12 ★ † FINANCIAL TIMES Thursday8 August 2019COMPANIES
A
lmost nobody makes unicorns quite like Swe-
den. Spotify, Mojang, King, iZettle — all are
examples of billion-dollar companies born in
Sweden that have made Stockholm the
world’s biggest unicorn factory per capita
behind Silicon Valley. But, today all four are largely con-
trolled from outside the Nordic country. Spotify’s main
centre of gravity is in New York, while the makers of games
Minecraft and Candy Crush as well as payments company
iZettle were sold off to deep-pocketed US companies:
Microsoft, Activision Blizzard and PayPal respectively.
EnterKlarna. The buy-now, pay-later start-up founded
in Stockholm became Europe’s largest unlisted fintech this
week, valued at $5.5bn — more than double its estimated
worth at the start of this year.
The path Klarna and its 37-year-old chief executive and
co-founderSebastian Siemiatkowskinow take is doubly
interesting. Firstly, it has the chance to be one of the main
global players seeking to disrupt the traditional retail
banking industry. The $460m it raised this week from ven-
ture capitalists, an Australian bank and pension funds will
be used to speed up its longstanding attempts to crack the
US market, where after some years of struggling it is finally
showing signs of success.
The second aspect may be even more crucial for Sweden
and Europe: can they hold on to their leading technology
groups or simply watch them get swallowed up by US or
Asian rivals? Mr Siemiatkowski is certainly aware of the
issue. The decision of iZettle a year ago to pull its planned
stock market listing and instead agree to be bought for
$2.2bn by PayPal reignited anxiety around promising
European tech companies often selling out rather than
taking the longer and tougher route of trying to rival some
of the biggest US groups.
The spotlight is on what Klarna plans to do next. Mr
Siemiatkowski says the company — founded by him and
two friends at business school in 2005 — is as close as it has
ever been to an initial public offering today, but that for
now pursuing growth is the priority.
Asked about iZettle and the temptations to sell out, he
replied: “We are very humbled to be in this city that has
given rise to companies like
Spotify and King and others.
The most important thing is,
as Ingvar Kamprad [the
founder of Ikea], said: most
things are still not done.
There is this massive indus-
try — retail banking — that
hasn’t put customers first.
This is almost an unlimited
addressable market.”
A person close to some of Klarna’s backers said: “It’s
down to the founder’s mentality. Does Sebastian have the
appetite to do another 10 years? And I think he does.”
Klarna still has plenty of challenges. Unlike many fin-
techs, it is profitable and has been for some time. But last
year its operating profit dropped 70 per cent to $19m on
revenues up a third to $627m.
Klarna earns money from online stores such as Asos,
Hennes & Mauritz and Adidas, as well as consumers, by
offering a deceptively simple solution that it claims boosts
sales substantially as fewer shoppers abandon their bas-
kets over difficulties paying. In return for a fee from mer-
chants, it offers the customers the chance to buy now and
pay later, while assuming their credit risk and the burden
of collecting the money from the seller. The service is free
for most customers but if they pay late or decide to pay in
instalments, Klarna collects the interest.
That has put it in the sights of the Swedish government
and some debt counsellors, who worry about whether and
how it aids young and vulnerable people in getting into
debt. Mr Siemiatkowski said Klarna was keen to stay
“humble and transparent” as well as learn from its mis-
takes but that its basic aim was merely to make online
shopping as easy as buying in a shop. He highlighted how
Klarna had become one of the 10 companies Swedes
trusted the most, scoring better than any bank.
Mr Siemiatkowski argued that now was the time for “a
huge disruption” of the retail banking and payment card
industry by putting customers first. An IPO seems to be
the next logical step, with Klarna’s founder saying it had
“most of the things in place that we need”, even if this
week’s fundraising showed it could access large sums of
money away from public markets.
Whatever it does next will be closely scrutinised at home
and abroad. Only a handful of Sweden’s 100 largest compa-
nies were started in the past 50 years, an extraordinary sit-
uation mirrored across much of Europe. The continent’s
future vitality may depend on how many Klarnas it can
develop and cling on to.[email protected]INSIDE BUSINESS
EUROPE
Richard
Milne
Sweden needs unicorns
like Klarna to keep
their magic at home
‘There is this
massive industry
— retail banking
— that hasn’t putcustomers first’
MYLES MCCORMICK— LONDONContinental, the German auto parts
group, is pivoting towards electric vehi-
cles as it looks to position itself for
rapid growth in cleaner transportation.Europe’s largest listed auto technology
supplier said yesterday it would stop
investing in making injectors and
pumps for petrol and diesel engines
amid a “fundamental, dramatically
accelerating”transformation.
The shift comes as the company,
which issued two profit warnings in
2018 and another last month, reacts to
tumbling global car production that is
knocking demand for its products.“The current market environment is
highly challenging. The key automotive
markets of Europe, North America and
particularly China are declining,” said
Elmar Degenhart, chief executive. “We
are responding to the declining market
by ensuring rigorous cost discipline and
enhancing our competitiveness.”
Continental last monthslashed its
full-year forecastas automotive produc-
tion, to which its sales are closely
aligned, contracted across the world.
Havingexpected roughly flat produc-
tion of cars and light commercial vehi-
cles, the group expects this to decline
by 5 per centthis year, as global trade
tensions drain confidence and leaveconsumers less willing to buy new cars.
Vehicle production is set to fall 10 per
cent in China, 3 per cent in Europe and
2 per cent in the US compared with last
year.
Arndt Ellinghorst, an analyst at Ever-
core ISI, said Continental may be “late to
the party” on electrification.One inves-
tor, he said, “had to triple-check the
date of the press release to make sure it
wasn’t a 2015 release, re-sent”.
Net income in the second quarter, in
line with its indications last month, slid
41 per cent to €485m. Sales fell 1 per
cent to €11.3bn. The shares rose about
1 per cent yesterday but are down 36 per
cent over the past year.Automobiles
Continental flicks switch to electric vehicles
HANNAH KUCHLER— NEW YORKTeva’s better than expected earnings
failed to allay investor concerns about
potential legal liabilities and the depar-
ture of the chief financial officer, send-
ing shares in the Israeli pharmaceutical
company down more than 5 per cent.The drugmaker put aside $646m for
liabilities related to litigation over the
opioid epidemic, which it said is likely to
be at the low end of the range, after it
agreed earlier in the quarter to pay
$85m to the US state ofOklahomaon the
eve of a court case.
Kare Schultz, Teva president and
chief executive, said themountinglawsuitsaimed at opioid makers and
distributors were “political” rather than
a “classical legal situation”.
He told the Financial Times: “Pre-
scription drug misuse has existed for a
hundred of years but now they have
made a claim that it was created by the
manufacturers.”
Shares in Teva have fallen 77 per cent
in the past year as Mr Schultz tries to
turn the company’s core business round
with a restructuring, while under pres-
sure from litigation.
Lawsuits include the opioid cases and
a US Department of Justice investigation
into price-fixing at generics makers,
which accuses Teva of artificiallyinflating prices on more than 110
generic drugs.
Teva, which has denied wrongdoing
in both cases, said it expected the cost of
refinancing its debt to go up because of a
lower credit rating, partly because of the
pending litigation.
On the earnings call, Mr Schultz said
the company had decided to settle in
Oklahoma despite being responsible for
only 247 prescriptions during the rele-
vant 10-year period.
Investors were further shaken by
Teva’s announcement yesterday that
Michael McClellan, its chief financial
officer, was planning to step down
because of a serious illness in his family.Pharmaceuticals
Opioid litigation fears drag down Teva shares
ROBERT SMITH— LONDON
LINDSAY FORTADO— NEW YORKLitigation financing specialistBurford
Capitallost almost half its market value
yesterday after prominent US short-
sellerMuddy Waterstook aim at a
favourite of London’s stock market.
The US hedge fund,headed byCarson
Block, described Burford as a “poor
business masquerading as a great one”
in a report that sent shares in the com-
pany crashing 46 per cent.
Burford, which counts troubled
stockpickerNeil Woodfordamong its
largest shareholders, makes money by
funding lawsuits and then taking a shareof any proceeds. The litigation finance
industry has been turbocharged by the
era of low interest rates, as investors
search for juicier returns.
The reportcriticised the accounting
Burford uses to value itscases, which it
says it is “aggressively marking” and
argues the company is“actively mis-
leading investors” further with some of
the metrics it reports. “We view it as a
lottery ticket model in that it relies on
huge, but rare, successes, rather than
consistently producing solid returns,”
Mr Block said. “It’s rare for us to come
across such a dichotomy between what
we see and what the market sees.”
Burford said in a statement thatit
employed IFRS accounting standards
and cited years of “clean” audit opinions
fromEY. The company also said that it
reported on its investments in “extraor-
dinary detail”.The steep declines in Burford’s shares
yesterday follow a near-20 per cent drop
on Tuesday, when Muddy Waters
tweeted that it would be announcing a
new short position. The company’s
value has fallen £1.7bn in two days.
Burford said it was “strongly suspi-
cious” of Tuesday’s share price fall and
that it would “take appropriate legal
action” if misconduct was discovered.
“There is a clear line between appropri-
ate commentary and market manipula-
tion,” the company said.
Until this week, Burford’s market
value was more than £3bn, making it
the largest stock listed on Aim, the Lon-
don Stock Exchange’s market for
smaller growth companies. It has also
been one of Aim’s strongest performers,
with its share price having previously
surged more than 1,000 per cent over
the past five years.Burford Capital is the second-largest
holding in troubled stock pickerMr
Woodford’s now-suspended Equity
Income fund. Mr Woodford has backed
the company for a decade, having first
invested in its shares in its 2009 initial
public offering when at Invesco, the
then-star fund manager’s longtime
home before he set up his own firm.
Muddy Waters is not the first to ques-
tion Burford’s reporting practices. Some
analysts havenoted that much ofits rev-
enue comes from writing up the value of
court cases that have not finished.
“We think accounting standards were
abused,” Mr Block told the FT. “We defi-
nitely think the authorities should look
at this. I believe it comes close to the line
and possibly crosses it.”
Woodford Investment Management
and EY declined to comment.
See LexFinancial services
Muddy attack wipes £1.7bn off Burford
Criticism from short seller
halves lawsuit funder’s
market value in two daysANNA NICOLAOU— NEW YORKWhenSumner Redstonedecided to split
Viacom and CBS in 2006,Netflixwas a
DVD-by-mail business. Now the sister
companies are dwarfed by the $135bn
streaming group, and are looking to
reunite to better compete in an industry
it has upended.
US media and telecoms groups have
hurtled towards consolidation in recent
years, with the biggest players huddling
together to defend against Netflix.
Rupert Murdochcashed out, selling his
treasured television and film studios to
Disneyfor $71bn, while America’s big-
gest phone company paid $80bn to buy
Time Warner’s Hollywood empire.
In the dust of these megadeals other
media groups look like minnows, and
analysts and executives are forecasting
a second wave of consolidation.
Mr Redstone, 96, has passed control
of the family business to his daughter
Shari, who is driving for scale. Her first
goal is the reunification ofCBSand
Viacom, bringing together programmes
such as60 Minutes,Stephen Colbert’s Late
ShowandThe Big Bang Theorywith a
portfolio of cable channels and thePara-
mount PicturesHollywood studio.
The companies’ boards have been in
talks for weeks, having hoped to iron out
a deal today, when they report quarterly
results. But while they have agreed to
makeBob Bakish, the Viacom veteran,
chief executive of the combined com-
pany, say people familiar with the situa-
tion, they have yet to agree on a price.
One person close to the boards said
there were many reasons to pursue a
deal. “In an environment where Disney
is putting stuff behind the walled gar-
den,WarnerMediais putting stuff
behind the walled garden... the com-
bined company would be pretty well
positioned.”
Ms Redstone has hinted that the
Viacom-CBS tie-up may be only the
start.“We would probably want to look
at something after that and to develop
scale and be transformative as we move
forward,” she said in June.
The likes of Viacom and CBS face a
Hollywood landscape dominated by a
few large companies. Disney makes up
38 per cent of the US box office take,
according to BoxofficeMojo, which
tracks the film industry. Adding in Fox,
the number rises to almost 42 per cent.
Ben Swinburne, head of media
research at Morgan Stanley, estimates
that Disney, after the Fox acquisition,
will produce about 30 per cent of all
primetime scripted broadcast TV series
this season.Warner Bros has been swallowed up
byAT&T, while Comcast owns Univer-
sal Pictures. Viacom’sParamount,Sony
andLions Gate, the remaining studios,
“are barely surviving”, said Jeffrey Bock,
analyst at Exhibitor Relations, the
entertainment research group.
Mr Swinburne is among observers
who believe further M&A activity is
inevitable. “This business is getting
harder, requiring more capital, more
global distribution and ultimately more
consolidation,” he said. “We think the
race for scale will lead to lower near-
term profits, and we continue to see only
a handful of platforms emerging on the
other side.”
The question now is who is on theblock.Sony Pictures Entertainment, the
studio behind shows such asBreaking
Bad, has long been viewed as a target,
but its parent in Japan has resisted it.
“Who is left? Sony does not seem like
it wants to sell, which leaves very few
options,” said an adviser to companies
including Disney and Fox. The adviser
listed Discovery Communications,
Lions Gate andImagination Entertain-
mentas potential targets but warned
that “cable cowboy” John Malone’s
stakes in Lions Gate and Discovery
could complicate any approach.
Lions Gate, the studio behind theThe
Hunger GamesandMad Men, has had a
tough run. It has struggled to produce
big hits, lost half its market value in thepast year to fall below $3bn, and has
held talks to sell its Starz cable channel
to CBS, according to multiple reports.
Discovery, the $15bn company behind
the documentary cable channel, as well
as TLC and the Food Network, this year
responded to rumours with a statement
that it was not for sale.
Even if there are deals between sec-
ond-tier groups, competing with the
leaders will be tough. A combination of
CBS, with a market value of $19bn, and
Viacom at $12bn would still be small
compared with Netflix and Disney,
worth $135bn and $250bn respectively.
Disney, AT&T, Apple andNBCUniver-
salare preparing to release streaming
services to make a success of the assets
they have bought. Lions Gate is trying to
follow suit through the expansion to
more countries of Starz Play, a stream-
ing service tied to the cable channel.
Jon Feltheimer, chief executive,
hailed an “investment into our future”
but Wall Street showed less enthusiasm.
Lions Gate shareshave fallen more than
20 per cent since the announcement.
Todd Juenger, media analyst at Bern-
stein, predicts that the “table stakes of
content spend to attract and retain sub-
scribers... will overwhelm niche serv-
ices like Starz”.
“Lions Gate is mimicking the Disney
playbook,” he said. “But not everyone is
Disney.”Additional reporting by Eric PlattMedia.Consolidation
CBS-Viacom talks point to wave of mergers
Rise of Netflix, Disney-Fox
and AT&T-Warner megadeals
leaves rivals racing for scale
A CBS-Viacom
tie-up offers to
bring together
shows such as
‘The Big Bang
Theory’,
pictured, and
‘60 Minutes’
Sonja Flemming/CBS/GettyDisney dominates the film industry
Studio market share, years to Aug ( )* Buena Vista subsidiary
Source: Box O ice Mojo Disney*UniversalFoxWarner BrosSony/ColumbiaParamount‘It’s rare for
us to comeacross
such adichotomy
betweenwhat we see
and whatthe market
sees’
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