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How to make money out of . . . money

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One thing to start: Boutique investment bank Perella Weinberg Partners, founded by Joe Perella (below) and Peter Weinberg, is in talks to take its advisory business public via a special purpose acquisition vehicle in a deal valuing the division at $1bn. More here.

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@ft.com.

The twists and turns behind private equity’s latest payments deal

Sometimes, the seemingly dullest and most overlooked businesses can be the most lucrative. 

That’s one lesson from private equity’s entry into the payment-processing industry over the past decade. Where some European banks failed to capitalise on what looked like an unglamorous back-office function, buyout groups stepped in and reaped the rewards. 

Owning payments groups carved out from banks “has been one of private equity’s biggest investment successes”, said Charles Hayes, a partner at law firm Freshfields which has advised on several deals.

The latest reminder is Nexi, the Italian group set to be worth about €22bn after two big deals in little more than a month — buying state-backed domestic competitor Sia and, this week, Danish rival Nets

How Nexi and Nets came together

Over the years the now-listed group’s component parts have been through a dizzying array of buyouts, listings, take-privates and add-on acquisitions, in which the role of private equity groups Advent and Bain has often been central. 

DD’s Kaye Wiggins and the FT’s Silvia Sciorilli Borrelli set out the twists and turns in this deep-dive

As Lex points out here, there’s been a scramble for scale in the industry — with more dealmaking likely, since plenty of smaller players are still sitting within struggling banks. Private equity is not alone in having spotted the opportunity, as ecommerce has taken off and contactless payments surged. 

Charts shows deal value ($bn) showing payment consolidation deals

But a risk looms large over the business. What if a huge tech group launched a global rival that, like Alipay, offered merchants lower fees — or cut out the intermediary altogether?

The private equity groups behind the combined Nexi, which floated last year, will probably sell down their stakes in the years to come. The thing to watch will be where they go next. 

Markus Braun pleads the fifth 

Throughout the entire Wirecard saga, there is something team DD has been dying to know. Did the top execs at the disgraced payments company have an FT subscription?

Unfortunately, we didn’t get an answer to that on Thursday, but thanks to German politician Danyal Bayaz for asking.

Markus Braun, who turned up to (not) answer questions from German lawmakers in his usual get-up — a style favoured by bond villains and tech chief executives alike — remained silent throughout much of the questioning

Wirecard’s former chief executive Markus Braun leaves after testifying to a German parliamentary committee in Berlin on Thursday © REUTERS

It’s the first time we have seen Braun, who is one of at least seven former top managers of Wirecard suspected of running a criminal racket that defrauded creditors of €3.2bn.

The irony of Braun being hauled in front of regulators isn’t lost on us. For a while, it seemed that the FT’s Dan McCrum and Stefania Palma, who doggedly reported on Wirecard and flagged accounting irregularities at the company, would be the ones required to have to answer to German authorities. 

BaFin, the country’s financial watchdog, appeared to be more concerned about the FT’s writing on Germany’s fintech champion than the inner workings of what has turned out to be the worst corporate scandal in Europe’s largest economy since the second world war.

Braun’s refusal to answer questions seemed to exasperate German politicians. Cansel Kiziltepe, a lawmaker for the Social Democrats, suggested that he had “destroyed people’s faith” in German institutions. “Are you aware that your silence is dragging people into the abyss?” she asked.

The one thing Braun had to get off his chest was that regulators and Wirecard’s longtime auditor EY, which has faced criticism since the company’s collapse, weren’t to blame. 

“I can’t understand why external regulators should be held responsible for failures here,” he said. Braun added that EY, Wirecard’s longtime auditor, was “apparently comprehensively deceived” during the annual audits as it did not spot irregularities “despite extensive checks”.

Why a UK regulator’s gain could be Telefónica’s pain

As Brexit talks drag on, Europe’s dealmakers have been keeping one eye on a tussle between the UK’s Competition and Markets Authority and the European Commission

The two sides have been wrangling over a series of mergers, each seeking the final say on what happens to blockbuster tie-ups due to affect both UK and EU citizens. 

Britain’s regulator has claimed a big victory. On Thursday it took ownership of the proposed £31bn merger between Virgin Media and O2. Catch up with the FT’s story here

Great news for the CMA, whose chief executive Andrea Coscelli has been publicly relishing the chance to “take back control — genuinely — of the decisions”.

Not so great for Liberty Global and Telefónica, Virgin Media and O2’s respective parent companies. They will have to wait until the middle of next year for a decision, even after the watchdog agreed to fast-track the case. 

That will be particularly agonising for indebted Telefónica, which was hoping for a cash boost. 

José María Álvarez-Pallete, its chairman and chief executive, won’t be too pleased. He told the FT last month that the merger would probably be cleared before the end of the year if Brussels was in charge. 

Job moves

  • Jeremy Sinclair, David Kershaw and Bill Muirhead, three of M&C Saatchi’s founders who were known as the “three amigos” when they split from Saatchi & Saatchi in 1995, are handing over the reins of the advertising group. Moray MacLennan will become chief executive. More here.

  • Sanjay Swani, a partner at private equity group Tailwind Capital, has been named co-chair of the Partnership Fund for New York City, a civic fund set up in 1995 by KKR co-founder Henry Kravis

  • Kevin Bradshaw has been appointed chief executive of Viridor, the UK recycling company that private equity group KKR bought in June. He succeeds Phil Piddington, who will make a “transition into non-executive management” according to a statement from the company. 

Smart reads

Royal connections How Britain’s Prince Andrew — who is already in the spotlight for his links to the late paedophile Jeffrey Epstein — helped to open doors for a secretive Luxembourg bank. (BBG

Diversity push Companies usually choose big-name banks like JPMorgan, Bank of America and Citigroup for bigger roles on bond deals — but the insurance company Allstate has hired solely banks owned by women, minorities or veterans to underwrite its offering. (BBG)

News round-up

BuzzFeed buys HuffPost as digital media sector consolidates (FT)

Carnival to sell $1.6bn unsecured bonds as virus pressure eases (FT)

Two Pimco employees accuse asset manager of discrimination (FT)

Coca-Cola Improperly Shifted Profits Abroad, Tax Court Rules (WSJ)

Jamie Dimon blames ‘childish’ Congress for stimulus deadlock (FT)

China’s first negative-yielding sovereign bond spurs investor rush (FT)

Cineworld considers CVA in struggle to survive (FT) 



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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