Richemont Goes Shopping Online

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What's going on here?

Switzerland’s Richemont, one of the biggest names in the luxury business, has agreed to spend up to $3.3 billion buying the 51% of online fashion retailer Yoox Net-a-Porter (YNAP) that it doesn’t already own.

What does this mean?

Richemont, the owner of Cartier, Montblanc and various other luxury brands, already owns 49% of YNAP, though only 25% of its voting shares. It’s now buying the rest of the company in a deal that values YNAP at over $6 billion. As well as running major online fashion marketplaces like Yoox and MR PORTER, YNAP also designs websites for luxury brands like Armani to sell their own products. The company also has an extensive logistics (e.g. delivery) operation, the sine qua non of ecommerce – especially when dealing with high-rolling customers used to top-notch service at the speed of money.

Why should I care?

For markets: It’s a big payday for YNAP’s shareholders; Richemont’s are more circumspect.

YNAP’s shares jumped 25% on Monday, close to the price that Richemont has agreed to pay. Meanwhile, Richemont’s stock fell about 2%. That’s fairly typical of such a deal, as investors fret over the company’s ability to successfully integrate a new firm and the risks that accompany Richemont’s promises to spend money expanding YNAP.


The bigger picture: It’s the rise of the millennial shopper.

Richemont’s aim here is to strengthen its online presence, which has become critical to meeting the demands of luxury customers. In particular, affluent millennials demand a digital experience and have high expectations regarding logistics such as delivery (couriered Church’s shoes on demand? Yes please). Richemont isn’t alone; competitors such as LVMH have recently launched their own multi-brand ecommerce ventures. The digital world was once seen as infra dig – too mass-market and a quick way to devalue one’s brand – but the land of luxury is now being forced to beef up such capabilities as millennials become a much more important demographic.

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Netflix Takes The Crown

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What's going on here?

Netflix had, in its own words, “a beautiful Q4” as it added a record number of subscribers – far more than Wall Street expected. Investors agreed, sending Netflix’s stock price up almost 10% following the news.

What does this mean?

Netflix increased its streaming revenue by 36% in 2017, adding a total of 24 million new memberships (tweet this) (compared with 19 million in 2016). Once again, investors’ expectations were high (its stock had already gained 17% so far this year) – but once again, Netflix had no problem exceeding them. The company credits the strength of its original programming and the ongoing shift to online viewing for its accelerating growth.

Why should I care?

For markets: Netflix’s business model is all about scale.

Growth is so important because Netflix is spending a huge amount on creating new programming (it spent $2 billion more than it earned last year, largely due to programming costs). The idea is that Netflix’s revenue will continue to rise as subscriber growth continues apace, and that its spending on new original programming will eventually fall (relatively speaking) – turning Netflix into a cash cow. The faster it grows, the closer it gets to that day – and the more valuable the stock becomes.


The bigger picture: Disney’s planned acquisition of Fox assets may make life harder for Netflix.

Netflix’s ability to generate user growth and produce fantastic content is going to be gnawed away at by the Mouse in the coming years. Disney recently announced it would pull its content from Netflix in 2019 and create its own streaming service. It then bought most of 21st Century Fox’s entertainment businesses, which will give Disney a lot of content to put on its new streaming platform (just imagine: The Simpsons mashed up with Star Wars). Disney could also compete with Netflix for Hollywood’s top producers and other talent – pushing up the cost of producing new shows and threatening Netflix’s bottom line.

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Breaking Up Is Profitable To Do

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What's going on here?

Shares of German industrial giant ThyssenKrupp jumped 4% on Friday after it agreed to review its overall strategy and structure in the face of investor pressure.

What does this mean?

ThyssenKrupp – which owns businesses that make various things, from submarines to elevators and car parts – is a throwback to the days where large conglomerates ran sprawling industrial empires. But it’s come under increasing pressure from investors of late as profits have continued to fall short of its own targets.


ThyssenKrupp has already implemented some major changes, including separating its steelmaking operations and merging them with India’s Tata Steel (due to be completed later this year). The CEO has now agreed to a strategic review of all its businesses, cheering investors who believe that splitting up the company further will lead to increased profits and a higher overall valuation.

Why should I care?

For markets: The main “activist investor” pushing for change believes a simpler structure could double Thyssenkrupp’s value.

Investment firm Cevian Capital is Thyssenkrupp’s second-largest shareholder and the most vocal, though not sole, critic of Thyssenkrupp’s current setup. It believes that Thyssenkrupp’s stock price could double if the company’s structure were less complex. The stock’s move 4% higher on Friday suggests that others also share the view that breaking up the various businesses would result in greater value for shareholders.


The bigger picture: This could be yet another example of a company simplifying in order to boost its value.

Last week, General Electric’s CEO suggested that the US industrial giant could be broken up into separate businesses in an effort to create more value for shareholders. Various other companies, including Hewlett Packard, have pursued a similar strategy. A more streamlined setup usually offers investors a clearer view of what they’re investing in, making a company more attractive and boosting its value. There’s also an argument that in this age of constant innovation, a slim operation can more quickly develop and profit from new technologies.

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How Low Can You IPO

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What's going on here?

US security company ADT Corp became a publicly traded company on Friday, but alarm bells rang as it sold its shares at a lower valuation than hoped – and then saw them decline over 10% on their first day of trading.

What does this mean?

New shareholders initially purchased ADT’s shares for $14, about 25% lower than the $17-19 range that ADT was targeting. To make matters worse, ADT’s shares then tripped to $12 on its first day of trading as investors expressed clear reservations over its valuation.


Despite the lower share price, the IPO still valued ADT at over $10 billion – meaning it will almost certainly be one of the biggest IPOs this year. (tweet this)

Why should I care?

The bigger picture: This IPO tested the waters for companies backed by private equity firms.

Private equity firms sometimes buy publicly traded companies, take them “private” (i.e. off of the stock market), try to turn them around, and then bring them “public” again via an IPO – which is exactly what the private equity firm Apollo has done with ADT. One risk for the new investors is that Apollo has already benefited from the turnaround, and there might not be many more reasons for the company’s value to increase. The poor performance of this IPO may mean that other upcoming private equity-backed IPOs will have to settle for a lower valuation.


For markets: A high level of debt makes ADT a bit less secure.

As is typical of private equity-backed companies, ADT has a lot of debt – which increases the riskiness for its new shareholders. ADT essentially has less margin for error if its profits were to decline (in other words, it has a higher risk of bankruptcy than companies with less debt). Investors will still back such a company, but often demand a lower valuation as a result of the higher risk – as appears to have been the case with ADT.

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Chocks Away For A380s

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What's going on here?

The game of chicken between plane builder Airbus and Emirates ended on Thursday as the Dubai-based airline coughed up billions of dollars for up to 36 more A380 superjumbo jets – rescuing production of the world’s largest commercial aircraft (tweet this) from a premature grounding.

What does this mean?

Eyebrows were raised at the recent Dubai Air Show jamboree when an expected new order from Emirates for more A380s failed to materialize. Emirates has been by far the biggest buyer of the A380 since it first rolled off the production line a little over a decade ago. Other airlines have typically gone for Boeing’s smaller and (usually) more fuel-efficient Dreamliner and 777 models.


Airbus said that, without another big order from Emirates, it would be forced to stop producing the signature aircraft. With that threat hanging over proceedings, a deal was struck whereby Emirates reduced the number of planes it guaranteed it would buy, while also agreeing to take delivery of its orders sooner than originally planned (which helps Airbus shift stock coming off the production line in the next few years). The result: the A380 program is set to cruise along for at least another decade.

Why should I care?

The bigger picture: Bigger isn’t always better.

Boeing, Airbus’ chief rival, argues that the future belongs to its 777 and Dreamliner models, which offer more flexibility (not least in the routes they suit flying) – and airlines appear to agree. Similar conclusions are being drawn in many industries: whether it’s small yet disruptive startups, conglomerates “shrinking to grow” or airlines wanting more nimble planes, corporate strategy has increasingly prioritized flexibility over the past decade.


For markets: Airbus’ stock price got a brief lift.

Relieved investors initially sent Airbus’ stock up 3% following the announcement, although it finished the day up less than 1%. While ending the A380 program would have been “emotionally expensive” for Airbus (like any breakup), it wouldn’t have caused major financial damage.

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Apple & Co. Repatriate Foreign Spoils

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What's going on here?

Apple is shifting at least tens of billions of dollars of cash it’s held overseas to the US and will spend a good deal of it on expanding its operations there – but it has to pay a $38 billion tax bill first!

What does this mean?

A few years ago, Apple’s CEO called the US tax system “total political crap” for encouraging companies like Apple to keep their overseas profits outside of the US (in order to avoid paying America’s relatively high tax rate). But due to a new lower repatriation rate brought in under the new US tax laws (down from 35% to 15.5%), Apple – and likely others – will bring much of their foreign cash onto home turf.


The idea is that all this extra loot will, at least partially, be used to expand the companies’ operations in America, creating jobs and boosting the economy. For its part, Apple said it would invest $30 billion in the US over the next five years, including a new corporate campus – creating more than 20,000 jobs.

Why should I care?

For markets: Investors could be even bigger winners than workers.

Apple and other American companies were legally unable to use their overseas cash to pay shareholders (e.g. via dividends or buying back their own stock). But with this money now homeward bound, the firms will soon have plenty of shekels sloshing around – and they’ll almost certainly pay out a significant amount to shareholders.


The bigger picture: Companies are walking a political tightrope.

Detractors of the new tax law worry that businesses will favor rewarding their shareholders over spending money expanding in the US, which is not as clear a positive for the US economy. Companies like Apple have been quick to tout elaborate new projects, magnanimous bonuses for workers and job creation figures – which is good PR. Investors, and the rest of us, haven’t heard much about dividends and stock buybacks – yet.

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Wall Street’s Weigh-In

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What's going on here?

It’s earnings season for Wall Street banks… and while some had pretty good news to report, Goldman Sachs surprised markets on Wednesday when it announced that revenues at its once-lucrative bond-trading division had nosedived to their lowest in ten years.

What does this mean?

A number of Wall Street’s biggest banks actually reported billions in losses last quarter related to one-off tax payments under the new Trump tax code. Goldman, however, was remarkable for all the wrong reasons: it reported its lowest quarterly revenues since the 2008-09 financial crisis, thanks to dismal numbers from the parts of the bank that trade commodities, currencies and debt (think: bonds and loans).


Despite encouraging revenue growth in its investment banking division (e.g. advising big companies on mergers), the steep decline in trading revenues suggests to many that Goldman may need to take a long, hard look in the mirror. Shares in the bank were down over 2% on Wednesday.

Why should I care?

For markets: Other Wall Street banks did better.

Bank of America reported a total annual profit of $21 billion on Wednesday, its highest since the halcyon days before the financial crisis; Citigroup reported strong revenue gains in consumer banking and institutional lending. No such luck for Wells Fargo, alas, whose viability as a lender has been hit by a series of scandals related to overcharging and fraud. However, nearly all of these banks should eventually benefit from the recent tax reforms – despite some taking a short-term tax hit.



The bigger picture: Markets these days are somewhat calmer than they used to be – meaning there’s less money to be made in some areas.    

Weakness in trading bonds has been a pretty constant theme for all banks in recent years. Goldman earned a paltry $1 billion from its bond-trading department last quarter; that’s nearly how much it used to earn every two weeks in 2009 (tweet this).

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Corporate Raiders Hoist The Jolly Roger

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What's going on here?

After failing to woo the top brass at British engineering firm GKN, turnaround specialist Melrose Industries has gone rogue and is attempting to mount a hostile takeover – the UK’s biggest since 2009.

What does this mean?

Melrose has made a pretty penny buying up companies, restructuring them, and then (ideally) selling them off for a profit. With GKN, Melrose envisions selling off non-core businesses before splitting up the firm into separate automotive and aerospace companies.


Following the rebuff of Melrose’s initial overtures, GKN’s management promised to make just these sorts of changes itself. But Melrose crashed the party, directly offering GKN shareholders £7 billion in Melrose shares plus cash for the company on Wednesday. GKN now has to convince shareholders that the future is brighter without Melrose, while Melrose may have to raise its offer in order to entice shareholders to get on board with its plans.

Why should I care?

For markets: Past mistakes will make it harder for GKN’s management to win over skeptical shareholders.

GKN had a rough 2017, issuing a profit warning after problems in its aerospace division. Melrose’s pitch is that its superiority to GKN’s management is worth investors taking a smaller slice of the pie: through the share swap, it’s offering current GKN shareholders a roughly 50% stake in any combined GKN-Melrose operations. GKN’s management obviously disagrees – but last year’s problems may have dented its credibility.



The bigger picture: Hostile takeovers need a mixture of willing shareholders and friendly regulators to succeed.

For a deal like this to go through, investors’ faith that the current management can turn around the business has to be fairly low. There’s also concern here that trustees for GKN’s pension scheme – which posted a £1 billion deficit last year – might work to scupper the deal if the pension program isn’t adequately protected and reformed (something similar happened when a private investment firm tried to take over WH Smith in 2004).

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GE’s Lightbulb Moment

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What's going on here?

On the same day that General Electric (GE) revealed a multi-billion-dollar hole in its finances, its CEO floated the idea of breaking up the struggling conglomerate – a move that would upend one of America’s most storied companies.

What does this mean?

Despite flogging off most of its financial services businesses in recent years, GE still owns insurance policies that promise to provide care for the elderly (e.g. nursing home expenses). However, the premiums it charged for these policies are, it transpires, insufficient to cover the costs of providing the care. GE said on Tuesday it would wipe $6 billion off the value of its insurance business immediately, and set aside $15 billion more for potential future charges – a significant hit to its profits.


On a conference call ‘fessing up to the news, the CEO said GE may change its corporate structure, turning its various business units into separate companies. Subsequent media reports suggested that such a move was likely and could be confirmed as early as this spring.

Why should I care?

For markets: Investors struggle to understand what’s under GE’s hood.

GE’s share price has plunged 40% over the past year, as some of its business lines struggled and investors became increasingly concerned about the low level of cash that GE generates on an ongoing basis. Tuesday’s news suggests investors have, nevertheless, still failed to fully grasp GE’s complex financial situation – and that there might be yet more skeletons in the closet (next to the electricity meter).


The bigger picture: A simpler structure can promote transparency.

Right now, investors looking for, say, exposure to GE’s industrial business have to risk a disparate business line like its insurance operations denting its profits by billions. But if GE were broken out into different companies, investors would be able to value each on their respective merits. By giving investors more clearly defined options, the sum of the value of a conglomerate’s various parts can be increased.

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BP’s $65 Billion Boo-Boo

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What's going on here?

British energy giant BP said on Tuesday that it would take a $1.7 billion charge relating to the infamous 2010 Deepwater Horizon oil spill – pushing its total Deepwater payouts above the $65 billion BP most recently estimated it would cost.

What does this mean?

BP has paid out billions in various claims and fines following the spill. The most complicated (and expensive) claims from affected businesses along the American Gulf Coast are among the last of the 390,000 to be settled. The bad news is that the costs are coming in about $1 billion higher than expected; though the good news for BP is that, with 99% of the Deepwater claims processed, the expense and uncertainty involved appears to now be coming to an end.

Why should I care?

For markets: Investors appeared a little surprised by the news.

BP’s stock sold off by almost 3% on Tuesday. It was the worst performer among big energy companies globally, which suggests that investors were stung by the higher-than-anticipated cost. One fear is that the remaining settlement costs will also come in larger than expected. If not, the impact on BP’s share price should be minimal (in the view of most research analysts). Tuesday’s hefty $1.7 billion, for example, isn’t expected to impact BP’s ongoing buyback of its own shares (which is helping to support its share price).


The bigger picture: It’s been a good month for oil companies.

Even with Tuesday’s news, BP’s “break-even” oil price will likely be somewhere in the low-to-mid-$50s (per barrel). With the oil price currently at a two-and-a-half-year high of around $70, BP and its contemporaries – which have spent years slashing their costs – are better placed to generate profits than they have been in a long time. It’s no surprise, then, that energy companies are among the best-performing stocks so far this year.

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