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Capital Calls

6 May 2021 By Breakingviews columnists

Concise insights on global finance.


– KKR deal

Up with people. Private equity isn’t known for having the backs of the rank and file. KKR, though, is trying. On Thursday, the investment firm run by Henry Kravis said it and rival Leonard Green & Partners will give 1,700 employees at Charter Next Generation, which it is buying, equity in the business.

More than 7,000 U.S. companies have some form of employee ownership, according to research organization Fifty by Fifty, less than 1% of all firms tracked by the U.S. Census Bureau. Since 2011, KKR has handed over $500 million in equity value to more than 20,000 employees.

That doesn’t necessarily mean they are all better off, though. A Harvard Business School study found that employment at buyout-targeted firms declined 13% over two years in deals involving publicly listed companies. KKR, along with Bain Capital, coughed up $20 million to help jobless workers at Toys R Us after it went belly-up. Now, with equity, employees have a stake in holding their owners more accountable, earlier. (By Jennifer Saba)

I’m alright, Jacques. Rio Tinto’s Australian mess has yielded one more hit to its credibility. A year after blowing up sacred Aboriginal caves, the dual-listed miner has had its remuneration report rejected by more than 60% of ballots cast in an advisory vote at its annual general meeting. No wonder: while ex-Chief Executive Jean-Sebastien Jacques had his annual bonus scrapped and his longer-term incentive plan (LTIP) cut, his 2020 pay still amounts to 1.5 million pounds in salary, plus LTIP shares with a current value of nearly 8 million pounds.

The vote, while significant, changes little. Jacques and other senior executives have already gone, and 2020 pay packages won’t change. The Rio board can argue that it was legally hard to cut the LTIP any further, given that it was hammered out in 2016 and its vesting hinged on financial metrics. Angry shareholders have little option other than to insist that future incentive plans include targets to not dynamite priceless historical artefacts. (By George Hay)

IP panic. Moderna’s insiders must have imagined corks popping instead of shares dropping. The $60 billion on Thursday biotechnology company unveiled its first quarterly profit ever, raised its 2021 revenue forecast to $19 billion, and said 2022 will be even better. Yet the stock fell some 10% at one point, knocking off more than $6 billion from its worth, thanks to news that U.S. President Joe Biden backs waiving intellectual property rights for Covid-19 vaccines.

It’s an overreaction. Moderna said in October it wouldn’t enforce patents associated with Covid-19 against vaccine makers during the pandemic and would license its intellectual property. That hasn’t hurt the company so far.

For now, Moderna can sell whatever it can produce. Despite efforts to increase production, that’s only around 1 billion doses this year. The technology underlying its vaccine is still new and scaling up manufacturing has created bottlenecks. Patent waivers won’t change this. At a valuation of only around 7 times estimated earnings for this year, according to Refinitiv, the patent panic looks more like an opportunity for investors. (By Robert Cyran)

Wooden spoon. Shareholders in Société Générale and UniCredit are unaccustomed to good news. The perennial European bank laggards bucked the habit on Thursday with blowout first-quarter results. Frédéric Oudéa’s French lender reported a juicy 10.1% return on tangible equity, after stripping out one-off charges. UniCredit’s new Chief Executive Andrea Orcel unveiled a less stellar but still respectable 6.9% ROTE, also on an underlying basis. Both banks’ shares rose 4%.

It’s unlikely to last. Both Oudéa and Orcel expect bad-debt charges to rise in the rest of the year. Revenues from investment banking will probably fall as market volatility subsides. Meanwhile analysts reckon SocGen’s costs will consume 73% of 2021 income, compared with BNP Paribas’ 68%. UniCredit’s equivalent ratio of 58% is much worse than Intesa Sanpaolo’s 52%. Little wonder the French and Italian banks respectively trade at a 38% and 54% discount to their two closest rivals, using price to forward tangible book value. Oudéa and Orcel will remain stuck at the bottom of the class. (By Liam Proud)

Reading the TIM leaves. What a difference a letter makes. Shares in Telecom Italia (TIM) fell as much as 9% on Thursday amid speculation about a change of heart by new Prime Minister Mario Draghi over national broadband strategy. The reason is admittedly tenuous. Newspaper La Repubblica jumped on a reference in a 269-page document outlining the government’s investment plans to broadband “networks” (reti, in Italian), as opposed to “network” (rete). The implication is that Draghi wants to nix a long-planned merger between TIM’s network and smaller state-backed rival Open Fiber.

True, Draghi, a former Goldman Sachs banker and European Central Bank chief, probably lacks the interventionist instincts of his predecessor, Giuseppe Conte. And it would have been quick and easy to clear up any confusion over the wording. The fact Rome is yet to do so suggests Draghi may indeed be lukewarm about an idea that always looked good for TIM shareholders and less so for Italian broadband users. (By Ed Cropley)

Small-minded. Hong Kong is struggling to toughen up. The local bourse operated by $77 billion Hong Kong Exchanges & Clearing will dial back plans to more than double the minimum HK$50 million ($6.4 million) profit required since 1994 for public offering candidates after financiers squawked, according to media reports. Instead, companies will have to show HK$80 million of earnings over three years.

Small companies are big business for brokers. More than half the roughly 750 that listed between 2016 and 2019 would not have made the cut under the stricter changes. Meanwhile, a more than doubling of the minimum market capitalisation in 2018, to HK$500 million, has helped lead to higher prices relative to earnings for newly listed minnows. That raises suspicions that some are designed to be shell companies for later backdoor IPOs. The danger is that small fry hurt the broader market’s reputation if rules aren’t tightened. (By Jennifer Hughes)

Smash and NAB. Disappointment comes in a strange form for shareholders of National Australia Bank. The country’s third-largest lender by market value didn’t just exceed earnings estimates for the six months through March 31. It also doubled its dividend, following increases by rivals ANZ and Westpac. Yet investors pouted, sending the shares down more than 3% in morning trading.

As Australia’s biggest business lender, NAB is heavily exposed to troubled sectors like travel. That meant the bank run by Ross McEwan released less from loan-loss reserves – $235 million ($182 million) – than its two peers; investors probably should have factored that in already. Its markets business also was a tad disappointing, but one flagged earlier by ANZ.

The issue seems to be the lack of a share buyback to reverse the A$3.5 billion in equity NAB raised at the start of the pandemic. How quick investors are to throw caution to the wind. (By Antony Currie)


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