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How exchange operators have grown bigger and bigger

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After a year in which a handful of companies have tightened their grip on the trading infrastructure and financial data that underpin financial markets, all eyes will turn to Brussels next month.

EU competition regulators have until January 21 to decide whether to approve the London Stock Exchange’s $27bn acquisition of data and trading group Refinitiv, a blockbuster takeover first agreed in August 2019 and one that authorities opened an in-depth investigation into in June.

Since the LSE struck its deal with Refinitiv, best known for its Eikon terminals on traders’ desks, the land grab among companies for a slice of the valuable data that lubricates markets has accelerated. Last month, S&P Global, the owner of the eponymous rating agency, agreed to pay $44bn for financial analytics company IHS Markit.

Not every recent deal in the industry has been about data. Last month, Deutsche Börse, which runs the Frankfurt stock exchange, took a majority stake in Institutional Shareholder Services, which advises shareholders on how to vote on everything from mergers to executive pay. Days later, Nasdaq sealed the $2.8bn purchase of financial crime software group Verafin.

Though eye-catching, industry analysts, lawyers and academics said the dealmaking of the past 18 months only extends the sway of the largest data providers and exchange groups that has been steadily growing since the financial crisis.

The biggest players have set their sights on owning more of the building blocks on which investors rely, including data, analytics, indices, the venues on which trades are executed and the businesses that subsequently settle them.

Just over half of the $35bn in revenues the industry generated last year came from just five exchange operators — CME, Intercontinental Exchange, London Stock Exchange Group, Deutsche Börse and Nasdaq — according to Burton-Taylor Consulting International.

It is why next month’s decision by the EU, which in 2017 torpedoed a planned €29bn merger between the LSE and Deutsche Börse, will be so closely watched. A deal will create a rival to Bloomberg, the US group.

“If it goes through everything is possible,” says Johannes Petry, an academic who specialises in capital markets at Warwick University in the UK, and argues exchanges are becoming powerful market actors in their own right.

In an effort to see off EU concerns that the group will dominate trading in European sovereign debt and interest-rate derivatives, the LSE has agreed to sell Borsa Italiana to Euronext for €4.3bn.

LSE and Refinitiv, which has more than 400,000 users, are likely to take comfort from the fact that other regulators, including in the US, have waved the deal through. In its review, the Department of Justice found that rivals who purchased products and services from the LSE or Refinitiv also often sold services back to the two.

That “significant bargaining leverage” would make price increases from the combined group unlikely, the DoJ concluded, and any potential fee increases were unlikely to be passed on to customers.

Yet executives and lawyers caution that navigating the antitrust process for high-profile deals is also about politics, especially in Brussels.

“It starts off as a dry technical exercise in the beginning . . . but it is natural for a utility to be subject to political steering. Utilities, like water or energy become politicised,” said one executive who had been through the antitrust process in Brussels and likened exchanges to utilities because of investors’ reliance on them and the lack of alternatives.

“Within the EU you have much less comfort with large size [of companies]”, the executive added.

Chart showing that large exchanges have been snapping up data, financial services and trading companies

As the LSE awaits the EU ruling, Doug Peterson, S&P Global chief executive, said that he expects any regulatory issues thrown up by the purchase of IHS Markit to be resolved. According to Burton-Taylor, the combined group will be the largest index provider in the world by revenues and account for a quarter of $4.1bn the index industry generates each year.

Stephan Leithner, a member of the executive board of Deutsche Börse, also downplayed any concerns over the German group’s acquisition of ISS, which along with Glass Lewis is the dominant shareholder advisory group.

“There’s no concentration issue. We’re not active in the corporate governance market,” he said. “ISS will operate completely independently. [For investors] it’s about quality and access to the information.”

Chart showing that the big five exchange groups have grown increasingly powerful

Tyler Gellasch, executive director of Healthy Markets Association, a trade group that promotes transparency in capital markets, said that the takeover by Deutsche Börse risked eroding customers’ trust in ISS.

“How much will investors trust the advice of a company that has so many deep relationships with issuers?” said Mr Gellasch.

ISS wields considerable sway over corporate governance issues, which also have a bearing on the trading and data businesses of Deutsche Börse. The company is trying to build ESG indices, for example.

Chart showing that exchanges have been drawn to data and services that power global markets

Industry experts said the growing ambition of a handful of companies within financial data, analytics and trading mean that the decision EU regulators face on the LSE deal is unlikely to be the last one.

“There are potential conflicts of interest with them expanding their range of services along the value chain,” Mr Petry noted.



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Analysis

Investors look to Sunak for clarity on new UK infrastructure bank

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Ever since chancellor Rishi Sunak announced the setting up of a UK government infrastructure bank last autumn, investors have wondered what its role will be. Next week, in the Budget, they will get the answer.

The Treasury has only said it will focus on supporting new technologies that are too risky for private finance and would contribute to meeting the government’s target of net zero carbon emissions by 2050. As examples, it gave carbon capture technology and the rollout of a nationwide network of electrical vehicle charging points. 

The selection process has just begun for a part-time chair, working two to three days a week, and it is scheduled to open on an interim basis on April 1.

The bank’s creation has prompted a debate about how infrastructure should be funded in the UK, at a time when the government’s finances are stretched and customers are likely to resist tax or bill increases, the means by which many sectors — such as ports, airports, energy, telecoms, water, and electricity — are funded. 

Many of these assets in England are owned by sovereign wealth, pension and private equity funds, and regulated by arm’s length bodies, under one of the most privatised infrastructure systems in the world.

The government’s finances have been stretched by the coronavirus pandemic, limiting funds for infrastructure projects such as rail © Niklas Halle’n/AFP

Dieter Helm, a utilities specialist at Oxford university, said the bank was “a good idea but it needs scale — a balance sheet and capital funding from the state, in which case you’ve essentially created a new arm of the Treasury”.

“The question is whether this is going to be the primary vehicle through which the government implements infrastructure,” he said. 

John Armitt, chair of the National Infrastructure Commission, a government advisory body, suggested it needed an initial £20bn over five years to make an impact and reach projects the market might be unwilling to support.

The institution, which Sunak has said will be based in the north of England as part of the government’s levelling up agenda, will partly replace the low-cost finance provided by the European Investment Bank, which is no longer available since Brexit. But it is unclear if it will be able to match the €118bn the EIB has lent to the UK since 1973.

Sunak has promised that the government, which spends much less than most European states on infrastructure, will spend £600bn over the next five years. But ministers hope that more than half their national infrastructure plan will be paid for by the private sector. However, private finance is generally more expensive than government borrowing and requires taxpayers to underwrite the construction and financial risks.

Infrastructure spending (as a % of total government expenditure) for Netherlands, UK and Germany. Also a band showing the min and max for all 31 European countries

“The government wants the public to believe that the country can have this wall of private sector investment without higher bills and taxes now but investors will only come if the government will guarantee they will receive a return and it acts as a backstop,” Helm said.

Dissatisfaction with UK infrastructure has been widespread for years: a CBI/Aecom survey in 2017 found that nearly three quarters of businesses were unhappy with facilities in their region.

The lockdowns have taken a heavy toll, for example forcing the renationalisation of rail services. At the same time the Eurostar train service, airports and airlines have called for taxpayer bailouts, while the government is also paying for some households’ broadband.

Although the prime minister has in the past year given the go-ahead to some rail and road schemes, including a tunnel under Stonehenge, other projects — including £1bn of rail improvements — have been axed. 

A road tunnel under Stonehenge is one of the infrastructure projects given the go-ahead © Matt Cardy/Getty Images

Meanwhile, local authorities — which are responsible for urban roads and other key infrastructure — have been forced to shift their limited financial resources to care for the elderly and vulnerable during the pandemic and so want more central government help.

Despite this growing demand, some investors have questioned the need for the new bank, even though they are popular elsewhere — such as Canada, which established one in 2017. 

“Given there is at least $200bn of international capital looking for projects in which they can invest, the government has to be careful it doesn’t just crowd out existing finance,” said Lawrence Slade, chief executive of the Global infrastructure Investor Association, which represents private sector investors.

He argued the new bank, which will take over the government’s guarantee scheme, should only take on projects that are “too risky” for institutional investors, pointing out that the Canada Infrastructure Bank was mandated to lose up to C$15bn (£8.45bn) over 10 years. “It’s not yet clear what question the new infrastructure bank is trying to answer,” he said.

Ted Frith, chief operating officer of GLIL Infrastructure, a £2.3bn fund backed by UK pension funds, said the EIB loaned money at competitive rates to projects that also borrowed from capital markets. “This is a global market and there are plenty of alternative sources of finance to replace the EIB,” he said. However, he added that the infrastructure bank could play a role in addressing the shortage of available projects.

While investors will put equity into existing or smaller infrastructure projects — such as an airport extension or a wind farm — they are wary of new projects, according to Richard Abadie, head of infrastructure at consultancy PwC, because the latter carry long term construction risks and do not provide an income stream for several years.

“The NIB can play a role de-risking projects but the main challenge is how we can afford and manage the cost of energy transition, not whether finance is available to bridge the cost,” he said.



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H&M experiments as it refashions stores after the pandemic

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The Hennes & Mauritz flagship store on Stockholm’s main square is trying to break the mould. A woman sewing a patch on to trousers, party dresses for hire, a beauty salon and a personal shopping service is not standard fare for most fast-fashion outlets.

But it could be a taste of things to come as H&M, the world’s second-largest clothes retailer, works out what to do with its vast network of 5,000 stores after a pandemic that has increasingly pushed shoppers online. The Swedish chain is not just looking at services such as renting and repairing clothes, but on whether its shops can play a role in the logistics of online selling.

For Helena Helmersson, appointed last year as the first H&M chief executive outside the company’s founding Persson family, it is all about boosting relationships and engagement with customers.

“The physical store network that we have is one of our strengths. It’s the different roles the stores can play, the different formats. What kind of experiences are there in a store? Could they be part of an online supply chain? There are so many things to explore . . . it’s almost thrilling,” she told the Financial Times.

Helmersson, 47, has had a tough first year as chief executive. At the height of the first wave of the Covid-19 pandemic, four-fifths of H&M’s physical stores were closed and a big push online was unable to offset the hit. Sales fell a fifth in H&M’s financial year until the end of November to SKr187bn ($22.6bn), while pre-tax profits plunged 88 per cent to SKr1.2bn, interrupting a nascent recovery after years of decline.

Line chart of Ebit margins (%) showing H&M has lagged behind Inditex's profitability

Sales plunged in March and April, before rebounding strongly in the summer, and then getting hit again around Christmas.

But as the pandemic has forced H&M into speedier decision-making and increased flexibility and with Helmersson forecasting a wave of pent-up demand when Covid-19 comes under control, the chief executive is emboldened to say: “Overall, we will come out of the pandemic stronger.”

Boarded up H&M store in Minneapolis, Minnesota, US, in April 2020
With four-fifths of H&M’s stores closed at the height of the first wave, pre-tax profits plunged 88 per cent © Ariana Lindquist/Bloomberg

Anne Critchlow, analyst at Société Générale, said that relatively small increases in sales at H&M could lead to bigger rises in profits. “Potential recovery is part of the attraction of H&M to investors at the moment: it’s very highly operationally geared. H&M should be the fastest to recover,” she added.

But she argued that Inditex, the Spanish owner of Zara that overtook H&M as the world’s biggest fashion retailer by sales a decade ago, was a “better quality company”, and that the Swedish group may be a “bit slower” at returning to its pre-pandemic profit levels as some customers steer clear of its stores.

H&M’s shares fell consistently from 2015 to 2018, before largely treading water since then, although they have climbed 50 per cent since their Covid-19 low in March last year.

Helmersson, a H&M lifer who joined the retailer in 1997 as an economist, said she started to see “light at the end of the tunnel” after a “very demanding” period. “I have super-high expectations on myself. Adding a crisis on top of that, it’s been a really tough year.”

Now, however, her focus is moving to a critical question for H&M: “Where do we need to move faster?”

Line chart of Total sales growth (%) showing H&M's sales have kept pace with Inditex

Despite being in fast fashion, critics said H&M had become slow, outpaced by nimbler Inditex and online retailers such as Zalando and Asos. Inditex could get new clothes to Zara stores in weeks from nearby manufacturing sites in Europe while H&M, with more sourcing in Asia, took longer. Opening new stores gave the Swedish group an easy path to sales growth but did not help its profit margins, which have been declining consistently for the past decade.

Helmersson said H&M took “really, really fast decisions” at the start of the pandemic on how it bought garments, worked with its supply chain, and moved to selling more online. She pointed to how technology allowed designers, suppliers and the production office to work together at the same time to produce new clothes, rather than waiting for one to send a garment to another.

H&M’s rental service at a store in Stockholm, Sweden
It is ‘difficult to gauge how big’ trials such as clothes rental could become, said the H&M chief © DAVID THUNANDER

“It sounds really basic but if you do that in many processes you can be much faster. You also have data to give you more customer insight, which means you can act much quicker,” she said, adding that accessories can now go from conception to store in a few weeks, T-shirts in six weeks, and trousers in eight.

H&M is also trying to increase its speed on sustainability, bringing in a target of using 30 per cent recycled materials by 2025. Critchlow said that the group was leading the industry in its attempts to become circular, although many voice concerns over how much fast-fashion groups encourage excess consumption. Strong investor demand this month led to H&M reducing the interest rate for its maiden sustainability-linked bond, which was 7.6 times oversubscribed

Line chart of Share prices rebased showing Inditex has outperformed its rival over the past decade

Helmersson, a former head of sustainability at H&M, said that the hardest task for the retailer was decoupling its growth from its use of natural resources. She added that the trials in repairing and renting clothes as well as selling second-hand garments through the website Sellpy, in which H&M is the majority owner, were important but difficult to gauge how big they could become. “We have such a size that we can to some extent influence customer behaviour. But we will also see how willing they are,” she added.

Critchlow said H&M deserved “full credit” for the trials but that they were unlikely to lead to soaring profit margins. She added that the crucial questions were how fast H&M returned to pre-pandemic sales and profit levels and whether it could go further. “It requires H&M to manage the costs of the stores,” she said, adding that renegotiated leases during the pandemic had only helped a little.

There is also a debate about how much increasing online sales — expected to rise from 28 per cent of H&M’s total last year to about 43 per cent in 2025, according to Critchlow — help given that they come with additional costs such as delivery and returns as well as in logistics.

Helmersson is unbowed, arguing that H&M will offer multiple ways for customers to engage with the retailer through various store formats offering different services, online, and its own club. “The customer journey is constantly evolving,” she said. “We will follow, and influence. Before, it was about transactions, now it’s about relationships with customers.”



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How vaccine laggard CureVac hopes to come out on top

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Fifteen years ago, after an hour-long meeting in the basement of a Paris hotel, Bill Gates agreed to back a German entrepreneur who claimed a new class of drug would revolutionise the fight against infectious diseases.

When Covid-19 shook the world last year, CureVac — the company built by Ingmar Hoerr with the help of the Microsoft founder’s money — seemed perfectly positioned to make good on that investment and produce a “best-in-class” vaccine.

It could be ready “by the autumn”, predicted European Commission president Ursula von der Leyen.

But while local rival BioNTech and US competitor Moderna brought to market vaccines using similar messenger RNA technology in less than a year, CureVac’s product is lagging up to six months behind.

Ingmar Hoerr, founder of CureVac © Imago images/ULMER Pressebildage

This is the story of how one of the most promising vaccine makers is trying to get back on track after development delays, the brain haemorrhage of its founder and a bizarre — possibly fictional — attempt by the White House to steal the company away from Germany.

‘America first’ again?

Following a meeting with pharma executives at the White House in early March, German media reported that the Trump administration had sought to lure the company, which also has a Boston base, to the US and secure its vaccine exclusively for Americans.

The news led to an uproar in Berlin, especially after billionaire Dietmar Hopp, CureVac’s lead investor, seemed to verify the reports in a magazine interview. 

Days later, CureVac’s American chief executive Daniel Menichella abruptly left the company, even though the biotech denied an official approach by the US government had ever taken place. The Trump administration also rubbished the reports — in one of the few public rebuttals by the former president’s staff against a reported “America first” policy stance.

Dietmar Hopp, lead investor of CureVac © Getty Images

Amid the turmoil, Hoerr, the company’s founder who had just taken over from Menichella as chief executive, suffered a brain haemorrhage in a hotel room, and relinquished the role again.

Venture capitalist Friedrich von Bohlen und Halbach, who sits on CureVac’s board, told the Financial Times that the Trump tale was probably “made up” by people leaping to conclusions about the presence of a German company at a US government event. 

But the reports were enough to spook European leaders. On March 16, von der Leyen spoke to CureVac’s management via video conference, and then publicly offered the 20-year-old company an €80m loan “to quickly scale up development and production of a vaccine”. 

By mid-June the German government had chosen to invest €300m in CureVac, for a 23 per cent stake, ahead of its flotation on the Nasdaq in August. Economy minister Peter Altmaier left little doubt as to Berlin’s motives: “Germany is not for sale, we don’t sell our silverware,” he told reporters.

Former US vice-president Mike Pence, centre, meets drugmakers last March © Eric Baradat/ Getty Images

Suggestions that CureVac’s investors may have spread the Trump tale to engineer a response from Angela Merkel’s government were strongly denied by people close to the company.

“It was not the plan to get German public money,” said von Bohlen, who first invested in the nascent company in 2004, and whose holding company, Dievini Hopp, created with Hopp, still owns half of CureVac. 

In any case, the company was unlikely to up sticks. When Hopp, a co-founder of tech group SAP, first agreed to invest roughly €2m in CureVac in 2005, he wanted to “make sure that we build infrastructure and new jobs here in Germany”, von Bohlen recalled.

Waiting for data

There was some rationale behind the German government’s investment, however. CureVac, which was developing a rabies vaccine when the Covid-19 crisis began, had more experience with infectious diseases than BioNTech. 

Some scientists also believed that CureVac, which unlike its rival does not chemically modify its mRNA, could end up prompting a stronger immune response.

But an initial readout from phase 1 trials in November damped the high expectations. The data showed that the level of antibodies produced by the vaccine was higher than the average in the blood samples of recovered Covid-19 patients, but appeared to be lower than those produced by the BioNTech and Moderna’s candidates.

However, as each company’s results were measured using different assays and against a different group of convalescent patients, they were not directly comparable, according to Suzanne van Voorthuizen, an analyst at Kempen. “You are always comparing apples with oranges,” she said.

The inconclusive data did not deter the European Commission, which signed a contract to secure 405m doses soon thereafter. Manufacturing deals with Germany’s Wacker Chemie and Rentschler followed in the next few weeks, as well as with France’s Fareva.

CureVac also raised $517m via a share offering and its shares trade more than six times last August’s IPO price. Twice in the last few weeks the company’s market value has surpassed that of Deutsche Bank and now stands at about €16bn.

Line chart of Rebased to Aug 2020 showing Vaccine makers' share prices

“In two years from now, nobody will care any more [about the delay],” said von Bohlen. “Capacity, quality and price — that is what everyone will care about,” he added, predicting that regular vaccinations would be required to protect against virus mutations and that CureVac’s mRNA technology would be ideally suited to that challenge.

An initial readout from large-scale phase 3 trials is expected in March, and although CureVac has given up on pursuing US authorisation, citing market saturation, approvals from the EU regulators will probably come halfway through 2021.

Competitive advantages

Being behind in the race to produce an mRNA Covid-19 vaccine could also end up being a blessing in disguise for CureVac, according to founder Hoerr, 52, who is recovering from his health crisis. He claims time spent perfecting the formulation of its candidate has given its product several competitive advantages.

Unlike vaccines by BioNTech and Pfizer, which currently have to be kept at an ultra-cold -70C while being shipped, and Moderna’s product, which must be kept at -20C, CureVac’s candidate is able to survive in standard fridge temperatures for at least three months, making it much easier to deliver to the developing world. “That’s not a miracle,” said Hoerr. “That is technology. You have to work on that.”

Additionally, at 12 micrograms per dose, it requires the smallest amount of active ingredient among the mRNA vaccines, enabling more efficient distribution.

Bar chart of Covid-19 shots under contract (doses bn) showing Vaccine makers race to supply the world

CureVac, which claims to be able to produce 300m doses this year and a further 1bn in 2022, spent extra time scaling up its manufacturing network.

The positive assessment is shared by pharma giant GlaxoSmithKline, which bought a 9 per cent stake in CureVac in July and earlier this month pledged a total of €150m to develop so-called “next-generation” Covid-19 vaccines with the company to tackle new variants.

The UK government has also agreed to provide CureVac with access to its genomic sequencing expertise. In exchange, the UK will receive 50m doses of the biotech’s jab and permission to use contract manufacturers to produce it in Britain.

“The UK is one of the most advanced countries in understanding mutations and sequencing them,” said Wassili Papas, a portfolio manager at German institutional investor Union, which has a small stake in CureVac. “So for them to choose CureVac, there must be something to it.”

CureVac’s ambitions were given its biggest boost to date in early January, when German pharma group Bayer agreed to help with the production and approval of the Covid-19 candidate — the first foray into vaccine development in the company’s 158-year history.

Bayer told the FT that the agreement was a “one-off” and that the company “just wanted to help”, denying suggestions that Merkel’s administration had pushed for the partnership.

Friedrich von Bohlen und Halbach
Venture capitalist Friedrich von Bohlen und Halbach sits on CureVac’s board © Andreas Riedel

The German government told the FT that it “explicitly does not exert any influence on the operating business of the company via its shareholding”, while von Bohlen said Berlin was first informed by the companies of the agreement after the deal was closed.

Nonetheless, in a government press conference last month, Armin Laschet, the newly elected head of Merkel’s party and the premier of North Rhine-Westphalia, which is home to Bayer, was clear about the deal’s significance.

“We need to recognise how important it is at this moment not to be completely reliant on the global market,” he said, “but also to be able to independently produce in Germany.”

Two weeks ago, CureVac began submitting approval data to the European regulator, and with the first batch of doses secured by the EU, the vaccine could also offer the bloc a chance to repair some of the political damage caused by the much-criticised procurement of the BioNTech and Oxford/AstraZeneca jabs.

If successful, the company built by Hoerr, who has reportedly been nominated for a Nobel Prize, could even eclipse Bayer’s €64bn market value, said von Bohlen, and along with BioNTech, reshape the entire sector.

“MRNA has the potential to become, by orders of magnitude, the broadest therapeutic class in medicine,” he said. “It’s a bit of a revival of the German strength in the pharmaceutical industry.”

The bar chart in this article has been amended since original publication to correct a rounding error



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