Financial Times 05Mar2020

10 ★ FINANCIAL TIMES Thursday5 March 2020

Shareholders ofMetro AG xpect itse

cash-and-carry outlets to give big

discounts. But they will want any buyer

of the German retail group to pay a full

price. After one failed bid last year by

Czech billionaireDaniel Kretinsky,

Sysco ould offer an answer.c

The US food distributor has

informally approached the ailing

business about a potential takeover. It

can improve on Mr Kretinsky’s price.

Metro would help Sysco broaden its

footprint in Europe. It would also give

the acquirer cash-and-carry expertise

to bring to the US. Mr Kretinsky

offered to buy thewholesaler for €

per share, valuing it at €5.8bn, in June

last year.Metro’s share price has fallen

as low as €10.42, from about €14 at

the time of the offer. Through his

investment vehicle, Mr Kretinsky

owns just under 30 per cent of the

company, avoiding the mandatory

offer threshold. Metro was however

right to dismiss Mr Kretinsky’s bid as

too low. Sysco would therefore have to

exceed €16 per share for the board

and the entrepreneur to consider it.

Sysco can afford to pay up. Assume

the US group had to offer a 30 per cent

bid premium over the three-month

average stock price. Sysco would need

to cut about €190m of costs annually

from Metro to cover that. At under

5 per cent of the German company’s

overheads this looks feasible.

Shareholders with links to the

company’s founders were causing

problems for Mr Kretinsky. His plan to

heap debt on Metro had them worried.

They would probably prefer Sysco as a

buyer. If it can come up with a better

price, objections would be few.

The real issue is whether Sysco’s

own shareholders welcome a further

European jaunt. It boughtBrakes

Group or $3.1bn in 2016, but hasf

struggled to integrate the UK food

distributor. Metro would be an

incongruous acquisition, Jefferies

analysts believe. Acquirers, like

Metro AG/Sysco:

has cash, could carry

shoppers in a discount store, may buy

items they do not need simply because

they are affordable.

Japan has hinted that this summer’s

Tokyo Olympics may have to be

delayed. A cancellationcannot be ruled

out. The global sports extravaganza is

just the most visible of thousands of

events imperilled by the coronavirus.

These could cost insurers dearly.

Payouts if the Tokyo Olympics are

cancelled will exceed $2bn, estimates

Jefferies. Broadcasters would be among

the claimants; media groups have paid

$5.7bn for broadcast rights. Even the

Asian insurers: Olympic

meddle imperils profits

better-case scenario of a delay rather

than a cancellation offers little relief.

Broadcasters have already scheduled

this year’s sporting calendar. Baseball

and basketball seasons would overlap

with an autumn Olympics.

So far, the region’s biggest insurance

companies, such as Hong Kong-listed

AIA nd Shanghai-listeda China Life,

have held up well. They do not have

exposure to the Olympics. Having

suffered large losses during the 2003

Sars epidemic, many have since

changed cover to exclude losses from

epidemics. Instead, they may benefit

from an outbreak as sales of personal-

health insurance policies grow.

ven so, Asia’s insurers are exposedE

to unprecedented levels of claims for

event cancellations and business

interruption. The outbreak has hit

more than 80 countries. Bankruptcies

of struggling smaller companies are

one source of potential losses. Claims

for healthcare costs from members of

the public are also set to surge if the

outbreak escalates.

Exclusions for epidemics may also be

less watertight than insurers would

like. They may need to pay out if public

authorities close an event venue or if

an infection has occurred on site.

Insurers have benefited from years of

calm across Asia. AIA shares have

gained more than 200 per cent in the

past decade. They fell to their level of

last October only after the outbreak

started and trade at17 times forward

earnings, a premium of more than a

third to global peers. The markets

underestimate the pain coronavirus

could do to Asian insurance stocks.

Jack Welch as a legend by the time hew

retired fromGeneral Electric n 2001i

after two decades. Fortune magazine

named him “Manager of the Century”.

Mr Welch, whodied on Sunday,

insisted his success would be measured

by how well his successors did. On this

count, his legacy looks shaky.

GE published a subdued update on

its 2020 prospectsyesterday. The

group is a shadow of its former self. Its

push into financial services nearly sank

the company during the financial

crisis. The empire that Mr Welch built

is being dismantled piece by piece.

Shares are down 80 per cent from

their 2000 peak. High debt,badly

timed acquisitions and the company’s

inability to respond to a changing

market have forced it to all but

eliminate its quarterly dividend.

GE turned a profit in only one out of

the past five years.

Brash and impetuous, Mr Welch

personified the so-called “cult of the

CEO” during the late-1990s boom. GE’s

soaring stock price made it the most

valuable company in the world. His

enthusiasm for slashing jobs earned

him the nickname “Neutron Jack”.

On his watch, GE was transformed

from an appliance and lightbulb

manufacturer into a super

conglomerate. Revenue shot from

$25bn to $125bn and earnings jumped

from $1.6bn to $15bn during his tenure.

The company’s market worth surged

4,000 per cent. Mr Welch’s influence is

undeniable. But the conglomerate

model he championed is out of fashion.

Conglomerates are breaking up

across the western world.Few leaders

are more vulnerable to revisionism

than chief executives. The philosophies

of today’s bosses — and the structures

they create — will appear equally

obsolete in a few decades from now.

For investors, the challenge is to

anticipate that shift. Hagiographies in

business magazines — and, alas, even

financial newspapers — may signal that

a turning point is on its way. GE shares

began their inexorable slide less than a

year after that feature in Fortune.

GE/Jack Welch:

an unwieldy legacy

Central banks in the US, Australia and
Canada have been cutting interest
rates. Stocks have wilted for the most
part. Investors have less faith in the
power of well-meaning stimulus efforts
than central bankers.
Lower funding costs will do little to
avert damage to corporate bottom lines
wrought by the coronavirus. Cancelled
conferences, years in the planning,
cannot be revived by cheaper money.
Ditto tourism, luxury retailing and
industrial investment. As the conduit
for monetary easing, private sector
banks are in the line of fire. The price
— subdued profits — is already evident
in their financial results across Europe.
Their shares have underperformed. In
an analysis of 109 banks, the Bank for
International Settlements found their
returns on assets correlated with the
level of interest rates. The BIS warned
of the unintended consequences of
accommodating monetary policy.
As UK banks discovered after the
financial crisis, making it cheaper to
borrow is of little benefit when
companies, seeing only weak end
demand, hold off spending.
Japan provides another example of
flogging a dead horse. There was scant
correlation between its quantitative
easing campaign and improved
corporate profitability. Manufacturers’
quarterly profits barely budged in the
years after monetary easing began in
early 2001; non-manufacturers’
earnings were wobblier still.
Japan’s only beneficiaries were
exporters, able to translate their
overseas earnings into more yen,
courtesy of the weaker currency.
Besides, those that really need the
funding usually find it costs rather
more than low base rates might
suggest. Research boutique Gavekal
highlights the divergence between
investment grade and high-yield debt
last week: while yields rated triple B
fell 10 basis points, those rated
double B rose 50 basis points.
Corporate titans command low
funding rates. They may not use the
money for anything useful, though.
Apple’s debt-to-equity ratio has more
than doubled since 2016 to 112 per
cent. Since 2013 it has spent more on
buying back its own stock than on
investment. The $330bn in share

Rate cuts/profits:

no silver bullets

buybacks over the past decade may

flatter earnings per share. They do

nothing for operating profitability.

Apple is not alone. US companies

spent $1tn on buybacks in 2018 and

$700bn last year.

CROSSWORD

No. 16,417 Set by JASON

 

 

  

  



 



  

  

 

JOTTER PAD

ACROSS

1 Chew over Cook’s opening with

eleven runs (8)

6 Country accepted Republican

twist? (6)

9 Being knowledgeable become

teary (4,2)

10 Delightful tea with the best

china? (8)

11 A piece of cake is, perhaps,

buttery but not gross (4)

12 More than double more or less

divided the sign of high scorers?

(6,4)

14 Sense revitalised by the return

of dry extracts (8)

16 Fellow quitting parody’s review

makes mistaken exclamation (4)

18 Quiet nana’s amorous advance

(4)

19 Iron they forged according to

principle (2,6)

21 Biscuit is a British hot shot, say

(10)

22 Drink after time – that might be

a whopper (4)

24 Sadly at risk we skim over the

surface (5,3)

26 Primarily at large? (6)

27 Tabloid’s dithering trope about

Duke (6)

28 Wind in bit of fork is an alpine

feature? (4,4)

DOWN

2 Papandreou’s last letter which

stands for resistance (5)

3 When journo jokes about rash

age (5,6)

4 Dummy declines HP (8)

5 A high-flier who launches one

studying salad? (6,9)

6 Established place to house

hacks, for example (6)

7 What Trump conceals is bizarre

(3)

8 Carry on blocking exclusive or

private landlord (9)

13 What shifts fat? Tight clothes

and active role (11)

15 Celeb carrying one bit of

baggage in flight (9)

17 Shutdown is opposed in theatre

(8)

20 Junk shop’s in possession of

yard sprinkler (6)

23 Pick up Latin warrant (5)

25 What to do with mutton, eg, with

its head removed (3)

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Solution 16,

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

Twitter: @FTLex

The good timing that in 1899 took the

Agnelli family into car production

has stayed with them. They are

getting out of insurance as falling

interest rates hurt the sector.Exor,

the holding company of the Italian

industrial dynasty, confirmed the

sale ofPartnerRe or $9bn yesterday.f

Exor bought the Bermuda-based

reinsurer at a valuation of $6.9bn in

2016. The disposal, to French mutual
      insurerCovea, will net a tidy return
      at a good valuation.Covea’s bosses
      were eager buyers, on the rebound
      from a fumbled attempt to buy rival
      Scor.John Elkann, the boss of Exor, is
      a shrewd operator.
      Gianni Agnelli, in his day the
      quintessential Italian tycoon, chose
      his grandson as his successor. That

bequest could have been a poisoned

chalice. But Mr Elkann has balanced

family legacy with a modernising

instinct. Exor has produced tenfold

returns during his decade at the helm.

This has reflected the protracted

turnround ofFiat Chrysler utomotiveA

bySergio Marchionne, who died in

2018. Mr Elkann orchestrated a merger
      agreement between FCA andPeugeot,
      bringing much-needed consolidation in
      a weakening industry last year.Exor’s
      key remaining assets will now be a
      one-third stake in FCA and a similar
      one in sports-car groupFerrari.
      Its mix of assets remain eclectic.
      They includeJuventus ootball club,f
      alongside holdings in TheEconomist
      and the business that owns La Stampa
      and La Repubblica newspapers. This

diversity gives some investors the

jitters. Like conglomerates, holding

companies usually trade below the

value of underlying assets.

Exor’s discount was a quarter of its

net asset value in November. Lex

calculates that this has widened to

about 35 per cent. Thecash from the

PartnerRe sale should help to narrow

that gap. The challenge for Mr

Elkann is to win a better rating once

proceeds have been reinvested or

spent on a special dividend.

Investors should remember that

when buying the shares of a dynastic

business you are hitching a lift in the

family limo, not hailing a taxi whose

destination you can order. Mr Elkann

deserves credit for the stylishness of

his driving. He is worth backing.

FT graphic Sources: Refinitiv; company; FT Research

Exor portfolio holdings

Asset values (bn)

5

10

15

Pro forma PartnerRe sale

Discount to

NAV   Discount to

NAV  

November 

-











PartnerRe

Ferrari

FCA

CHN

Cash

Gross debt

Investment returns

Rebased to 













MSCI All

World index

Exor

FCA

Market

value

Market

value

Others

Elkann/Exor: shrewd steward breaks from cover

Exor, the Agnelli family holding company, confirmed the sale of its reinsurer PartnerRe yesterday. Led for a

decade by family member John Elkann, Exor has thrived. Share returns have outpaced global benchmarks.

But Exor trades at a persistent discount to its constituents, a gap tht has widened since last year.

MARCH 5 2020 Section:FrontBack Time: 3/20204/ - 19:02 User:nick.miller Page Name:1BACK, Part,Page,Edition:EUR, 10, 1