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Analysis

Big oil’s huge losses raise prospect of mega mergers

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When Exxon struck the biggest deal of a $300bn wave of oil mergers during the brutal late-1990s crude price collapse, Mobil chief executive Lou Noto gave a warning to the industry.

“We need to face some facts,” he said as he announced his company’s takeover. “The world has changed, the easy things are behind us. The easy oil, the easy cost savings, they’re done. So all of us are now looking for some way to make a jump.”

Now the finances of the supermajors those deals created are in tatters, just as the rise of clean energy and doubts about long-term oil demand force another existential reckoning — and the prospect of megamergers is on the cards again.

“We’ve had two price crashes in the last five years and we’ve seen a lot of money leaving the sector,” said Greg Aitken, head of mergers and acquisitions research at the consultancy Wood Mackenzie. “We’ve seen a lot of concerns about energy transition and ultimately demand destruction and a lot of uncertainty about how quickly that’s going to happen. So big strategic tie-ups and deals — those are entirely feasible.”

ExxonMobil, Chevron, BP and Shell recorded more than $50bn in losses between them last year, as the pandemic-driven crash in oil demand crushed crude prices and forced them to slash their spending plans

Reports last week that Exxon and Chevron discussed what would have been the biggest industrial merger in history during the depths of last year’s market bust are a measure of the panic that swept through the sector.

Column chart of Disclosed deal sizes ($bn) showing Upstream oil and gas M&A*

“The situation looked so desperate last spring and it was unclear how bad it was going to get,” said Daniel Yergin, vice-chairman of IHS Markit and author of The New Map, a recent book on the oil sector.

The desperation has faded but investors say big deals would be a welcome reset for a sector that was shedding value before the crash and is now watching the investment landscape tilt towards cleaner rivals.

Darren Woods, Exxon chief executive, said last week that the company was on the hunt for deals and looking at companies that could “grow value, unique value” and complement its portfolio, in what some analysts said was a nod to Chevron.

A tie-up between the US supermajors would make “eminent sense,” according to one Houston energy banker, creating a more profitable oil portfolio to compete with low-cost Middle Eastern and Russian suppliers. Such a deal could also free up capital to spend on the low-carbon technologies investors are demanding.

But scale is a key driver — part of a “last man standing” strategy for survival even if oil demand shrinks over the coming decades. A combined Exxon and Chevron, for example, could produce close to 6m barrels a day, more than any Opec country other than Saudi Arabia.

“Scale is a real enabler of cost efficiency,” said Nick Stansbury, head of climate solutions at Legal & General Investment Management, which holds shares in many supermajors.

Big deals would also help some companies “get out of the penalty box”, he added, allowing producers to align their business to “play an active role in the transition”.

Line chart of $bn showing Supermajors’ debt burden has swelled in the past decade

Despite last year’s mammoth losses, short-term pressures on operators have eased thanks to a rebound in oil prices, which struck a 12-month high close to $60 a barrel this week.

Some observers think the rally and a growing industry consensus that prices will keep rising have lessened the pressure for a dramatic course correction.

Exxon and Chevron have probably “moved past” the need to combine, according to Sam Margolin, managing director at Wolfe Research. “Both companies have stabilised now and have a very transparent plan out to 2025,” he said.

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But others say bigger concerns still loom over the sector, compelling it to consider radical solutions.

“This isn’t just about the near term, it’s about a long-term energy transition, demand destruction, price volatility . . . and the twilight years,” said Mr Aitken, referring to the possibility of those kinds of deals. A historic oil crash had left “no sacred cows”, he added.

Analysts at Morgan Stanley last year raised the possibility of Exxon or Chevron buying a US electricity producer as a “potentially more attractive strategy” than buying more oil production.

Still, although Royal Dutch Shell and Total have said they would like to go from Big Oil to Big Energy, transformations such as oil-dominated Dong Energy’s reconstitution into clean-energy focused Orsted will be tricky to pull off.

Line chart of $bn showing Supermajors’ market capitalisation

As oil company share prices slid last year, with BP’s market capitalisation more than halving to $50bn, bankers and energy analysts speculated about the company becoming an acquisition target as well as broader consolidation in the European sector.

But hurdles would stand in the way of another wave of megamergers — not least government scrutiny of such deals. And selling oil assets to raise funds for transition projects is tricky when potential buyers are also reducing exposure to fossil fuels.

“If you have to sell assets, where do they go? It’s not as easy as it once was,” one banker said. “Antitrust solutions are not as clear.”

One area where more M&A activity is widely expected is the battered American shale patch, where more than $50bn worth of deals were struck in the second half of 2020, according to the data provider Enverus.

Behind the mergers was operators’ need to amass scale, drive down drilling expenses and eliminate some of the shale sector’s notoriously bloated general and administrative costs.

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More deals are likely, especially in the prolific Permian shale fields of Texas and New Mexico, following President Joe Biden’s executive orders to clamp down on drilling on federal land, according to Lee Maginniss, a managing director at the consultancy Alvarez & Marsal.

“Companies with large inventory of non-federal drillable locations have just gotten more attractive,” said Maginniss. He expects at least another big deal or two in the Permian this year, as the big US independent producers consolidate.

Chevron has already bought Noble Energy, which had shale assets as well as an international gas business. Supermajors are still hovering over the shale patch with intent, analysts say.

Top-tier operators such as EOG Resources, Pioneer Natural Resources, Diamondback Energy and ConocoPhillips — with productive fields, relatively sturdy finances and environment, social and governance plans — are all prime targets.

“We are in an era of consolidation,” Mr Yergin said. “But in shale.”



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Analysis

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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Amazon given lifeline in Future Group fight after India Supreme Court ruling

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India’s Supreme Court handed Amazon a lifeline on Monday in its fight for the country’s vast retail market by temporarily barring Indian retailer Future Group from closing a $3.4bn deal with Reliance Industries. 

Amazon is racing against time to stop Reliance’s chairman, Mukesh Ambani, from buying up Future’s 1,500 fashion and grocery stores and boosting his ambitious JioMart venture, which delivers daily essentials from a growing network of small shops.

Ambani swooped for the ailing Future Group late last year, after it missed a bond payment and its credit rating was downgraded to “near default”.

The deal has been signed off by regulators and is pending a green light from the National Company Law Tribunal (NCLT) and a vote by Future’s shareholders.

But Amazon alleged that the sale breached a contract it had with a subsidiary of Future that barred Future from selling its retail assets without Amazon’s consent.

An arbitration panel in Singapore called in October for the deal to be put on ice pending a final verdict, and Amazon appealed to India’s Supreme Court to intervene.

On Monday, the Supreme Court agreed the NCLT should not “sanction” the deal until it has heard the case, which is scheduled for March.

Amazon’s fear is that, once Future’s shareholders vote, any legal action will become “irrelevant”, said a source with knowledge of the company. “There is no point in closing the stable door after the horse has bolted,” he said.

The deal would give Reliance, which is already the country’s biggest offline retailer, another national network of stores and brands including Big Bazaar and the gourmet food store Foodhall.

It would strengthen JioMart as a competitor to Amazon, which currently has just under a third of India’s booming ecommerce market, estimated to be worth $86bn by 2024, according to research firm Forrester.

Neil Shah, an analyst at Counterpoint, said that Reliance was racing Amazon to win over millions of mom-and-pop stores. JioMart taps into the 400m users of Reliance’s Jio mobile phone network and has partnered with WhatsApp for payments.

“Reliance getting stronger is direct competition to Amazon,” said Shah. “It’s a battle of technology companies in the end and it’s the data that counts rather than just building a retail channel, it’s a means to an end.” 

Following its Future deal announcement in August, Reliance’s retail arm raised more than $6bn from investors including Silver Lake and KKR for just over 10 per cent of the company. 

Amazon has cast the battle with Future and Reliance as the latest example of the uneven playing field foreign investors face in the country. Its case comes as Vodafone and Cairn Energy are fighting long-running legal disputes over retrospective taxes with Prime Minister Narendra Modi’s government.

But Future argues that Amazon’s contract was with subsidiary Future Coupons — which markets and distributes gift and loyalty cards — not the entire group, so the international arbitrator’s order is not valid and the deal can go ahead.

Its lawyers have likened Amazon to the East India Company and said it was obstructing the transaction “to prevent any competition in the Indian retail market”. 

Amazon acquired a 49 per cent stake in unlisted Future Coupons in 2019, with the right to buy into the flagship company after a few years. Amazon also holds minority investments in More, a supermarket chain, and department store chain Shoppers Stop.

Together with Walmart-owned Flipkart, Amazon commands about 70 per cent of the online market in India. However, India’s regulations currently restrict a foreign company from running online “multi-brand retail” stores, similarly to how Amazon operates in the US. 

Legal experts said Amazon may have invested in Future Coupons to work around the FDI rules and exercise control indirectly, with the hope of eventually being able to invest further if and when the rules change. 

While the legal battle continues over enforcing the international arbitrator emergency order, there is a good chance Future and Reliance will close the deal and come out on top, said Nigam Nuggehalli, law school dean at BML Munjal University in Gurgaon outside New Delhi. 

“When Amazon entered a complex structure at this time, it was already sailing close to the wind,” added Nuggehalli.

“Lawyers are basically arranging contracts to meet the challenges of FDI regulations and tax compliance and things can go wrong,” he said. “When that happens you have cases like Vodafone and Amazon/Future.” 

Future, in deep distress after India’s coronavirus lockdown and in danger of liquidation, has argued that it will collapse if the deal does not go through, putting 25,000 employees out of work.

Future companies, including food-focused FMCG arm Future Consumer and retail infrastructure firm Future Enterprises, have defaulted on debt repayments in the past six months. 

Debanshu Mukherjee, a co-founder of the Vidhi Centre for Legal Policy, said Indian courts would probably consider it important to keep the company alive to save jobs. 

“Courts are also considering whether the company survives and they would look at this factor,” said Mukherjee. “Everything will be worse if the underlying asset loses all its value.” 



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