Financial Times Europe - 13.11.2019

12 ★ FINANCIAL TIMES Wednesday13 November 2019

COMPANIES

J

ust a few years ago, there was almost no online food delivery in India. But todayZomato ash 200,000 eople bringing food to middle-classp consumers in 500 cities across the country. In 18 months, it hopes to double that number, its co- founderGaurav Gupta ays. Its average delivery persons receives Rs22,000 ($208) a month gross or between Rs15,000 to Rs18,000 in take-home pay, depending on whether they travel by push bike or motor bike. If you add up the numbers of people working for Zomato’s great rival,Swiggy, for ride-hailing services includingOla nda Uber, and the army of those delivering parcels ordered fromAmazon nda Flipkart, the grand total might add up to 1.5m, according to estimates from McKinsey’s Mumbai office. Include the multiplier effect of that army serving the new economy and an optimist might come up with 5m jobs created by consumer-facing tech companies and cite it as one of the few hopeful signs in an economy that appears to be struggling. With GDP growth hovering at no more than 5 per cent a year — far less than the level required to absorb the up to 1m people cited as joining the workforce every month — sentiment is dismal and as dark as the clouds of pollution hovering over Delhi. There is virtually no private sector investment. Credit growth has slowed in tandem with problems in thenon- bank lending sector nd, despite official efforts, the cost ofa capital remains high. Rural distress is widespread. Manu- facturing remains a relative non-starter, given the lack of transport and energy infrastructure and a relatively unproductive workforce. If India continues on its downward trajectory, given how little of a social safety net the government offers, at some point anger and social stability could make the country’s prospects even worse. So how much difference can these consumer internet companies really make at a macro level? Like young businesses everywhere, they are under pressure to produce profits rather than spend on growth indefinitely — which suggests the wages they pay are not going to rise signifi- cantly, given the supply of labour compared with demand. There is also little agree- ment on whether the jobs they have created are new or merely replacing jobs in areas such as retail that are strug gling because of increased competition online. Was the young man delivering a smartphone to a customer who ordered it from Amazon yesterday previously running a small stall selling that same phone before people decided it was easier and cheaper to buy online? Nor is it clear whether these jobs can lead to upward mobility, reducing the disparities between rich and poor and between cities and the countryside. Will they instead cause little more than changes at the margin — better than nothing but still far more incremental than what the country so desperately needs? There are lenty of sceptics. “India lacks the per capitap income growth and purchasing power for critical mass,” said Ruchir Sharma, the head of emerging markets for Morgan Stanley Investment Management. “It just doesn’t have the scale or the wage growth you see in China.” The chief executive of one of India’stop private sector banks is more blunt: “The tech story is oversold,” he said. Others, though, are more hopeful. “These platforms are creating real income and real opportunities for young people,” said Alok Kshirsagar of McKinsey’s Mumbai office. “These are good jobs and flexible jobs. And the alternative doesn’t exist for most people in any case.” Where an alternative does exist for some is in providing services for the rich. Most affluent residents of big cities employ drivers who have been with them for years, even decades. The pay is generally about Rs25,000. Come holi- dayssuch as Diwali, they receive packets of money. In addition, many receive support for big expenses such as their children’s education and healthcare when they or their families fall ill. But those who work as drivers, gardeners, nannies and cooks for the well-off also live in a more feudal world. Out- side that world, life can often be tougher but individuals can also control their destiny to a greater extent. They can let out their motor bikes when they are not using them, and afford to send their children to schools where they will learn English and engineering and have a shot at a better, more secure future. It will never be enough to allow India to close the gap with China but it is still vastly better than before these tech groups came on the scene.

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INSIDE BUSINESS

ASIA

Henny

Sender

Online service jobs

offer hope for India’s

aspirational classes

Those who work

for the well-off also live in a

more feudal world

N AT H A L I E T H O M A S —EDINBURGH

New York’s governor Andrew Cuomo
has warnedNational Grid t has 14 daysi
before he plans to revoke the British
utility’scertificatetooperateinpartsof
thecity,markingaseriousescalationin
amonths-longrowovergassupplies.

National Grid distributes gas to busi-
nesses and homes in New York and sur-
rounding areas but has found itself at
loggerheads ith the governor after say-w
ing in May that it wouldnot connect nya
new customers in downstate areas such
as Brooklyn, Queens and parts of Long
Island. National Grid imposed the
moratorium fter the Cuomo adminis-a

tration rejected a permit for a $1bn gas supply pipeline project, which the company had argued was vital s morea buildings switch to gas heating from oil and the city’s economy expands. But Mr Cuomo has previously accused National Grid of improperly denying service, including to ustomersc who found themselves cut off fter tem-a porarily switching off their gas supply. Mr Cuomo’s officeyesterday released a letter in which he gave National Grid a fortnight to present “meaningful and immediate remedial actions” to resolve the dispute or he would withdraw its right to operate its downstate gas fran- chise. “National Grid has made clear

that its only plan for future supply was based on a single, speculative project: construction of a private pipeline through New Jersey and New York. The plan to build such a pipeline was risky at best,” Mr Cuomo wrote in theletter. “National Grid should have explored all options before denying service,” Mr Cuomo said. Analysts at Bernstein said the affected business accounted forabout 13 per cent of National Grid group’s overall earnings before interest and taxes. National Grid said: “National Grid is in receipt of the letter from Governor Cuomo and will review and respond within the timeframe outlined.”

Utilities

NY governor gives National Grid ultimatum

M AT T H E W R O C C O —NEW YORK

DR Horton, the biggest US home- builder, exceeded earnings forecasts and projected stronger 2020 sales than anticipated amid lower borrowing coststhathavelifteddemand.

Interest rate cutsthis year have brightened the outlook for the housing market and for builders that have faced pressure from rising material and labour costs. Cheaper mortgage rates have made homes more affordable, encouraging shoppers to return to the market. DR Horton aid yesterday it expectss to sell 60,000 to 61,000 homes in its

2020 fiscal year, more than the 59, units forecast by analysts. In its fourth quarter which ended in September, orders were up 14 per cent year on year to 13,130 homes. “When you look at what drives home- building, which is job growth and the overall economy, we feel very, very good about what’s happening,” saidDavid Auld, chief executive. The Federal Reserve has cut interest rates three times this year.The average rate on a 30-year fixed-rate mortgage has slipped to 3.69 per cent, Freddie Mac said last week, from a peak of 4.94 per cent in November 2018. New home sales ticked 0.7 per cent

lower in Septemberfrom August but were up more than 15 per cent against the same month a year earlier. Texas-based DR Horton sold 16, homes in the September quarter, up 9.2 per cent year on year. It earned $505.3m in net income, or $1.35 per share, compared with $466.1m, or $1. per share. Revenue was up 11.7 per cent at $5.04bn. The results topped analysts’ estimates for earnings per share of $1. on revenue of $4.86bn. DR Horton expects to book 2020 revenue of $18.5bn to $19bn, also beating forecasts of $18.58bn at the midpoint of the range.

Construction

DR Horton home sales outlook tops forecasts

TA B BY K I N D E R— LONDON

The UK government has questioned the
six largest accounting firms on their
ability to survive a financial shock, in a
test of resilience that comes ahead ofa
possibleindustry break-up.
In a five-page letter, the department
for business, energy and industrial
strategy asked about the capital
strength and insurance provisions of
PwC,Deloitte,EY,KPMG,Grant Thorn-
ton nda BDO.
Among 19 questions, the letter asked:
“Why shouldn’t you be holding addi-
tional equity capital given the risks that
your audit business faces?”

It also asked: “What is the extent of [guarantees from the international net- work and your UK non-audit business] and can they be withdrawn unilaterally such as at times of distress?” The letters were sent as the government considers whether to implement a series ofsweeping proposals y the com-b petition regulator to improve choice and quality in the audit market. Its recom- mendations include breaking up the Big Four firms and introducing mandatory joint auditing for large listed companies. The query was prompted by concerns over vulnerability at some of the firms, according toinsiders at accounting businesses who have held conversations with the department in recent weeks. In language that recalls the implosion in 2002 of Arthur Andersen, the department for business, which is led by And- rea Leadsom, also asked the firms to

share their “contingency planning” for the risk of failure at any large audit firm, which would disrupt the provision of audit services and the overall stability of the financial system. The head of audit at a mid-tier accounting firm said it looked increas- ingly likely that any reforms would be applied to all six firms, instead of just PwC, Deloitte, EY and KPMG. Mrs Leadsom’s department also asked the six firms to explain in detail by what performance measures their auditors are paid and what service lines they believed should sit within an inde- pendent audit practice that was sepa- rate from its consulting units. The vulnerability of large audit firms to the risk ofregulatory fines or litiga- tion has been put under scrutiny after a number of flawed audits contributed to the collapse of businesses that have

left creditors and investors out of pocket. Legal and regulatory claims against audit firms have been growing in size and frequency. KPMG’s US business was ordered to pay $50m by the Securities and Exchange Commission for“ethical failures” n June, while last year, PwC’si US arm paid $335m in damages for negligence in its audit ofColonial Bank ni Alabama. In the UK, Grant Thornton lost a £21m negligence lawsuit brought by its former clientAssetco, while PwC was fined a record £10m — reduced to £6.5m after a settlement — for miscon- duct in its audits ofBHS. The departmentsaid: “A strong and competitive audit market is crucial to confidence in business — and we are committed to bringing forward reforms to ensure the UK continues to be a world leader in audit and accounting services.”

Financial services

UK tests resilience of top six auditors

PwC and rivals quizzed

over capital strength and

insurance provisions

Among 19 questions,

the letter asked: ‘Why

shouldn’t you be

holding additional

equity capital?’

H A R R I E T AG N E W —PARIS

Iliad ounderf Xavier Niel ill finance aw
€1.4bn buyback of a fifth of the French
telecoms group’s share capital, increas-
ing his stake and putting the stock on
track for its biggest single-day rise
sincethecompanylisted15yearsago.

Iliad said it planned to repurchase about
11.7m shares on the open market at a
price of €120 per share. This represents
a premium of 38 per cent on the vol-
ume-weighted average price over the
past three months and a level not seen
since January.
However, it is a long way off Iliad’s all-
time high of €238.70 in June 2014. The
shares gained as much as a fifth in
morning tradingyesterday.
The transaction will tighten Mr Niel’s
grip on the group, which shook up the
French mobile market with its low-cost
service Free, and marks a vote of confi-
dence in Iliad by the telecoms entrepre-
neur.
His stake in Iliad could rise from just
over 52 per cent to as much as 72 per
cent, depending on the uptake of the
share buyback by investors, according
to Russell Waller, an analyst at New
Street Research.
The transaction will be fully financed
by a share issue at the same price, repre-
senting the same amount as the buy-
back offer, open to all Iliad shareholders
and guaranteed by Mr Niel, who will not
tender his own shares. The repurchased
shares will be cancelled so Iliad’s total
numb er of share s will remain
unchanged.
“We think Xavier Niel is sending a
very strong signal that he thinks the
shares are undervalued,” Mr Waller said
in a noteyesterday.
“Iliad denied... that they were
thinking of taking the company private
but given the market’s unwillingness to
reward Iliad’s ‘good’ capex and long-
term free cash flow return, this must
surely have been considered in our
view.”
Iliad burst on to the scene with Free
mobile in 2012, launching a price war
withOrange,Altice’sSFR nda Bouygues
that has eaten into its profitability.
The announcement comes as the tele-
coms group, which has roughly a fifth of
the mobile market share in France, tries
to turn round its performance after a
difficult period. The group has faced
shareholder concern about its commer-
cial strategy, its ability to generate cash,
an insider trading conviction for its
chairman and acontroversial pay
scheme or its senior management.f
See Lex

Telecoms

Iliad boss

to guarantee

€1.4bn

buyback

M A R K VA N D E V E L D E , J O E R E N N I S O N A N D E R I C P L AT T —NEW YORK

KKR’sproposal o acquire Walgreenst Boots Alliance sets up a test for debt markets, where a tide of cash has sent borrowing costs lower but left inves- torsworriedaboutriskydeals.

The listed pharmacy group carries about $15bn in net debt, accounting for about one-fifth of its enterprise value. But a private equity-backed takeover would typically entail borrowing far more: whenKKR oughtb Alliance Boots in 2007, the firm leaned on credit markets for as much as 80 per cent of the £11.1bn acquisition price. Raising enough debt to fund a similar leveraged buyout of the $70bnWal- greens usiness presents a challengeb that “would be overwhelming”, said David Norris, head of US credit at TwentyFour Asset Management. Much would depend on whether Wal- greens retains an investment-grade rating for at least part of the debt, gaining access to the $8tn investment-grade bond market, which some analysts believe is essential for capital-raising on this scale. Walgreens’ bonds are rated BBB or equivalent by the main rating agencies, which have yet to respond to news of a potential deal. Moody’s in August held its rating, noting that “operating per-

formance has been weak but fundamen- tals remain strong”. News of a potential takeover hit Walgreens’ bonds, with a 10-year note falling 2 cents on Friday ahead of the Veterans Day market holiday to trade at 101 cents on the dollar. That is slightly above the bond’s origi- nal sale value, and close to the value at which Walgreens would have to buy back the bonds in the event of a change of control, according to Covenant Review, a credit research group. Investment-grade corporate credit has been one of the most sought-after investmentsbut the surge ofinterest has raised questions over whether risks are building in the market. The premium demanded by investors overUS Treasury bonds has fallen from 1.6 per cent in January to 1.1 per cent, according to data from Bloomberg. The junk bond market is far smaller than that for investment-grade debt, however, and some investors doubt it could support a Walgreens acquisition. A $50bn capital raising would repre- sent about 5 per cent of the value of all outstanding junk bonds. WhileVerizon, Anheuser-Busch InBevandCVS have issued investment-grade bonds worth $40bn or above, the biggest high-yield bond financing ever was far smaller: completed byNumericable Group, a French company, in 2014, it was

for almost $11bn, Dealogic data show. “With the current state of the high- yield bond market it’s a big nut to digest,” said Mr Norris of a Walgreens deal. “They will have to come up with some innovative financing.” Maintaining the investment-grade rating would be a feat for a private equity- backed firm, but there is at least one apparent precedent in Dell’s $63bn purchase f EMC, the computer storageo company, in 2016. By pledging assets as security, the junk-rated group was able to raise some of the money through a $20bn investment-grade bond. Still, some participants believe KKR has struck when junk bond investors are so hungrythey may be willing to bite into what would be the biggest private equity deal on record so long asprotec- tions are adequate and the credit rating is towards the top end of junk territory. Borrowing costs for the highest rung of the junk bond ladder, rated double-B, hit a six-year low of 3.96 per cent late in October on strong investor demand, even as lower-rated, triple-C bonds have risen to trade above 12 per cent from a low earlier in the year of 10.5 per cent. “It’s a little surprising we haven’t seen more mega LBOs,” said a high-yield bond trader. “This is certainly untested but there is demand in the market. I would not be surprised if it goes through.”

Retail

Walgreens move poses test for bond market

Raising enough debt to fund a leveraged buyout of the $70bn Walgreens business presents a challenge for KKR —Wolterk/Getty Images

‘With the current

state of the high-yield

bond market it’s

a big nut to digest’

David Norris, TwentyFour Asset Management

NOVEMBER 13 2019 Section:Companies Time: 11/201912/ - 18:54 User:jon.wright Page Name:CONEWS1, Part,Page,Edition:USA , 12, 1