things up. And that’s before the company has even tried to negotiate a higher offer from Heineken. Presented with a chance to split the company into its components parts, shareholders would be crazy not to respond with a resounding “bottom’s up.”

Obama’s not the trustbuster he thought he would be

By Reynolds Holding The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Barack Obama isn’t the trustbuster he thought he would be. The U.S. president roared into office promising an antitrust crackdown. But a new study concludes he’s no bolder than his allegedly wimpy predecessor.

In 2007, then-Senator Obama ripped George W. Bush’s antitrust record as the “weakest” of any president’s “in the last half century.” The Obama administration quickly repealed Bush guidelines limiting monopoly cases. It then gunned down AT&T and T-Mobile USA’s merger, H&R Block’s acquisition of TaxAct’s owner and the joint bid by Nasdaq OMX and IntercontinentalExchange for NYSE Euronext. The new sheriff had arrived.

Yet he turned out to be a lot like the old sheriff. A study published last week by Stanford Law School found that, despite several high-profile scalps, the current Justice Department challenged mergers, monopolies and restraints of trade in its first two years about as often as the one under Bush did in its final two years. And in price-fixing cases, the DoJ under Obama collected fewer fines, obtained shorter jail sentences and initiated far fewer grand jury investigations. An earlier study of the U.S. Federal Trade Commission’s antitrust efforts reached similar conclusions.

Of course, deal volume declined by about a fifth from 2009 to 2011 thanks to the financial crisis. Investigations per merger actually increased in that period over the last two years of the Bush administration. The current DoJ also has extracted significant concessions before allowing transactions like Ticketmaster’s merger with Live Nation to proceed. And the harsh rhetoric alone may have dissuaded companies from even proposing iffy deals.

In any event, the statistics are less an indication of Obama’s failures than of how little ideology sways antitrust enforcement. While presidents come and go, the law, the courts and career federal attorneys change slowly. Behavior that’s legal under one administration doesn’t suddenly become illegal under another, no matter how aggressive the new regime.

This Justice Department may, of course, still make its mark, perhaps with a long-rumored antitrust action against Google. That could put more bite behind Obama’s bark. But any decision to sue would almost certainly be based on the law rather than mere politics.

China Inc not letting politics get in way of M&A

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China Inc isn’t letting politics get in the way of M&A. The upcoming conclave of China’s Communist Party, a once-a-decade changing of the guard, was supposed to hold back the global ambitions of state enterprises, at least temporarily. But CNOOC’s $15.1 billion bid for Canada’s Nexen suggests that’s not happening.

The 18th party congress is expected to convene in the fall to select new leadership. Seven of the nine seats on the all-powerful standing committee of the politburo are up for grabs. The two continuing members, Xi Jinping and Li Keqiang, are widely presumed to replace Hu Jintao and Wen Jiabao as China’s president and premier, respectively. Xi is also likely to become general secretary of the Communist Party.   The next-most powerful body, the politburo, will see many of its two dozen members rotate. Ditto the central committee, which includes over 300 full and alternate members. All these changes will mean new people manning the red phones that connect party leaders to the heads of China’s most important ministries, regulatory agencies and state-owned enterprises.

Bankers and investors have, as a result, been bracing for a slowdown in Chinese deal-making. The logic is that an ambitious executive would be foolhardy to propose a risky transaction that might soon be frowned upon by new masters somewhere up the chain of the country’s inscrutable power structure.

CNOOC’s agreement to buy Calgary-based Nexen goes against that rationale. While smaller than the company’s eventually withdrawn bid for U.S. oil group Unocal a few years ago, it will be the largest ever full-blown foreign takeover by a Chinese company if it’s approved. Perhaps learning from the controversy over its Unocal effort, CNOOC is making big efforts to pitch the benefits of the deal to Canadian authorities, too.

In the run-up to a possibly tumultuous transition of power, such a big deal is a bold move. It brings China’s outbound announced M&A volume to $38 billion so far this year, 72 percent more than last year, according to Thomson Reuters. Though other sectors feature in much smaller deals, the bulk of that is in energy. China’s oil and gas champions are on the hunt for resources everywhere. Maybe, at least as seen from Beijing, even in a political season there’s no such thing as a bad energy deal.

CNOOC pulls out stops to make Nexen bid palatable

By Kevin Allison The author is a Reuters Breakingviews columnist. The opinions expressed are his own.CNOOC must be hoping it has struck a deal Ottawa can’t argue with. Seven years after U.S. protectionists effectively scuppered its $18 billion bid for Unocal, the Chinese offshore oil giant has agreed to pay $15.1 billion for Nexen, a Canadian producer. The all-cash deal is at an eye-watering 61 percent premium. Perhaps just as importantly, the purchase includes an array of sweeteners that could smooth the political path.

The hefty price tag – with few obvious synergies – along with a promise to establish a major base in Calgary and list its stock in Toronto may, for CNOOC, amount to an acceptable price to move up a few notches in the global big leagues. Nexen’s 207,000 barrels per day of 2011 production were more than double Hong Kong-listed CNOOC’s non-Chinese output in the same period. The acquisition would bring a big presence in Canadian oil sands and access to attractive projects in the U.S. Gulf of Mexico, the UK North Sea and Nigeria.

Despite Nexen’s agreement to the deal, though, it will come to nothing if politicians can’t be brought onside. So far the two companies say they’ve only held initial conversations. Lawmakers have the power to block any deal if a foreign acquirer can’t make a strong case that Canada will be better off as a result of the sale of a Canadian company.

Canada’s willingness to block big deals isn’t in doubt after the thwarting of BHP Billiton’s $39 billion bid for Potash Corp in 2010. But Nexen is only a middling producer – the eighth biggest Canadian oil company by global output, and only the 24th biggest producer of Canadian barrels, according to Macquarie. It’s also a flawed one, as shown by recent management turnover. Its strategic significance looks more on a par with wheat trader Viterra, whose $7 billion sale in March to a group led by Swiss commodity trader Glencore went through without much fuss.

With existing investments worth about $2.8 billion since 2005, CNOOC is known in Canada already. All the same, it is trying to pre-empt questions with a “benefits to Canada” section in the deal press release. The 50 percent bounce in Nexen’s New York-listed shares by about midday on Monday suggests investors mostly think even protectionists in Canada will be hard-pressed to knock the latest CNOOC effort back.

Can Citic avoid the investment bank buyer’s curse?

By Rob Cox and Wei Gu

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Can Citic avoid the investment bank buyers’ curse? The Chinese securities firm is paying $1.3 billion for Credit Agricole’s CLSA broker business. Avoiding another Dresdner/Wasserstein, Nomura/Lehman or Credit Suisse/DLJ would be hard for any bank – much less one controlled by the Beijing government. Arm’s length management alone is unlikely to make this deal different.

As it is, the transaction is something of a Plan C for Citic’s global ambitions. The firm led by Wang Dongming nearly grabbed a chunk of Bear Stearns before the global financial crisis. Then it started talking to CLSA about a complex cross-investment arrangement. After two years of negotiations, it has reached this agreement, which should give it control.

It may rue the day. That has been the experience of other, more experienced, global banks that have picked up rival firms they’d hoped would give them entrée to the Wall Street club. Nomura, for instance, in 2008 acquired the assets of Lehman Brothers in Europe and Asia. It failed to rank among the top ten equity issuers in Asia so far this year. At least Nomura didn’t pay much.

Dresdner Bank spent $1.4 billion – not much less than CLSA’s costing – on Wasserstein Perella, a boutique mergers advisor. The rainmaker whose name adorned the firm’s door left within a year to run Lazard. Credit Suisse paid a whopping $14.7 billion for Donaldson Lufkin & Jenrette in 2000 only to watch its more enterprising bankers head for the exits.

It’s hard to see how it will be different this time. Citic is controlled by a Chinese state enterprise. CLSA is a highly independent, research-based broker founded by a couple of expat Asia hands. Even with retention packages – and Nomura, Credit Suisse and Dresdner offered these in quantity – motivating CLSA employees is going to be extremely difficult.

Citi, M. Stanley reveal randomness of M&A advice

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own. It’s hard to imagine a worse advert for the worth of M&A valuation advice than Citigroup and Morgan Stanley’s battle to put a price on their wealth management joint venture. The two Wall Street firms are in negotiations for Morgan Stanley to boost its controlling stake by 14 percent to 65 percent. But their valuations for the business are a whopping $13.5 billion apart. 

The difference is some three-fifths of the $22 billion-plus Citi reckons the entire unit is worth. There are reasons for the gap, of course – and not just that buyers are always looking for a lower price and sellers for a higher one. 

Citi, aside from a couple of small tweaks, has kept its minority investment in Morgan Stanley Smith Barney on its books at pretty much the same level ever since the two companies started the venture three years ago. That seems too optimistic: industry trading volumes are down, most similar financial firms have lost value since 2009 and the JV itself is at best a work in progress, cranking out a lackluster 12 percent pre-tax margin last quarter. 

Morgan Stanley, meanwhile, has already written down the value of its 51-percent slug, in part because holding goodwill against inflated assets eats up capital, which the bank has been working aggressively to maximize. But marking it down to less than half where Citi’s valuation stands is harsher than some expected. Analysts at Credit Suisse recently estimated that MSSB could be worth $15 billion. 

Perhaps that’s where the third-party appraiser who must now be called in will come down. Whoever it is has just over a month to come up with a number that will then bind both Citi and Morgan Stanley. There’s plenty of strategic and tactical art in M&A. But valuation is the part that ought to be most like a science. The gulf between the two owners of MSSB shows how embarrassingly random it actually is.

Heineken tries to take the Asian Tiger by the toe

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Heineken is trying to catch the Asian tiger by the toe. The Dutch brewer launched a $6 billion bid to take control of Asia Pacific Breweries, its longtime Asian partner, pitting it against a thirsty Thai beer mogul and Japan’s Kirin. It’s a bold move for conservative Heineken that will put Singapore’s corporate governance bona fides to the test.

Amsterdam-based Heineken is offering S$50 a share, or some $S5.3 billion including other interests the two hold, for the 40 percent of APB that is held by its joint venture partner since 1931, Fraser & Neave. Along with its current holding of 42 percent, that would give Heineken 82 percent of the company, triggering a mandatory S$2.4 billion offer for minority interests in APB under Singapore’s takeover code.

If the bid is successful, Heineken will be paying a premium of about 43 percent to the undisturbed market price, worth some $1.8 billion, for the rest of APB. That’s a pricey ticket to keep the status quo in Asia, where volumes grew twice as fast as they did in the Americas in the first quarter of the year. To cover the premium, Heineken would need to extract synergies equal to about 50 percent more than APB’s current earnings before interest and tax of around $500 million.

But getting to that point will be tricky. In the move that triggered Heineken’s offer, Thai beer mogul Charoen Sirivadhanabhakdi agreed to pay some $3 billion earlier this week to acquire a chunk of APB and Heineken’s partner, F&N. Kirin of Japan owns 15 percent of F&N, too. While they do not hold a majority in the conglomerate with interests in food, soft drinks and property, they could certainly influence the company to reject Heineken’s offer.  

In that sense, Heineken’s maneuver provides a compelling test of capitalism, Singapore-style. With competitive offers for a beer business that F&N does not, in the end, control, the company’s independent directors should be working to extract the best deal for all shareholders – not just its new Japanese and Thai constituents.

Valentino makes Permira look not shabby nor chic

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It had all the hallmarks of a boom-time finance disaster. Permira’s leveraged 5.4 billion euro acquisition of a controlling stake in Hugo Boss through Valentino Fashion Group was one of the biggest deals of 2007, the year that the sub-prime crisis kicked off in earnest and Terra Firma bought EMI Group. Five years on, the UK buyout firm is selling Valentino to the Qatar royal family for a punchy price. That leaves Permira’s fashion binge looking respectable, if not glamorous.

The original acquisition, alongside the Italian Marzotti family, got off to an inauspicious start when the high-end fashion firm’s founding couturier Valentino Garavani retired shortly afterwards. Then in 2009 Permira had to restructure the group’s 2.3 billion euros of debt, upping its bet by buying back loans at a steep discount from Citigroup.

The sale of Valentino brings Permira’s fashion spree to a respectable point. The new owners are to pay 700 million euros, a whopping 20 times this year’s EBITDA, for the enterprise. That’s in line with LVMH’s purchase of Bulgari last year, but far above the average sector valuations of 10 times. SVG, one of Permira’s investors, reckoned its stake in the group was worth just half the purchase price three months ago.

Add the Valentino sale proceeds to the far larger continuing stake in Hugo Boss and Permira’s various investments in the group are now worth about 1.6 times their original cost, according to a person with knowledge of the matter. That seems like a respectable outcome at this stage given the state of the world economy in the last few years.

But Permira still needs to find a suitable exit for Hugo Boss, which has a market capitalisation of 5.1 billion euros. It will need to steer its way through a probable global slowdown and protracted slump in Europe, which still makes up over half of its revenues. Sizeable exposure to Germany and growth potential in Asia provide some comfort: Hugo Boss’s 469 million euros of EBITDA last year is nearly double its level when Permira bought in. The target is 750 million euros by 2015. If that’s achieved, and a lucrative exit follows, Permira will be looking truly smart.