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Sanjeev Gupta in spotlight after swoop on Thyssenkrupp steel unit



From a makeshift command centre deep in Germany’s rustbelt region, Sanjeev Gupta sketched out a plot to seize control of one of the country’s oldest — and most symbolic — industrial concerns.

The controversial British tycoon this month tabled an offer of an undisclosed price for Thyssenkrupp’s ailing steel division, which traces its roots to a foundry built by Friedrich Krupp in the Ruhr valley in 1811.

The surprise approach by Liberty Steel, a privately owned company that only five years ago was virtually unknown and has no real presence in Europe’s leading economy, kickstarted a process that could see the unit fall into foreign hands for the first time.

If the audacious bid underlined the faded fortunes of the German conglomerate, which once produced everything from submarines to lifts and is being dismantled under chief executive Martina Merz after years of underperformance, it showed the opposite trajectory of Liberty’s founder.

The former commodities trader has rapidly assembled a $20bn metals-to-energy powerhouse through acquisitions around the world. Clinching Europe’s second-largest steelmaker would be a crowning moment — and his biggest deal yet.

But for that to happen, the 49-year-old entrepreneur must overcome a number of obstacles — even if Thyssenkrupp’s management proves amenable and other steelmakers fail to outbid him — including a possible backlash from unionised workers and doubts over his credibility. 

A worker at Thyssenkrupp’s steel factory in Duisberg. The unit is set to lose €1bn this year © REUTERS

“We see value where others don’t,” Mr Gupta said of his latest target, which is set to lose €1bn this year. “And when we do, we invest and change what needs to be changed.”

He added that he was “in it for the long run” and would be able to plough enough money into the new entity to transform it into a low-carbon steelmaker. Others are less convinced of the rationale.

“It’s his ego talking here,” said one industry adviser. “Why would you take on a big company with massive overheads and a significant challenge in the future in the transition to decarbonisation?”

Among the obstacles is how a self-styled industrialist whose spectacular rise has attracted scepticism will fund a business, worth almost €3bn according to some analysts, that is bleeding cash and will require huge investments to remain competitive. 

A lack of transparency over Liberty’s finances has provoked questions over the sustainability of its growth and strategy, while its owner’s borrowing arrangements have piqued the attention of regulators.

A tie-up would result in a producer with about $25bn in turnover and a workforce of more than 50,000, encompassing both companies’ European sites and Liberty’s facilities in Australia, the US and India.

Thyssenkrupp’s decline

However, this could dilute the importance of Thyssenkrupp’s steel operations, which are largely based in the state of North Rhine-Westphalia, home to all three candidates to succeed Angela Merkel as head of the ruling Christian Democrat party.

“Thyssenkrupp is a very important employer in the region and it also emits some two per cent of all sorts of German carbon emissions, so in many areas, it’s very political,” said Ingo Schachel, an analyst at Commerzbank.

The powerful IG Metall union is implacably opposed to a foreign takeover and is lobbying for the German state to take a stake, fearing a merger might lead to further job losses on top of 6,000 announced across the group.

“To solve its many problems, Thyssenkrupp steel needs capital, not a new owner,” said Jürgen Kerner, head treasurer of IG Metall and a member of the company’s supervisory board. 

Liberty will also be mindful of the Krupp Foundation, Thyssenkrupp’s biggest shareholder with almost 21 per cent, which has the task of “preserving the integrity” of the historic enterprise but maintains it will not interfere with the day-to-day management of the company.

Thyssenkrupp workers demonstrating at an IG Metall rally calling for partial nationalisation © AFP via Getty Images

With excess production capacity dragging down prices and profits, experts say consolidation is key to strengthening the steel sector. The industry in Europe in particular faces existential challenges from the impact of Covid-19, high volumes of imports and pressure to meet EU climate change targets.

Yet rather than rationalise, Mr Gupta plans to increase output. Liberty says its assets complement Thyssenkrupp’s with little overlap, making it less likely that Brussels would reject the deal on competition grounds.

But that also limits the scope for reducing costs. About half Thyssenkrupp’s steel sales are linked to the automotive industry, which is not expected to recover to pre-Covid levels for several years.

Even if there is a logic to the combination, Mr Gupta’s record is likely to receive close examination in Germany, which prides itself on the responsible stewardship of industrial assets. 

Since reopening a Welsh steel rolling mill in 2015, the Indian-born UK national has snapped up struggling furnaces, aluminium smelters, engineering plants and mines under the banner of GFG Alliance, a loose collection of Gupta family interests that include Liberty.

For all his braggadocio and promises of revitalisation, though, Mr Gupta’s turnround tactics have included seeking support from public authorities eager to secure jobs. As GFG Alliance is not a legal entity itself but rather a loose collection of dozens of individual businesses, there is little insight into its overall finances and performance. 

Thyssenkrupp Steel and Liberty Steel: Combination would create a European steel powerhouse

A year after pledging to incorporate its numerous steel ventures into a single company and publish consolidated financial statements, Liberty has blamed the pandemic for delays and is promising the accounts by the end of 2020.

Attention will inevitably turn to how Mr Gupta will muster the financial firepower required. Liberty said its non-binding indicative bid included “a number of letters from financial institutions” on the potential provision of funds “with no commitments at this stage as is typical for this phase of the offer process”. It named only Credit Suisse, which declined to comment.

Until now, GFG’s expansion has largely relied on forms of finance linked to customer payments that are typically more expensive than standard corporate debt.

Billions of euros have come this way from Greensill Capital, a start-up backed by Japanese technology investor SoftBank that specialises in supply-chain finance. In effect, this means paying suppliers early for a fee, or else providing upfront cash for client invoices not due to be paid for months. 

A German bank owned by Greensill has been probed by the country’s financial regulator, BaFin, over its level of exposure to companies connected to GFG, as first reported by Bloomberg.

Greensill said it did not comment on work for clients, adding that it was in compliance with all regulatory requirements in the jurisdictions where it operates.

And a lender owned by Mr Gupta himself, Wyelands Bank, has come under scrutiny from the UK’s banking watchdog over its loans to shell companies that finance GFG entities.

Martina Merz, Thyssenkrupp chief executive, promises to examine all options for steel before deciding on any sale © Bloomberg

If instead Liberty tries to raise conventional acquisition finance secured against the Thyssenkrupp assets, it will have to convince lenders there will be no repeat of its first big foray into traditional corporate borrowing.

Within a year of securing a $350m term loan from a club of lenders to fund its purchase of a large aluminium smelter in France in 2018, the borrower fell into technical default. While no scheduled payments were missed, the issues included delayed filing of audited accounts and a requirement for Mr Gupta to inject more cash into the venture. 

However he funds the bid, there is no reason to believe that Mr Gupta will benefit from being a frontrunner, according to people close to Thyssenkrupp.

His approach could encourage other potential suitors, such as Sweden’s SSAB or Germany’s Salzgitter, as well as Tata Steel Europe, whose proposed merger with Thyssenkrupp’s unit was blocked by Brussels last year.

Following the blockbuster €17bn sale of its elevators division this year, Thyssenkrupp is “not under immediate pressure from a liquidity perspective because they’re sitting on more than €5bn in net cash”, said Mr Schachel. Ms Merz has vowed to examine all options for steel before making a final decision.

But the single-minded boss will know that finding a solution for the storied business will become much harder once campaigning for Germany’s general election begins next year. 

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

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US stocks make gains on Fed message of patience over monetary policy




Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.

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Fed needs to ignore ‘taper tantrums’ and let longer rates rise




The writer is chief executive officer and chief investment officer of Richard Bernstein Advisors 

The Ferber Method, a sleep training technique, teaches babies to self-soothe and fall asleep on their own. It’s as much a training technique for new parents to ignore their baby’s crying as it is for the child to learn to cope by themself. 

The US Federal Reserve should consider Ferberising bond investors and ignore future “taper tantrums” like the market disruption that occurred when the central bank signalled tighter monetary policy in 2013. The long-term health and competitiveness of the US economy may depend on bond investors’ self-soothing ability to cope with reality.

The slope of the yield curve is a simple model of the profitability of lending. Banks pay short-term rates on deposits and other sources of funds and receive longer-term rates by issuing mortgages, corporate loans, and other lending agreements.

A steeper curve, therefore, is a simple measure of better bank profit margins, and has in past cycles spurred greater willingness to lend. Historically, the Fed’s Survey of Senior Bank Lending Officers shows banks have been more willing to make loans to the real economy when the yield curve has been steeper.

A chart showing how banks have been more willing to lend with a steep yield curve. As the slope on the US treasuries  10-year-less-2-year yield curve has steepened, so the net percentage of banks reporting tighter lending standards has fallen

With that simple model of bank profits in mind, textbooks highlight the Fed’s control of short-term interest rates as a tool to control lending. The Fed reduces banks’ cost of funding and stimulates lending when it lowers interest rates. But it increases funding rates and curtails lending when it raises short-term rates. Coupling lower short-term rates with a steeper yield curve can be a powerful fillip to bank lending. 

However, policies in this cycle have been unique. As US short-term interest rates are near zero, the Fed has attempted to further stimulate the economy by buying longer-dated bonds and lowering long-term interest rates. Those actions have indeed lowered long-term borrowing costs in the economy, but banks’ willingness to lend has been constrained because lending margins have been narrow and risk premiums small.

Banks in past cycles might have been willing to lend despite a relatively flat yield curve because they could enhance narrow lending margins by using leverage. However, regulations after the financial crisis now limit their ability to use leverage.

This policy and regulatory mix has fuelled some of the growth in private lending. Private lenders are not subject to regulated leverage constraints and can accordingly lend profitably despite a flat curve. The growth in private lending effectively reflects an unintended disintermediation of the traditional banking system. This has meant liquidity destined for the real economy has largely been trapped in the financial economy.

The yield curve has started to steepen, and the Fed should freely allow long-term interest rates to increase for monetary policies to benefit the real economy more fully. Allowing long-term rates to increase would not only begin to restrain financial speculation as risk-free rates rise, but could simultaneously foster bank lending to the real economy. 

Thus, the need for the Fed to Ferberise bond investors. Banks’ willingness to lend is starting to improve as the curve begins to steepen, but some economists are suggesting the central bank should continue its current strategy of lower long-term interest rates because of the potential for a disruptive “taper tantrum” by bond investors. The Fed needs to ignore investors’ tantrums and allow them to self-soothe.

The investment implications of the Fed allowing longer-term interest rates to rise seem clear. Much of the speculation within the US markets is in assets such as venture capital, special purpose acquisition vehicles, technology stocks and cryptocurrencies. These are “long-duration” investments that have longer-time horizons factored into their valuations. They underperform when longer-term rates rise because investors demand higher returns over time. Capital would be likely to be redistributed to more tangible productive assets.

Investors and policymakers should be concerned that monetary policy is fuelling speculation rather than supporting the lending facilities needed to rebuild the US’s capital stock and keep the country’s economy competitive.

Like a new parent to a baby, the Fed should not rush to coddle bond investors’ tantrums and should let the financial markets soothe themselves. Short-term financial market volatility might cause some sleepless nights, but the Fed could unleash the lending capacity of the traditional banking system by letting the yield curve steepen further.

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