This week’s news includes; the Hinkley Point approval, Deutsche Bank‘s potential $14bn settlement, British music’s contribution to the economy, Spotify & Tidal‘s financial results and Pure Gym‘s IPO.
Opinion articles of the week:
Analysts argue that the rise of the corporate colossus is a giant problem. Click here for more information.
It’s eight years since the Lehman Brothers collapse. What’s changed? Click here for more.
With average property prices in London passing £500,000, is London’s housing market is at breaking point? Click here for more.
1. HINKLEY POINT APPROVAL
The government has approved a new £18bn nuclear power station in the UK after imposing “significant new safeguards” to protect national security. The new plant at Hinkley Point in Somerset is being financed by the French and Chinese governments.
However, the UK government says it will have control over foreign investment in “critical infrastructure”. Ministers will be able to stop EDF, the state-controlled French energy firm, from selling its stake in Hinkley. Critics of the deal have warned of escalating costs and the implications of allowing nuclear power plants to be built in the UK by foreign governments.
EDF is funding two-thirds of the project, which will create more than 25,000 jobs, with China investing the remaining £6bn. The Chinese agreed to take a stake in Hinkley, which will meet 7% of Britain’s electricity needs, and to develop a new nuclear power station at Sizewell in Suffolk on the understanding that the UK government would approve a Chinese-led and designed project at Bradwell in Essex. That decision has raised questions over national security. (BBC News)
General Electric has said it will receive $1.9bn (£1.4bn) for a contract to supply steam turbines, generators and other equipment to the nuclear power plant. (City A.M)
2. DEUTSCHE BANK
Deutsche Bank AG’s shares and its riskiest bonds dropped the most since the Brexit vote after the lender said the U.S. Justice Department is seeking $14 billion (£10.6 billion) to settle a probe tied to mortgage-backed securities, more money than the bank is willing to pay.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement early Friday in Frankfurt. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling risky assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital. Reaching a mortgage deal would clear a major hurdle for Deutsche Bank, which has paid more than $9 billion in fines and settlements since the start of 2008, according to data compiled by Bloomberg.
Deutsche Bank fell as much as 8.8 percent, the biggest intraday drop since June 27, and was down 8.7 percent at 11.96 euros at 2:41 p.m. in Frankfurt. Other European lenders under investigation in relation to residential mortgage-backed securities also declined, with UBS Group AG down 2.9 percent and Credit Suisse Group AG slipping 5.2 percent. Royal Bank of Scotland Group Plc slumped 4.5 percent, while Barclays Plc fell 2.8 percent.
Germany’s largest lender confirmed that it had started negotiations with the Justice Department to settle civil claims over the bank’s issuing and underwriting of residential mortgage-backed securities from 2005 to 2007. The Wall Street Journal reported the $14 billion claim on Thursday.
Bank of America Corp. paid $17 billion to reach a settlement in a similar case in 2014, the biggest such accord to date. Goldman Sachs Group Inc. agreed to a $5.1 billion settlement with the U.S. earlier this year, including a $2.4 billion civil penalty and $875 million in cash payments, to resolve U.S. allegations that it failed to properly vet mortgage-backed securities before selling them to investors as high-quality debt. The settlement included an admission of wrongdoing.
The Justice Department, in concluding previous investigations into the sale of mortgage-backed securities that soured during the financial crisis, typically has presented initial penalties higher than what banks ultimately paid, people familiar with those negotiations have said. The sides may negotiate over the final tab, as well as what conduct the bank will acknowledge and whether individuals will be sanctioned. (Bloomberg)
3. BAYER CLOSES IN ON $66 BILLION ACQUISITION
A deal by German drugs and chemicals giant Bayer to take over US seeds company Monsanto is imminent with Monsanto thought to be valued at more than $66bn (£50bn).
According to German media, Bayer has increased its offer to $129 per share while the Reuters news agency says the deal will be announced Wednesday. The takeover would create the world’s biggest seeds and pesticides company.
Combining Bayer and Monsanto would make it the market leader in the US, Europe and Asia. Bayer’s farm business produces seeds as well as chemicals to combat weeds and insects, but it is better known for its healthcare products such as Aspirin and Alka-Seltzer. Monsanto is primarily known for its genetically modified seeds for crops including corn, soybeans, cotton, wheat and sugar cane. Such seeds have attracted criticism from some environmental activists.
The latest $66bn offer – which would be the largest cash acquisition on record – comes amid a wave of mergers in the agriculture sector.
Rivals including Dow Chemical, DuPont and Syngenta have all announced tie-ups recently, although some have yet to be cleared by regulators. The drop in commodity prices has put pressure on companies such as Monsanto, with farmers’ cutting orders for supplies.
A Bayer takeover of Monsanto is likely to draw close scrutiny from anti-trust regulators because of the sheer size of the combined company and the control it would have over the global seeds and sprays markets. Farming groups have raised concerns that such mergers could lead to fewer choices and higher prices while opponents of genetically modified food in Europe worry about Monsanto’s influence on the continent. (BBC News)
4. HP AGREES TO ACQUIRE SAMSUNG PRINTER BUSINESS FOR $1.05 BILLION
HP Inc. agreed to buy Samsung Electronics Co.’s printer business for $1.05 billion, a deal designed to bolster the Silicon Valley company’s offerings in the market for high-volume devices that handle printing and copying for office work groups.
The transaction, which is subject to regulatory approval, is expected to close within 12 months, the companies said on Monday. Samsung also agreed to buy between $100 million and $300 million in HP shares through open-market purchases after the business sale is completed.
HP, created as part of the breakup of Hewlett-Packard Co. last fall, sells personal computers but gets most of its profit from supplying ink and toner for its printers. It is the market leader in the desktop printer business.
That business hasn’t been growing lately, in part because PC users print fewer pages these days. HP last month reported that revenue from ink and toner supplies declined 18% in the third fiscal quarter from the year-earlier period, while printer hardware unit sales fell 10%.
HP also acquires through the deal the ability to manufacture the crucial mechanisms inside laser printers, known as printing engines. Samsung developed the printing engines used in its own laser printers, while HP has always used external suppliers for these components.
The deal includes about 6,500 Samsung printing-related patents, which Mr. Lores said would also help HP expand its business. Around 6,000 Samsung employees will join HP, including about 1,500 engineers, he said.
The world’s top maker of smartphones, memory chips and refrigerators, Samsung ranks fifth in the world-wide market for printers and copiers by shipments with a 4% market share, behind global majors HP, Canon, Seiko Epson Corp. and Brother Industries Ltd. Samsung’s shipments declined by 8.9% in the second quarter compared with a year earlier, according to research firm IDC.
Samsung doesn’t break out sales figures for its printer business, which falls under the consumer-electronics division that also includes television sets and home appliances such as refrigerators and washing machines. Last year, consumer electronics contributed just 4.7% of the company’s operating profit, while the higher-profile smartphone and chip divisions generated 38.4% and 48.4%, respectively. (Wall Street Journal)
5. ALLERGAN TO BUY VITAE PHARMACEUTICALS FOR $639 MILLION
Allergan PLC agreed to acquire clinical-stage biotechnology company Vitae Pharmaceuticals Inc. for $639 million, more than double its market value, in a move aimed at strengthening the drugmaker’s skin-care pipeline.
The price values Vitae at $21 a share, compared with the company’s closing price of $8.10 on Tuesday. Vitae shares jumped to $20.93 in premarket trading Wednesday, while Allergan shares rose 0.8%.
The deal gives Allergan a drug in mid-stage trials that is intended to treat psoriasis, a disease that causes scales and itchy dry patches, and other autoimmune disorders. Such treatments make up one of the drug industry’s biggest markets, which EvaluatePharma says had nearly $49 billion in world-wide sales last year.
Vitae also is developing another drug to treat atopic dermatitis, or eczema, a skin disease that causes similar itchy patches. Allergan had been interested in an eczema drug that a company called Anacor Pharmaceuticals Inc. was developing, according to a person familiar with the matter. But rival Pfizer Inc. agreed in May to buy Anacor for $4.5 billion.
The Anacor drug is further along in development and has a different mechanism of action than the Vitae drug that Allergan plans to buy. The deal is subject to customary closing conditions and antitrust approval and is expected to close by the end of the year. (Wall Street Journal)
6. MUSIC INDUSTRY
The British music industry contributed £4.1bn to the UK economy in 2015, according to new research from industry body UK Music. Most of that revenue came from music exports, which were worth £2.2bn over the course of the year following the overseas success of artists like Adele, Sam Smith and Ed Sheeran.
The dominance of Britain in the global music market was such that one in six of all artist albums which were sold anywhere in the world in 2015 came from UK artists, while half of the year’s top selling albums were made by Britons.
The report found that while adapting to the new ways people are consuming their music has been a challenge for the UK industry, the growth of online music streaming over the past four years has in fact offset declines elsewhere in the market.
Streaming sites including Spotify, Apple Music and Tidal have provided a “significant boost” to the digital music market over the course of 2015, with paid services valued at £251m – a jump from the £168m registered in 2014. (Sky News)
Spotify subscribers reach 40 million
Spotify announced today that it has reached 40 million paid subscribers, putting it far ahead of competitor Apple Music, which has just 17 million paying subscribers. The info first came in the form of a Tweet from CEO Daniel Ek:
For the past two years, Spotify has been growing its paid subscriber base at a steady clip. In March, the company hit 30 million paying subscribers, and it had just 15 million subscribers in January 2015. Spotify also has a significant unpaid tier, with 100 million total subscribers (both paid and unpaid) this past June.
Perhaps most importantly, this growth puts Spotify far ahead of Apple Music. While Apple Music hasn’t been around as long as Spotify (it launched in January 2015), it could be struggling from the lack of an unpaid tier to lure in subscribers. That said, when Apple Music reached the 15 million subscriber mark just one year after its creation, it was the fastest growth any new music streaming service had seen to date.
Tidal suffers $28 million loss
In the year rap mogul Jay Z took control of Tidal, the music-streaming service more than doubled its losses, burning cash at a rapid rate and testing the depth of its owner’s pockets.
Aspiro AB, the Swedish holding company that Jay Z and a group of other musicians bought in early 2015, recorded a net loss of $28 million last year, according to a legal filing. The spill of red ink at Tidal parent Aspiro illustrates the challenge the music-streaming service faces in competing with much-larger rivals such as Spotify AB and Apple Inc.’s Apple Music.
Despite significant marketing efforts, Tidal is stuck between consumers reluctant to pay for tunes they can easily access free, and record labels, which often demand upfront payment for copyright fees. Tidal charges $20 per month for a high-fidelity version of its 40 million-song catalog and $10 a month for download-quality sound
Spotify, while also recording a net loss in 2015, expanded much faster than Tidal, doubling its revenue to 1.95 billion euros ($2.19 billion). Tidal’s parent company had net cash of $4.13 million at the end of 2015, down from $7.41 million a year earlier. That was despite receiving a cash injection of $10.93 million through a rights issue.
In June, Tidal said it has expanded its user base to 4.2 million paying subscribers, many of whom it amassed this year with a string of exclusive releases from artists such as Kanye West, Rihanna and Beyoncé, Jay Z’s wife. However, that still is far behind its main competitors. Apple Music boasts 17 million paying subscribers, while market leader Spotify has 40 million paying subscribers. (Wall Street Journal)
7. PURE GYM IPO
Britain’s biggest gym operator, Pure Gym, has revealed plans to float on the London Stock Exchange, raising £190m to pay off debts and fund expansion.
The no-frills fitness chain said a stock market listing would allow the company to raise its profile and increase its network of gyms, as well as open the door to more acquisitions. The private equity-owned company did not say how many shares it intended to sell, or their expected price, but the initial public offering is expected to take place in October.
The Leeds-based business was founded in 2008 and following a period of rapid expansion is now the UK’s largest gym operator, with 163 gyms and almost 790,000 members across the UK. Last year it bought rival chain LA Fitness and struck up a partnership with Olympian Sir Chris Hoy, who is a “special adviser and brand ambassador” to Pure Gym.
Pure Gym says its business model is based on offering members affordable fees without tying them into fixed term contracts, with gyms accessible at any time of day and night. The chain does not have swimming pools, saunas or cafes, which have high fixed costs. In the first half of 2016 the company opened 27 new gyms, 16 of which were conversions of previously acquired LA Fitness premises. Revenue over the six months was £76.6m, up 51% compared with the first half of 2015. (The Guardian)
8. HOLLYWOOD BOWL IPO
Hollywood Bowl Group announced an IPO price of 160p per share, which would give it a market capitalisation of £240m. The company said today that it has placed 113,283,274 shares in an offer which is expected to raise £181.3m. Dealing is expected to start on 21 September, it added.
The company, which is the UK’s largest ten-pin bowling operator with more than 50 centres across the UK, is currently owned by private equity group Electra Partners.
It was initially formed over five years ago when Mitchells & Butlers sold its 24 Hollywood Bowl locations to rival operator AMF for £27m. Electra snapped up the group, which was then known as The Original Bowling Company, in 2014 for £91m.
Hollywood Bowl acquired rival bowling chain, Bowlplex, last year. The deal raised eyebrows at the Competition and Markets Authority (CMA), prompting the group to offload five of the 16 venues. (City A.M)
9. JD SPORTS
JD Sports has announced record half-year profits as it continues to benefit from strong demand for sports fashions. Pre-tax profits for the six months to 30 July jumped 73% from a year earlier to £77.4m.
The company also announced plans to open shops in Australia. Most of JD Sports’ 900 outlets are in the UK, although it is expanding elsewhere in Europe in countries such as Spain, France and Germany.
The company said that while the UK’s Brexit vote “means that there will be some uncertainties over the next two or three years, we have no doubt that we have the support of our brand partners to continue our expansion in Europe and beyond”.
JD Sports said its sports fashion division had enjoyed “an exceptional first half”, with operating profits up 53% to £79.9m. Its outdoor division – which includes the Blacks and Millets chains – managed to narrow losses to £2.3m from £4.5m last year. (BBC News)
10. GO COMPARE AND ESURE TO DEMERGE
Insurance group Esure is to demerge its Gocompare price comparison website and list it on the London stock market. The decision follows a strategic review conducted by the insurer, which took full control of Gocompare last year.
In June, Esure said it had “reinvigorated” the marketing strategy of Gocompare during its first year of full ownership and expected profits at the price comparison site to rise by as much as 30% this year. Esure took full control of Gocompare in March 2015 when it bought the 50% of the business it did not already own for £95m.
Costs associated with the split are expected to be about £19m. The demerger is expected to be completed before the end of the year if it wins the approval of Esure shareholders and regulators.
Shares in Esure rose 1% to 290p and are up more 14% this year, valuing the company at just over £1.2bn. Gocompare was founded in November 2006 by Hayley Parsons, who had previously worked for the insurer Admiral for 14 years. (BBC News)