All posts by katrina.hamlin

Wanted: bold activist to take on Masayoshi Son

Sparks flying

BY LIAM PROUD

Masayoshi Son’s SoftBank Group is worth significantly less than the sum of its parts. For an activist investor with plenty of cash and the stomach for a fight, it could be the trade of a lifetime.

Son’s $82 billion tech-to-telecom conglomerate ticks the boxes for pushy shareholders like Dan Loeb’s Third Point Management or Paul Singer’s Elliott Management. There’s poor governance: Son is both chief executive and chairman and makes investments in cash-burning companies like WeWork partly based on his ability to “feel the force”. Performance is weak too. SoftBank shares have returned minus 15% over the past six months, including dividends.

The result is that Son’s company trades at a huge discount to its theoretical asset value. It owns Alibaba shares worth $136 billion. Chipmaker Arm’s value is probably $22 billion, using the price before Son bought it in 2016. Listed stakes in SoftBank’s eponymous Japanese telecom unit and U.S. operator Sprint are worth $19 billion and $43 billion, respectively. Finally, SoftBank touts $36 billion of mostly private holdings, including its share in the Saudi-backed Vision Fund. Add everything up, deduct debt, and SoftBank’s equity should be worth $215 billion – 161% more than its current market value.

An activist-led breakup would help close the gap. SoftBank could start by handing Arm, Sprint and the Alibaba stake to shareholders. The latter could admittedly be tricky. As Yahoo discovered, it’s hard to realise the value of shares in the Chinese e-commerce giant without triggering a massive tax bill. Still, the potential rewards outweigh the costs.

Son’s 22% stake, based on information on the company’s website, is a big obstacle to forcing change. Major corporate decisions at SoftBank require the support of two-thirds of shareholders. If, say, three-quarters of them turn up to vote, Son only needs the support of investors representing 3% of the company to veto a motion. To overcome that hurdle an activist would either need to acquire a huge stake or rely on widespread support from fellow shareholders.

A protagonist would not be short of potential allies, though. Investors including Capital Group and Tiger Global Management privately criticised SoftBank’s Vision Fund losses and governance, the Wall Street Journal reported. In 2020, an activist could tap into that dissatisfaction to make a killing.

First published Dec. 10, 2019

IMAGE: REUTERS/Kim Kyung-Hoon

Tencent is next in Western cross-hairs

Sparks flying

BY PETE SWEENEY

China’s Tencent is set for unwanted attention overseas. Its WeChat app, with over 1 billion users, is indispensable to life and business in the People’s Republic, and plays an important role in Beijing’s campaign to monitor and influence Chinese people abroad. The debate over containing it will test Western commitment to free information flow.

The Hong Kong-listed company looks ripe for a session on the griddle. ByteDance, owner of the TikTok video app, is already under investigation in the United States. But if TikTok is a risk, WeChat is too. It is obligated by its government to share user data, plus censor conversations and news. It has flown under the radar because it has few non-Chinese users. This is unlikely to last.

The app is already under fire in Australia, which has around half a million residents born in China. Politicians there are nervous about Chinese meddling in their political system. The Labor Party recently alleged misleading articles describing their policies on immigration and gay rights were disseminated over WeChat – similar to how Facebook was criticised after the U.S. presidential election.

The $461 billion company is the largest constituent of the Hang Seng Composite index, and the second-largest member of the MSCI China Index. While China remains its main market, revenue in other countries from advertising and payments could be at risk. It may be forced to divest stakes in U.S. game studios, including a 40% piece of Epic Games HSBC estimates to be worth $6 billion, or be unable to co-produce films, as it did with “Wonder Woman” and “Venom”.

But WeChat could also present a challenge that previous targets of U.S. ire, like telecom-equipment maker Huawei Technologies, did not: how to block the flow of data. Authorities could tell Tencent to stop transmitting anything back to China, or to store data locally. The most extreme measure would be to block WeChat outright, the way Beijing blocks Facebook.

WeChat is media, not message. But any of the above moves would grease the slippery slope Western societies are already easing on to. With an election around the corner, 40% of Americans believe the government should restrict false information online, per Pew Research Center polling. As Europeans and North Americans harden physical borders, the idea of them creating their own versions of the Great Firewall seems less far-fetched.

First published Dec. 20, 2019

IMAGE: REUTERS/Bobby Yip

Argentina debt do-over is even chancier than usual

Sparks flying

BY ANNA SZYMANSKI

Sovereign debt’s bad boy is back. Argentina, the eight-time defaulter, is on the hook for around $100 billion of hard currency debt held in private hands, just part of its hefty borrowings. The International Monetary Fund may complicate new President Alberto Fernandez’s plans for a quick debt fix, with wonky new bond features making the outcome even chancier than usual.

The dwindling liquid cash reported by the country’s treasury won’t even cover next year’s roughly $10 billion in private-lender interest, let alone principal. The Fernandez administration, which took office on Dec. 10, has signaled it prefers a so-called reprofiling to anything more drastic. That normally means maturities would be pushed out a few years, but interest rates and principal amounts due would be unchanged.

The IMF may nix this. The fund gave Argentina a $57 billion credit facility in 2018. No rejig of government debt will happen without its agreement. And its debt-sustainability analysis is unlikely to deem this a simple liquidity issue, especially factoring in the debtor’s history.

So a harsher restructuring is more likely. Citigroup has suggested that private lenders ought to be the biggest losers, with some interest payments cut by about 65% and maturities kicked out by around 10 years. Markets are also gloomy. Argentina’s benchmark U.S. dollar bond maturing in 2028 was trading at around 40 cents on the dollar in early December.

Further drama might come from a seemingly boring source: new legal language. Argentina added so-called single-limb collective-action clauses to recently issued debt. These force owners of specific bonds to accept a deal approved in a vote by 75% of holders of all issued bonds, making it harder for a small group of creditors to hold out, as Elliott Management and a few others famously did last time around. But a related clause says a deal must be “uniformly applicable” to all parties, and this can be interpreted in many ways.

Finally, the so-called pari passu clause – the boogeyman of Argentina’s last restructuring, a provision traditionally understood to give different bonds equal legal ranking – could even become an issue again, with new clarifying language apt to be tested in U.S. courts. The only certainty is that the outcome of the country’s likely debt do-over will, once again, change the wider sovereign debt landscape.

First published Jan. 3, 2020

IMAGE: REUTERS/Agustin Marcarian

ECB feuding will have a new front in coming year

Sparks flying

BY SWAHA PATTANAIK

Christine Lagarde has given a masterclass in diplomacy since taking the helm of the European Central Bank in November. But even her considerable peace-making skills will be challenged in the coming year. Disagreements will erupt in 2020 between rate setters who are fed up of ultra-loose policies and those who are convinced that the euro zone economy needs more help.

The discord will be over a big ECB strategy review that will, among other things, look at how the central bank’s treasured price stability mandate is defined. Unlike, say, Britain, where this definition is spelt out by politicians as an inflation rate of 2% with some margin of error, the ECB can set – and move – its own goalposts. Since 2003, the central bank has interpreted price stability as meaning inflation that is close to but below 2%. Before then, it simply aimed for less than 2%.

The review that led to the change didn’t cause much in the way of ructions. But this time will be different. How the mandate is defined will determine how loose monetary policy will be in the future. Those who oppose sub-zero rates or asset purchases may therefore back definitions that would strengthen their case.

For example, Austrian central bank chief Robert Holzmann has expressed a preference for a lower inflation target, of 1.5%. That would make it harder to justify ultra-easy monetary policy. So would a switch to an alternative measure of price pressures that includes owner-occupied housing costs, since the inflation rate that is being targeted would be higher. Or the ECB could focus on actual price levels, rather than the annual rate of change. In this case, a protracted period of weak inflation would require monetary policy to remain looser until the undershoot was eliminated. Focusing purely on core inflation, which excludes volatile food and energy costs, would also militate for easier policy.

A major change could destabilise the euro zone. A shift towards tighter monetary policy could cause investors to sell the debt of weaker countries, like Italy. But a looser framework could infuriate savers in northern Europe. With so much at stake, the battle is likely to be bitter and played out in public.

First published Dec. 11, 2019

IMAGE: REUTERS/Francois Lenoir

Margrethe Vestager will open tech’s walled garden

Sparks flying

BY LIAM PROUD

European Competition Commissioner Margrethe Vestager will in 2020 swap her sledgehammer for a scalpel. A new, more surgical approach to antitrust regulation could finally make it easier for Alphabet-owned Google and Facebook’s rivals to compete with these behemoths.

The Dane has yet to really earn her reputation as Big Tech’s slayer-in-chief, despite slapping 8 billion euros worth of fines on Google. Facebook got off with a 110 million euro charge for providing misleading information about its WhatsApp acquisition. Amazon.com has been largely unscathed, while Vestager’s tilt at Apple was mostly about taxes.

She certainly hasn’t dented their share prices. These four companies’ combined market capitalisation has increased around 150% to $3.5 trillion in the five years since Vestager’s term started. Google still processes almost all web searches in Europe. It and Facebook suck up about three-quarters of digital ad spending in the bloc’s five largest economies, eMarketer calculates. Apple’s App Store and Google Play control the discovery and distribution of mobile applications.

Such dominance is sustained by so-called network effects, or self-perpetuating advantages that make it hard for others to compete. A budding Instagram competitor would struggle to get off the ground, since early adopters of a newbie could no longer interact with friends who stayed on the Facebook-owned site. It’s the same for online marketplaces such has Amazon, or app stores. Meanwhile, Google’s search algorithms get better the more they are used. Dominance begets ever greater dominance.

Vestager, now starting her second term in the job, could break the loop by introducing what antitrust wonks call interoperability – basically, shared technical standards that apply across competing services. As with email, users of different social networks could seamlessly interact and move their data around. Rival digital-marketing companies could slot advertisements on to Google’s web pages, allowing them to undercut the search giant’s ad prices. Entrepreneurs could build rival app stores which work on Apple’s phones.

True, hammering out details will be tricky. But the mobile-phone sector shows that industry-wide technical standards are possible. Similarly, British banks now build their IT systems so that customers’ accounts interact with third-party apps. Forcing Big Tech to do something similar might feel less satisfying than a huge fine. But it would give Vestager a better chance of breaking their stranglehold.

First published Dec. 20, 2019

IMAGE: REUTERS/Francois Lenoir

Tokyo brings home the Olympic gold in 2020

Alternative energy

BY SHARON LAM

Tokyo will top the sporting podium in 2020. Host cities for the summer Olympics are often saddled with large debts, and cases of mismanagement have stretched from Montreal to Rio de Janeiro. Yet Japan is setting new standards in sponsorship and sustainability. Add on a boost from short-term stimulus, and the Land of the Rising Sun is set to bring home host gold.

The games come with outsize economic costs. Los Angeles ended up turning a profit in its 1984 event, a rare feat in recent times. Brazil extended a $850 million emergency state loan to Rio in 2016, and others have grappled with post-competition maintenance costs for abandoned facilities.

True, Team Japan hasn’t been perfect. Tsunekazu Takeda, former president of the country’s Olympic committee, stepped down in March on allegations of suspected corruption, putting governance front and centre. And the cost of hosting had also swelled to $12.6 billion as of December 2018, according to Reuters, up from an original estimate of under $7 billion. Still, most countries aren’t in it to pocket a financial profit.

Tokyo is leading the race elsewhere, racking up more than $3 billion in domestic sponsorships, three times more than any previous summer games. And the city is sending a timely message about the environment: Medals have been made entirely from the parts of 6.2 million used mobile phones, and electricity during the games will also come from renewable sources, according to organisers aiming for a carbon-neutral competition.

Robots, ferrying people to their seats and carrying food and luggage, will also showcase Japan’s technological prowess. In July, International Olympic Committee President Thomas Bach noted that Tokyo was better prepared than any city he has seen before. So, the city is on track to score a big win.

An influx of games-related tourism infrastructure spending will also give Japan a much-needed boost, even if it proves short-lived. The world’s third-largest economy has slowed, growing at an annualised 1.8% in the third quarter and prompting Prime Minister Shinzo Abe to call for stimulus measures to maintain the country’s economic competitiveness beyond the Olympics. In the games at least, it’s going for gold.

First published Dec. 24, 2019

IMAGE: REUTERS/Eric Gaillard

Gaming’s strongest opponent will be regulation

Alternative energy

BY OLIVER TASLIC AND ROBERT CYRAN

The $130 billion video game industry looks set to be a major battleground in 2020. Microsoft and Sony will release their first new consoles in years. Alphabet’s Google has just released Stadia, its cloud-based platform – and along with Apple wants to be the Netflix of online play. Meanwhile developers like Activision Blizzard have a strong hand. But the way the industry is growing will attract increasing regulatory scrutiny.

Amazon and other behemoths have either launched or are planning subscription packages offering monthly access to a slew of games, in the hope that a mix of exclusive content and a wide selection persuades players to pay up. People tend to play a few games a lot, though, rather than a wide range of games a few times. Popular ones like Fortnite have become places to hang out online with friends. The gaming comes second. This acts as a coalescing force around a few titles and gives the developers of popular games, like China’s Tencent, Activision and privately held Epic Games, a strong hand.

While these players duke it out for market share, though, their strongest opponent is limbering up. An important source of developers’ revenue are so-called loot boxes – digital packages of random items that can be purchased using real money. They give players the chance to win desirable digital items, and gaming companies a stream of high-margin income. In Electronic Arts’ Ultimate Team mode, for example, gamers open randomised “packs” in the hope of acquiring rare sports players. It accounted for 28% of the company’s net revenue in the most recent financial year.

But success brings scrutiny. Critics argue there’s a correlation between loot-box use and gambling addiction. Worse, children can easily access games featuring loot boxes, since many of them are approved for youngsters and age verification is typically weak.

Microsoft, Sony and Nintendo, which dominate the console market, will from 2020 make it mandatory for developers to show the probability of winning certain types of items from loot boxes. Apple introduced that two years ago, yet loot boxes remain in many high-grossing games in its App Store. Developers will be hoping that self-regulation is enough. But the bigger gaming gets, the sharper the scrutiny will become.

First published Dec. 23, 2019

IMAGE: REUTERS/Wolfgang Rattay

Peak subscription economy approaches in 2020

Alternative energy

BY PETER THAL LARSEN

Don’t subscribe now! At least not to the idea of the subscription economy. It’s not just streaming TV services chasing steadily paying customers. Wine sellers, food delivery outfits and even Swedish furniture giant Ikea want them, too. Buyers can only spend and consume so much, though.

Online video is the fiercest battleground. About 10 million people signed up for Disney+ within 24 hours of its November debut, lured by “Star Wars” and other classic movies. Apple has rolled out its own service; HBO will soon join the fray. They’re all taking on Netflix, which has amassed 158 million users worldwide since pioneering unlimited viewing access for a regular fee.

The business model has exploded. Razors, meal kits, pet food and clothes are all available by subscription. Peloton Interactive bicyclists pay $39 a month for virtual spin classes. Revolut customers can spend 13 pounds a month for the online bank’s shiny metal card. Carmakers and supermarkets are experimenting with subscriptions.

The logic is clear. Regular payments are more predictable than one-off sales. That helps companies plan their spending and gets rewarded by investors. Salesforce.com, a huge purveyor of software as a cloud-based service, is valued at around $140 billion, more than 7 times expected revenue for the year to January.

Newcomers may struggle to repeat such success. Customers are expensive to recruit and difficult to keep. Half of subscribers to e-commerce services cancel within six months, according to a 2018 study by McKinsey. Delivery of physical products doesn’t benefit from the same economies of scale as software. Meanwhile, Netflix and its rivals probably are not charging enough to cover their vast investments; Disney+ is charging just $7 a month. When prices inevitably rise, subscribers may be forced to choose.

The best subscription services may therefore be those with extra benefits. Take Amazon. More than half of U.S. households pay $13 a month for Prime, which includes faster shipping and access to movies and music, UBS analysts reckon. The real benefit, though, is that users spend a lot more on Amazon. Only companies that can unlock similar advantages will stay atop peak subscription. For the rest, the summit will prove unattainable.

First published Dec. 23, 2019

IMAGE: REUTERS/Mike Blake

Underdog will take home Japan’s casino jackpot

Alternative energy

BY KATRINA HAMLIN

Betting group Genting is not the bookies’ favourite as it competes for a coveted casino licence in Japan. The Malaysian outfit lacks the scale or the glitz of rivals in Las Vegas and Macau but it has an ace up its sleeve to enter the hotly anticipated new market in 2020.

The prize is tantalising. The Japanese enjoy a flutter: Pachinko parlours rake in around $30 billion each year. Now the country, eyeing a gaming-economic uplift, will introduce three casino resorts to open a new market. The initial opportunity is worth a potential $10 billion, according to Bernstein estimates. 

The biggest names in the business are readying their bids. Sheldon Adelson’s Las Vegas Sands seems like a shoo-in, and rival MGM Resorts International boasts both deep pockets and extensive experience. With three spots up for grabs, an Asian operator could get lucky too.

Though their Chinese heritage could be a disadvantage given sometimes tense relations between Tokyo and Beijing, Macau’s homegrown operators, Galaxy Entertainment and Melco International Development, will be worthy competitors.

Genting boss Tan Sri Lim Kok Thay is vying for a chance in Osaka or Yokohama, and plans, through a Singapore unit, to raise $3.2 billion for expansion. The group has experience in smaller markets, including its native Malaysia and the Philippines, and a new project under development in Las Vegas lends some street cred. The Malaysian group will also wow wary rookie regulators with the success of its resort in Singapore. Japan studied Asia’s strictest gambling jurisdiction to prepare their own regime. 

Officials in Tokyo have expressed admiration for the robust rule book in the city-state where locals must pay to merely enter the gaming floor. That’s because ordinary folk are fretting over unsavoury side-effects on society: two-thirds of respondents in an October poll said they oppose gambling resorts, according to the Japan Times.

That makes the underdog a more palatable winner too. Genting Singapore’s share price hovers at around 17 times its 2019 earnings, consistently below those of rival bidders in recent years. If the Malaysians play their cards right in Japan, they might hit the jackpot in multiple ways.

First published Jan. 3, 2020

IMAGE: REUTERS/Toru Hanai

A health craze for 2020: Chinese medicine

Alternative energy

BY ROBYN MAK

Move over, connected exercise bikes. There’s a new, more serious healthcare fad for investors: Chinese drugs. U.S. regulators in November approved the first-ever cancer therapy from the People’s Republic. For global pharmaceutical companies, a made-in-China blockbuster drug may be within reach. 

The world’s most populous country is aging quickly. Despite overwhelming demand for treatments against cancer, diabetes, and cardiovascular disease, Chinese drugmakers have produced few innovative medicines so far. But there’s a new breed of biotechnology upstarts inspired by friendly policies, government research incentives, and the prospect of grabbing a slice of the world’s second-largest drugs market, at $137 billion in 2018 according to healthcare analytics group IQVIA. 

Leading the charge is BeiGene. The Beijing-based company, valued at $12 billion as of early December, focuses on oncology treatments. China now accounts for more than a fifth of new cancer cases, according to the International Agency for Research on Cancer. And BeiGene’s co-founders, John Oyler and Xiaodong Wang, have global ambitions. In November its lymphoma treatment won an accelerated approval from the U.S. Food and Drug Administration – a first for a Chinese company. 

More such breakthroughs are probably on the way. One reason is the country’s 2017 entry into the International Council for Harmonisation, which sets standards for developing new drugs. For China, a key benefit of adopting ICH guidelines is that other members of the coalition, including American and European regulators, will more readily accept local clinical trial results. BeiGene’s landmark U.S. approval was also the first to be based partly on data from Chinese patients. 

Big Pharma is noticing. Just weeks before the United States approved BeiGene’s cancer drug, biotechnology giant Amgen splashed out $2.7 billion for a 20.5% stake in the company. The same month, AstraZeneca unveiled plans to partner with investment bank China International Capital Corp to launch a $1 billion healthcare fund in the country. These big-name endorsements will attract other potential investors. 

Unfortunately, as with many health crazes, this one comes with small-print warnings. Most Chinese biotech firms don’t have a long record, so it’s difficult to tell good from bad. BeiGene itself was subject to a short-seller attack earlier in 2019. Moreover, clinical trials in developing countries have often been plagued with fraud and other issues. Some unexpected side-effects are inevitable. 

First published Jan. 2, 2020 

IMAGE: REUTERS/Adam Jourdan

HR nous will make or break tech-driven ambitions

Alternative energy

BY ANTONY CURRIE

Chief executives from carmakers to consumer giants sound surprisingly similar when talking about the future. Artificial intelligence, machine learning and automation crop up, as does the challenge of finding staff qualified to carry out such grand strategies. That gives an unlikely back-office function the power to make or break tech-driven ambitions in 2020: human resources. 

It’s usually a department with limited scope, performing the grunt-work of hiring, setting workplace-conduct policies and policing unacceptable behavior. At a more senior level, it also involves devising compensation packages to encourage and reward service – sometimes to excess. 

The focus is shifting. Over four-fifths of corporate executives and HR bosses surveyed by Randstad Sourceright expect artificial intelligence and robotics to create employment opportunities. Mentions of AI rose almost fivefold between 2012 and 2017 on the earnings calls of non-tech New York-listed companies, reckons Stanford University’s AI Index. 

Yet hiring the best tech talent pits, for example, Walmart, whose jobs website lists almost 700 vacancies for software developers, against Alphabet and Amazon. The median annual salary for a U.S. software developer with five years’ experience is over $100,000, according to Stack Overflow. CEOs outside of finance, who are not used to paying handsomely for junior staff, have to get comfortable with higher wage bills. 

Companies also face frequent battles to stop employees decamping elsewhere. Software firms have higher staff turnover than those in other sectors, LinkedIn found. CEOs hoping to attract and keep coders may therefore have to offer more appealing benefits, like Dropbox’s unlimited vacation, or help paying off student loans, or better parental leave. Appealing to millennials’ much-hyped sense of social responsibility might also work. Ford Motor could pitch that working on self-driving cars is more beneficial to society than building new phone software. Procter & Gamble can talk up the kudos of creating environmentally friendly shampoo. 

Yet CEOs will also have to accept that tech-savvy staff increasingly want multiple changes of job, rather than long stints at one firm. Specialty chemicals group Covestro, for example, set up a tech hub away from its German headquarters in Leverkusen, and assumes those who join will remain for 18 months at best. That means the hunt for good coders may be endless, and that hiring the right hirers will become the most crucial job in 2020. 

First published Dec. 31, 2019 

IMAGE: REUTERS/Al Drago