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Capital Calls

4 May 2021 By Breakingviews columnists

Concise insights on global finance.


– Pfizer’s vaccine boost

– ConocoPhillips’ deal

Good fortune. Pfizer’s decision to partner with Germany’s BioNTech to produce vaccines was a coup. First-quarter earnings on Tuesday showed the resulting bounty.

Pfizer now expects adjusted earnings to be nearly $21 billion this year, 40% more than what it would have earned without Covid-19 vaccine revenue. That leaves a big bottom-line windfall. Pfizer appears to have fewer side effects and be more effective than some vaccines, too, so further guidance increases are easy to imagine.

It could leave the company with a cash windfall, though. Perhaps caution is prudent, as the pandemic won’t be here forever. The company is upping spending on research and development as a result, particularly in the technology that underlies the vaccine. As demand wanes, it will need new products to refocus efforts.

Yet the need to provide boosters means some durable vaccine demand, according to Chief Executive Albert Bourla. That likely leaves enough left over for shareholders as a gesture of appreciation for the upfront funding of the pharmaceutical muscle against Covid. (By Robert Cyran)

Black on black. ConocoPhillips is seizing the moment. On Tuesday, the independent U.S. oil driller said it planned to sell shares of Cenovus Energy it received in exchange for Canadian assets in 2017. For Conoco boss Ryan Lance, the timing looks as good as any.

Four years ago Conoco agreed to sell oil and gas properties to the Canadian driller for $13 billion, with about $2.7 billion coming in shares. The value of that stake is roughly a third lower than when the deal was announced, but up more than fourfold from last year’s low.

Conoco’s shares have been on a similar though less pronounced path. That’s partly because the price of Canadian oil is more volatile than where Conoco drills because it’s expensive to produce and transport – it averaged around $3 a barrel during the April 2020 nadir when West Texas Intermediate traded at $17 and Brent at $27.

Lance plans to offload Conoco’s stake in Cenovus systematically through 2022. Fingers crossed that in terms of valuation, its relative good fortune lasts. (By Lauren Silva Laughlin)

Soft foundation. Bill Gates and Melinda French Gates no longer believe they can “grow together as a couple”. The question for the world of philanthropy is whether the same goes for their eponymous charity. The Microsoft founder, who has a $131 billion net worth according to Forbes, announced the divorce along with his wife of 27 years late on Monday. Investors in the $1.9 trillion computing giant needn’t fret. Unlike in the divorce of Amazon.com founder Jeff Bezos and Mackenzie Scott, there’s no important corporate stake up for grabs, as the Gates are not large shareholders.

The impact is less clear for the Bill & Melinda Gates Foundation. It has paid out $68 billion in charitable grants, and as of 2019 had access to a further $50 billion in assets. The pair will remain co-chairs and trustees of the organisation, which has about 2,000 employees. But that looks like a potentially awkward arrangement. The risk for would-be recipients is that the Gates’ fortune and philanthropic endeavours both splinter after their divorce. (By Liam Proud)

Pit stop. Ferrari is smoothing the path for its next driver. The maker of $215,000 sports cars delayed its 2022 financial targets by a year, dragging shares down 6%. It now predicts it will take until 2023 for annual EBITDA to reach between 1.8 billion euros and 2 billion euros. This contrasts with estimates-beating first-quarter core earnings of 376 million euros and an order book at record levels.

Ferrari blamed the protracted Covid-19 emergency for the change in guidance. The group currently run by Agnelli family scion John Elkann after the surprise departure of Louis Camilleri last year will likely push investment earmarked for 2020 into this year and the next, boosting costs. And it’s not immune to a global chip shortage. To counter the impact, Ferrari could draw from its waiting list and sell more cars. But that would dent its scarcity value. By disappointing shareholders now, chairman and acting chief executive Elkann will at least make it easier for his successor to have a safer start. (By Lisa Jucca)

Twin peaks. Deutsche Lufthansa’s mammoth capital-raising plans don’t leave a lot of room to clear the top of its debt mountain. The German carrier is asking shareholders for permission to raise up to 5.5 billion euros in new equity, more than 80% of its current market value. It’s unclear when it will pass round the hat, or for how much. Chief Executive Carsten Spohr will need most of it.

Spohr’s first priority will be clearing the 1.3 billion euros he owes Berlin in equity and hybrid debt instruments known as a “silent participation”. There’s also another 1.2 billion euros in loans from Switzerland, Belgium and Austria. Assuming he raised the whole 5.5 billion euros, net debt would drop to 6.6 billion euros, the same as at the end of 2019. Yet EBITDA will still only be 3.1 billion euros next year, according to Refinitiv forecasts, leaving borrowings at a toppy 2 times that number. Shareholders who pony up are unlikely to see much of a dividend for some time. (By Ed Cropley)

Military might. Writing down its $783 million investment in Myanmar may be one of Telenor’s easier decisions after February’s military coup. Now the $25 billion Norwegian telecommunications operator must work out what to do with its business in the southeast Asian country.

In the first three months of last year, Telenor’s Myanmar operations generated $130 million of EBITDA, roughly 8% of the parent company’s total. That figure fell by nearly a third this year following political turmoil, including the military junta turning off mobile data services last month. Chief Executive Sigve Brekke is thus unlikely to find a buyer. But keeping his head down also carries risks. Even if the situation normalises and business picks up, Myanmar’s generals are likely to keep a firm grip on power. Bringing telecom services to the country’s impoverished citizens is a good look; operating under a military regime whose leaders are subject to Western sanctions is not. (By Ed Cropley)

Low fidelity. Shareholders have their work cut out recalculating the value of Ant. Investors from Temasek to Carlyle are stuck holding shares of the Chinese financial technology group after its failed initial public offering. Regulators have forced Ant to overhaul key business practices, and a political campaign against founder Jack Ma adds more uncertainty.

U.S. asset manager Fidelity Investments has repriced its stake. In a February filing it marked down its position by half compared to August last year, implying a total valuation of $144 billion for Ant, the Wall Street Journal reported.

That looks generous. Take Ant’s stable digital payments business. If the unit resumes its pre-pandemic growth rate of 17% achieved in 2019, that implies revenue of 61 billion yuan this year, based on annualised 2020 figures. U.S. peer PayPal boasts a 15% operating profit margin and an enterprise value 46 times forecast operating profit. On those assumptions, the payments arm is worth only $64 billion. Ant’s other business units could get smaller yet. (By Robyn Mak)

Paying peanuts. Martin Sorrell doesn’t have to worry much about the money his former employer refuses to pay him. S4 Capital, which the 76-year-old founded after he was ousted by WPP, on Tuesday raised its target for full-year organic revenue growth this year to 30% from 25% after winning clients including BMW and Mondelez.

S4 is benefiting from the switch to digital advertising, which has been accelerated by the pandemic. Including a 2.5% jump on Tuesday morning, its shares are up 14% this year, lifting the value of Sorrell’s 10% holding by 38 million pounds. WPP is withholding shares worth at least 200,000 pounds due to its former chief executive because it accuses him of leaking client information. Yet every time WPP fights with its former boss the 12 billion pound company invites comparisons with the 3 billion pound upstart. Withholding Sorrell’s pay looks like a false economy. (By Dasha Afanasieva)

No sacred cows. Namyang Dairy Products stumbled into a novel way of cleaning up a mess. Chairman Hong Won-sik resigned on Tuesday amid a police probe into the $240 million company’s since-retracted claims that its yoghurt drink could prevent Covid-19. The share price bubbled up nearly 10% on the news.

Many beverages such as Hindustan Unilever’s Horlicks boast immunity-boosting benefits, but Namyang went notably further. The head of research said last month that its Bulgaris drink was found to be 77.8% effective in fighting the virus behind the pandemic, according to local media.

The curdling may run deeper. Hong’s son was sacked last month after allegations of misusing company funds. And although the family owns more than half of Namyang, the chairman’s mea culpa included a vow not to hand management rights to his children. With a market value that has tumbled 70% since a 2013 peak, a governance overhaul might help minority shareholders milk more from their investment. (By Robyn Mak)

Injecting reality. Hong Kong’s financiers and politicians should be worried by the population’s lack of enthusiasm for vaccinations. Eddie Yue, head of the Hong Kong Monetary Authority, warned on Monday that low inoculation rates could cause the Chinese special administrative region to be left out of international travel bubbles, making it a less appealing base for multinationals. Yue pointed to arch-rival Singapore, where 24% of people have had at least one dose, and the UK, where almost as many are fully vaccinated. Just 13% have had one shot in Hong Kong.

Other factors further dim the city’s appeal. A mandatory three-week hotel quarantine for non-Chinese visitors is expensive. A new law allows authorities to prevent people from leaving, which might impact commercial disputes. Hong Kong’s airport, typically busier than Singapore’s, is welcoming less than half as many visitors; travellers were down 98% year-on-year in the first quarter. Officials say their crackdown on dissent via the national security law is misunderstood. The list of reasons for executives to avoid Hong Kong is lengthening nevertheless. (By Jennifer Hughes)


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