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Corona Capital

8 June 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.


– U.S. recession data

– Grubhub’s bidders

– Airline optimism

Recession compression. The U.S. economy ended its longest expansion on record in February and went into recession, according to the National Bureau of Economic Research on Monday. The peak came 128 months after the post-financial crisis recovery began in the middle of President Barack Obama’s first year in office.

The committee that referees such things noted that because of the very sharp dropoff in economic activity in March, the peak quarter for the U.S. economy was the last period of 2019. The date mismatch is one more challenge to traditional data norms created by the coronavirus pandemic. Typically the peak month and quarter are the same or at least adjacent.

The NBER also designated this a recession unusually quickly. That reflects the breadth and depth of the downturn, but it’s also a nod to the possibility that it could be over quickly. Six months is the shortest to date. Maybe that’s yet another record that will fall to the pandemic. (By Richard Beales)

Shotgun. Grubhub is trying to take the wheel from Uber Technologies. Rivals Just Eat Takeaway.com and Delivery Hero are also interested in buying the U.S.-based food delivery service, according to CNBC on Friday. Those deals make less sense – unless they were used to force Uber’s hand.

The ride-hailing service and Grubhub are haggling over the exchange ratio for an all-stock deal and the reverse break fee. Because of overlap, watchdogs will likely take a critical view. But market similarities are also crucial: UBS reckons a merger could result in more than $500 million in cost savings.

Meanwhile European competitors would have a lower bar for regulatory clearance, but, consequently, meager benefits from a deal. They could overpay, but a transaction ultimately is less likely. So Grubhub is best sticking to its other power play. Covid-19 has boosted business as delivery has come in high demand. That’s not the case for $65 billion Uber, which is suffering from a dearth of riders. (By Jennifer Saba)

Difficult takeoff. Wanderlust is returning, fitfully. Almost one-fifth of respondents in a UBS survey say they are ready to travel, over twice as many as two months earlier. And over 440,000 people passed through security on June 7, according to the Transportation Security Administration, more than quadruple the average in early April.

It is a start, but there is a long way to go. Airport traffic is still 80% lower than a year ago. American Airlines is preparing severance packages for high-level employees for when the terms of a recent government bailout expire, according to CNBC. Delta Air Lines said last week it will stop serving 11 cities.

Stock prices of major U.S. carriers are above their mid-March levels. But that says more about government support than imminent recovery. Over 40% of UBS respondents still don’t plan to travel for six months or more. That suggests a long summer of empty seats and dwindling cash piles. (By Lauren Silva Laughlin)

Flowers for Blackstone. Steve Schwarzman’s buyout group in February struck a deal to buy Dutch bank NIBC for 1.3 billion euros. It has been clear for a while that the pre-pandemic price would have to be renegotiated. But Blackstone seems to have turned adversity into opportunity, knocking one-fifth off the price according to a statement on Monday.

Though it’s risky to take a bank private at the start of a downturn, Schwarzman’s dealmakers have a margin of safety. At 7 euros a share, Blackstone is paying investors like J.C. Flowers – which first bought into the bank in 2005 – two-thirds of 2020 tangible book value, using ABN Amro forecasts. That’s roughly where the top 20 European banks trade, before any takeout premium. Moreover, Citigroup analysts are forecasting an 8.5% return on equity for NIBC next year – higher than many other banks. Crisis dealmaking, when sellers have few other alternatives, has its advantages. (By Liam Proud)

Tough job. Economists are bad at predicting the future – now understanding the present may be tough too. The U.S. Bureau of Labor Statistics’ jobs report on Friday showed a shocking decline in the unemployment rate to around 13%. But as the bureau conceded, the rate would have been roughly 3 percentage points higher if workers classified as employed but not currently working for “other reasons,” above normal May levels, had been labeled as unemployed.

So does this change the story? Not really, because the same caveat applied in April: The 15% rate for that month would have increased by almost 5 percentage points. The numbers are slippery but the direction still holds.

Monthly economic reports don’t normally deal with such dramatic change, definitional uncertainty or distortion from massive government stimulus. The result, though, is that odd data points can easily appear to contradict other statistics. Financial pundits can still try to find trends – but with a big dose of humility. (By Anna Szymanski)

Publi-can’t. The British government’s plan to reopen pubs and restaurants on June 22 lifted stocks in chain Mitchells & Butlers by more than 15% while Marston’s, which also has breweries, rose 12%. Allowing establishments with outdoor spaces to operate two weeks earlier than previously expected is obviously good for the sector, but that reaction looks anything but rational.

Analysts are more sober. They predict a revenue decline of 30% for Marston’s and 36% for Mitchells & Butlers in the year ending in September, according to Refinitiv. Social distancing measures, even if reduced to keeping punters a metre apart, are going to eat into capacity, and many punters will stick to parks and gardens this summer. Investors, in their thirst for good news, are getting ahead of themselves. (By Dasha Afanasieva)

Electric feel. Boris Johnson may be following Angela Merkel’s lead. The UK prime minister is considering mimicking Germany’s plan to subsidise electric cars. According to the Telegraph, drivers will be given up to 6,000 pounds if they trade in their gas guzzlers for a battery-powered vehicle. Ironically, emissions-free cars were the only section of the market to register a year-on-year increase in sales last month as the rest of the market collapsed, but only by 429 vehicles, according to the Society of Motor Manufacturers and Traders.

Electric cars have accounted for just 4% of total sales so far this year, or roughly half Germany’s proportion. If Johnson wanted to double that it would cost him around 454 million pounds based on last year’s totals, assuming the full subsidy is applied. Faced with uncertain Brexit negotiations, the move might also buy him some goodwill with Nissan Motor and BMW, both of whom produce electric models in Britain. (By Christopher Thompson)

Fashion frenzy. Wobbly brand Salvatore Ferragamo is enjoying a market revival. Shares in the Italian maker of finely crafted leather shoes jumped 8% on Friday amid hopes it could fall prey to luxury giant LVMH. This seems premature. The coronavirus crisis has clearly turned the 2.4 billion euro Italian brand into a target. But the French giant remains preoccupied with its $16.2 billion bid for famed U.S. jeweller Tiffany & Co.

At 2.7 times expected revenue, Ferragamo looks cheap compared to peers. But it’s too small to move the needle at Bernard Arnault’s 200 billion euro behemoth. Ferragamo needs a fresher look and investment. Assuming a 30% premium, a buyer would need to double the company’s operating margin and grow annual revenue by 5% a year until 2025 to earn a positive return on capital, Breakingviews calculations show. A private-equity takeover, or a marriage with a similar-sized local peer like Ermenegildo Zegna makes more sense. (By Lisa Jucca)

Cheque please. Suntory boss and government adviser Takeshi Niinami reckons more than 20% of bars and restaurants could fail due to the coronavirus pandemic. The owner of premium spirits brands Jim Beam and Maker’s Mark depends on the $230 billion local dining scene, and that explains why Suntory is backing Saki-meshi, a dining app that allows customers to pay for meals up to 180 days in advance to help restaurants with cash flow.

It’s similar to how American restaurants have sold dining bonds, or discounted gift certificates, but those unsecured debts can have little recovery value if the lights go out in ramen joints and tapas-style izakaya bars. With Japan’s vast economic stimulus package favouring subsidy support for premium ingredients like wagyu beef and melons over eating establishments, no wonder Suntory is tweaking the menu. (By Sharon Lam)


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