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Capital Calls

10 May 2021 By Breakingviews columnists

Concise insights on global finance.


– Microsoft and Amazon

Virtual hole. The Pentagon is sensibly mulling an end to Project JEDI, according to the Wall Street Journal. The up to $10 billion, 10-year contract to consolidate military data under one cloud provider was controversial from the start. Rivals initially claimed Amazon.com was favored, but then former U.S. President Donald Trump helped Microsoft win.

One possible result is to contract with both companies, and maybe others too. Redundancy is as sensible for the military as it is for the private sector. Multiple suppliers would help end current litigation and reduce long-run costs. It’s also easier to get lawmakers on side when work is split between vendors.

The direct financial effects aren’t huge. At a 30% operating margin, what Amazon Web Services earns, the net profit from JEDI would be worth less than $2 billion in present value terms. That’s minimal for $1.9 trillion Microsoft or $1.6 trillion Amazon. Of course, contracts may be extended, and government cloud business can only grow. Better to spread it around from the start. (By Robert Cyran)

When you believe. France may soon have a mini-Vivendi. Music group Believe is looking to raise about 500 million euros in a Paris stock market listing to go on an acquisition spree. The company, led by ex-Vivendi executive Denis Ladegaillerie, helps more than 850,000 music artists distribute their content on platforms like Spotify, Apple Music and YouTube, and is targeting a valuation of about 2.5 billion euros.

That hoped-for price looks like a bargain. With sales growing more than 20% a year, Believe reckons its revenue can reach 654 million euros by 2022. That implies an enterprise value to revenue multiple of 3.1 times, assuming a 2 billion euro valuation including cash after the IPO. Bigger rivals Warner Music and Tencent Music Entertainment are trading at an average of 3.9 times 2022 sales, according to Refinitiv data. And Ladegaillerie may be able to boost sales by snapping up music catalogues, or smaller local rivals like TuneCore. The risk is that he spends the money badly. If so, Believe might end up becoming an acquisition target itself. (By Karen Kwok)

Exit strategy. The Gavio family is paying little extra to retreat from Italy’s stock market. The owners of 4 billion euro motorway operator ASTM have hiked to 28 euros a share their offer to buy out minority investors holding around 47% of the company’s shares. That’s a 9% increase on the initial offer price of 25.6 euros, and more than 40% above where ASTM shares stood before the surprise bid announcement in February.

The exit strategy looks tactical. A bitter spat between the Italian government and bigger road toll rival Atlantia, controlled by the rival Benetton dynasty, had hurt ASTM’s shares even before the pandemic hit revenue, and accelerated a planned foreign expansion. The Gavios and private equity partner Ardian will take advantage of ultra-low interest rates to borrow the 1.8 billion euros needed to buy out minorities. Still, they are paying around the same price as ASTM’s pre-pandemic value, and around 10% below its peak in 2019. Even the revised offer looks far from generous. (By Lisa Jucca)

Brass neck. You can’t fault Metro Bank Chief Executive Daniel Frumkin for lack of brazenness. Little more than two years after the 190 million pound UK lender’s previous boss said it had massively under-reported the risk in its loan book, Frumkin wants regulators to ease rules on small banks to make his life easier.

Admittedly, he’s responding to a serious problem. A Metro-sponsored report by the Social Market Foundation found that fewer customers switched banks in 2020, helping incumbents like Lloyds Banking Group. The market for personal current accounts is “moderately concentrated” under the Herfindahl-Hirschman Index, trustbusters’ favourite competition measure. That’s a failure for the post-2008 drive to shake up the sector.

Yet financial technology upstarts like Revolut stand a much better chance of changing that than conventional challengers like Metro. They’re faster-growing and unencumbered by branches. Revolut rival Starling Bank has even turned a profit. While Frumkin complains about the rules of the game, the fintechs are out there racking up points. (By Liam Proud)

Mutually insured destruction. Online insurance platform Waterdrop closed down 19% on its first day of trading in New York. Amid Beijing’s campaign against the fintech sector, the offering was a tough sell. Still, the Tencent-backed company raised $360 million after pricing shares at the top of the range – at a valuation of nearly $5 billion, or 100 times historical sales.

Waterdrop is one of many startups that started out selling “mutual aid” services, a largely unregulated business in which members contribute small monthly amounts in exchange for a guaranteed lump-sum payment for critical illnesses. In March, Waterdrop closed down the unit.

What’s left is mainly an online marketplace for insurance with ugly financials. The company has run at an operating loss since 2018 yet founder Shen Peng told Reuters “becoming profitable is not our priority”.
China needs alternatives to supplement thin public coverage. Ant, for all its troubles, is sticking with mutual aid. But until a profitable model is found, best not price too aggressively. (By Pete Sweeney)

Micro-madness. Kolkata-based Bandhan Bank’s earnings are a sober reminder of how volatile extending credit to the underserved can be. The fast-growing micro-lender turned fully fledged bank reported a massive 80% fall in net profit for the March quarter compared to the same period last year. Its gross non-performing loans hit an eye-watering 6.8% – and that was after a big provision just shy of 16 billion rupees ($217 million), a 93% jump.

On top of pandemic pain, Bandhan has been hurt by politicians in Assam promising to waive micro loans; the north-eastern state accounts for 12% of its microloan portfolio which in turn makes up around two-thirds of its loan book. The $6.5 billion bank now trades at about 2 times book value, half the ratio at which it went public almost three years ago, reflecting a roughly commensurate drop in its return on equity as its bad-debt ratio quadrupled. Bandhan is unlikely to reverse that until long after Covid-19 dissipates. (By Una Galani)


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