10 ★ FINANCIAL TIMES Monday7 October 2019
COMPANIES & MARKETS
F T R E P O RT E R S
Will US-China trade talks provide
comfort to investors?
Market volatility hasspikedin recent
days amid a swirl of disappointing eco-
nomic readings andgeopolitical con-
cerns. So all eyes will be on Washington
on Thursday and Friday when US
and Chinese negotiators convene for
another round oftrade talks hat couldt
help ease traders’ jumpy nerves.
Last month, President Donald Trump
delayed a 5 percentage point tariff
increase on $250bn worth of imports
from China as a“goodwill” esture.g
Mr Trump said the delay was made at
the request of vice-premier Liu He and
out of deference to the 70th anniversary
of the founding of the People’s Republic
of China on October 1.
Mr Liu, who is also China’s top trade
negotiator, will lead the delegation to
Washington. But there is little sign so far
of either side backing down.
Meanwhile, investors’ concerns over
the outlook for global growth have
intensified with a fall of nearly 2 per cent
for the S&P 500in the middle of last
week following manufacturing data and
private payrolls figures that both disap-
pointed. Amixed jobs report n Fridayo
did not banish fears entirely.
One thing that has tended to bring Mr
Trump back to the negotiating table ash
been a sell-off on Wall Street. If negotia-
tions do start to fall apart, a sharp tum-
ble for equities could prompt the
president to think again. udson LockettH
Is the global bond rally back on
track?
After a record-breaking summer rally,
government bond markets endured a
bruisingSeptember with a two-week
sell-off wiping $1tn off the value of glo-
bal bonds. But since then, investors
haveagainbegun piling into the safest
government debt,prompting questions
about how low global yields can go.
The US 10-year bond yield, which
climbed as high as 1.9 per cent, is back
down at 1.52 per cent and closing in on
its all-time low of 1.46.
Yields in Japan and the eurozone have
seen a similar turnround, sinking fur-
ther below zero in the past two weeks as
a run of weak economic data drove
investors into safe havens.
Markets have returned to the sum-
mer playbook with weak data from the
world’sbig economies prompting bets
on aggressive monetary stimulus.
The European Central Bank has cut
interest rates and revived its bond-buy-
ing programme while the US Federal
Reserve is expected to respond ith ratew
cuts of its own.
“If you expect even a shallow US
recession in the next year, you would
expect the 10-year yield to go to 1 per
cent,” said Stefano Di Domizio, head of
fixed income at Absolute Strategy
Research. “That will clearly have a
knock-on effect on the rest of the
world.” ommy StubbingtonTHow wide is the divide at the
Federal Reserve?
On Wednesday, minutes from the Fed-
eral Reserve’s most recent rate-setting
committee meetingwill be released,
shedding light on just how divided
officials remain about the future path of
monetary policy.
Tensions emerged n Septemberi
when three members of the FederalOpen Market Committee dissented
from the decision to move ahead with
the second quarter-point interest rate
cut since the financial crisis.
Jim Bullard, president of the St Louis
Fed, threw his weight behind a more
aggressive half-point cut while EstherGeorge of the Kansas City Fed and Eric
Rosengren ofthe Boston Fed voted to
keep rates unchanged as they did in July.
Mr Bullard has long based his case for
more accommodative monetary policy
on the fact that he thinks the US econ-
omy will slow in the face of elevated
uncertainty over trade and weak global
demand.
Cutting rates at a more rapid pacewas
simply “prudent risk management”, he
said after the September meeting.
Ms George and Mr Rosengren see
things differently. The US economy is on
a firm footing, they say, with the unem-
ployment rate at multi-decade lows and
consumer spending robust. Cutting too
much too quickly would bring its own
risks, they warn. Not only could it under-
mine the Fed’s ability to act decisively
when the next downturn comes but it
could encourage imprudent lending.
Markets are expecting the Fed to once
again cut rates by a quarter-point by the
end of the month. That implies another
split around the table. olby SmithCMarket questions. ariff warT
Scant sign of compromise ahead of US-China
trade talks amid concern over global growth
US and Chinese
negotiators hold
another round
of trade talks
this week in
Washington to
try to end the
deadlock over
escalating
tariffs on
imports of each
other’s goods
Qilai Shen/BloombergDAV I D K E O H A N E— PARISThe chief executive of Société Générale
has dismissed calls for the European
Central Bank to buy bank bonds,
arguing that it would support failing
rivalsandpreventconsolidation.“There is a need to make the difference
between banks with a robust business
model and the ones that are just still
there thanks to support from the ECB,”
Frédéric Oudéa told the Financial
Times.
He said the ECB should not try to
reduce the cost of funding for “an aver-
age, mediocre, small retail bank that
should disappear in two years’ time”.
He added: “If you buy the bonds
of a small bank, which should change
its business model... is it an obstacle
at the end of the day to some consolida-
tion?”
Mr Oudéa has takenover as head of
the French Banking Federation. He is
the latest European chief executive to
wade into a fierce monetary policy
debate asMario Draghi repares to cedep
the ECB presidency to Christine
Lagarde.
In contrast to Mr Oudéa, Jean Pierre
Mustier, the chief executive officer of
Italy’s UniCredit, as called for the ECBh
to directly purchase bank bonds, which
might help lower their funding costs.
Oliver Bäte, the chief executive ofAlli-anz,criticised the ECB this week for
“making it easy for people to spend
money they don’t have”.
The ECB lowered its key deposit rate
by a further 10 basis points to minus 0.
per cent in September,renewing fears in
some quarters of a so-called Japanifica-
tion of the European banking sector.
Executives at some EU lenders, such
as Deutsche Bank, have objected tothe
ECB’s “lower for longer” monetary pol-
icy, which haskept its key deposit rate
below zero since mid-2014.
However others,including Mr Mus-
tier, have called for banks to stop com-
plaining about negative interest rates
andfind ways of offsetting their impact.
Mr Oudéa, head of France’s third-big-
gest bank by assets, agreed that “moan-
ing” about negative interest rates “is not
an action” and the job of bankers was to
deal witha reality facing them, includ-
ing diversifying internationally and into
less rate-sensitive parts of the market.
He argued that the ECB’s recent deci-
sion to introduce tiering , which
excludes a portion of banks’ reserves
from negative rates, was “a very impor-
tant decision because it means that the
ECB is paying attention to the conse-
quences on profitability of the sector”.
He added: “Philosophically, at least,
the instrument is there. If for any reason
they would have to go further, deeper
into negative territories, there is a tool
which can again mitigate the conse-
quences.”
Mr Oudéa also said thetieringwould
make it harder for banks to pass on neg-
ative rates to small customers. However,
he added that, for corporates and finan-
cial institutions, the imposition of nega-
tive interest rates had already started
and would be hard to resist.Banks
ECB should
let mediocre
banks fail, says
SocGen chief
October rate cut bets rise
Futures-implied odds on Federal
Reserve rate action at October
meeting ( ) Jan Oct basis point cutNo cutSource: Bloomberg ‘If you buy the bonds of a
small bank... is it an
obstacle at the end of theday to some consolidation?’
JAV I E R E S P I N OZ A— BRUSSELS
Private equity takeovers of public
companies lead to substantial lay-offs,
according to a new study of the impact
of buyouts on the real economy that
promises to reignite controversy
surrounding the industry.
The study, authored by researchers
from institutions including Harvard
University and the University of Chi-
cago, analysed private equity takeovers
of US companies from 1980 to 2013. It
found that publicly listed companies
bought by buyout funds saw employ-
ment fall by 13 percentage points over
two years, relative to a control group.
Units of corporations sold to private
equity groups experienced the sharpest
relative decline at 16 percentage points,
mostly due to jobs lost when facilities
are shut down.
The report, published today, comes
at a time when buyout groups are
acquiring public companies at their
fastest pace. Last month, US buyout
fundAdvent International greed toa
purchase UK defence groupCobham ni
a £4bn deal hile a group of investorswled by private equity groupBlackstone
tookMerlin Entertainments rivate in ap
£6bntransaction this summer.
The study found that buyouts have
mixed effects, depending on the nature
of the transaction. Public companies,
which account for one in 10 takeovers
by private equity groups, “exhibit large
post-buyout employment losses”, the
academics concluded. But, overall,
productivity improves when public
groups are taken private in this way.
Other types of buyouts lead to posi-
tive outcomes for workers. Employ-
ment rises by 13 percentage points when
a buyout group acquires a private com-
pany. It also rises when buyout groupssell to each other. The study concluded
that the overall net impact on jobs of a
private equity takeover is still minus 4.
percentage points, after adjusting for
post-buyout acquisitions and sales.
The report also revealed workers at
the target company see their average
wages decline by 1.7 per cent after a deal.
Studies of this kind have been criti-
cised for their lack of scientific rigour or
limited data in the past with some
funded by private equity groups them-
selves. These findings, however, rely on
the data from 3,600 private equity deals
affecting 5m workers. They also rely on
data from the US Census Bureau tracked
over a large period that experiencedhuge swings in credit markets and eco-
nomic performance.
“We were motivated to do this study
by the fact that our last study only went
through 2003, missing the huge changes
with the mid-2000s boom and subse-
quent bust,” Josh Lerner, a professor of
investment banking at Harvard Busi-
ness School, told the Financial Times.
Prof Lerner, who has worked as an
adviser to private equity groups, added:
“We expected that there were a lot of
differences in the economic impact of
transactions across buyout types and
over time.”
The results will provide ammunition
to critics of the sector.Financials
PE takeovers lead to job losses, study finds
Impact of US buyouts over
more than three decades
investigated by academics
FastFT
Our global team
gives you the
market-moving
news and views,
24 hours a day
ft.com/fastftT I M B R A D S H AW— LONDON
Lime ees little value in buying itss
smaller rivals, according to the electric
scooter rental company’s president,
despite growing anticipation that
the overcrowded European market orf
alternative urban transportation will
soonbegintoconsolidate.
A flurry of start-ups have emerged
around the world over the past two
years to offer on-street scooter rentals,
unlocked via smartphone apps.
More than a dozenoperated in Paris
alone his summer, capitalising ont
strong demand from both tourists and
locals but prompting a backlash from
some residents concerned about over-
crowded pavements and unsafe riding.
Hundreds of millions of dollars have
beeninvested in European scooter
start-ups ut investors and entrepre-b
neurs have predicted that only a hand-
ful of operators will remain by the end of
next year, triggering a race to raise new
funds or find a buyer.
However, Joe Kraus, a Silicon Valley
veteran who is now president at San
Francisco-based Lime, said making the
case for acquisitions in Europe would be
“really challenging” due to overlapping
operations in cities and minimal hard-
ware differentiation between rival com-
panies. “There is a lot of disincentive, to
be honest, on purchasing and consolida-
tion,” he said.
Last month, Lime became the first
bike- and scooter-sharing company toprovide 100m rides to customers, a
metric that has established it as the glo-
bal leader in the fast-growing market.
Fuelled by almost $800m in venture
capital financing, Lime’s rapid expan-
sion has raised questions about whether
the lossmaking company can continue
to tap investors after a Wall Street back-
lash against capital-intensive busi-
nesses such asUber,Lyft nda WeWork.
Lime’s rivals accuse it of expanding
too quickly, flooding cities with scootersin unsustainable numbers. Mr Kraus
insists that Lime’s operations are profit-
able in a “meaningful majority” of the
120 cities where it operates. “We have
figured out how to make money in this
business and we’ve shown it repeatedly
in a variety of geographies, cultures, city
types, city sizes,” he said. “The business
has got much less capital-hungry as
scooters last longer and as operations in
all these cities get better and better.”
Lime’sswitch in the past year romf
using off-the-shelf scooters, which often
break within weeks, to more durable
custom-built vehicles has improved the
economics of its business, as have
increases to ride pricing.
“The drive to profitability in general
as a company is something we take very
seriously,” Mr Kraus said, acknowledg-
ing “headwinds” in the financial mar-
kets. “There is natural scepticism
around asset-intensive businesses. We
are not blind to those things.”
Raising debt instead of the equity
financing upon which Lime has relied to
date “could make sense” as a way to
cover the upfront costs of buying more
scooters, he suggested.Technology
Lime president sees little value in consolidation
‘We have figured out
how to make money
in this business’Joe Kraus, president of LimeL E I L A A B B O U DUnilever as pledged to reduce theh
amount of plastic packaging it pro-
duces annually by about 14 per cent by
2025 across all its brands from Dove
soap to Lipton tea — and to halve its
relianceonnon-recycledplastics.The Anglo-Dutch company also said it
would invest over the same timeframe
to improve waste collection and
processing in the countries where it
operates, which could include partner-
ships with recycling companies or
directly paying for the collection of its
packaging.
The moves are a sign of how looming
regulations and consumer concerns
about ocean pollution and climate
change are prompting makers offood,
drink and other consumer staples to
change their practices. It is also the first
time a big consumer goods company has
committed to a numerical target to
reduce absolute plastic packaging use,
although some retailers, such asSains-
bury’s n the UK, have done so.i
But campaigners and academics have
said the industry needed to go furtherand faster, given the size of the environ-
mental problems andpersistently low
rates of recycling in much of the world.
Some 127 countries have already
placed limits on plastic bags, according
to the UN, while the EU has banned a
range of single-use plastic items — like
cutlery, plates and straws — by 2021.
The UK is considering adraft law ot
tax packaging that does not include 30
per cent of recycled content.
Roughly 200 consumer goods mak-
ers, packaging producers and retailers
have made voluntary commitmentsunder a project led by the Ellen
MacArthur Foundation that aims to cre-
ate “circular economy” for plastics, in
which they never become waste. Started
in 2018, theproject as encouragedh
companies o accelerate their effortst
and disclose some data on plastics.
Although audited data on packaging
is scarce, since companies are not
required to disclose it, Unilever has said
it produces 700,000 tonnes of plastic
packaging annually. This puts it in fifth
place among companies who have vol-
untarily disclosed their figures after
Coca-Cola with 3m tonnes a year, Nestlé
with 1.7m tonnes, Danone with 750,
and Tetra Pak with 721,000.
The new pledges complement two
earlier ones to use 25 per cent recycled
plastic in its packaging and to make all
plastic packaging reusable, recyclable
or compostable by 2025. This demands“
a fundamental rethink in our approach
to our packaging and products,” said
chief executive Alan Jope in a state-
ment. “It requires us to introduce new
and innovative packaging materials and
scale up new business models... at an
unprecedented speed and intensity.”Personal & household goods
Unilever vows to shrink plastic packaging use
The consumer brands group wants a
14 per cent cut in plastic use by 2025OCTOBER 7 2019 Section:Companies Time: 10/20196/ - 18:13 User:stephen.smith Page Name:CONEWS3, Part,Page,Edition:EUR , 10, 1