10 ★ FINANCIAL TIMES Wednesday19 February 2020
How do you say “bold” in Italian?
Audaceis one way; another isCarlo
Messina. Late on Monday night the
chief executive ofIntesa Sanpaolo,
Italy’s biggest domestic lender,
launched an unsolicited offer to
acquire local rivalUBI Banca.
The €4.9bn all-stock deal implies an
offer price of €4.25 per share. Italian
banking needs consolidation, and a
clean-up of non-performing loans.
Intesa made its offer hours after UBI
Banca had announced its own shake-
up plans. Both shares rose yesterday.
Mr Messina has clearly pondered this
deal for some time. He had already
approached local regulators and the
ECB, and even signed up another
Italian bank,BPER Banca, to acquire
up to 500 branches in the merged
entity to forestall antitrust concerns.
The merged bank will have a fifth of
the Italian market. Paying with shares,
at an exchange ratio of 1.7 times, will
mean no added stress to the new bank’s
balance sheet. Based on the
undisturbed price from Friday, UBI
Banca shareholders would receive a
27.6 per cent premium.
Another audacious move is to rely on
“negative goodwill”. As Intesa will pay
less than UBI Banca’s tangible book
value, the difference (€5bn less €8bn)
minus any sales of branches (estimated
at €1bn), leaves negative goodwill of
€2bn. Intesa already trades at its
tangible book value. Thus Mr Messina
assumes that the merged bank can
write back that amount to cover €2bn
of non-performing loans plus
integration costs.
Presto! While that may look like
sleight of hand, his cost cuts (including
voluntary redundancies) do not. Intesa
promises to save more than half a
billion euros annually. Taxed and
capitalised, it sums to more than
€3.2bn, which covers the bulk of the
takeover price.
That suggets Intesa could pay more,
underscoring its stock price rally on
Intesa/UBI Banca:
oh, my word
the day. Intesa shareholders get a good
deal. Holders of UBI Banca, though,
should not sell out too soon.
Resource company results come
slathered in greenwash these days.
Swiss mining and trading giant
Glencorewas the latest to wield the
paint brush, delivering earnings after a
tough year. Thebusiness is touting a
projected 30 per cent reduction in
carbon emissions, including those of its
customers, by 2035.
Tough bossIvan Glasenbergthinks
targets to reach carbon neutrality by
2050, such as that set byBPlast week,
Glencore:
old king coal
lack conviction. But you could say the
same of his own mission, which
depends on running down some coal
and oil assets to near zero.
Some commodity giants plan to sell
their mines instead. Though coal still
generated $900m of first half ebitda of
$12.1bn,BHPtalks of dumping these
assets.Rio Tintohas already kicked
coal out of its portfolio.
Glencore maintains that it is green,
not dirty, by producing commodities
set for stellar growth in a low-carbon
economy such as copper, nickel and
cobalt. The fear is that coal, its planet-
trashing cash cow, is irreplaceable.
Coal has the highest margins of any
commodity in Glencore’s portfolio. It
generated 31 per cent of group ebitda
in 2019. Asian demand is ballooning.
The black stuff is leaving a grubby
mark. Coal produced $1bn of a chunky
full-year goodwill impairment of
$2.8bn. That left Glencore with a net
loss of $400m. Low gas prices were to
blame — or maybe thank — for this.
Full-year ebitda beatestimates but
fell 26 per cent on the previous period,
hit by lower commodity prices. The
well-rated shares traded 4.8 per cent
lower on the day.
This is not the first time Glencore has
been behind the times. It has snail-
trailed on diversity, governance
standards and reducing net debt.
Change at the top of the billionaires’
boys club is needed to modernise this
formidable business. An air pollution
crackdown in China and falling prices
for renewablesshould make Glencore
reconsider the future of coal in Asia.
Last year’s write-offs will not be the last.
Nelson Peltzis bullish on Donald
Trump. But he, like the rest of Wall
Street, is more bearish on active asset
management. On Saturday night in
Florida, the activist hosted a lavish
fundraiser for his longtime friend, Mr
Trump. US asset managerLegg Mason,
in which Mr Peltz invests, was
meanwhile putting the finishing
touches to its $6.5bn sale toFranklin
Resources. The deal was announced
yesterday morning.
Franklin and Legg are both mid-tier
active managers brutalised by the shift
to passive management. Franklin is
making the bet that it can be a
consolidator. By wringing out costs, its
$1.5tn of total assets would leave it one
of the handful of active managers left
standing. Mr Peltz’sTrian Fund
Managementsigned an agreement to
support the 23 per cent premium being
paid. Other Legg shareholders appear
warier. The shares rose above the $
offer price yesterday.
Franklin’s stock has fallen a fifth in
the past five years. But it has been able
to accumulate cash. The $4.5bn equity
purchase price for Legg will be funded
exclusively from existing balance sheet
resources. The consequence of using
that cash, rather than new debt or
shares, is massive earnings per share
accretion. That is estimated at a
staggering 30 per cent, which reflects
$200m of annual savings.
Might it have been more prudent for
Franklin to spend its cash hoard on
buying back its shares? Its own price to
forward earnings multiple is only about
10 times. But to acquire Legg at a
premium, Franklin is paying just 12.
times. The favourable economics sent
its shares up more than 10 per cent
early yesterday, though as Legg shares
moved above the $50 offer price,
Franklin shares inevitably eased lower.
Legg shareholders will therefore
have to decide if they want to play
tough. They could threaten to vote
down the deal unless Franklin coughs
up another dollar or two. Mr Peltz, an
investor from last spring, is already set
to make a healthy profit.
Franklin/Legg Mason:
at full Peltz
What’s a bloke got to do to get a break
round here?Noel Quinnis taking an
axe to the investment bank inHSBC’s
biggest shake-up for years. The
grizzled lifer is dealing with the effects
of epidemics and rioting. Yet the
qualifier “interim” lingers obstinately
in his title of chief executive.
As a son of Birmingham, the UK’s
phlegmatic second city, Mr Quinn must
shrug and press on.Stuart Gulliver,
bossfor seven years last decade, shrank
this sprawling, Asia-focused lender by
attrition. ChairmanMark Tucker
wants to go faster, ousting Mr Gulliver’s
slowpoke successorJohn Flint.
The heavy lifting falls to Mr Quinn.
Hewill cut 35,000 jobs, one-sixth of the
total, shunt $100bn of risk-weighted
assets into Asia and reduce geographic
divisions from seven to four.
The City of London investment bank
will bear the brunt. A$7.3bn write-off
on the unit and European commercial
banking cut attributable profits by a
half to $6bn in 2019. The bank will
reduce its presence in European
equities, rates and derivatives.
HSBC lowered the flag on full-service
US investment banking years ago. With
Europe trimmed to an appendage, only
deal-doers in the bank’s spiritual home
of Hong Kong will still cover the
waterfront. The world hegemony of
Wall Street tightens another notch.
The divisional simplification is
another waypoint in a longer process:
the transformation of a postcolonial
federation into a centralised lender
catering to wealthy, empowered
Asians. HSBC now says it will focus on
the buzzing technopolis of the Greater
Bay, instead of the Pearl River Delta
with its picturesque mangroves. They
are, of course, the same place.
Given agonies including a two-year
suspension of buybacks, HSBC’s targets
aremodest. Coronavirus and trade
wars areafflictingan Asia that is still
growing. No wonder the shares fell
6 per cent. By 2020, the bank aims to
raise returns on tangible equity from
8.4 per cent to 10-12 per cent. Core tier
one equity should beat 14 per cent —
but already does.Costs must drop by
$4.5bn to $31bn or less.
No matter how Mr Tucker dresses it
up, his prevarication over the chief
executive’s role is destabilising. Will he
HSBC/Noel Quinn:
the executioner’s song
turn round in another six months,
point to Mr Quinn and say “him, after
all”? The danger for the Brummie is the
chairman will not make him the CEO
because a necessary shake-up has
made him unpopular.
CROSSWORD
No. 16,404 Set by AARDVARK
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ACROSS
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rejected small plans (8)
6 Type of Bible from God in spirit
(6)
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somewhere in south Wales (8)
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Solution 16,
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
Cheap debt is a narcotic. Back in
2018, many corporates tried to quit.
But as central banks turned on the
taps again in 2019, businesses once
again succumbed. Last year, they
borrowed an additional $2.1tn in the
form of corporate bonds, says the
Paris-based OECD.
The scale of the decade-long bond
binge is unprecedented. So too is
much of the debt’s poor quality. Over
half of investment -grade bonds — 51
per cent — was rated triple B, the
lowest tier, last year. During 2000-
2007, the portion was 39 per cent.
Triple B is just one notch above
“junk” status. The danger is that a
recession causes downgrades. Many
holders would then have to sell the
bonds of such “fallen angels” as their
mandates stop them owning non-
investment-grade paper.
Take US food companyKraft Heinz,
for example. Last week, rating agencies
cut its rating below the investment-
grade threshold, making it the largest
“fallen angel” in almost 15 years, say
data from Ice Data Services. Kraft’s
bond due in 2046, formerly trading
above 102 cents on the dollar, has
slumped to 93 cents.
Expect more dropouts from the
heavenly host. The OECD reckons
$261bn of triple B rated bonds would
fall off the lowest rungs of the
investment-grade ladder in a serious
economic downturn.
It is not just higher borrowing costs
that threaten companies; investors are
also taking bigger risks. There may be
excessive optimism that they can
easily sell their holdings in a
relatively illiquid market. That threat
has increased with the growing
portion of triple B bonds in the
portfolios of US investment-grade
corporate bond mutual funds — up
sharply from 20 per cent to 45 per
cent in the eight years to 2018.
For now, bondholders seem
unfazed. Central banks are
supportive on liquidity. Interest
cover, operating profit as a multiple
of interest payments, is relatively
high historically, says UBS. Many
companies may aim to cut their debt.
But policy wonks are right to worry.
The longer the debt binge
continues unchecked, the harder it
will be to kick the habit later.
FT graphic Sources: OECD; Bloomberg; Federal Reserve; BEA; UBS
Corporate bond debt is piling up
Non-financial companies ( tn)
Global Advanced Emerging US Europe China
Dec Dec
Share of investment-grade bonds
Per cent
US corporate debt
AAA
AA
A BBB
x
x
x
x
x
x
x
Debt to profits Debt to GDP ()
Mar
Apr May
Jun Jul
Aug Sep
Corporate bonds: schlock full
The volume of corporate debt has reached an all-time high, according to the Paris-based OECD. More than
half of investment-grade bonds issued worldwide are now rated triple B, the lowest tier. The borrowings of
US businesses are at a record high relative to GDP, but not to profits.
FEBRUARY 19 2020 Section:FrontBack Time: 18/2/2020-19:08 User:nick.miller Page Name:1BACK, Part,Page,Edition:EUR, 10 , 1