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Capital Calls

30 July 2021 By Breakingviews columnists


– Chinese IPOs

– Scar-Jo vs. Mickey Mouse

– EU stress tests

– P&G’s costs

– African mobile money

Chinese hors d’oeuvre. American investors and regulators alike have long glossed over key risks when Chinese companies go public on U.S. stock exchanges. That’s finally changing. Securities and Exchange Commission Chair Gary Gensler on Friday said he wants firms to provide more information. It’s just a starter for the SEC.

The new urgency owes much to the Didi Global debacle. Days after the ride-hailing giant went public on the New York Stock Exchange in late June, Beijing cracked down and shares tanked. Now the SEC wants firms to say whether Chinese authorities gave permission to list and disclose more about shell companies sometimes used to get around China’s foreign-investment restrictions. Reuters also reported that the commission has stopped processing Chinese initial public offerings.

That probably won’t satisfy Congress. A company failing to meet U.S. accounting standards three years in a row can now be delisted. But lawmakers want the SEC to investigate Didi and speed up the timeline for kicking firms off American exchanges. The agency has a buffet of options to come down harder. (By Gina Chon)

Tangled. An actor who takes on Walt Disney is brave, though not necessarily foolhardy. Scarlett Johansson has filed a lawsuit against the Magic Kingdom over its decision to release her “Black Widow” movie simultaneously in theaters and on its own streaming service.

Johansson says Disney’s split release lessened her pay, which was tied to box-office sales but not showings on Disney+, under a contract drawn up before Covid-19 hit. The cost of angering the Mouse House isn’t small. Disney+ has over 100 million subscribers, thanks to franchises like Star Wars and Marvel. It says the lawsuit is “sad” and “distressing.”

The dispute is worth watching because what happens to the “Black Widow” star may give an insight into the power dynamics of streaming. Netflix and Amazon.com are also paying up for talent to feed their digital services. Netflix recently signed Steven Spielberg and expanded its contract with Disney alum Shonda Rhimes. In fighting a box-office superhero, even a giant can overplay its hand. (By Jennifer Saba)

Keep calm. The Italian government’s bargaining hand with respect to its most troubled lender just got weaker. On Friday the European Banking Authority released stress-test results that modelled the impact on lenders’ capital from a severe recession. In a downturn involving a prolonged pandemic, a 3.6% drop in regional GDP until 2023 and “lower for longer” interest rates, state-controlled Banca Monte dei Paschi di Siena’s entire common equity Tier 1 capital would be wiped out.

That should strengthen the hand of UniCredit boss Andrea Orcel, who is seeking generous state support to take over the stricken lender. Yet other banks cannot be too smug. The industry’s aggregate CET1 ratio under the EBA’s “adverse” scenario was a still-respectable 10% in 2023. But Germany’s Deutsche Bank, France’s Société Générale and Spain’s Banco Sabadell would see their fully-loaded ratios drop to a less-comfortable 6.5%-7.5%. If Covid-19 variants force another slump, that may keep shareholders up at night. (By Christopher Thompson)

Freightening stuff. Companies everywhere say their costs are rising, but Procter & Gamble has given a vivid warning that investors, customers and maybe even central banks should heed.

The maker of Pampers nappies said on Friday that higher commodity and freight costs would knock $1.9 billion off its earnings in its current accounting year, offset only slightly by currency movements. That’s $2.2 billion before tax, based on P&G’s expected rate.

Imagine new Chief Executive Jon Moeller, who starts in November, tries to recoup that by charging customers more. With $76 billion of sales last year, all else being equal, he’d need to increase P&G’s prices on the shelf by almost 3%. That’s higher than most developed-country central banks’ inflation targets.

All else isn’t really equal, of course. If P&G hikes prices and competitors don’t, it may sell fewer goods. And with a 24% operating margin, Moeller can absorb some costs. Lower profitability looks likely; difficult decisions look inevitable. (By Dasha Afanasieva)

Banking on the unbanked. Africa’s financial technology buzz is growing. Airtel Africa on Friday said the Qatar Investment Authority would pay $200 million for a minority stake and a board seat in the telco’s mobile-money unit, AMC. That’s on top of the $300 million Airtel Africa received from selling stakes in the business to private equity firm TPG and Mastercard earlier this year. The deal values AMC at an enterprise value of $2.7 billion – over 13 times its EBITDA for the year to March. Airtel Africa gets cash to invest in telecom infrastructure.

AMC allows phone subscribers to send money without using the banking system. The long-run potential is vast: mobile-money transaction volumes in sub-Saharan Africa rose 23% to $490 billion last year. Yet competition is growing. African banks, tech firms and mobile rivals MTN and Vodacom are all battling for market share. The continent’s unpredictable regulators and economic gyrations also create problems. Not everyone will grab a prize. (By Karen Kwok)

Class wars. China’s answer to Zillow has decided to keep control concentrated after its legendary founder Zuo Hui’s unexpected passing in May. Ke’s top shareholder, a company controlled via a trust of the Zuo family, has transferred its class B shares, representing nearly 80% of voting rights, to an entity originally affiliated with him. That gets around a rule that such a transfer outside the family would automatically downgrade his weighted stake to ordinary shares. Long-serving Chief Executive Peng Yongdong and an executive director on the partnership will inherit Zuo’s votes.

Dual-share structures, banned in China for a long time, led many Chinese entrepreneurs to list in New York where they are common. They protect founders interests and give them latitude to think long-term – but also enable abuse. Ke claims that this move will enable the company to preserve Zuo’s vision. But it can do that without granting managers with small economic stakes outsized power. Ke’s shares have already fallen 60% this year, and a wave of Chinese delistings and take-privates may be building. The online real-estate broker, caught in two simultaneous crackdowns on internet and property companies, might be preparing to make decisions ordinary shareholders won’t like. (By Yawen Chen)

Splash the cash. NatWest boss Alison Rose will discover that money doesn’t solve all problems. The state-owned lender on Friday announced a share buyback of up to 750 million pounds. Together with dividends, it will pay out at least 2.9 billion pounds to shareholders in 2021. That’s equal to a whopping 12% of the company’s market capitalisation. And there might be another 5 billion pounds to 7 billion pounds to come given Rose’s common equity Tier 1 ratio goal of around 13%, compared to 18% currently.

Such splurges can only hide mediocre profitability for so long. Rose’s 9% return on tangible equity target by 2023 – below a probable 10% cost of capital – is poor for a bank which has been in cleanup mode for over a decade. Rival Lloyds Banking Group, by contrast, targets a 10% ROTE this year. Costs which ate up 66% of revenue in the first half were higher than competitor Barclays, which also runs a U.S. bank. Payouts will only temporarily distract from such concerns. (By Christopher Thompson)

A rich path. Oyo Hotels & Homes is making an impressive comeback. Microsoft is planning to invest in the Indian startup at a $9 billion valuation ahead of its planned initial public offering. The price tag would be on par with the SoftBank-backed group’s last big private marker before the pandemic disrupted its global operations and forced a reset.

Founder Ritesh Agarwal is tracing the footsteps of his peer, Airbnb’s Brian Chesky. Just like the way the U.S. company raised $2 billion in crisis financing, earlier this month Oyo sold a well-subscribed $660 million loan  in the U.S. market.

Roughly matching an earlier valuation augurs well too. While the American initially marketed his company’s worth at up to $30 billion in a December 2020 listing – in line with its last private valuation in 2017 – he eventually increased that to $41 billion. Airbnb’s market capitalisation is now more than double that. Oyo might hope to eventually achieve a similar uplift.

Microsoft’s backing will be an endorsement. The bigger the investment, the more weight its implied valuation will carry. (By Una Galani)



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