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Corona Capital

12 May 2020 By Breakingviews columnists

Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– Anthony Fauci

– Covea/Exor

– Uber pay

May the Fauci be with you. There’s no absolutely correct date for lifting lockdowns imposed to control the coronavirus. The shutdowns impose heavy costs – people unable to work, farm animals euthanized, and children falling behind in school. But Anthony Fauci, director of the U.S. National Institute of Allergy and Infectious Diseases, on Tuesday laid out for senators the dangers of reopening too soon.

He said official death counts are almost certainly understated, the disease is not under control, there won’t be a vaccine or effective treatment available by the fall, and relaxing prematurely could lead to further outbreaks. Even so, multiple senators flouted workplace guidance to maintain sufficient distance and wear masks.

Not all was grim. Fauci said effective measures to control the disease – testing and contact tracing – should be available by the autumn. With Washington’s partisans drowning him out, though, it will be tough to get people to listen and comply with restrictions in the meantime. (By Robert Cyran)

Under the Covea. Covea has belatedly come to its senses. Two months ago, as the pandemic spiraled, the cash-rich French insurer agreed to purchase reinsurer PartnerRe from the Agnelli family’s Exor investment vehicle for $9 billion in cash. Covea boss Thierry Derez’s willingness to pay a 38% premium to book value amid a global crisis looked rushed. His attempt to chisel the price now just looks weaselly.

Exor Chairman John Elkann had no need to part with PartnerRe for less, as the sale to Covea was purely opportunistic. The insurer had not been for sale. Nonetheless, Covea, which cited the changed economic scenario as a reason for its sudden U-turn, could face legal consequences. Derez’s move may have saved Covea investors from an expensive purchase. But after a previously failed attempt to buy Scor, Derez’s ability to consummate any deal is questionable. (By Lisa Jucca)

Back-seat driver. Uber Technologies left its annual meeting on Monday a bit beaten up. Only 70% of shareholders approved the ride-hailing company’s executive-compensation packages. That’s a low margin considering the other three proposals, including electing nine board directors, received almost unanimous support. Proxy advisory firms Institutional Shareholder Services and Glass Lewis had recommended investors reject Chief Executive Dara Khosrowshahi’s $43 million 2019 pay.

That’s part of what it took to woo him to scandal-plagued Uber in 2017. He has done a good job of stabilizing the company. But Uber reported a $2.9 billion net loss in this year’s first quarter and faces a big hit to its core business because of the pandemic. As part of cost-cutting measures, Khosrowshahi last week said he would waive his base salary of $1 million this year. That, though, did little to console the company’s increasingly frustrated shareholders. (By Gina Chon)

Stay on pay. Rishi Sunak has put off a difficult decision. Britain’s chancellor on Tuesday extended the country’s employment subsidy until the end of October. That averts a potentially painful crunch at the end of June for the scheme, under which the government is paying 7.5 million British workers 80% of their salaries, up to 2,500 pounds a month.

Some expected Sunak to withdraw support from industries which are reopening, like construction and manufacturing. Others wanted him to scale back a subsidy which the Office for Budget Responsibility reckons is costing taxpayers 14 billion pounds a month. Instead, Sunak says he will allow furloughed employees to work part-time, while asking employers to share an unspecified proportion of the costs from August.

The decision helps employees through the gradual easing of Britain’s lockdown. But it also delays the moment of truth, when companies will have to decide how many workers they can afford to keep. (By Peter Thal Larsen)

SPAC snack. If the advertising crew from “Mad Men” were making a commercial about Utz potato chips today, as they did in the U.S. hit series, they would have an easy sell. Crisps are a pandemic pantry essential. That might be why Collier Creek, a blank-check company started by Roger Deromedi, formerly an adviser to Blackstone and chief of Kraft Foods, is in talks to buy the company, according to Bloomberg, for more than $1 billion.

Some so-called special purpose acquisition vehicles, like the one backed by hedge-fund manager Dan Loeb, are having little luck closing deals. But another blank check target, Hostess Brands, has benefitted from the pandemic. Its stock had underperformed the S&P 500 Index since being bought in 2016 but has shot up almost 20% since late March. Whether chips are a better snack than Hostess Brands’ Twinkies is debatable. Right now, there is room in the cupboard for both. (By Lauren Silva Laughlin)

Brave new world. Mere months ago pundits were arguing about whether a 50 basis point rate cut from Federal Reserve Chair Jay Powell would leave the U.S. central bank with little ammo. How quaint that now seems. As of Tuesday, its Secondary Market Corporate Credit Facility can begin buying exchange-traded funds – including those exposed to junk bonds.

The Fed’s actions have helped the financial markets. The spread between investment-grade corporate U.S. bonds and Treasury debt is down almost 45% from March highs, based on an ICE Bank of America index. But stabilizing asset prices doesn’t fix the broader U.S. economic crisis or prevent severe demand destruction. For that, look to Congress and even more aggressive fiscal measures. Now that Powell has broken out of the Fed’s comfort zone, politicians may have to do likewise. (By Anna Szymanski)

Branson’s pickle. Bearded billionaire Richard Branson may raid his piggy bank. The Brit’s Virgin Group said on Monday it could sell up to 25 million shares in space tourism venture Virgin Galactic to support its portfolio of earthbound travel companies. Assuming a 5% discount to Monday’s closing price, a sale would raise $460 million – handy, if not game-changing, for struggling airline Virgin Atlantic, which also wants UK government help.

It was inevitable that Branson would have to show some hurt in return for state support. The bigger question is whether he has much else to offer. As Breakingviews pointed out last month, the 69-year-old runs a pretty asset-light empire. Necker, Branson’s private Caribbean island, is probably worth about 100 million pounds, based on Breakingviews estimates. Mortgaging, or even selling it, would be a more convincing way to show that he is sharing the pain. (By Liam Proud)

Vodafone pays out. The $40 billion mobile phone giant is bucking the prevailing FTSE 100 trend of cash-saving dividend cuts. Admittedly, boss Nick Read got his shareholder shocker in a year early, slashing the payout by 40% in May 2019 ahead of an expected 5G investment splurge. But after falling more than 20% this year, Vodafone shares now yield 7%, against a 4.2% index average. That suggests they are either too low or that Read’s payout bar is too high.

Tuesday’s rock-solid results, which pushed Vodafone shares up 5%, point to the former. Even after the effects of Covid-19, this year’s free cash flow should be at least 5 billion euros. Take off 1.2 billion euros for spectrum licences, the annual average, as well as 2.4 billion euros for the dividend and Read is still left with 1.4 billion euros – not bad for rainy day loose change. (By Ed Cropley)

Talking shop. The world’s priciest commercial property district is slowly changing. Hong Kong’s recession, exacerbated by Covid-19, has forced multinational and mainland Chinese companies to move to smaller locations or further-flung neighbourhoods. The prime office vacancy rate in prestigious Central hit 4.4% in March, its highest in six years, according to property firm JLL. Rents in the area are now forecast to fall as much as 30% this year.

High streets are changing, too. Retail sales plunged 42% in March from a year earlier, as travel restrictions batter tourism. While luxury brands such as Tiffany & Co close stores on the once-bustling Canton Road shopping strip, a Japanese discounter of everyday goods has signed a lease in the heart of the city, local media reported. Likewise, gyms and health-food markets have been driving the latest rental activity. Dire circumstances are forcing a property makeover that will suit local consumers. (By Robyn Mak)

Travel sickness. The world’s largest duty-free group is in a spot of bother. With travel curbs in place at most of its locations, airport retailer Dufry is planning for a full-year sales slump of between 40% and 70%. The question is whether the former or the latter number is more likely.

Buttressing the optimistic case is Dufry’s geographic diversification: 38% of sales were in Europe and Africa in the first quarter, 45% in America and 15% in Asia. It has a nicely hedged set of bets over the pace of recovery in different regions. But the smart money in travel retail is pessimistic. Activist Dan Loeb’s Far Point is urging its shareholders to vote against the acquisition of tax refund firm Global Blue, while private equity group Carlyle wants to call off a purchase of a stake in American Express Global Business Travel. Dufry will struggle to avoid the prevailing winds. (By Karen Kwok)


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