Financial Times Europe - 31.07.2019

(Axel Boer) #1
10 ★ FINANCIAL TIMES Wednesday31 July 2019

Huawei’s first-half numbers ere aw
surprise. Despite a US blacklist
banning US companies from supplying
the Chinese telecoms group with parts
and software, revenues rose 23 per
cent. The unaudited numbers of this
private company should be taken with
a pinch of salt. Even so, they suggest
that the tech cold war is not cramping
the style of a company whose products
remain popular across Asia, despite the
disapproval of Donald Trump.
The on-off animosity of the US
president evidently hurt enterprise
sales, which include cloud and AI
businesses. But these constitute just
8 per cent of total sales of Rmb401bn
($58bn) for the half year. Huawei’s core
telecom equipment and smartphones
businesses offset that weakness.
Smartphones sales grew almost a
quarter, making up more than half of
revenues. Huawei expects this business
to drive growth in the second half. It
has an optimistic sales target of 270m
units, 30 per cent more than last year.
Taking the hint from previous US
export bans on local rivalZTE , Huawei
stockpiled components, signed up
alternative suppliers and developed its
own smartphone chips, increasing
research investment to $17bn this year.
The story is not so positive for its
suppliers. A third are US companies,
includingIntel, Micron, Qualcomm,
Xilinx, Flex nda Nvidia, to name a few.
Huawei sourced $11bn in parts and
software from US companies last year.
Some have lowered sales forecasts for
this yearbecause of the bans.
US hostility should help bolster local
Chinese support for Huawei. About
half of China Mobile’s 5G equipment
orders have gone to Huawei. Half of all
smartphones the state-owned telecom
operator will use in 5G testing will also
come from Huawei.The group’s latest
numbers will reduce the fearsexport
bans induce in other Chinese groups.
If the narrative is to be believed,
Chinese tech self-sufficiency may be

Huawei/trade war:
undaunted by Donald

accelerated rather than held back by
trade friction. That which does not kill
us makes us stronger, as Nietzsche said.

A steep share price jump on a chief
executive’s appointment is personally
flattering.Peter Sanderson, new bossof
ailing Swiss fund managerGAM,
should enjoy the acclaim while he can.
GAM was floored in 2018, when a top
portfolio manager was suspended. An
SFr11bn ($11bn) absolute return bond
fund had to be liquidated. GAM also
botched the acquisition of a UK quant
hedge fund. The shares have fallen
two-thirds in 13 months. They rose as

GAM/asset managers:
reaching de Botton

much as 10 per cent yesterday. A “buy”
case would be that Mr Sanderson’s
appointment marks a break with the
past. First-half results suggested the
rush of net outflows had started to
reverse. A truce has been agreed in a
legal stand-off with Tim Haywood, the
suspended manager, GAM revealed.
Investors in the affected bond fund got
their money back.
But the little-known Mr Sanderson,
most recently a BlackRock manager,
faces a struggle securing GAM’s future
as an independent finance house. GAM
was set up 36 years ago by Gilbert de
Botton, a financier and father of Alain,
the pop philosopher. It is now a midsize
asset manager with an image problem.
David Jacob, interim boss who will
become chairman, seeks SFr40m in
cost savings. Income generated on

shrunken clients’ assets has fallen
faster, dropping 42 per cent to SFr213m
in the first half. GAM has sold its
precious metal and money market
funds to Zürcher Kantonalbank to
focus on profitable active management.
More salami slicing could follow. Staff
retention will be a priority for Mr
Sanderson. But so will be correcting
GAM’s reputation for high pay.
GAM’s shares do not yet look cheap.
They trade at an enterprise value of 27
times depressed full-year ebitda — far
above peers — according to Bloomberg.
Speculation that it is a takeover target
supports the shares. The board is open
to offers. So far none has emerged.
Even if one did, it would be hard to
demand a premium for the brand. Mr
Sanderson arrives at a low moment for
GAM. It is not yet a turning point.

US private equity must be wondering
when hostile fire from Democrats such
as Senator Elizabeth Warren will abate.
When it stops handing critics
ammunition, perhaps?A burgeoning
scandalinvolving longtime private
equity investorTom Barrack s thei
latest delivery of high explosives.
A report released on Monday by the
US House of Representatives alleges
that Mr Barrack leveraged his close
relationship with the Trump White
House in an attempt to help Saudi
Arabia and the UAE purchase nuclear
energy technology. The asset in
question wasWestinghouse, a
bankrupt US maker of power plants.
According to the report, Mr Barrack’s
firmColony Capital artnered withp
Blackstone nda Apollo Global n ano
ultimately unsuccessful bid for
Westinghouse. Mr Barrack then
allegedly attempted to join forces with
Brookfield Asset Management, another
big asset manager, the winning bidder.
Blackstone and Apollo deny that
Colony was ever a member of their
consortium. A representative of Mr
Barrack said he had co-operated with
the House investigation and had
cultivated “respected relationships”
throughout the Middle East. Whatever
the truth of Mr Barack’s involvement
with Westinghouse, the report puts its
finger on an uncomfortable reality of
high-stakes dealmaking.
Private equity firms would like
others to believe they spend the bulk of
their time fixing the operations of
broken companies. But it is also about
raising money rom backers that mayf
include autocratic regimes in the
Middle East. It may then involve
pulling strings in hopes of getting
involved in “proprietary” transactions
to put that money to work.
The title of Ms Warren’s Stop Wall
Street Looting Act implies she is not
totally convinced private equity’s main
purpose is to bolster pension funds and
make industry more efficient. If she
looks into how PE exploits ontacts toc
find and structure transactions she is
set to become even more disapproving.

Private equity:
nuclear family

Iain Conn, boss of British Gas owner
Centrica, has announced a dividend cut
and his own departure. Thousands of
gas fitters will nod approvingly. A swift
retreat to the van is often advisable,
they will say, after handing a
householder a hefty repair bill.
To be fair, Mr Conn will continue
fronting Centrica for a while yet. It is an
abrasive assignment. Consumers beef
about their energy bills. Investors gripe
about a dire share price. This has fallen
76 per cent in five years on earnings
The dividend has stayed at 12p per
share, even as profits have dwindled.
Centrica made a pre-tax loss of £446m
in the first half, compared with a
£704m profit last time. A yield of over
13 per cent showed a reduction was
The cut was deeper than expected,
to an anticipated 5p for 2019. That
implies earnings per share will drop
by a third.
The shares fell 17.5 per cent. But the
new yield of about 7 per cent still
reflects scepticism. Centrica’s problems
include an energy price cap, weather,
gyrating gas prices and angry mobs.
The group also embodies the failure
of vertical integration. Mr Conn’s
predecessor, ex-oilmanSam Laidlaw,
bought upstream assets at the top of
the cycle. Thanks to Gulf tensions,
Centrica will not be disposing of them
at the bottom. Production is healthy,
even if exploration looks challenged.
Bernstein analysts reckon the
company might get £1.3bn for its
stake inSpirit Energy, a joint venture,
and £700m-£800m for a nuclear
The money will help reduce net debt
of £3.4bn. Forecast ebitda of over
£2bn for 2019 would not leave
Centrica over-geared. But upstream
contributed around one-third of
half-year operating profits. When the
units are sold, leverage could start
to look uncomfortable without a
Pressure on Centrica to spin off a
North American division may mount
when the upstream business has gone.
That would likely be NMP — “next
management’s problem”. The
difficulties of running a retail energy
business whose prices are regulated by

the gas man goeth

public outrage are perennial.
Somewhere in the City, a head hunter
will be seeking bright external
candidates for a job whose last two
incumbents had exceptionally rough
rides. Do not all rush at once.

No. 16,233 Set by JULIUS









1 Time to spoil 9’s game? (6)
4 Gaze fixedly about space with
glasses (8)
9 Backsliding Liberal Democrat:
“Recess? Get stuffed!” (6)
10 Spooner’s runny French cheese
... man, packed a helluva punch
12 4d united in favour of the VP
13, 27 Public school’s 50/50 to
make the game (5,6)
14 Meat dish (hopefully not as
tough as old boots) (4,10)
17 Order two more gnocchi – it’s
good for business (8,6)
21 In Barcelona, Dali is an
acknowledged genius (5)
22 Nose to tail Channel port vehicle
queue had a few too many (9)
24 Grand Prix tops conserving
energy, a test for 21 at 1 across
25 Tabloid featuring nine grand
revolver (3-3)
26 In retirement Blofeld became a
father, getting ridicule (8)
27 See 13
1 Being economical with the truth,
criminally libels FT (4,4)
2 Returning to write melody, one
by Holst? (7)
3 Frost admitting “I like a drink”
5 When drunk, Cher Tweets “Hi,
weird sisters” (5,7)

6 Scottish family magazine
including chapter upsetting
Roger (9)
7 Everybody say “Romania!”
quickly (7)
8 Waugh visiting Kiev, Ely, Naples
11 The old dromedary/camel
question posed by acting
mother? (3,4,2,3)
15 Lewis isn’t broadcast in places
where Bergerac might be shown
16 Poor Keith Moon’s last Kansas
get-together for the band (3,5)
18 Hearse transporting ex-PM’s
body (7)
19 Wife called; left message,
ending in noisy argument (7)
20 I had dinner after King Duncan
finally got stabbed (6)
23 “Doctor: I have reduced libido”

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Solution 16,

Lex on the web
For notes on today’s breaking
stories go

Twitter: FTLex@

Three years ago, they were almost in
bed together.Deutsche Börse asw
close to merging with theLondon
Stock Exchange. That was before
Brexit. The LSE plans to elope with
Refinitiv, buying the financial data
provider for $27bn. It will challenge
Bloomberg’s trading room terminals.
Deutsche Börse is the forlorn
erstwhile partner. Its shareholders
risk feeling similarly abandoned.
For Deutsche Börse, the LSE’s move
would be a double blow. It would
wreck its plans to beef up its foreign
exchange trading by buying currency
platformFXall rom Refinitiv. Itsf
London rival would also steal alead
in scaling up its business. Banks no
longer excite investors looking for the
next big thing. Insurers never did.

Financial infrastructure has filled the
gap. Deutsche Börse’s shares have risen
20 per cent. But the LSE’s shares are up
60 per cent. That includes 15 per cent
since the Refinitiv deal was revealed.
The LSE is a bet on big data and
indices. Deutsche Börse spent $850m
in April acquiringAxioma, a US risk
and portfolio analytics provider. It
remains prone to volatile trading
conditions in core markets businesses.
Lower US Fed interest rates threaten to
squeeze margins on cash held at
Clearstream, its trade settlement and
custody arm. Chief executiveTheodor
Weimer argets 5 per cent “secular” —t
or adjusted — revenue growth. Even
that could be ambitious.
Deutsche Börse trades at 20 times
forward earnings, a 10th higher than its

five-year average. True, that is
modest compared to the LSE on 33
times, or 50 per cent above average.
Notwithstanding consolidation
fantasies unleashed by the LSE, both
look stretched.
The German group is constrained
on how much it could splash out on
transformational deals. It treasures a
top credit rating for Clearstream. Net
debt should remain below 1.75 times
ebitda, the company reckons. The
LSE’s debt will reach 3.4 times ebitda
after acquiring Refinitiv, calculates
UBS. Nor is Deutsche Börse a likely
acquisition target. Germany’s
politicians would not countenance
the threat to Frankfurt as its financial
capital. That is another factor
damping Deutsche Börse’s allure.

FT graphic Source: Refinitiv; S&P Capital IQ

Stock exchanges beat the banks
Shares and index, rebased

Jan  Jan  Jul


London Stock Exchange

Stoxx  Banks Index

Profits take o ...
Earnings before interest, tax, depreciation & amortisation (bn)


Deutsche Börse London Stock Exchange

Price-to-earnings ratio

Five-year average
London Stock

... and the shares trade above historic averages

Five-year average

Deutsche Börse: the wallflower
London Stock Exchange’s $27bn bid for financial data provider Refinitiv is a blow for its German rival and
former would-be partner. But both have caught the eyes of investors looking for more exciting alternatives
to European bank stocks. Rising profits have increased their allure.

JULY 31 2019 Section:FrontBack Time: 30/7/2019- 18:52 User:alistair.fraser Page Name:1BACK, Part,Page,Edition:EUR, 10, 1






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