Nixing China’s oil bid may create Canada discount
By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Canada is at risk of slapping a national discount on its resources sector. Investors reckon there’s a roughly one-in-four chance that the country’s politicians will block a $15.1 billion offer by China’s CNOOC for local energy company Nexen. Takeovers by state-owned companies raise tricky questions. But hoisting the national flag over a company of little strategic importance risks further alienating outside investors.
When state-owned oil giant first unveiled its bid on July 23, investors expected little Canadian resistance. Since then, however, doubts have crept in. Nexen shares are now hovering about 10 percent below CNOOC’s cash offer of $27.50. Though that’s still well above the pre-bid level of $17.30 to which Nexen shares would probably return if the deal was blocked, the market is no longer taking approval for granted.
Part of the anxiety stems from Prime Minister Stephen Harper’s insistence that market access should run both ways. Canada’s Bank of Nova Scotia, for example, has been waiting a year for official go-ahead to purchase a minority stake in China’s Bank of Guangzhou. Cabinet members – and the country’s spying agency – have also expressed concerns about selling to state owned companies which might harbour sinister political motives. And Canada has form in spurning foreign buyers: two years ago, it blocked BHP Billiton’s $39 billion takeover of Potash Corp., the world’s largest fertilizer company.
But buying Nexen hardly gives the Middle Kingdom control of Canada’s energy output. The company is the nation’s 24th largest pumper of oil, according to Macquarie, and about three quarters of the Nexen’s resources are outside Canada. Blocking the takeover would also raise tricky policy questions: is Canada singling out Chinese buyers, or would it also object to the trio of Indian state companies that recently lodged a $5 billion bid for Canadian oil sands currently owned by ConocoPhillips?
Hoisting the flag over Nexen would be bad news for investors in other Canadian mid-sized drillers – including Talisman Energy and Celtic Exploration – that are seen as potential foreign targets. Canada has said it needs $640 billion over the coming decade to fully exploit its energy reserves. Rebuffing its most enthusiastic investor seems especially foolish.
Franco-German politics first hurdle for BAE/EADS
By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
France and Germany must clear the air before the merger between BAE and EADS can proceed. Their uneasy alliance over the Airbus maker’s shareholding and governance cannot continue as is – its end is even a prerequisite for the merger. But Paris and Berlin remain obsessed by “parity”, the sacrosanct notion that their position in the company should be identical. Franco-German parity could be preserved in a larger group, as long as political passions are kept under control.
The two nation’s shareholdings in EADS have always been kept rigorously equal – currently at 22.5 percent for each side. The only asymmetry was that the French state has a 15 percent direct stake in the company, with media group Lagardère, formerly a defence contractor itself, owning 7.5 percent. On the German side, Daimler long represented the country’s interests. The auto group has been reducing its stake – 7.5 percent has gone to a consortium of government controlled regional banks and KfW, the state-owned lender was set to buy another 7.5 percent.
Ideally, the merger would serve as a golden opportunity to clear the air. Each of the three governments involved – the UK, France and Germany – would own a golden share with significant blocking powers. Furthermore, as important customers of the enlarged group, they would have considerable influence over its decisions.
The problem is that the French government seems to want to keep its stake in the group – which would be reduced to around 9 percent in the combined entity. It’s unclear whether this is a deal-breaker for Paris. The government’s preference may simply be motivated by the need to avoid a domestic backlash over “privatisation” – still a dirty word in some circles of the ruling left.
But if the French persist, the German government might be tempted to go ahead with the sale of the Daimler stake to KfW. Such a move back into the state’s orbit would reinforce UK worries about excessive politicisation, perhaps leading to a British nixing of the project.
BSkyB should start to build in new bid premium
By Chris Hughes
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
BSkyB shares should start to reflect the chance of a second bid from News Corp. Ofcom, the UK media watchdog, has confirmed that Rupert Murdoch’s media group is a suitable lead shareholder in the satellite broadcaster despite the phone-hacking scandal in News Corp’s UK newspaper business. The clarification removes a potential obstacle to it taking full control of the business.
Ofcom excoriates Rupert’s son James for his mishandling of the phone-hacking affair, detailing management failings as late as December 2010. His conduct was “ill-judged” and “fell short” of what was expected of him. Ofcom also fails to endorse James’s account of what he did and didn’t know about the scandal, saying only that there was no convincing evidence to contradict his version of events.
The Ofcom verdict clearly vindicates the BSkyB board’s decision to demote James from chairman to non-executive director in April. Without that switch, Ofcom may well have forced his exit or stripped BSkyB of its broadcasting licence. Crucially, however, Ofcom is content to allow Sky to continue broadcasting with James on the board.
There are still risks in a new bid for Sky. Ofcom might change its mind if it gets new information from criminal cases relating to phone hacking, or from the forthcoming Leveson report into UK media standards. Even if News Corp gets over these hurdles, any new bid would reignite the political firestorm in Britain against the Murdoch empire.
But News Corp has long coveted full control of BSkyB and may well decide to move before the next UK general election, due in 2015. The current government could have blocked it on grounds of reduced media choice but seemed prepared to approve the deal before the hacking scandal broke. Dissenting voices in the ruling coalition government came from the junior Liberal Democrats, but they are a weakened political force. The 2015 vote, meanwhile, could see the election of a new, Murdoch-hostile, Labour administration.
Key ingredient missing for M&A revival
By Christopher Hughes The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Cheap money. Tick. Stable equity markets. Tick. Revenue pressure. Tick. Ideal conditions for a boom in mergers and acquisitions, surely? Spirits seem to be stirring in Europe, of all places, with BAE’s attempted union with defence peer EADS and Glencore’s heated pursuit of fellow miner Xstrata, while August generated a handful of multi-billion dollar U.S. deals. But not all the ingredients are in place to cook up a deal feast.
Financial conditions are certainly propitious for companies to take on debt and buy equity. Real policy interest rates are negative and shares are cheap enough that many companies offer cashflow yields higher than the interest rate on debt financing. As yet, though, the equity of choice for companies has been their own. Buybacks are buoyant, while global M&A volumes are down 17 percent year-to-date, including falls of 28 percent in the United States and 15 percent in Europe, according to Thomson Reuters data.
Adversity might encourage boldness. China’s growth is slowing, the U.S. recovery remains a work in progress and Europe’s has barely begun. That argues for deals to build scale, cut costs and obtain greater leverage in procurement – key, although not sole, drivers of the BAE-EADS talks. And assuming recovery is only deferred, now is the moment to buy capacity on the cheap. Building it is costlier and riskier.
So why are deal volumes so low? Because financing and logic aren’t enough. Chief executives, boards and investors all need to believe that deals offer more return than risk. That confidence is lacking. The Philadelphia Fed’s latest Business Outlook survey reported less optimism than in July. Shareholders are inclined to punish companies for increasing leverage.
Europe’s big deals give a false signal. Both have been in the works for ages – BAE-EADS from the late-1990s and Glencore’s since its holding in Xstrata became a large part of the trader-miner’s value. Besides, a deal would actually deleverage Glencore’s balance sheet.
A minority buyout here, a long-mooted merger there – deals will happen. But bankers shouldn’t spend the bonus yet.
Old dogs of war get mega M&A deal
By Hugo Dixon and Quentin Webb The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
The old dogs of war have secured one of the biggest M&A mandates of the year. Bankers often say they are in the relationship business. With the proposed $45 billion tie-up between EADS and BAE Systems, this sales patter is actually true.
Back in the 1990s, there was a big spurt of consolidation in Europe’s fragmented aerospace and defence industry. The two main deals were: the creation of EADS by merging France’s Aerospatiale and Germany’s DASA; and BAE’s takeover of GEC’s Marconi unit. Even at the time, the financiers and industrialists played elaborate war games to see whether it wouldn’t be better to go the whole hog and merge all four units.
More than a decade later, many of the same bankers are still playing the game – although often they are in different firms, typically boutiques. Bernard Taylor, who at the time advised Aerospatiale as a Robert Fleming banker, is now advising EADS as the boss of Evercore in Europe. His relationship with the company has no doubt been cemented by the fact that Philippe Camus, a former co-chief executive of EADS, is now a senior adviser to Evercore.
Dietrich Becker, another EADS adviser, has also been circling around this deal for ages. Back in the 1990s, he advised DASA as a Morgan Stanley banker. He, too, has since jumped ship to help create boutique, Perella Weinberg. His German nationality probably helps keep Berlin on side.
Meanwhile, Tim Shacklock has probably been BAE’s longest-standing adviser. He represented it on the Marconi acquisition as a top banker at Dresdner Kleinwort Benson. He now runs yet another boutique, Gleacher Shacklock.
These are not the only advisers. Lazard is also on the EADS ticket. The head of its Paris office, the politically well-connected Matthieu Pigasse, can probably help square things with the Elysee. BNP Paribas is present too. Meanwhile, BAE has got two top British bankers from bulge-bracket firms – Goldman Sachs’ Karen Cook and Morgan Stanley’s Simon Robey – on its roster.
Xstrata should accept revised Glencore pitch
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Xstrata should accept Glencore’s revised $35.5 billion offer for the mining giant. What was originally billed as a merger of equals is now, for all practical purposes, a takeover at a modest premium. Changes to the proposed governance arrangements make the business combination look riskier than before. Glencore may have to pay up to convince Xstrata’s top people to take orders from its boss, Ivan Glasenberg, after his Xstrata counterpart Mick Davis leaves. But for all the recent animosity, this is a recommendable proposal.
Glencore’s final offer represents a 17-percent premium to the pre-deal status quo in February. That’s almost double the premium offered in the originally agreed merger. It may be short of the 30 to 40 percent typically expected in takeovers, but that reflects Glencore having partial control already via its existing 34-percent stake, which is also a deterrent to counterbids. It is also consistent with Glencore’s partial takeover of the Xstrata board: under the merger proposal, Davis was to be CEO under his exsiting chairman, John Bond. Now Davis will stay for only six months but Bond will continue – an astonishing reward given Bond’s poor handling of the merger process so far.
It looks more likely now that Xstrata’s top managers could follow Davis out the door. That’s a big worry given one rationale for the deal was to acquire Xstrata’s mining talent. Glencore has acknowledged as much, saying it will consult with Xstrata’s independent directors and shareholders on new incentives to prevent talent flight. It should be a solvable problem, at the right price. But it will take some delicate maneuvering given the blow up over Davis’s original retention bonus.
Xstrata may have to swallow its pride at the weakish premium. But a rival suitor is unlikely: Glencore’s blocking stake prevented Brazil’s Vale buying Xstrata in 2008. And the premium gains a few more percentage points when judged against Xstrata’s market value last week when investors were pricing in a high probability of deal failure. What’s more, Breakingviews’ calculations show Xstrata shareholders are already getting the full value of the synergies.
Having originally agreed to a lower premium, Xstrata’s board will struggle not to recommend the sweetened terms, even with the governance changes. The changes may just accelerate the inevitable. It was questionable whether Davis would have stayed that long anyway. Of course, Xstrata’s shareholders – including the Qataris, with 12 percent – may feel they have the bit in their teeth. They have yet to weigh in. But Xstrata’s directors have a fiduciary duty to say yes.
Glenstrata drama is no way to do M&A
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Memo to Ivan Glasenberg: this is not the way to do big public company M&A. The boss of Glencore has lobbed a last-minute curveball to save the commodity trader’s proposed merger with miner Xstrata, seeking more time to discuss sweetened terms. The clumsiness of the move creates the impression that Glasenberg can’t suppress his trader instincts when he needs to play the statesman CEO. It also augers ill for any transaction that follows.
For almost two hours on Sept. 7, shares in both Glencore and Xstrata gyrated as investors were left wondering whether Glasenberg really would revise the terms of Glencore’s existing offer, which shareholders in Xstrata were poised vote down. First Glencore adjourned its own shareholder vote on the merger proposal, then Xstrata delayed its meeting a few minutes. Then Xstrata announced that Glencore was dangling a fresh proposal. There was no detail from Glencore, no recommendation from Xstrata, and no word on what Qatar Holding, the leading refusenik on the deal, thought of it all.
This kind of drama might be expected in a hostile takeover. But this was an agreed deal, and Glencore has had months since the Qataris first announced their opposition to the original terms to negotiate an offer that works. It’s not blue chip, it’s slapdash – even if Tony Blair, an adviser to JPMorgan, has reportedly joined the discussions.
Xstrata says the Swiss trader is proposing to pay 3.05 of its shares for every Xstrata share it does not own, a 17 percent premium to the state of play on Feb. 1, and up from an original 2.8. A share-swap ratio beginning with a 3 was always seen as the magic number to get the deal done. On a Breakingviews analysis, it would be mildly value-destructive for Glencore, whose shares are now suffering.
But there are also new obstacles to a transaction. Xstrata says the new proposal envisages Glasenberg, not Xstrata Chief Executive Mick Davis, running the combined group. And Glencore might structure the transaction either as a takeover offer or a scheme of arrangement, as originally proposed. There was no word on what happens to Davis, who has the deeper experience in mining, and was previously deemed so critical to the combination’s success that he needed a $45 million retention package.
Open courts healthy for Delaware and dealmakers
By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)(Fixes link.
Courts that are open to the public are healthy for Delaware and dealmakers. A U.S. district judge ruled that the state’s jurists can’t arbitrate disputes behind closed doors. That may disappoint shy companies, but it ensures that the Fortune 500’s preferred legal forum remains accountable. The mergers world can also depend on continued access to helpful -and sometimes witty – decisions.
The popularity of private arbitration has soared among the corporate set, with a big boost from the U.S. Supreme Court. The confidential process typically entails fewer rules, tighter deadlines and lower costs than litigation. And in several recent decisions, the highest U.S. court has upheld controversial arbitration agreements, stressing their value in diverting lawsuits from overloaded courts.
Afraid of losing cases to private arbitrators, Delaware in 2009 permitted companies to resolve their disputes in secret before the state’s own judges. Litigants would fatten government coffers with a $12,000 filing fee and a $6,000 daily payment, the reasoning went, and the Delaware bench would maintain its pre-eminence as arbiter of corporate altercations.
But last week, a federal judge shot down the scheme. She ruled that the public had a constitutional right to see what taxpayer-funded jurists are up to. And from a policy perspective, open hearings and published opinions tend to keep judges, lawyers and witnesses honest.
They also serve an essential business purpose. Dealmakers need to know if a proposed transaction will pass legal muster, and investors deserve prompt notice when a company breaks the rules. Court precedents help clarify matters in both instances. Allowing litigants, in effect, to keep conflict resolutions off the record creates potentially dangerous gaps in the law.
Focus Media insider buyout gives investors relief
By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
U.S. investors should take heart from a $3.5 billion Chinese-led buyout. Some of the same people who brought Focus Media public in 2005 now want to take it private. They might want to re-list the shares later in China, out of the focus of U.S. shorts-sellers, where the provider of advertising screens in public places might command a higher valuation.
Short-seller Muddy Waters alleged accounting irregularities in 2011. The share price fell from $25 to $15 a share in a day. They did not fully recover – the price was $22 two days before the $27 a share offer was announced. But the offer, and in particular the insiders’ participation – founder and chief executive Jason Jiang is leading the buyout – gives the company credibility.
The buyout would also be a round trip for Credit Suisse. It underwrote the initial public offering with Goldman Sachs and is one of the banks that has agreed to back the private equity buyers. In addition, the ex-Goldman bankers who brought it public now work at FountainVest, part of the buyers’ consortium. U.S. private equity group Carlyle, also a member, sold one of its portfolio companies to Focus in 2006.
The offer needs the backing of two thirds of the shareholders. Jiang owns 18 percent and Shanghai conglomerate Fosun International, which owns 17 percent, is likely to go along, especially as it bought at a 70 percent discount to the offer price. Fosun said the offer is attractive and it won’t support any competing proposals without Jiang’s participation.
The price may be lower than it would have been without the allegations, but it looks reasonably generous at eight times 2012 estimated EBITDA, not bad for a business with diminishing growth prospects in a saturated market.
Public investors lose in Mongol mining battle
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Mongolia’s treatment of the Chinese bid for coal-producer SouthGobi shows that the state which birthed Genghis Khan has lost none of its warlike spirit. Politicians seem determined to spike an offer from China’s state-owned Aluminium Corp of China (Chalco), which also involves mega-miner Rio Tinto and China’s sovereign wealth fund. A truce is possible, but public investors look likely to lose out.
Chalco’s $925 million offer for a 60 percent stake in SouthGobi in April produced an unfriendly response: a new investment law limiting foreign companies to 49 percent ownership of mines. More insidiously, Mongolia has dragged its feet over renewing some of SouthGobi’s licences, scaring away customers and squashing production. SouthGobi’s shares now trade at less than half the value of Chalco’s April approach, which stands until September.
For a tiny country, Mongolia has picked some hefty targets. Rio Tinto indirectly holds a controlling stake in SouthGobi, through its controlling position in Toronto-listed Turquoise Hill, known until last week as Ivanhoe Mines. China Investment Corp also owns 13 percent of SouthGobi, bought at around the level of Chinalco’s bid – and now deep underwater.
Mongolia’s protectionism looks short-sighted, but its opponents are unlikely to fight back too hard. Rio Tinto won’t want to jeopardise its 66 percent interest in world-class Mongolian copper mine Oyu Tolgoi and many Chinese steel mills depend on Mongolian coking coal.
There is room for compromise. Mongolia needs capital and customers – and China controls its main trade routes. That makes it risky to boot Chalco out entirely. The Chinese miner could turn a crisis into an opportunity, lower its offer price and settle for less than half of the company in return for some certainty of supply. It might also buy out some of CIC’s shares too to mitigate the fund’s losses. Without Chinese control, Mongolia’s nationalists should be happy to leave SouthGobi in relative peace.
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