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Capital Calls

24 March 2021 By Breakingviews columnists

Concise insights on global finance in the Covid-19 era.


– DRS IPO flop

– Equity opportunists

IPO envy. Leonardo is sitting out a stock market frenzy. The state-controlled Italian defence company on Wednesday postponed its listing of U.S. naval systems and satellite communication unit DRS. Boss Alessandro Profumo launched the offering of a 22% stake in mid-March at between $20 and $22 a share. At the top of that range DRS would have been valued at $3.2 billion – more than half its parent’s market capitalisation – while bringing in $700 million in cash.

Leonardo blamed “adverse market conditions”, which is surprising as U.S. markets are flush with initial public offerings and special-purpose acquisition companies. Investors appear to have demanded a too-low valuation for the unit, with too much demand coming from short-term hedge funds. Shareholders who had been anticipating a boost to Leonardo’s valuation, and a reduction in its 3.3 billion euro net debt pile, knocked 6% off the Italian company’s shares on Wednesday morning. Though Leonardo may try again later, the IPO market can hardly improve. (By Lisa Jucca)

Capital raise. When times are good, cashing in is smart. Media group ViacomCBS, worth over $50 billion, is taking advantage of its surging stock price to sell equity, and $10 billion-plus video-game retailer GameStop may do the same.

The opportunity is clear. Over the past three months, ViacomCBS stock has more than doubled and GameStop is up more than sixfold against indexes that have barely budged. Selling pricey shares beats expensive buybacks, something ViacomCBS used to indulge in, and both companies can afford the share-price declines that came on Tuesday.

The media company plans to invest its up to $3 billion of proceeds in streaming, which at least matches one reason the stock has zoomed upward. Reddit star GameStop, which said it would invest any proceeds in e-commerce, is a different case. True, its fourth-quarter online revenue surged 175% year-on-year, but overall quarterly sales fell 3% to $2.1 billion. Social-media love doesn’t make the investment case any stronger. (By Jennifer Saba)

Playing the slots. International Airlines Group’s arms are having to stretch ever further down the back of the sofa in search of spare change. The London-based company, owner of British Airways and Spain’s Iberia, has posted landing slots at London’s Heathrow and Gatwick airports as security for a new $1.8 billion overdraft from its banks. That’s on top of flogging its art collection and in-flight silverware, leaning on pensioners for support and hitting up shareholders for 2.75 billion euros in October.

With 10.3 billion euros of available liquidity, IAG has plenty of gas in the tank. Rapid vaccine rollouts in the United Kingdom and United States also mean its transatlantic routes could reopen sooner than others. Yet there’s a risk that big-spending corporate travellers will stay home. Moody’s reckons many executives will continue to favour Zoom meetings over face-to-face ones, delaying a recovery until at least 2024. Given its reliance on transatlantic business travel, IAG will be hoping for a speedier recovery than that. (By Ed Cropley)

Rebel alliance. Toyota Motor, its commercial truck unit Hino Motors and Isuzu Motors have announced a new joint venture to develop connected trucks and fuel cells. That might serve Tokyo’s push to reduce the national carbon footprint, and Toyota’s hope to be a leader in clean-vehicle development. Alas, Isuzu and Toyota are also buying 42.8 billion yen ($394 million) stakes in each other, returning to a cross-shareholding structure they had abandoned in 2018. The arrangement is particularly awkward given Hino, in which Toyota owns 50%, competes with Isuzu.

That complicates Toyota’s lengthening list of friendly yet pointless holdings in rivals, including significant stakes in Subaru and Mazda Motor, plus a series of clean-energy-related strategic partnerships, technology-sharing agreements, and so on. Shares in Toyota, already down sharply since a March 13 peak, shed another 2% on the announcement; Isuzu, in which Toyota will now own a 4.6% stake, popped over 5%. Japan’s government is trying to improve governance and returns for shareholders. On this front Toyota’s new venture looks unclean. (By Pete Sweeney)


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