THURSDAY, JUNE 13, 2013
BUSINESS
BOE’s Fisher urges end to RBS uncertainty LONDON: Britain should end the uncertainty over long-term plans for state-controlled Royal Bank of Scotland, a senior Bank of England official said yesterday. Paul Fisher, the BoE’s markets director, said RBS’s ability to attract investors and sustain lending was being hampered by a lack of clarity over when it would be returned to the private sector and whether it might be split up. Britain’s government ploughed 45.8 billion pounds ($71.4 billion) of public money into RBS to save it from collapse in 2008, and now holds
an 81 percent stake in the bank. Finance minister George Osborne will signal that the time is right to offload the government’s shareholding in an annual speech to financiers on June 19, political and industry sources said on Monday, but he is not expected to explain how. Senior lawmakers are expected to report shortly on whether it would be better to break up RBS instead. Outgoing Bank of England Governor Mervyn King has said RBS would have benefited from a much more radical restructuring. Fisher - who is in charge of a BoE
scheme to boost bank lending - said this lack of clarity was damaging. “As a matter of market management, I think it is the uncertainty about RBS which has been holding investors back,” Fisher said at an investment conference in London. “People have been saying to us that they don’t want to invest in RBS or provide capital because they don’t know what is going to happen to the bank,” he added. Boosting bank lending is a key priority for the BoE and Britain’s government, which together set up a scheme last
year that offers banks cheap finance if they lend more to support a sluggish economic recovery. “Individual banks are now awash with liquidity,” Fisher said, adding that he hoped that businesses’ demand for loans would rise as economic confidence returned. In April, a Funding for Lending Scheme was extended by another year into 2015, and tweaked to give banks a greater incentive to lend to small businesses rather than home buyers. Fisher said the BoE wanted to see more
property purchases, but not a rise in house prices, which he said were high already. Fisher serves on both the Bank of England’s Monetary Policy Committee, which sets interest rates, and its new Financial Policy Committee, which regulates the financial system. Fisher is among the minority of MPC members who have voted since February for the central bank to buy more bonds with newly minted money to aid the economy’s recovery. Yesterday he said the economy still needed support. —Reuters
Severn Trent deal blow hits merger funds LONDON: Hedge funds that bet Severn Trent would agree to a Canadian-led takeover are reeling from losses after the water company refused to talk, casting further doubt on their money-making abilities in an anaemic M&A environment. The LongRiver consortium walked away after the British utility let the bid deadline expire on Tuesday, ignoring an effective invitation to negotiate on price. That sent Severn Trent shares down 8.3 percent yesterday, adding to falls on Monday and leaving it below its pre-bid price, piling up the losses for hedge funds that bought stock in the past three weeks expecting a deal to be sealed. “It’s pretty disappointing. It looks like the bid/ask spread wasn’t that wide, so it’s perplexing,” said one hedge fund investor who spoke on condition of anonymity. “The bigger problem here is the current deals environment.” It is impossible to calculate exactly how many shares were held in the hands of hedge funds because UK regulations stipulate that investors must only publicly disclose stakes larger than 1 percent in a company under a takeover offer. Two US hedge fund giants, Elliott Capital Advisors and Davidson Kempner European Partners, did tip the scale with stakes in Severn on June 7 equivalent to 1.27 percent and 1.05 percent respectively, but others will have smaller holdings. People familiar with the market say the deal attracted a number of hedge funds, though the short period between initial bid and collapse, and the lack of trading in Severn shares, ensured most funds’ bets were small Davidson had to spend around 40 million pounds for the majority of its stake to earn itself a regulatory filing. Two of those sources estimated hedge funds owned around 5 percent of Severn’s stock - by comparison, managers owned almost a third of TNT Express when it was under offer from rival United Parcel Service in January. But losses on the Severn deal come on top of a series of struggles this year for merger arbitrage funds who wager on the outcomes of bid attempts. Most are grappling with a slowdown in new M&A deals this year - particularly in
Europe and the cross-border big ticket deals they thrive on - while the few takeovers that have emerged have left many funds wrongfooted. The average merger arbitrage fund is up just 1.9 percent this year against a near 5 percent rise in the average hedge fund, data from Hedge Fund Research shows. Over the past three years merger arbitrage managers have made 3.4 percent, while across all strategies the average fund has gained 5 percent. “Investors are chasing the same few highprofile M&A opportunities and end up hit by the same adverse events,” said Thierry Lucas, founder of London-based hedge fund Portland Hill. “I’ve been staying away from merger arb. This may change if the environment improves and we see a big wave of M&A.” (just checking quote) Lionel Belka, partner at Paris-based hedge fund Bernheim, Dreyfus & Co said the collapse of Severn Trent dealtalks was not a depressing sign for future M&A activity because it was a very particular situation of a regulated company that attracts infrastructure investors for its inflation-protected cash flows. “Given the low offer and the asset scarcity, we did not get involved. The nature of the bidder also played its part; it is always more difficult to bring a consortium in a bidding process with a board than an individual buyer,” he said. “Finally, the fact that this deal did not go through is not similar to a definitive agreement not getting done.” UPS’s decision to abandon its 5.2 billion euro bid for TNT in January left funds nursing potential losses of more than $700 million, sources said at the time. Funds owned an estimated 30 percent of TNT shares before news European antitrust regulators would veto the deal, the sources said. Other losing positions this year include small wagers on Meda, currently in talks about a deal with India’s Sun Pharmaceutical Industries, after shares in the Swedish drugmaker fell as prospects for a takeover faded. The big hope for managers now is that a deal like Vodafone’s approach to buy Germany’s biggest cable company Kabel Deutschland - announced yesterday becomes a prolonged bid battle from which they can wring a profit. —Reuters
US growth to pick up in second half of 2013 NEW YORK: The US economy should regain momentum in the latter half of the year, improving from what will likely be a weak second quarter even as the sting of tighter fiscal policy keeps growth restrained, a Reuters poll found. Improving job and housing markets, along with resilient consumer demand, should help to keep the world’s largest economy chugging along through 2013, setting it up for a stronger performance next year. Still, it has to contend with the pressure of greater fiscal austerity out of Washington. Across the board government spending cuts of $85 billion went into effect in March, while the payroll tax holiday expired at the beginning of the year, raising taxes for many Americans. That belt tightening is expected to slow growth in the current quarter, with the latest data already pointing to an economy that has hit a soft patch. A Reuters poll of 88 contributors found economists now expect the US economy to grow at an annualized 1.7 percent in the second quarter, from 1.5 percent in the previous poll. However, that is slower than the 2.4 percent growth rate recorded in the first three months of the year. But the economy will pick back up to a 2.2 percent growth rate in the third quarter and is predicted to improve from there, hitting 3 percent by the same time next year. “The consensus is the US is getting better, healthier, and once the fiscal drag wanes, private sector strength will show through,” said Michael Gapen, senior U.S. economist at Barclays Capital. The effects of tighter fiscal policy will likely be more evenly distributed through the year than some are forecasting, said Gapen, who expects momentum in the private sector will become more evident in the early months of next year. The unemployment rate is seen averaging 7.5 percent for the year, only just below the 7.6 percent most recently reported by the government for May. Hiring is expected to average 163,000 jobs a month in the second quarter and rise to 200,000 a month by the second quarter of next year, almost unchanged from last month’s poll. However, at a constant rate of May’s 175,000 job additions per month, it would take roughly over a year to get US employment back to prerecession levels. The improving labor market, along with recent comments from Federal Reserve Chairman Ben Bernanke, have stirred worries the Fed could reduce its current stimulus efforts before long. The Fed has said it will keep the federal funds rate near zero until the unemployment rate drops to at least 6.5 percent as long as inflation stays close to its 2 percent target. The central bank has also said it will continue its bond purchases until the labor outlook improves substantially. Consumer price inflation is expected to rise 1.5 percent for the year, its lowest yearly rate since 2009, down from predictions of 1.7
percent in the May poll. As analysts try to gauge the timing of when the Fed will slow its $85 billion-a-month quantitative easing program, some expect the central bank could begin to cut back by the end of the year. Still, economists expect the Fed will try not to proceed so quickly that it derails the still-fragile recovery. “If the US economy sags perilously in response to an announced winding down of QE3, the Fed probably would reinstate QE,” said John Lonski, chief economist at Moody’s Analytics Capital Markets Research Group. Investors are also focused on who will take the top spot when Bernanke’s term as head of the Fed ends in January. The vast majority of those polled expect the top spot to be filled by Fed Vice Chair Janet Yellen. —Reuters
BAE Systems names new chairman LONDON: British arms maker BAE Systems appointed yetserday business veteran Roger Carr as its new chairman, replacing Dick Olver who came under pressure to step aside after the collapse last year of the company’s proposed mega-merger with European aerospace group EADS. Carr, 66, is presently chairman of British energy group Centrica and recently stepped down as president of the CBI, Britain’s main business lobbying group. “BAE Systems plc is pleased to announce that Sir Roger Carr...will succeed Dick Olver as chairman in the first quarter 2014, following a transition period,” the defence group said in a statement. Olver, who will leave after nine years in the role, had faced pressure to resign from BAE’s biggest shareholders after last October’s merger collapse. An attempt to create the biggest aerospace and defence group in the world became mired in the quicksand of politics and eventually failed. The dream stopped short when both groups scuppered further talks over irreconcilable differences between the leaders of Britain, France and Germany. BAE’s biggest shareholder, fund manager Invesco Perpetual, had in any case publicly opposed plans for a tie-up, arguing that it failed to see the strategic logic of a deal. Following the appointment of Carr, whose name had been widely touted in the media ahead of yesterday’s announcement, BAE Systems’ share price was showing a gain of 0.48 percent to 394.5 pence on London’s benchmark FTSE 100 index, which was flat at 6,340.82 points compared with Tuesday’s close. —AFP