12 ★ FT Weekend 9 November/10 November 2019
COMPANIES. WEEK IN REVIEW
People are suddenly worried about
profits. Goldman Sachs chief executive
David Solomon reacted to the
implosion of property group WeWork
this week with the thought that “it’s
important for people to grow, but
there’s got to be a clear and articulated
path to profitability. I think there’s a
little bit more market discipline
coming into play.”
Mr Solomon was roundly accused of
stating the obvious. Of course earnings
are what count. Sales are vanity, profits
are sanity!
But profits are over-rated. Focusing
on the bottom line can produce bad
results. There are plenty of profitable
companies languishing on moribund
European stock markets, which are
sapped of vitality or growth.
In the US, public markets have
neither lacked discipline nor — as they
are often wrongly accused — been
guilty of short-termism. Theyfacilitated the growth of Amazon, while
it racked up losses and meagre profits
during a dash for dominance in
ecommerce and as it investedin a
different business: cloud computing.
US public investors are not gullible,
though. They shunnedthe attempt by
Goldman and other banks to sell them
WeWork stock. The lack of discipline
was in the private sphere, where
investors ascribed a $47bn valuation to
a company with a flimsy business
model and disastrous conflicts.
Goldman itself torched $80m last
quarter with its own investment in
WeWork.
It is true that ignoring profits
altogether can be perilous.
SoftBank, the Japanese tech group
that is WeWork’s main backer, spent
much of itsresults presentation hist
week explaining why shareholders
should ignore a ¥700bn ($6.4bn)
quarterly loss.“Not profit from [an] accounting
perspective, but shareholder value —
that’s the biggest and most important
measurement for us when we run the
business,” said chief executive
Masayoshi Son.
Mr Son mentioned “shareholder
value” 22 times. “In the period when
we recorded the biggest loss in our
corporate history, shareholder value
increased by ¥1.4tn,” he said,
unconvincingly.
It is not a particularly compelling
concept. The biggest component is
SoftBank’s shares in Alibaba. Investors
may as well buy into the Chinese
ecommerce group directly.
But thereare other excellent reasons
to ignore profits and indeed to make as
little as possible. Take John Malone, the
“cable cowboy”, who once said: “I used
to go to shareholder meetings and
someone would ask about earnings,
and I’d say, ‘I think you’re in the wrongmeeting’.” While his competitors in the
cable TV business were busy issuing
equity to grow, which protected their
profits, Mr Malone’s TCI did the
opposite, borrowing heavily to buy
assets and then suffering a hit to profits
from the interest and amortisation.
“It made our earnings look awful, but
it meant we were sheltered from
income tax and we weren’t diluting
that common equity,” he said.
Perhaps you are still unconvinced.
Profits are sanity! Then go buy some.
Mr Solomon’s bank and others will
soon try to sell Saudi Aramco shares.
The state-owned oil company made net
profit of $111bn last year.
Crown Prince Mohammedbin
Salman would like a $2tn valuation. It
comes with vast financial risks and
ethical questions, but, hey, it is the
most profitable machine on the planet.[email protected]Profits aren’t
always the bottom
line in business
Thereare
excellentreasons to
ignoreprofits and
indeed tomake as
little aspossible
Stefano Pessina, the dealmaker who
transformed a failing Naples drug
wholesaler into a global pharmacy
empire, has once before escaped the
tyranny of the stock market. This
time will not be so easy.
When the Italian-born billionaire
teamed up with KKR to buy Alliance
Boots for £11bn in 2007, he had to
winapproval for Britain’s biggest ever
management buyout and the first
private equity-backed takeover of a
FTSE 100 company. It took 46 days.
Now he is in talks with at least one
private equity firm about what would
be the biggest buyout in history. The
mooted $70bn take-privateof
Walgreens Boots Alliance, which Mr
Pessina runs and has a 16 per cent
stake in, would smash records set a
decade ago in the pre-crisis boom. It
would remove from the stock market
the world’s biggest drugstore group,
which last year displaced the mighty
General Electric from the Dow Jones
index of America’s top 30 stocks.
A deal would also reflect the
78-year-old’s antipathy to life as a
public company executive, a mantle
he has taken on for the second time
in an extraordinary career that at
first seemed to hold little promise.
Mr Pessina was already in his30s
when he began trying to turn round a
pharmaceuticals wholesaler in
Naples, which his father owned and
had thought of shutting down. He
had planned tostudy as a nuclear
physicist but campus life held few
charms in the tumultuous70s, amid
a spate of political assassinations that
Italians recall as the “years of lead”.The faltering business quickly
becameMr Pessina’s vocation.
Commuting from his home in Milan,
he struck up contracts with other
proprietors, promising to spearhead
operational improvements in
exchange for shares. A decade on, he
merged his company with a similar
concern ounded by a 33-year-oldf
pharmacist named Ornella Barra,
with whom he continues to work.
Before long they were in love. They
were also running one of Europe’s
larger pharmaceutical wholesalers.
“Quite soon, I realised that we were
becoming maybe too big for Italy,” Mr
Pessina told the Financial Times in- “We had at a certain point 22
per cent market share, and when you
grow rapidly, you have a lot of people
who don’t love you.”
The remedy, which has brought the
couple astounding wealth and a
powerful position atop an industry
they largely created, was to expand
abroad. The strategy began in France
and Spain, and culminated in a 1997
deal that formed Alliance UniChem, a
pan-European group listed on the
London Stock Exchange and a leading
operator of UK pharmacies.
“Is [Stefano] clubbable?” asked
Nigel Rudd, who fterwards joined thea
board of Boots, Alliance UniChem’s
bigger rival. “Is he great fun? No, he is
not. He is remorseless; just awesome,
actually. I rank him as one of the most
talented business people and deal-
doers I have ever met.”
By July 2006, the men were on the
same team, having agreed to combine
theircompanies. But the partnership
barely lasted six months. “[It] was not
a fantastic success,” Mr Pessina
recalled. “We had a very big board, [a]
very conservative board, and we had
made a lot of promises to the
shareholders... But due to the slow
machine, we were not able to deliver.”
With KKR, Mr Pessina, then Alliance
Boots’ executive deputy chairman,
proposed to take the company privatein 2007. As chairman, Sir Nigel was in
an invidious position. “I wanted to
exclude Stefano... from any
discussions we were having,” the
veteran industrialist recalled.
“It was my job to make sure he
thought there were other people who
were likely to trump him. And I did
find somebody who was willing to talk
about paying a lot more.”
Wellcome Trust, the medical charity,
came forward with a rival bid backed
by Terra Firma. “They weren’t really
that serious, I didn’t think,” Sir Nigel
said. Still, KKR was unnerved enough
to pay 15 per cent more than its
starting bid.
Today, Mr Pessina is chief executive
of Nasdaq-listed Walgreens Boots
Alliance, a company created when he
sold his European business to the
American chain five years ago. “It was
clear to me that I had to find a way out
for KKR,” he explained in 2016. The
merger, he said, had “gotten a
premium, while in a flotation you
would have had probably a discount”.
But life as a public company has
again been traumatic. Walgreens’
shares have fallen nearly 30 per cent in
the past year, as the company has
raced to lay off staff and close stores as
part of a large cost-cutting programme.
Finding the money to take
Walgreens private “might be possible”
said Blackstone founder Stephen
Schwarzman his week, although “it’s at
huge stretch doing things over $50bn”.
A deal would probably require
several large investors to work
together, making it less likely that any
bidder would face serious competition.
“I would never bet against Stefano,”
Sir Nigel said.Mark Vandevelde
and David CrowItalian alchemist works on formula for largest ever buyout
‘When you
growrapidly, you
have a lot ofpeople who
don’t loveyou’
Veteran dealmaker Stefano Pessina
is in discussions with at least one
buyout firm to take Walgreens
Boots Alliance private Taylor Glascock—McDonald’s fires CEO
3 McDonald’sousted chief executive Steve Easter-
brook after he engaged in a relationship with a col-
league. Mr Easterbrook, who has been credited with
doubling the company’s share price since becoming
chief executive in March 2015, “violated company
policy and demonstrated poor judgment involving a
recent consensual relationship with an employee”,
the fast-food chain said.3 ankers forB Saudi Aramco’s initial public offering
dangled the possibility of bonus payouts that could
take the company’s annual dividend past $100bn in
an effort to woo inves-
tors for a listing tipped
to be the biggest ever.
The banks charged
with launching the list-
ing have been told that
shareholder payouts
could be far greater
than the promised min-
imum annual dividend
of $75bn over the next
five years. “Aramco management has stressed the
possibility of additional distributions to sharehold-
ers above and beyond the minimum dividend
pledge,” Bank of America Merrill Lynch said in a
report for investors seen by the Financial Times.3 Juul Labs, the largestseller of e-cigarettes, has
ended US distribution of mint vaping pods that
account for 70 per cent of its remaining sales in the
country, in the wake of studies showing the flavour’s
popularity among teens.3 KPMG s to axe a tenth of its UK partners, 65 posi-i
tions, by Christmas in the latest of a string of meas-McDonald’s Steve Easterbrook
‘violated company policy...involving a recent consensual
relationship with an employee’Saudi Arabia has been pulling out
the stops to entice potential
investors in the stock market
flotation of its state energy giant, in
what could be the world’s biggest
ever listing.
From changing royalty payments,
cutting tax rates and reducing long-
term capital expenditure to
ensuring a minimum dividend of
$75bn for shareholders, the
kingdom has sought the highest
possible valuation for Saudi Arabia’s
main revenue source.
With earnings of $111bn last year,
it dwarfs the profits made by Apple,
the world’s largest-listed profit
maker, and makesExxonMobil’s net
income of $20.8bn look paltry.
Crown Prince Mohammed bin
Salman, for whom the listing is at
the heart of economic reform plans,
hassought a $2tn price tag, which
investors both at home and abroad
have deemed too high, even for the
world’s most profitable company.
While the kingdom’s heir
apparent is said to have reduced his
expectations in order to get the
flotation over the line, people
familiar with the matter have said
there is still a big question over
what the final valuation will be.
The kingdom seeks to sell 1-3 per
cent of the company, hoping to
raise $20-$60bn through a listing
on Riyadh’s Tadawul exchange.
Bankers are trying to encourage
the country’s leadership to move
towards a valuation of about $1.75tn
even as some investors believe the
company is worth less, somewhere
between $1.2-$1.5tn.Anjli Raval
See Lexures to overhaul the Big Four firm. The cull comes as
the accountant scales back its costs and restructures
its operating model in an effort to recover from a rep-
utational crisis and prepare for regulatory changes.3 Xerox aunched a bid to acquire HP, its much largerl
rival, for more than $30bn, including debt, in a move
to revive the fortunes of two former tech innovators.
The US printer and photocopier maker made a cash-
and-stock offer valuing HP, which makes printers
and personal computers, at about $22 a share.3 JPMorgan Chase as pushed more than $130bn ofh
excess cash into long-dated bonds and cut the
amount of loans it holds, marking a big shift in how
the largest US bank by assets manages its balance
sheet.3 Chesapeake Energy, a highly indebted prime
mover of the US shale gas boom, warned that it might
not survive if low oil and gas prices persist into 2020.The disclosure underlined the straitened circum-
stances of US shale groups, which despite soaring
output have lost much of their access to financing.3 A quarter of cabin crew working atQantas Airways
were sexually harassed by a colleague over the
past 12 months but only 3 per cent reported it to
the airline, according to a group-wide audit com-
missioned by the Australian airline in the wake of
the #MeToo movement. A third of those who did
not report sexual harassment said it was because
they were able to put a stop to the harassment them-
selves.3 Gap aid chief executive Art Peck is to step down ass
the retailer struggles to win back customers.The
owner of Banana Republicwarned that profits this
year would be smaller than forecast.Number of companiesNet profits* ( bn)*Trailing four quarters Source: Bloomberg FT visual journalism: Patrick Mathurin; Oliver Elliott; Chris CampbellTop global companies by net profit, Apple makes almost
half the profit of
Saudi AramcoMicrosoftSaudi Aramco
With a net income of
bn in , it dwarfs
the most profitable
companies in the world.
But it needs to as it has
promised to pay at least
bn in dividendsAlphabetGazprom PJSCRoyal Dutch ShellChevronRosneftFacebookCitigroupVisaExxonMobilOtherFinancialsTechnologyOil and gasSoftBankChina MobileConstituents of the
Tadawul exchange
(circle size
market cap)Oil and gasOtherFinancialsConsumer servicesIndustrialsAl Rajhi Bank
$40.3bnSaudi Basic
Industries
Corp
$70.8bnSaudi
Telecom Co
$51.6bnRabigh Refining
and Petroche $4.8bnAramco would donimate Riyadh’s stock market
In a league of its own At $1.5tn Aramco would trade at a discount to rivals
Saudi Aramco could be 75%
of the Tadawul exchange
with a valuation of
$1.5tnProduction (barrels of oil equivalent (m))Price-to-earnings ratio Circle size
market cap
( bn)Saudi AramcoExxonMobilChevronRoyal Dutch ShellTota lBPGazpromAker BP$30bn
Value of bid by
printer maker
Xerox bid for its
larger rival HP25 %
Share of Qantas
crew who were
sexually harassed
by a colleagueThe Top Line
Tom
Braithwaite
Stefano Pessina
CEO, Walgreens Boots AllianceBEST OF
BUSINESS
Corporate
person in
the newsUnder the hood nvestors wooed to Saudi Aramco IPO by raft of sweetenersI
Oil group’s bumper listing is key to Saudi Arabia’s economic plans although the kingdom’s original $2tn target valuation has since been trimmed
NOVEMBER 9 2019 Section:Companies Time: 11/20198/ - 17:20 User:cathy.pryor Page Name:CONEWS2, Part,Page,Edition:EUR, 12, 1