Financial Times Europe - 07.04.2020

Tuesday 7 April 2020 ★ FINANCIAL TIMES 5

DO N W E I N L A N D— W U H A N

Goldman Sachs said that it would seize and sell Luckin Coffee shares from the chairman of the scandal-hit chain after he defaulted on the terms of a $518m marginloan.

Luckin went public in New York last year with a lofty goal of displacing Star- bucks in China but announced last week that its revenues had been manipulated, sending its shares down 80 per cent since then. Goldman said yesterday that it was seizing the shares as collateral on the margin loan facility to Luckin chairman Lu Zhengyao. It would then con- vert them into American depositary shares and sell them to recoup losses on behalf of a syndicate of lenders. After the value of shares and ADS fell again yesterday, the stake claimed by Goldman would be worth about $350m, implying a loss of about $168m. An internal probe into the Chinese group revealed last week that it had fab- ricated Rmb2.2bn ($310m) in transac- tions. The share price collapse that fol- lowed wiped out the value of the collateral backing the loan, leading the banks to call in the facility. Goldman Sachs is the disposal agent for sale of the 73m in shares. The bank declined to comment further on the matter. A full sale of the shares would not change Mr Lu’s voting rights in the company, Goldman said in its statement. However, the sale would significantly decrease the voting rights of Luckin chief executive Qian Zhiya, whose shares in the company were also pledged in the arrangement. Mr Lu, who also goes by the English name Charles, founded the company in 2017 but rapidly grew the coffee chain to more than 4,000 stores by the end of

He could not be reached for com-
ment yesterday.
The expansion was fuelled by backing
from a list of top private equity groups,
including BlackRock, Singapore’s GIC
and Centurium, an investment group
founded by former Warburg Pincus
China head David Li. Louis Dreyfus, one
of the world’s biggest traders of orange
juice and coffee, was also a backer.
The disclosure from the internal
probe has cast doubt over the group’s
future but Luckin said on Sunday that
its China operations were continuing as
normal. China’s securities watchdog has
said that it will investigate the company.
Additional reporting by Robert Smith in
London

Goldman to

seize and sell

Luckin shares

of chairman

JA M E S F O N TA N E L L A- K H A N— N E W YO R K
C L A I R E B U S H E Y— C H I C AG O

Hexcel and Woodward, the Boeing sup-
pliers, have pulled the plug on their
$6.4bn merger in the first big deal to fail
because of the coronavirus pandemic.
The companies, which had agreed to
combine in January partly to cope with
the impact of Boeing’s grounding and
halting production of its 737 Max air-
craft, said that market instability fol-
lowing the outbreak made it harder to
realise the benefits of the deal.
“The termination was approved by
the boards of directors of both compa-
nies and is in response to the increasing
impact on both the aerospace and

industrial sectors, and global markets
broadly, resulting from the health crisis
caused by the coronavirus (Covid-19)
pandemic,” they said yesterday.
“The pandemic has resulted in a need
for each company to focus on its respec-
tive businesses and has impacted the
companies’ ability to realise the benefits
of the merger during these unprece-
dented times,” they said.
Several agreed mergers and acquisi-
tions have fallen into limbo in recent
weeks as government actions to curtail
the outbreak have wreaked havoc in glo-
bal markets and forced many compa-
nies to reconsider their priorities.
Raytheon’s all-stock $74bn merger
with United Technologies, two compa-
nies also hit by Boeing’s woes, was
approved last week after some concern
it might be delayed because of the

impact of coronavirus. Boeing’s deal to acquire Brazil’s Embraer has stalled because of the market turmoil. Cash deals are at greatest risk as buyers have seen the value of the companies acquired drop significantly below their agreed offer. Hexcel and Woodward had agreed to an all-stock merger, which makes ending a transaction far easier as no financing is linked to the merger. “The move was not entirely surpris- ing,” said Ken Herbert, a Canaccord Genuity analyst. “Both the supply and demand shocks to the commercial air- craft market have created much more distraction now, and require a focus on near-term cost actions and execution, as opposed to white-knuckling a merger on the scale of Woodward-Hexcel.” Boeing has been hit hard by the grounding of its workhorse 737 Max after two crashes claimed 346 lives. It estimated the crisis would cost $18.6bn, and S&P Global Ratings has predicted a free cash outflow of $11bn this year. Production at sites in Washington state and Philadelphia has been halted by the virus. Hexcel said it had issued a sharehold- ers’ rights dividend as a poison pill to guard against a hostile takeover. The company’s “massive” reduction in share price, down 64 per cent from a 52-week high of $87, makes it an attrac- tive target, Mr Herbert said. But until Boeing and Airbus give more informa- tion on their production plans, it is hard to value Hexcel, which derives nearly three-quarters of its revenue from sup- plying the aerospace manufacturers. Hexcel had $64m in cash at the end of 2019 and no debt maturing until June 2024, “which gives the company a fair amount of breathing room to ride out the temporary effects of the pandemic”, Mr Herbert added.

Hexcel and

Woodward

pull $6.4bn

merger deal

3 Boeing suppliers react to coronavirus

3 Market turmoil follows 737 Max woes

‘Thepandemic has

resulted in a need for each

company to focus on its

respective businesses’

Robert SmithCarnival’s successful $4bn bond sale provides a template for other asset-heavy struggling groups yMARKETS INSIGHT

B

ack in the days of British rule in India, Delhi was overrun with cobras. Frustrated colo- nial officials put a bounty on them, paying out for every snake head the locals could deliver. But the scheme quickly backfired. The story goes that people started breeding cobras to collect the reward, eventually forcing the British to scrap the scheme. The Delhiites released the cobras, leaving the city with a worse infestation than it had started with. The possibly apocryphal tale was made famous by Horst Siebert, the Ger- man economist, inThe Cobra Effect, his book on how poor policies can have unintended consequences. Perhaps future economists will point to the recent mayhem in financial markets as another example of the cobra effect — efforts to make the system safer in the wake of the 2008 crisis may instead have conspired to make it more brittle. The quickest global bear market in history reflected the scale of the coronavirus crisis and how stretched valua- tions already were at its onset. But analysts and investors say that the violence of the rout was also exacerbated by a dramatic drought in market “liquidity”. Liquidity is essentially financial argot for the healthiness of trading conditions. When liquidity is good, the differ- ence between the price one would pay to

Risk has snaked its way from the banks to the trading arena

buy or receive for selling a security is tiny, and even big trades do not affect prices much. But when liquidity is poor, “bid-ask” spreads balloon and even modest trades can make prices judder. Trading conditions always deterio- rate when markets are turbulent. But last month investors say that liquidity was atrocious across almost every important market. Even US Treasuries, the biggest and most liquid bond market and a bedrock of the global financial system, suffered an alarming drought. Citi labelled the phenomenon a “cross- asset liquidity collapse”. Some stability has returned, thanks to aggressive central bank action and government spending packages to amelio- rate the economic destruction caused by the outbreak. Yet nervousness remains and liquidity is still strained. Just why have trading conditions been so abysmal? Several dynam- ics are at play but one of the biggest is the legacy of 2008. Vowing never to b a i l o u t b a n k s again, policymakers slapped them with stricter capital requirements and “pro- prietary” trading with their own money was strangled. As a result, the amount banks allocate to “market-making” — essentially acting as intermediaries between buyers and sellers — has shrunk. Instead, they have copied the techniques of high-frequency traders, replacing capital with speed. This has accelerated the evolution of trading, from humans shouting orders in the pits of stock exchanges or holler- ing bond bids over the phone, to a vast electronic ecosystem of unfathomable complexity and speed. The digital revo- lution is uneven in finance — stocks are

nowadays traded electronically, while junk bonds often still need a human touch — but by and large, algorithms now rule markets. Most of the time this is a boon, and has helped cut trading costs. It has also made banks safer, a fillip at a time when the global economy is shutting down. But risk does not disappear: it moves and takes another form. And in practice the consequence of de-risking banks has been to push risk into financial markets — a modern-day cobra effect. When markets become turbulent, algorithmic market-makers — whether at investment banks or dedicated trading firms — automatically ratchet back the prices of their quotes and the size of the orders they will handle, to protect themselves from sudden, ruinous losses. In practice, this is the high-tech version of stockbrokers refusing to answer calls from panicky clients. Critics have long argued that banks blaming regulations for more fickle liquidity are merely looking for excuses to shuffle off their post-crisis straitjack- ets. They correctly point out that banks were hardly altruistically cushioning the blows of previous downturns. But just because banks are obviously biased does not mean they are entirely wrong. The Federal Reserve last week tacitly accepted the argument had some validity, by exempting Treasuries from one important regulatory measure. That is not to say that we should start a wholesale regulatory rollback; a more resilient banking system should not be ceded lightly. And as far as the tech goes, the genie is out of the bottle. But we may just have to adjust for consequences: at times of distress, liquidity fades even faster than before, and markets can break down in alarming fashion.

[email protected]

INSIDE BUSINESS

FINANCE

Robin

Wigglesworth

Analysts and investors

say that the violence of the rout was exacerbated

by a dramatic drought in market ‘liquidity’

T I M B R A D S H AW— LO N D O N

Quibi, the mobile video start-up that raisedablockbuster$1.8bnbeforeits debut, launched its long-anticipated challenge toYouTubeandNetflix yesterday, despite the worldwide dis- appearance of the coffee shop lines and commutes for which its “quick bite”contentwasdeveloped.

Several Hollywood studios, along with Alibaba, Goldman Sachs and JPMor- gan have huge sums riding on the suc- cess of the platform, led by Dream- Works founderJeffrey Katzenberg and former HP chiefMeg Whitman. Los Angeles-based Quibi spent hun- dreds of millions of dollars to ensure that content featuring celebrities such as LeBron James, Chrissy Teigen and Idris Elba was available on its app. The rise of YouTube and latterly TikTokhave demonstrated the huge popularity of short-form mobile content, while Netflix’s growth to almost

170m subscribers indicates that people will pay for online video. But Quibi is the first big-bud- get attempt to fuse the two models with slick, professional content desig- ned for on-the-go viewing. “People are already watching a lot of videos on their phones. You just need to create a different experience,” Ms Whitman, a veteran of eBay, Hewlett-Packard and Disney, said last year. After more than a year in develop- ment, the app promises “movie-qual- ity” scripted shows, reality television and documentaries, as well as daily news, sports and a BBC world affairs show. Quibi will be free for the first 90 days, before charging a monthly sub- scription of up to $7.99. Quibi has also recruited engineers from tech companies including Snap to make its service more distinctive, by allowing viewers to watch shows with phones held sideways or upright. It is unclear how coronavirus,

which has disrupted routines and quarantined millions, will influence Quibi’s early popularity. Like Hulu, the Hollywood-led TV streaming service that was dubbed “Clown Co” by Silicon Valley bloggers before it premiered in 2008, Quibi has faced considerable scepticism. Reviews for its launch-day content slate and the app have been mixed. “I don’t see the evidence [demand] for this gap” between YouTube-style short clips and traditional TV shows, said Tom Harrington of Enders Anal- ysis. Yet Hulu managed to defy the scep- tics to become a mainstay of many US households, allowing viewers to catch up on shows made for traditional TV channels, as well as breakout original hits such asThe Handmaid’s Tale. The hope for Quibi is that it will be able to piggyback on the wider shift from traditional broadcast TV towards mobile entertainment.

Freeze frameLockdowns fail to deter Quibi’s

launch as $1.8bn start-up bets on mobile video

Thriller: Sophie Turner and Corey Hawkins in ‘Survive’, about a plane crash in a snowy wasteland— Quibi via AP

APRIL 7 2020 Section:Companies Time: 6/4/2020 - 18:52 User: joe.russ Page Name: COMP&MKTS1, Part,Page,Edition: USA, 5, 1