10 ★ FINANCIAL TIMES Friday26 July 2019Take a road trip off the beaten track.
That is Nissan’s messageto car buyers
in its latestads.Investorsare also being
invited to headinto uncertain territory.
On Wednesday, the Japanese car
companyannounceda 99 per cent fall
in first-quarter operating profit.
A restructuring planwill axe 12,
jobs, almost a 10th of the global
workforce. This was a bigger reduction
than expected and more than double
its previous plan. Cutbacks of a 10th to
global production capacity and a big
reduction in the product line-upwill
come in the next three years.
Such drastic cuts echo measures
taken by Carlos Ghosn, “Le Cost Killer”,
to turn round Nissan’s fortunes in the
early 2000s. But there the parallels
end. Mr Ghosn, whois awaiting trial on
financial misconduct allegations that
he denies, embarked on an ambitious
expansionin 2011. The latest cuts will
focus on less profitable factories that
grew under this plan.
He deserves much of the blame for
Nissan’s problems. The weak
performance of the US, its biggest
market, underlines flaws inhis
strategy.Heavy discounting to boost
sales has led to razor-thin margins and
undercut the brand. Theageing model
line-up is another problem.
The poor performance is likely to
add to the pressure on Hiroto Saikawa,
Mr Ghosn’s protégé-turned-accuser.
Last month, he survived ashareholder
motionto oust him but many investors
are frustrated by the deteriorating
performance.The company stands by
its full-year profit target. It looks overly
optimistic. Investors should be braced
for more falls in the share price.It has
already lost nearly a quarter of its
value since Mr Ghosn’s arrest.
Nissan’s woes raise the stakes overits
fractured alliancewith Renault. They
might make it harder to resist a tighter-
knit relationship. That would help
deliver the new models that are
needed. But there are big forces drivingNissan:
lost highwaythe two companies apart. Nissan could
find itself on its own. Itneeds to find a
negotiable route to recovery.Tell people what they want to hear.
That, as Dale Carnegie wrote, is how to
win friends and influence people.
Nokiaproved the pointyesterday by
talking up its 5G equipment sales.
The Finnish telecoms company touts
its ability to sell integrated packages of
fixed and mobile communications kit.
Yet shareholders do not want to listen
to Nokia droning on about “end-to-end
solutions”. They have wanted to hear
good news about the next wave ofNokia:
we’ll call youmobile technology. Nokia has a chance
to catch up with Chinese rivalHuawei,
accused by the US of spying. Nokia
finally got its message acrossyesterday.
Second-quarter numbersbeat
analysts’ expectations.Rajeev Suri,
president and chief executive, pointed
to 5G demand as a key factor. The
share price duly jumped 8 per cent.
The problems of Huawei have
evidently given Nokia a leg up. Free
cash flow will turn positive again this
year. That should protect a dividend
yielding more than 4 per cent. Not only
were revenues of €5.67bn decently
ahead of a consensus figure,
profitability was better, too. An
operating profit margin of 7.9 per cent
thrashed the market’s assumption by
more than 3 percentage points.
Nokia needed a good result. It haspromised an operating margin of
9-12 per cent for the full year and thus
has some way to go. Mr Suri believes
the second half will improve on the
first. If so, that message has not got
through to analysts covering Nokia.
Most rate Nokia a buy. But they have
been ignoring the forecasts of the
company they cover. Consensus
estimates of operating profits from
S&P Global suggest margins will come
in at the bottom of Mr Suri’s outlook
ranges for this year and next.
Nokia still needs to prove itself. This
strong result was preceded by a bad
miss on profit margins in thefirst
quarter. Mr Suri says quarterly results
are too volatile to judge Nokia’s
progress by. Take him at his word. Buy
the shares only if he imparts more good
news on 5G with annual results.A Goldman Sachsmutual fund targets
stocks set to capitalise on the rise of the
millennial generation. With hefty
charges of as much as 1.9 per cent, the
financially challenged late-20 and
30-somethings do not seem to be the
target set of buyers.
A series of investment vehicleshas
sprouted to buy shares of companies
pitched at young Americans who are
advancing into full-fledged adulthood.
Such demographic-oriented exchange-
traded funds (ETFs) are redundant.
Millennial titans likeNetflixand Uber
are so big they alreadydominate
traditional index funds. It is more
interesting to ask which traditional
companies will adapt to the
millennials’ rise and which apparently
youth-friendly start-ups will not
discover viable business models.
One view is that as millennials age,
their life paths will resemble their
parents. That may be partially true but
their experienceshave been affected by
the reverberations of the financial
crisis. In 2016, the median wealth of
millennials was below that of Gen X
and Baby Boomers at the same age.
That kind of instability along with
advancements intechnology have led
to the gig economy. Companies such as
WeWork,Airbnb, Uber andPostmates
take advantage of young people’s
flexibility and willingness to rent
rather than buy. Whatever
conveniences these companies provide,
many have yet to prove profitable.
Investors are for now just subsidising
big losses. At the other end,incumbent
consumer food companies such as
Kraft Heinzand Campbell’s Souphave
failed to understand that younger
consumers do not care for processed,
unhealthy food and have sacrificed
billions of dollars of their own value.
Millennial ETFs so far created are
relatively modest, with assets of $100m
or less. Selecting the right stocks that
precisely map to millennials is not
straightforward. Investors of all ages
can probably create such portfolios
themselves just as accurately and more
cheaply.Millennial funds:
young bucksA foreign private equity group needs
audacity — or indifference to politics —
to announce it is buying a historic
British defence business. A government
with populist leanings has just taken
power in the UK, where protectionism
was already rising.Cobham, which
Adventwants topurchasefor £4bn,
owns world-beating technology for
refuelling warplanes in flight. It was
founded by Sir Alan Cobham, a real-life
version of fictional fighter ace Biggles.
Chocks away? Maybe not. Cobham is
a UK military technology asset, unlike
GKN, whose takeover byMelrose
caused a storm last year. Today, new
ministers, such as Ben “Who’s he?”
Wallace at defence, are busy digging in
around Whitehall. But this is a deal
they will take an interest in, even with
the Brexit countdown clock ticking.
Investors would be disappointed if
the takeover is blocked or loaded with
restrictions. Sir Alan flew brilliantly by
the seat of his pants. Cobham has done
so chaotically. The group has warned
on profits five times and has had two
rights issues. The shares are 50 per
cent below their 2015 peak, due partly
to a US dispute over refuelling systems.
Advent is paying a full price. This is
equivalent to a 47 per cent premium to
the average share price over three
months and 13 times forward ebitda.
The purchase still looks attractive
financially. Cobham now has little debt.
Suppose Advent covered half the
purchase price with borrowings at a
ratio of 6-7 times ebitda. The interest
bill should still be less than half
operating cash flow.
Cost cuts and any disposals of
underperforming divisions would then
bolster the bottom line. In a few years,
Advent could contemplate floating or
selling a restructured Cobham.
The shares are a shade above the bid
price. The market hopes a trade buyer
may bid higher for a business that
modernised the refuelling technology
pioneered by Sir Alan: a hose
terminating in a giant shuttlecock,
dangled from a tanker aircraft.
The board has recommended the
deal. Even if there is no higher bid, a
second round of haggling is likely.
Ministers may seek guarantees over
2,000 UK jobs and a headquarters in
south-west England. Sir Alan is history.Cobham/Advent:
the buyout of BigglesBut so is the chillaxed David Cameron.
In 2012, the Tory prime minister
acquiesced to an ultimately abortive
foreign bid forBAE, the UK’s key
defence company. That would not
happen today.CROSSWORD
No. 16,229 Set by REDSHANK
JOTTER PAD
ACROSS
1 A cop has Rebus diverted in
order to appear in court (6,6)
8 Driver uses it to travel round
Germany apparently (4,3)
9 Sham dose left expert in lead
with zero (7)
11 React defensively, placing king
in corner (7)
12 Label European article found in
mine (7)
13 Second person briefly smuggled
clothing material (5)
14 Horrible theatre worker goes
round waving gun (9)
16 Guy pursues scandal about drug
at rock-bottom price (4,5)
19 Cross over a hundred and
twenty (5)
21 Top four dismissed from board
(7)
23 Lamb catches, say, cold,
becoming plaintive (7)
24 The last busy cat-burglar’s
speciality (7)
25 Huge Zulu comes in for
daughter in case (7)
26 Lorry wheel goes round roughly
parallel (6,6)
DOWN
1 Cure Yankee eating rocket to
excess (7)
2 Rustic behind shocking pink
(7)
3 Software released without
following source of Newton’s
theory? (5,4)4 Bluebottles start to eat wood
(5)
5 Solitary pursuit each day in
group (7)
6 Arthur managed to cover end of
one waste pipe (7)
7 Organised state school with a
leftist head (12)
10 Like hand in greeting, revealed
over time (12)
15 Zest for each round Ulster
sausage (9)
17 Game to do with passing round
dictionary, I think (3,4)
18 Item at the conclusion of sonnet
(7)
19 He has doubts about entering
sort of tank (7)
20 Opening old cereal that’s out of
condition (7)
22 Set of values incorporated in
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6 1 6 + ' ( 7 'Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLexFacebook users are a resilient lot. In
the past year the company has been
accused of violating theirprivacy,
failing to protect their data and
allowing their feeds to be littered
with misinformation. Yet the
company’s monthly active user count
is still ticking up. At the end of June it
reached a new high of 2.41bn.
What social media challenger can
take onFacebook?Twitter’s 321m
monthly active users andSnap’s
203m look weedy in comparison. It
does not seem to matter that users in
Europe and the US are losing interest
in the main Facebook platform.
Growth is high in emerging
economies and video adverts in
“Stories” onInstagramare popular
with clients. In the second quarter,revenues were close to $17bn — 28 per
cent higher than they were last year.
Yet chief financial officerDavid
Wehneroffered up an Eeyore-ish
outlook that is worth paying attention
to. Costs in the second quarter rose
66 per cent from a year ago thanks in
part to afinefrom the Federal Trade
Commission for misusing user data and
a $1.1bn cost related to a dispute over
companies with overseas assets
deducting stock option payments from
taxable income. Even without these,
costs would have tracked up thanks to
privacy measures, which will also limit
the information the group can extract
from users and damps revenue growth.
The regulatory storm is not over yet
either. The notion that tech companies
with free services can swerve antitrustlaws is fading. The FTC and the
Department of Justice have opened
antitrust investigations that are likely
to prod Facebook’s domination over
the $1tn digital advertising market
and could force a break-up.
Facebook’s response is to demand
clarity in the form of laws for the
internet while also claiming that
punitive oversight will hand a
business advantage to nations less
squeamish about collecting data —
read China. It has shown itself to be a
canny negotiator. The supposedly
landmark $5bn FTC fine is a rap on
the knuckles for a company with
close to $49bn in the bank. If the
outcome of new antitrust probes is
anything like the privacy case then
Facebook will emerge in one piece.FT graphic Sources: Federal Trade Commission; S&P Global; FacebookFacebook’s record-breaking fine
FTC v
Facebook
bnCFPB** & US states
v EquifaxUK regulator
v British Airways*US states v Uber
mFacebook cash holdings
bnBillionComparison with other privacy or data security penalties * Proposed ** Consumer Financial Protection BureauMonthly active users
Q Q Q Q Q Q Q Rest of the world Asia-Pacific Europe US & Canada m mFacebook: bulletproof behemoth
Facebook’s record-breaking $5bn fine for the misuse of data is almost 20 times greater than any previous
privacy or data security penalty. But the US tech company’s cash holdings are nearly 10 times that and its
audience is still growing. User numbers are flat in the US and Europe but rising overall.
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