10 ★ FINANCIAL TIMES Tuesday18 February 2020
Oyo s a curiously familiar concept. Iti
has a beguiling business idea but has
hit roadblocks after raising a tonne of
money, some of it fromSoftBank.
The Uber-like platform for hotels si
investing heavily for growth.
Businesses backed by the Japanese tech
investor epitomise this greed for speed.
The India-based group views current
issues as teething problems that can be
fixed through restructuring. Last
month, itaxed ,000 staff, exited 200 2
cities and purged 1,000 hotels from its
platform. It is, in time-honoured
words, “on the path to profitability”.
Oyo lifted revenues more than four-
fold last year while net losses ballooned
sixfold, according to numbersfiled
yesterday. By now, Oyo is well into its
next stage: international expansion.
All the improvement last fiscal year
came from the home market: for every
dollar it brought in there, Oyo shelled
out $1.12 compared with $1.22 the
previous year. In China, its next biggest
market at roughly a third of revenues,
it matched every dollar of revenues
with $1.64 of spending. The sliver of
sales from the rest of the world was less
than half the operating expenses there.
The China segment looked
vulnerable even before the coronavirus
took a swipe at domestic tourism.
Competition s far tougher than ini
India. Hoteliersgripe bout reduceda
payments and little added value. The
real problem is more fundamental:
China’s hotel market was not a good fit
with the Oyo model. Oyo standardises
ramshackle mom-and-pop lodgings;
China has already moved up that curve.
Oyo owes its mooted worth of $10bn
to a funding round in which owner
Ritesh Agarwal ought shares. He saysb
the deal underscored his confidence in
his company. Maybe so. But such “up
rounds” have sometimes fattened
valuations to impress other investors
or prepare the ground for an IPO.
Mr Agarwal bristles at comparisons
withWeWork, the workspace companyOyo/SoftBank:
not so fastthat backer SoftBank wasforcedto
rescue. The onus is on him to provide
evidence to the contrary.City bosses admire mavericks, just not
in their own firms, please. For this
reason, compliance has been a growth
area in finance for a decade. Not for
much longer. Institutions such as
Deutsche Bank se contractors to keepu
a lid on full-time employee headcounts,
including within compliance.
An imminent change in the rules for
freelancers, known as IR35, has
negative implications for contractors.
They could end up paid less, sometimesDeutsche/compliance:
risk waitas full-time employees. But the bad
news is that compliance employment
in the City shows signs of peaking.
Some compliance-related
contractors mayleavethe German
bank, the Financial Times reported last
week. The tax ruling will come into
force from April. This affects only
about 50 workers within the more than
1,500 involved in the bank’s anti-
financial crime unit (AFC), says
Deutsche. But more important is that
contractors tend to cost more than full-
time employees, even though
freelancers do not receive benefits.
No surprise the bank plans to move
some of these functions into cheaper
regimes such as Romania and India.
Yet maintaining compliance teams,
whatever insurance they provide for
those occupying the executive suites, ispricey. Over the past five years,
headcount in compliance has jumped,
especially on AFC. Deutsche admits
personnel for this unit has more than
doubled in that period. Moreover, full-
time salaries have risen — up to 25 per
cent for senior managers, say specialist
headhunters Morgan McKinley.
No wonder that the recruiter noted a
sizeable drop in its permanent
assignments, down by nearly half last
year over 2018. Deutsche thinks its AFC
team headcount will peak this year.
Others such asBarclays xpect overalle
compliance costs to fall this year.
Deutsche touts its compliance efforts
as strong. But rising costs and now a
UK tax hassle encourage banks to
reconsider how they pay staff.
No matter what, the era of costly
compliance teams in the City is over.Like any conscientious 16-year-old,
Facebook s working hard on its highi
school assignments. The $610bn social
network has already tackled the
question: “How to stop jerks posting
bad stuff without wrecking the First
Amendment”.Its broad solution is one
all frontier industries demand sooner
or later:regulate us harder.
More intriguingly, Facebook is
embracing proposals with big financial
consequences in response to the teaser:
“What tax should tech bros pay?”
Cynics will wonder whether chief
executiveMark Zuckerberg upports as
grand plan from the OECD because he
knows it will never happen.
Theorganisation wants tech groups
to pay more tax in all the placesthey
are active. In each country, there will
be additional taxing rights based on
sales. Groups would also be subject to a
global minimum corporation tax rate.
In supporting the clampdown,
Facebook is making a couple of implicit
concessions. First, that its market
value of $610bn is created by its 2.4bn
users, as well as its staff. Second, that
tech groups should pay special taxes on
their enormous earnings.
OECD mandarins have touching faith
in their own ability to separate tech
earnings into “routine profits” and
“residual profits”. The latter sounds a
lot like the excess returns economist
Adam Smith saw as evidence of market
failure. The OECD’s solution is to
charge quasi-monopolies a premium,
rather than repair the market.
Tech giants would still pay the vast
bulk of tax in the US, where most of
their intellectual property is located.
Tax expert Michael Devereuxsuggests
all profits should instead be taxed in
the countries where sales are made.
But even the OECD’s fiddly plan could
provoke US fury. President Donald
Trump is proud of the capital inflows
lower US taxes have encouraged.
Conditions look right for a good old-
fashioned multilateral stand-off. Smart
teenagers opt out offamily rows sothey
can quietly get on with what they enjoy
— in Facebook’s case,making money.Facebook/tax:
citizen of everywhereThe single most important number an
investor should know? For the
billionaire founder ofNMC Health ti
was the size of his shareholding.
BR Shetty esigned from the board ofr
the Abu Dhabi-based hospital operator
yesterday, taking two executives with
him. His departure follows claims from
his co-chairman that the entrepreneur
incorrectly reported his shareholding.
London’s popularity as a venue for
foreign listings comes at a cost.
Unfamiliar businesses require
investors to take more on trust. Listing
rules, widely criticised in this case,
provide one backstop. The reputation
of local advisers is another soft
guarantee. Their credibility suffers
when the client they vouch for suffers a
governance implosion. A gold-plated
bevy of banks, brokers nd lawyers hasa
worked for NMC over the years. They
includeDeutsche Bank, JPMorgan,
Numis, EY , Allen & Overy nda Clifford
Chance. Some have spent thousands of
hours preparing documents on which
investors depended.
That well-paid toil has proved of
little value to investors. There is
something badly wrong with the
governance of a business where a
powerful director took out loans
secured on shares, some of which may
then have gone walkabout.
Adding to investor woes,Carson
Block, the short seller who nervous
chief executives see as the Fifth
Horseman of the Apocalypse, rode into
town in December. He claims that NMC
inflated cash flows and understated
debt. NMC denies this but shares in the
group have still dropped 70 per cent.
Finablr, another UK-listed business
set up by Mr Shetty, is tainted by
association. The stock of the group,
which owns foreign currency retailer
Travelex, is down 65 per cent.
The Financial Conduct Authority is
investigatingMr Shetty and his
associates. Accounting bodies may
probe the quality of audits at their
usual leisurely pace. None of this helps
shareholders who have lost their shirts.
Some had already forfeited their
jackets during the governance
implosions ofminersBumi nda ENRC.
Investors should take an
appropriately sceptical view of new
financings brought to them by NMC’s
NMC/advisers:
the companies they keep
advisers. Professional services firms
are not taxis. They can turn down
clients whose credibility they doubt.
Banks, brokers and accountants who
avoided NMC should congratulate
themselves on their foresight.CROSSWORD
No. 16,403 Set by FALCON
JOTTER PAD
ACROSS
1 County affair run by exclusive
group (6)
5 Man on river, a Boar’s Head
regular (8)
9 Woman, one with clubs in
Italian city (8)
10 A northern artist capturing
shot rabbit (6)
11 Some aren’t always for hire (6)
12 Working with popular group,
leader having left (2,6)
14 Great scribe wrong about date
in Hardy’s Dorchester (12)
18 Meagre rations: not long
before general confronts head
of supplies (5,7)
22 At home, after round, gets
news update (8)
25 Trick male in bumper car (6)
26 Character in ballet and poem,
teetotal European (6)
27 Female friend flipped sailor’s
pancake (8)
28 Offer of support also sent out
(8)
29 Pill taken primarily on board
(6)
DOWN
2 Key cricketer, first to bat (6)
3 Contest evidence of accident
in fast vehicle (6,3)
4 Liqueur got from the French
city after tour (6,3)
5 Record includes piece of jazz
music, light (7)6 Monk astride large beast of
burden (5)
7 Close firm (5)
8 Leave hard-water deposit on
Irish lake (8)
13 My county, not Kerry originally
(3)
15 Transmit from spacious shed
(9)
16 Crime committed with
collusion of jailed piece of
work (6,3)
17 Bear ought to, I hesitate to say
(8)
19 Something to wear for sleeper
(3)
20 Aware of object, almost
packed (7)
21 Secure unstable salvage (6)
23 Stop grant at college (3,2)
24 Strain, failing to open lock (5).,1*6&5266 8*/,
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(778 7(03(5$1&(Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter: FTLex@
The only way to catch a train is to
miss the one before, wrote GK
Chesterton.Alstom lso appears toa
believe in second chances.
Its hopes of scaling up were dashed
last year when a mooted rail merger
withSiemens as nixed onw
competition grounds. Now it has
announced that it is buying the train
unit of Canada’sBombardier.
The agreed price, about €7.5bn
including debt, is a sign of
Bombardier’s weakness. It would
value its rail business at 15 times its
trailing operating profit. That
compares with just over 18 times for
Alstom, a business of comparable
scale and, until recently, lower profit
margins.
Projects in the UK, Switzerland andGermany have knocked Bombardier’s
Berlin-based business off the rails.
Alstom will have its work cut out to
get Bombardier’s margins back on
track. But there is a bigger prize.
Greater scale would help it compete
with China’sCRRC, the industry
leader. Its global ambitions were
evident in its offer to build Britain’s
high-speed railway, HS2, at breakneck
speed.
Over-extended Bombardier needs
cash to cut its $7bn net debt pile, more
than six times this year’s expected
ebitda. Alstom has about $1bn of net
cash. But the latter business, which
nearly went bust in 2003, would
struggle to gear up and retain its credit
rating. The purchase will require the
issuance of more shares.Investors seem unfazed. Alstom
shares are up 11 per cent over the
past month, as deal speculation
mounted. The deal could result in
savings of about €244m, worth about
€1.8bn taxed and capitalised.
That assumes savings of about 1.
per cent combined revenues, normal
for the capital goods sector but only
half as large as the target in the
proposed Siemens Alstom
transaction, says UBS.
That is a good sign. Less overlap
between the businesses reduces the
chance of regulators blocking the
deal, as with Siemens Alstom.
Scale matters in this industry.
Consolidation may be necessary to
respond to growing economic
nationalism.FT graphic Sources: UBS; companiesOperating margins Revenues
Per cent (bn)
AlstomSiemens MobilityBombardier TransportationCRRC Siemens
MobilityBombardier
TransportationAlstomEmployees by location
%, 2018Alstom Bombardier
TransportationEuropeAsiaAmericasOtherAlstom/Bombardier: keeping track
France’s Alstom is in talks with Canada’s Bombardier over a possible purchase of its train unit. The two
businesses are similar in scale; both are dwarfed by China’s CRRC. The operating margins of Bombardier’s
train unit have fallen below those of Alstom’s. Siemens Mobility, meanwhile, has outstripped both of them.FEBRUARY 18 2020 Section:FrontBack Time: 17/2/2020- 18:48 User:joe.russ Page Name:1BACK, Part,Page,Edition:EUR, 10, 1