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Corona Capital

17 December 2020 By Breakingviews columnists

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


– Private jets set

High-flyers. Private equity firm Blackstone is betting that plutocrats will be back in the air before the rest of us. Shares in London-listed Signature Aviation – which provides fuelling and ground services to private jets and charter flights – jumped by 40% on Thursday after it revealed Steve Schwarzman’s firm made a $4.3 billion cash takeover offer. A proposal from a rival investment fund, Global Infrastructure Partners, was rejected.

The bid, a respectable 17% premium to Signature’s pre-Covid high in January, looks like a risky punt on a sector shellacked by Covid. The company made a $30 million pre-tax loss in the first half of 2020 whilst net debt of $2.2 billion equals a turbulent 5 times estimated 2021 EBITDA, according to Refinitiv data. Still, a core market of peripatetic executives criss-crossing the United States appears to have already achieved relative lift-off: its U.S. flight activity was down by around one-fifth year-on-year in October, compared to what IATA reckons was a 61% drop in domestic U.S. air travel more generally. (By Christopher Thompson)

Taxing times. Kering faces a fresh battle with the taxman. The luxury giant confirmed on Thursday that French prosecutors are investigating it for tax matters, but denied wrongdoing. A similar spat in Italy over transfer pricing at its top brand Gucci led to a 1.25 billion euro settlement last year. Swiss subsidiary LGI, at the centre of that probe, also offered services to Kering’s French brands, before overhauling the whole system in 2017.

It’s not clear whether French authorities will take the same approach as their counterparts across the Alps. But Gucci’s tax bill was 60% of its 2.1 billion euro recurrent operating income in 2017. A similar hit for its French brands Saint Laurent and Balenciaga, which had combined operating income of 500 million euros that year according to Breakingviews estimates, would only imply a hit of a few hundred million euros. With Kering projected to report 3 billion euros of net income next year, Gucci boss François-Henri Pinault would be able to afford it. (By Lisa Jucca)

Magically delicious. General Mills is on a lucky streak with more pet owners and bakers staying indoors. The Lucky Charms cereal maker’s fiscal second-quarter net revenue rose 7% to $4.7 billion as sales of dog food and baking stuff surged at double-digit rates. With Covid-19 cases still rising, the Minneapolis-based company expects those trends to stick around for another quarter or so.

Moreover, earnings increased 19% in part because it charged more for premium products, like Blue Buffalo dog chow, offsetting higher advertising spending. Chief Executive Jeff Harmening said the brand, which General Mills bought two years ago, shows its deals “can add value.” Perhaps further acquisitions will be on the Cheerios maker’s 2021 resolutions list. (By Amanda Gomez)

Heart in the desert. Israel and the United Arab Emirates have found a use for Finablr. A year ago the London-listed payments company was worth 1.3 billion pounds ($1.8 billion), but since then the Travelex operator has been hit by an accounting scandal involving $1 billion of undisclosed debt and its shares have been suspended. On Thursday Abu Dhabi’s state-backed Royal Strategic Partners and Prism Advance Solutions, whose non-executive chairman is former Israeli Prime Minister Ehud Olmert, struck a deal to buy Finablr for a nominal fee of $1.

The joint bidder will provide working capital to maintain the business operation, and will fork out a price of $190 million if the company succeeds in recovering the missing funds. For Abu Dhabi, it’s a way to save 3,000 jobs at Finablr unit UAE Exchange, which helps foreign workers send money home. For both parties, it cements the “normalization agreement” Tel Aviv signed with Abu Dhabi back in August. With $4 billion in expected annual trade between the two, that may make sense. (By Karen Kwok)

Fuel injection. Norwegian Air Shuttle is still not past the point of no return. That’s thanks to 80% of its investors voting in favour of letting the board raise up to 4 billion Norwegian crowns ($458 million) through a sale of hybrid bonds. It’s the second win for the $284 million airline this month, after it secured protection from its creditors in a bid to convert debt to equity. Its shares were up nearly 10% on the news.

Still, clear skies are a long way off. Chief Executive Jacob Schram has to haggle with creditors as he seeks to reduce debt and liabilities of $7 billion. The bigger challenge may be to convince new investors that it has a viable future and secure new investment for its debt sale. But if he fails to raise the necessary funds, Schram reckons the carrier will run out of cash by March. For now, the airline can argue it still has a route back to recovery. (By Aimee Donnellan)

Key man risk. Emmanuel Macron has tested positive for Covid-19, the French presidency announced on Thursday, offering a potent reminder that even as vaccines are rolled out, the virus is still virulent and has no political allegiance. The centrist politician joins other leaders as diverse as Brazil’s Jair Bolsonaro, U.S. President Donald Trump and British Prime Minister Boris Johnson among those to contract the disease.

Those leaders recovered, which bodes well for the relatively healthy and youthful Macron. Yet his condition could still have consequences. It comes just as the European Union is trying to finalise a trade deal with Britain. Though the European Commission is leading the talks, an active Macron may be needed to approve any last-minute compromise. Meanwhile, France’s infection rate has been falling in recent weeks, allowing the country to slowly emerge from its latest lockdown. There’s no better reminder for French citizens of the need to remain vigilant. (By Neil Unmack)

Sales pop-up. The advertising industry’s recovery may come sooner than expected. That’s the bullish message from WPP, which reckons it can resume share buybacks next year, pay a progressive dividend and ramp up spending by up to 500 million pounds per year to win new clients. Most importantly, the world’s biggest ad agency is aiming to get net sales back to 2019 levels by 2022, one year ahead of the previous schedule.

Chief Executive Mark Read’s plans to juice up the company’s margin caught the most attention. He intends to deliver an operating margin between 15.5% and 16% in 2023, a steep jump from the 11% analysts expect this year, according to Refinitiv. That could be delivered by 600 million pounds of cost savings and working with clients like L’Oreal and Ford Motor to move their marketing and sales online. Since companies slash advertising budgets when the going gets tough, WPP’s success rests on a wider economic recovery. (By Aimee Donnellan)

Island paradise. New Zealand is roaring back to business. After successfully containing Covid-19 cases, the country’s economy grew a record 14% quarter-on-quarter in the three months to September, beating the central bank’s own November forecast. Even more impressive, output actually expanded slightly compared to last year, pointing to a rebound back to pre-pandemic levels. It’s “as close as you can get to a true V-shaped recovery”, Kiwibank Chief Economist Jarrod Kerr marvelled.

Strong domestic consumption – likely pent-up demand from strict lockdown measures earlier this year – seems to have offset the toll of closed borders and lost tourism. Fiscal and monetary stimulus also played a role, though house prices now risk overheating. Barring another outbreak, the momentum can be sustained by mass vaccine rollouts and a potential travel bubble with Australia next year. (By Robyn Mak)

Plus ça change. The more things change, the more they stay the same at Paris-listed Scor. The 5.2 billion euro French insurer on Wednesday evening said it would separate the roles of chairman and chief executive as part of long-overdue governance reforms.

If that seems like a win for activist investor CIAM, which has campaigned for the roles to be divided, it’s not. Veteran boss Denis Kessler, who has occupied both positions since 2002, will stay on as chairman and only relinquish his CEO title in early 2022. His anointed successor, Benoit Ribadeau-Dumas, who has never worked in the insurance sector, will become Kessler’s deputy in the interim.

Since rebuffing an 8.2 billion euro takeover bid by Covea in 2018, Scor shares have fallen by 22%, while peers Hannover Re and Munich Re have seen their stock rise. A governance reboot offered the prospect of meaningful change. Shareholders have been served dour continuity. (By Christopher Thompson)


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