Hostile takeovers have fallen out of favour in recent years, as confidence amongst corporate leaders shrank during the financial crisis. But now Pfizer is preparing to embark on a no-holds barred battle for the hostile takeover of Astra-Zeneca, so we look back at some of the biggest attempted takeovers of the past decade.
1. AOL and Time Warner, $164bn, 2000
When AOL announced it was taking over the much larger and successful Time Warner, it was hailed the deal of the millennium. But the dotcom boom meant the new AOL Time Warner lost over $200bn in value in less than two years.
2. Sanofi-Aventis and Genzyme Corp, $24.5bn, 2010
Sanofi fought hard to takeover biotechnology company Genzyme in 2010. It had to offer significantly more per share than they initially wanted before triggering a top-up option to assume control over around 90 percent of its target company.
3. Nasdaq OMX/IntercontinentalExchange and NYSE Euronext, $13.4bn, 2011
In a battle for control over the New York Stock Exchange, Nasdaq was determined to undermine Deustche Borse’s bid to buy the NYSE parent company with an unsolicited and valuable bid. Nasdaq was ultimately forced to withdraw its $13.4bn offer amid concerns from regulators.
4. Icahn Enterprises and Clorox, $11.7bn, 2011
When Clorox refused Icahn’s bid of $10bn, CEO Carl Icahn sent a full-caps letter to the Clorox board directly telling them shareholders should decide on the takeover. Though the bid was eventually raised to $11.7bn, Icahn was eventually forced to withdraw and drop the push for a proxy fight.
5. Air Products & Chemicals and Airgas, $7.94bn, 2010
Airgas was forced to take Air Products to court in Delaware to avoid the hostile takeover, after the buyer attempted to seal the deal over the course of a year. The main point of contention was the price per share Air Products was offering, and eventually a judge sided with the short-changed seller.
Brazil’s private pension industry grew 10 percent last year, with premiums now worth BRL 21bn. With the public pension deficit at BRL 50bn, there’s a big gap in pension provision that the private sector can capitalise on. Alfredo Lalia, CEO of HSBC Insurance Brasil, talks about the opportunities and challenges facing the sector, and touches on the importance of financial education.
World Finance: Alfredo, what has been the driving force behind Brazil’s private pension industry?
Alfredo Lalia: The main reason for growth was that when [hyper]inflation stopped in Brazil in the 90s, people started to think in much more long-term. And this helped the industry to convince people to prepare for their retirement. So it’s much more common now to think in the long-term than it was in the 80s, when you had a hyperinflation period in Brazil.
World Finance: Is the public concerned about the large gap in public finances I mentioned?
Alfredo Lalia: Yes, in fact in Brazil and in any country of the world, people know that the government can’t provide the same level of benefit that you are used to having. So, people are much more concerned that they should start to develop their own plans for retirement.
World Finance: Now you commissioned a study recently in which two thirds of your Brazilian respondents said that they had never saved for their retirement; why do you think this is the case?
We discovered that people are concerned about their retirement, but there are other short-term projects that are not allowing people to comply with all their plans
Alfredo Lalia: Basically we discovered that people are concerned about their retirement, but there are other short-term projects that are not allowing people to comply with all their plans. So basically you have a huge space to work in financial education, and show to the people that they have short, medium, and long -term projects, and the long-term should be started in the beginning of their professional life.
World Finance: But your study also found that Brazilians do understand the need to save for their retirement, so is it a question of financial education, or is it a more serious wage issue?
Alfredo Lalia: It’s a combination of both. In fact, as you have this long-term inflation period, people don’t have this culture of long-term planning. People say, “Oh, should I buy a new iPhone? Should I change my car? Or should I keep my pension plan?” So consumption is a challenge, and how you convince or how you explain to people that you can have both: you can have the short-term pleasure, and you need to guarantee the long-term pleasure that is their retirement plans.
World Finance: And so what is your message to the people of Brazil?
Alfredo Lalia: You should be realistic in your retirement needs, in your retirement ambitions. You know? There isn’t any formulaic approach: each person has a different view about the future, and will be at a different level of expense at the future. So you need to build your own future needs.
You need to understand your incomes, your expenses, and create a strong plan
The second one is to start as early as possible. So if you start early, even if it’s one, two, three percent of your income, but it’s constant – that’s important.
The third one is, you need to understand your incomes, your expenses, and create a strong plan. And this includes not only you, but you, your family, your children; you need to create this budget that says “No, this is what you can save for the future,” and you need to make choices about the expenses that you need to cut or keep.
The fourth step is, you always need to remind yourself that each plan is a long-term plan. It’s a type of marathon. And some different things can happen that you’re not planning. So the plan is not perfect, but you can rebuild your future plans.
And finally, know that you can have some specialists to help. So, as you go to a doctor when you have a health problem; probably the best option is go to a financial planner when you are building this budget for the future. So let’s go to the specialist as you go to a doctor. This is an important message.
As with many places that attract vast quantities of the world’s wealth, demand for property is excessively high in Switzerland. With many leading international businessmen seeking to benefit from the country’s relaxed attitude towards regulation and tax, prices for properties – both luxury and modest – have crept up in recent years. According to figures from UBS, over the last five years average house prices have jumped by 35 percent. In popular areas, such as beside Lake Geneva, prices have gone up by as much as 70 percent during that time.
With historically low interest rates and an influx of cash into the banking industry, many think that high house prices are merely a natural consequence of the country’s economic model. So much wealth has poured into the country over the years, attracted by its secretive banking industry, that alongside almost zero percent interest rates it is inevitable that property will become highly sought after.
The problem facing Switzerland is not exclusive. Other countries are also seeing dramatic rises in house prices, six years after a series of mortgage-related crashes caused the global financial crisis. Economist Nouriel Roubini wrote recently that he believes that there is a serious danger of housing bubbles emerging across the world: “…signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centres in Turkey, India, Indonesia, and Brazil.
“Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anaemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.”
Long time coming Switzerland’s apparent crisis has been building up for longer than just a few years, however. Protests over the lack of affordable housing in the country have taken place this year, especially in the second-largest Swiss city Geneva. Towards the end of 2013, a series of rallies were organised in Geneva, where hundreds of protestors complained about the shortage of affordable housing and lack of cheap accommodation. A particular complaint was at the worryingly low vacancy rate that has sat at around 0.2 percent for the last decade – far below the two percent that is seen as healthy for most cities.
Many observers are becoming increasingly concerned that Switzerland is experiencing a damaging house price bubble that is set to burst in the coming year. UBS economist Claudio Saputelli told reporters in January that his company expected a correction to take place in the market: “Despite slower momentum, valuations in the Swiss owner-occupied housing market have reached a high. This has further increased the risk of a correction.”
He added that the country has been in a “risk zone” with regards to prices for much of the last year (see Fig. 1). UBS’ report added: “A five percent fall in prices or a halving of mortgage growth in the current year would be sufficient for a noticeable calming of the market.”
The government toughened mortgage-lending laws in 2012 in an effort to dampen the market, while the country’s central bank, Swiss National Bank (SNB), has repeatedly warned that the market is overheating to such a level that a correction is inevitable. Last year, SNP chief Thomas Jordan requested a bugger to be introduced for Swiss banks, forcing them to hold an additional one percent of risk-weighted assets to stave off the potential dangers of the housing boom.
Announcing the move, Finance Minister Eveline Widmer-Schlumpf told reporters, “We want to counter pre-emptively the possibly difficult consequences of a bubble. If the situation stabilises, we can abolish it the same way we introduced it.”
Earlier this year, as worries about a bubble increased, the SNB instigated a number of policies to prevent any more dramatic rises. This included doubling the capital buffer requirement to two percent. However, despite a partial slowdown since January, Jordan told reporters in March that the work was not yet done. “The pace has slowed, but we are far away from the soft landing we want. We don’t yet see the slowdown that we would like to see.”
However, this is not the first time that the country experienced such steady growth for its property industry. In 1989, the country saw real estate values rise dramatically, before a sudden collapse during the 1990s that continued until the year 2000. Those values have continued to rise at an average level of 42 percent since the turn of the century.
Soft landing Writing on his Roubini Monitor website in March, Roubini said that while Swiss house prices were getting close to the levels seen during the 1990s, other considerations mean that it is perhaps not set to experience the collapse of before.
“Switzerland experienced its last property bubble (and collapse) in the early 1990s. Real home prices and real rental apartment prices are headed toward the peaks of that period, with the UBS Housing Bubble Index also rapidly moving toward its previous highs.”
In October last year, the Swiss Government agreed to share financial information with almost 60 countries, which could in turn lead to many wealthy clients moving their money out of the country
He believes that the problem is perhaps less dramatic than people believe, on account of rates being lower than the longer-term average. “The house prices-to-rents ratio remains below its long-term average from the 1970s, and just above the level of the 1990s. The price-to-income ratio is above its 1990s level but, according to OECD estimates (which concur with our estimate of house-prices compared with per capita GDP), remains below its long-term average.”
He adds that the rates on mortgages have also seen a fall from what was being charged during the 1990s. “Equally, the average interest paid on mortgages has declined substantially from the 1990s, despite the increase in the stock of mortgages as a percentage of national disposable income, reflecting the fall in variable mortgage interest rates that occurred in the period. Finally, construction permits are just now back to the levels of the mid-1990s.”
Specific regions within the country are experiencing different levels of valuation rise, but many remain under watch by UBS, which said that “the Martigny economic region is now one of the risk regions due to its strong price growth in the last three years. In contrast, the Saanen-Obersimmental and Unteres Baselbiet regions have seen a slowdown in the market.”
Roubini agrees that the problems vary considerably across the country. “A study using the log periodic power law (LPPL) bubble model to analyse the development of asking prices of residential properties in all Swiss districts [between] 2005 and 2013 suggests that there are 11 critical districts showing signs of bubbles, and seven districts where bubbles have already burst.”
Preventing the sort of crash that occurred during the late 1990s is obviously something that the government has been striving to do. Roubini says that even though a number of regions in Switzerland appear to be on the verge of housing bubbles, it is more likely that things will ease off in the coming months.
In October last year, the Swiss Government agreed to share financial information with almost 60 countries
“Despite these strong signs, the study argues that, based on the economic environment, a soft landing rather than a severe crash is more likely. This is possible in our view given that house prices are not completely unhinged but, if macro prudential measures fail to slow leverage and speculation, a repeat of the previous multi-year bust, which saw a 37 percent decline in real terms and a 22 percent drop in nominal terms, spread over six years, becomes more and more likely.”
Another interesting shift in the country to come about in recent months is the change to its banking laws. With an estimated $2.2trn of offshore wealth in the country, many governments around the world have long called for Switzerland to abandon its secretive banking laws, so that they can see where their wealthier citizens are stashing their cash.
In October last year, the Swiss Government agreed to share financial information with almost 60 countries, which could in turn lead to many wealthy clients moving their money out of the country. This could certainly lead to Swiss properties being discarded as well.
Investing in Swiss real estate has certainly proven lucrative for those lucky enough to enter into the market at the turn of the century, but with prices continuing to skyrocket over the last decade, some sort of correction is almost inevitable. Certainly the lack of affordable housing is something that needs to be addressed by the government, and the recent changes to banking laws that will enforce greater transparency might cause some of the overseas wealth to depart, helping to force down prices. Whether it is as sharp and dramatic a drop as the one seen during the 1990s remains to be seen.
The UK has had a minimum wage for the last 15 years, but how has it shaped the country, and can it be seen as an example for Germany, who will be implementing it next year? David Norgrove, the Chair of the Low Pay Commission, shares his insights.
World Finance: Well David, since 1999 how would you say minimum wage has shaped Britain?
David Norgrove: Well it certainly helped the low paid. The evidence is clear that the pay of the people at the bottom has risen faster than it would otherwise have done, and faster than average earnings, and faster than prices. So it’s certainly helped the low paid, and all the research that we and others have done has shown that it’s had no effect on employment of low paid people, so it’s done what it was intended to do.
World Finance: Well 15 years on, and even the architect of minimum wage, Sir George Bain, said it isn’t working. Do you think it’s now maybe run its course as an artificial way to bolster an economy?
David Norgrove: He didn’t say it wasn’t working, he said it’s worked extremely well, but he’d like to push it further, and there’s certainly a case for some of the things that he’s mentioned. I actually think that it’s working well, and the risk is that if you overload it with too many things it starts to break down, that’s always a risk with something that’s successful.
World Finance: Well you did say that minimum wage doesn’t affect unemployment, but this does contradict a lot of economists…
We’ve had over a hundred research studies done by academic economists from around the country over the last 15 years, and none of them has found any significant effect
David Norgrove: I shared that view right back at the beginning, that the risk with any kind of minimum wage is that it causes unemployment. But I think most economists have now come round to the view that it doesn’t, provided it’s set at a sensible level. We’ve had over a hundred research studies done by academic economists from around the country over the last 15 years, and none of them has found any significant effect. Occasionally you get one that happens to show one effect, but it’s not replicated elsewhere, so I think we’re pretty confident that it hasn’t affected employment.
World Finance: Minimum wage does fall quite short of the living wage, so in that context, is there really any point in it?
David Norgrove: It’s not the same as a living wage, it’s not designed for people to live on, it’s designed as a floor, and actually even the living wage isn’t really enough for people to live on because it doesn’t take account of how many hours people work or what their family circumstances are, just as the minimum wage doesn’t. Really you need to look to the tax and social security systems to reflect what people need to live on.
World Finance: Well it has been suggested that minimum wage increases have been too low, which has had a direct impact on consumer demand, weakening it substantially. Do you think this is the case?
David Norgrove: It’s really hard to say what would have happened otherwise. What you can say is that, during this downturn, the minimum wage has fallen less in real terms than other earnings. The pay of the people at the bottom has behaved quite differently from previous recessions, where they tended to do less well than others. Should it be used as an instrument to raise consumer demand? I don’t think so.
World Finance: During the global recession, do you think minimum wage was a help or a hindrance?
David Norgrove: Well there’s no doubt it helped. The pay of the low paid was protected better than it ever has been, certainly since back to the early 70s, so I think it did its job.
World Finance: As of next year, Germany, Europe’s strongest economy, will implement minimum wage. Why now do you think?
David Norgrove: As I read it, it’s partly a matter of politics. Germany has a very different wage bargaining structure from the UK, with different kinds of arrangements for it.
World Finance: Well the UK brought minimum wage in during a time of prosperity, but Germany is still recovering from the recession, so do you think a shock to the European markets could throw the ship off course?
It seems to me unlikely that minimum wage in Germany will affect the whole European economy in that way
David Norgrove: It seems to me unlikely that minimum wage in Germany will affect the whole European economy in that way, and also Germany actually has been recovering very strongly and growing faster for the last few years. So actually, from a Germany point of view it seems to me they’re introducing it at a point when they’re in a reasonably strong economic position.
World Finance: Do you think the UK then can act as a model for Germany so it can learn from how we’ve implemented minimum wage?
David Norgrove: Well we’ve had people from Germany coming to look at the way we’ve done it, as I’m sure they have at other countries. So they have tried to learn, I think very sensibly, from other other countries’ experience.
World Finance: Well finally you said that minimum wage has no effect on unemployment, but is that the same for youth unemployment?
David Norgrove: The evidence internationally is that a minimum wage is likely, if anywhere to have an effect on young people. That’s why in the UK we’ve got rate for young people which are lower than they are for adults, and in fact the Low Pay Commission with some reluctance over the last few years has held back pay increases for young people out of fear that there was some effect appearing on young people, but we’ll have to judge that over the course of the next year or two as well.
World Finance: So how do you see minimum wage developing then for the UK?
David Norgrove: Well our objective is to raise it as high as we can as a recommendation to government, provided it doesn’t affect employment of the low paid, and we are now seeing quite a strong recovery in the UK, we’ve recommended a much more substantial increase this year than we have done in past years, and we hope very much that we’ll be able to carry on doing that.
Sustainable investment is increasingly gaining traction as more look to ensure that their cash not only generates more money, but also does good. Similarly, firms are eager to improve their images through a ‘green’ or sustainable profile. This is even more so in Africa, where governments and local firms are keen to ensure that the continent’s economic development is socially and environmentally responsible.
To this end, more and more funds are investing in Africa, and particularly in green and sustainable initiatives. Financial regulators and institutions such as the World Bank are looking to promote sustainable investment in the continent by rewarding companies that embrace a socially responsible and inclusive strategy, and help investors recognise and value these practices. In addition, African policymakers have sought new ways to ensure that their countries take a bigger share of the winnings.
The hedge fund also doesn’t deny, that while looking good on paper, sustainable investment also generates
a profit
Raising the bar Institutional and foreign investors are making an effort to keep up with Socially Responsible Investment (SRI) requirements. In 2013, the UN-sponsored Africa Sustainability Barometer found that institutional investors are eager to see larger companies raise their sustainability reporting and standards, while investors also expressed a willingness to pay a premium for good Environmental, Social and Governance (ESG) performance.
One such foreign investor is the Ebullio Hedge Fund, which with its strategic partnership with Alexander Mining, has invested in a revolutionary technology, which makes the extraction processes for base metals, sustainable. The technology has the potential to make an otherwise controversial industry an attractive investment. “Trade in base and precious metals has always been a messy business. The actual production of metals often takes a lot of chemicals such as cyanide and sulphuric acid. In order to become a more sustainable producer as well as reduce costs by reducing clean-up, we’ve found a production technology that is more sustainable and also more economical,” explained Executive Managing Partner, Lars Steffensen.
The technology is aimed at being used in abandoned mines in Africa, where previous multinationals have spent hundreds of millions on establishing and cleaning up after resource extraction. According to Steffensen, sustainable investments like this are not only important to his firm, but to the continent in general, as it enables the use of existing mining infrastructure and thereby, firms investing in mining avoid having to scar the landscape further.
Reusing resources “It is economically a good decision because a mine nowadays might cost $200m to open and then just as much in order to close because of the clean-up. Because we’re using ammonia, we’re setting up mines a lot cheaper and it’s more efficient to use than sulphuric acid. This results in a cheaper production,” explained Steffensen.
The hedge fund also doesn’t deny, that while looking good on paper, sustainable investment also generates a profit.
“SRI is important because it’s the way of the future and because we make money off it. Also it attracts investors who normally wouldn’t invest in metals because it’s politically incorrect. Now we’ve given them a way were they can, and still feel good about making money.”
It’s worth noting that when the Global Sustainable Investment Alliance surveyed the entire sustainable investment industry in 2012, it revealed that Africa has the second highest relative proportion of SRI assets (35.2 percent), amounting to £153bn out of £9,091bn in total assets under management across Europe, the US, Canada, Africa, Asia, Australia and New Zealand. For many investors, this means that doing business in Africa also means doing it in a green and sustainable way.
The world’s leading smartphone maker has posted its first operating profit decline in nine quarters, owing to increased market competition and slowing momentum, most notably in emerging markets. However, Samsung‘s lacklustre mobile performance will likely be cushioned in the short-term by its buoyant television business, which is widely expected to pick up pace amid the World Cup period.
The company’s first quarter results were largely in keeping with forecasts, as group sales overall fell nine percent and net profits rose 5.9 percent year-on-year – equating to $7.3bn. However, ambitious projections at the beginning of the year were scaled back one month ago, as the market for high-end smartphones was discovered to have dropped off somewhat.
Samsung’s results contrast quite sharply with Apple’s, which exceeded analysts’ expectations last week, owing to unusually strong mobile performance
As a consequence, sales at the group’s IT and Mobile communications division plummeted four percent on the previous quarter. Investors will be keeping a close eye on Samsung’s mobile arm in the immediate future, given that it accounts for over half of the company’s overall profits.
Without any new products or major innovations to speak of, there was very little to drive Samsung Electronics’ profits forwards through the first quarter. The release of the company’s long-awaited curved and bendable displays, however, should spell the beginning of a positive stint for Samsung in the second quarter.
Samsung’s results contrast quite sharply with Apple’s, which exceeded analysts’ expectations last week, owing to unusually strong mobile performance. Sales of Samsung’s Galaxy S4 have slowed by quite some margin, with many consumers looking instead to the iPhone 5s and 5c, and Asian buyers opting instead for much cheaper models.
China is today the greatest opportunity for those in the mobile business, as consumers there look for an affordable though no less capable model of smartphone. With Apple having signed a deal with China Mobile, it looks as though Samsung’s efforts to occupy a large chunk of the market have taken a hit, courtesy of the California-based tech giant.
Oman’s Islamic banking sector is growing quickly, and institutions, such as Bank Nizwa, have seen the benefits of Sharia compliant operations in the region. World Finance talks to Dr Jamil El Jaroudi, CEO of the bank, about how Sharia compliance is developing in the Arab state, what is his organisation is doing to raise awareness of it.
World Finance: Dr Jamil, Bank Nizwa is Oman’s first dedicated Islamic bank, how is Islamic Finance growing in Oman, and how is this helping the country to develop?
Dr Jamil El Jaroudi: From the legal point of view, definitely it’s going faster than what we experience in other Gulf states, because it took a longer time there to evolve and develop. The difference here is that they’ve learned from previous experiences. However, on the market share, it takes a lot of time first of all, because you are lacking still the awareness of the audience. I mean, definitely, they like that, they wanted it, but it takes some time, so the percentages of growth were not as anticipated by the studies which were made early on. On the development side, it takes time for the role of Islamic banks to appear. Today they are taking only a share of the present market, because it will be shifting from one industry to another. However, when they get more and more involved into the core of any economy, like the SMEs, project finance, and trade finance, I’m sure that will take its position and share like any other state in the Gulf.
We’ve trained recently teachers, who are going to be teaching children about Islamic finance
World Finance: Well what challenges did you face during your inauguration?
Dr Jamil El Jaroudi: First of them was to create the awareness of the audience, it is not enough to want something, it is how to understand how this specialised industry works. Second challenge was that the regulator in general were a little bit conservative at the beginning, and that’s understandable, because they don’t want to introduce a new body into the banking sector without knowing its implications. And the third challenge would be in creating the infrastructure, especially on the IT systems. We started form scratch, and we had to a lot of users’ acceptances testing, UATs, for our systems. And most importantly is to train the people, because Oman has lot of good bankers in the conventional sector, but very few of them knew Islamic banking, because its still a new industry.
World Finance: Well what role does Bank Nizwa play in raising awareness for Islamic banking in the country?
Dr Jamil El Jaroudi: Basically, it doesn’t happen overnight. You have to go through, first of all, continuous seminars and many conferences. We had to go through the universities, because we believe also that the future is for the young generation, and we got some kind of strategic planning with the banking school in Oman, and also we invited an international university from Malaysia which is expert in Islamic finance to help us in training people. Also, we are relying on the media to help us in creating that awareness, and the Ministry of Education. We’ve trained recently teachers, who are going to be teaching children about Islamic finance. So it’s going to be a long process.
World Finance: Well what stage is Islamic Banking at compared to traditional banking in Oman?
Dr Jamil El Jaroudi: We are only one-year-old, we are the first Islamic bank, and then we were followed by another full-fledged Islamic bank, and there six conventional banks who opened windows. Still, collectively, we didn’t capture on the asset side more than around three percent of the market, but if you look at the incremental between 2012 and 2013, that represents 50 percent of the incremental market. On the liabilities side, the deposits, it was one percent representing 12 percent of the incremental in that year. So I’m sure that in three to five years the position of Oman will be like most of the Gulf states, between 15-20 percent of the total market will be captured by Islamic Finance.
[B]etween 15-20 percent of the total market will be captured by
Islamic Finance
World Finance: Well the Omani government has announced that it will issue a Sukuk in 2014 to cover the budget deficit. How are you preparing for this?
Dr Jamil El Jaroudi: We were the issuer of the first Sukuk issued in Oman for a private company, before the government decided to do that. So the way we prepared ourselves first of all is to get a licence for the investment banking, to be allowed in addition to the retail and commercial to do investment banking, which is the advisory services, under which you can underwrite for the Sukuk issues, which you can structure, and later on sell them to the market. I have a very good team also specialised in Sukuk, which we did issue it in other countries, be it in Bahrain, be it in Malaysia. We are very well prepared from that angle. And we are lining up also the other Islamic banks, I need to see how we can play a role collectively, either through somebody leading that or creating a syndication or strategic alliance. So we are very ready, waiting to know what are the government intentions, what type of Sukuk they want to issue, and the size we know about now, it’s going to be 200m Omani rial. This is as a start, and I’m sure that will continue later on as a sequence of issuance.
World Finance: Finally, what plans does Bank Nizwa have for expansion?
Dr Jamil El Jaroudi: We have a policy to say that we want to work before we run. So our objective first of all is to cover the Omani market as much as possible. We opened the first day with three branches, today we have seven branches, after one year. This quarter we will be opening another two branches, and maybe another four before the year ends, which will allow us to, as much as possible, cover Oman geographically. However, there are alternative channels we are going to consider soon. In certain areas you don’t have to open the same time of branches, you can open what we call alternative channels, like a kiosk or small branches, or use internet banking, telephone banking. So that will give us also access to certain cities. But our ultimate expansion plan is we want to be a global leading Islamic bank born in Oman.
While still relatively unloved and under-owned, Japan’s economy is looking to pick up in the coming years and catch up on the global earnings recovery. Investor capital has continued to pour into the Japanese hedge fund industry over the past few months as foreign investors show increasing interest for Japanese equities. The potential for earnings per share growth is looking greater than ever, according to BNY Mellon’s Japanese equity investment team.
Giving a broad overview of the Japanese economy, Miyuki Kashima, Head of Japanese Equity Investments at BNY Mellon Asset Management Japan, explained that she has “never felt this positive for the long term” during her near 30-year career running Japanese equities. She argued that even given last year’s equity rally, which saw Tokyo’s TOPIX index gain more than 50 percent in local currency terms, the market was a long way off its peak. “The market hasn’t caught up to the earnings recovery since the financial crisis,” Kashima said, adding that she expects a 10 percent growth in earnings in the coming financial year.
As such, BNY Mellon, like many other international firms, has recently launched two new funds investing in Japanese small- and all-cap equities. This comes at a time when global funds have put more than $150bn into Japanese investments – despite still being massively underweight on the asset class. However, as 2013 data from EFPR Nomura reveals, investors have been underweight since 2008, but in the past year sentiment has grown gradually positive and pushed inflows into record territory.
Bullish on Japanese equities The positive sentiments on Japan are also shared by other industry players such as Swiss & Global Asset Management, which is part of Switzerland-listed GAM Holding AG. The firm said in a recent outlook on Japanese equities that it expects double-digit annual profit growth for the asset class in 2014 and 15.
“Sustained currency weakness will continue to benefit most Japanese companies; a weaker yen will allow businesses to achieve an even higher level of profitability and will boost investment spending and wages. This will herald an end to deflation and boost the country’s economic growth,” the firm said in the paper.
North American FDI into Japan (net)
-$61m
2012
$1.4bn
2013
European FDI into Japan (net)
$893m
2012
$1.1bn
2013
Similarly, other global players have started investing in Japan and buying prime office locations in Tokyo and Yokohama. One example is Singapore-based investment manager Lotus Peak Capital, which recently launched a new fund of hedge funds product aimed at capitalising on Prime Minister Shinzō Abe’s economic growth strategy. The product will invest in 10 Japan-focused managers across different strategies, with a preference for equity markets.
“We did a fund of funds in order to have access to different sources of alpha. If you believe in the Japan recovery, you could buy an index tracker and wait – and that is fine, but probably fairly volatile – you are going to miss out on what we think is the really interesting story, which is the Third Arrow. Entire sectors of the economy need to be restructured, and that is where the alpha is,” said Managing Partner Stephane Pizzo, referring to the last leg of Japan’s current financial policy.
Abenomics to the fore This faith in the rebound of the Japanese economy comes down to two particular points, Kashima explained. First, and most importantly, the country is experiencing a rare period of political stability, as the Prime Minister’s so-called ‘Abenomics’ looks to end deflation quickly by setting a target of two percent inflation to support a target of two percent real GDP growth.
Second, and as a result of this policy, public opinion on the Japanese economy is shifting, as Japanese investors, who had previously lost all faith in their own products, are slowly returning to the domestic market. As such, Japanese funds enjoyed $150bn in inflows during 2013, primarily boosted by foreign investors, yet with another $200bn needed for Japanese allocations to reach a neutral standpoint, there’s room for growth fuelled by domestic investors, explained Kashima.
Japan is coming out of a vicious deflationary cycle, and the national loan-deposit ratio remains at 60 percent – its lowest point in over 30 years, according to the Bank of Japan. With ample room to encourage lending, the potential for significant recovery is substantial, yet local companies have only just started borrowing again, as Abenomics begins to have a positive effect.
So far, the policy has helped fuel the yen’s depreciation against the dollar by more than 20 percent over the last year; increased availability of low-cost debt from Japan’s domestic banks; an attractive real estate yield spread over treasuries; and low rents and land prices across major Japanese cities.
As a result, Japan is back in the spotlight for international real estate investors. Recent surveys indicate that Japan was the third most active market globally in 2013 after the US and the UK, with transaction volumes of approximately $40bn, the highest since the financial crisis and an almost 70 percent increase from 2012. In addition, Tokyo is currently viewed as the top city in the Asia-Pacific region for real estate investment.
This has prompted a noticeable increase in activity from foreign institutional investors, including private and sovereign funds from the US, Europe, the Middle East and Asia (see Fig. 1) and, as a consequence, the burgeoning Japanese recovery is largely fuelled by global, long-term investors.
Cracking Japan
In this respect, 2014 could be a very good year for foreign investment managers looking to enter the Japanese market, as more local firms start awarding mandates to international players. As mentioned, this comes at a time when general interest in Japanese investments is picking up and the need for expertise on the market continues to grow.
In a joint study on asset management in Japan by Cerrulli Associates and the Nomura Research Institute, it was revealed that sub-advised funds accounted for 65 percent of investment trust assets under management as of 30 June 2013 – up from 61 percent in 2008.
Sub-advisory mandates, which take the form of either a discretionary mandate or a fund of funds brief, offer opportunities for foreign managers, especially in areas like foreign equity and foreign real estate investment trusts, where sub-advised funds account for over 90 percent of assets under management. To this end, the report indicated that the greater willingness of Japanese firms to do deals with foreign players should encourage Western private banks that have in the past found the Japanese market tough to crack.
“Foreign managers wanting to break into the Japanese market as a sub-advisor should target their sales activities at major investment trust companies as well as pension funds. It is crucial for foreign firms to ensure that these institutions are aware of where their expertise lies as they are on the lookout for distinctive asset managers from around the world,” said Sadayuki Horie, Senior Researcher at Nomura Research Institute.
Long-term gains When asked whether Japan will contract along with Asian emerging markets such as China and India, Kashima insisted that money would not be pulling out of Japan, “because Japan never enjoyed money inflows post-crisis like China did. If anything, money should flow in,” she explained.
This claim is strengthened by a recent report from global hedge fund researcher HFR, which revealed that the HFRX Japan Index saw strong performance in the last quarter of 2013, as it gained six percent, ending 2013 up 32.8 percent. Asian capital inflows were led by allocations into Japanese-focused hedge funds standing at a total of $4.5bn in inflows for the asset class. This stands in stark contrast to Pan-Asian flows, which only reached $2.9bn, signalling that Japan is clearly outperforming the region.
In addition, Swiss and Global said that it expects profits in industrialised countries like Japan to approach pre-crisis levels. “We also expect comparable price gains in equity markets in the long term, with Japan rising in line with other developed markets,” the firm explained, adding that investors should focus on internet firms and market leaders, where there are payoffs to be found, even in the short term.
That said, though there is potential for the Japanese economy to truly pick up, it is not going to happen overnight, Kashima concluded: “This is a long-term recovery. At the current loan-to-deposit ratio of just 60 percent, Japanese banks have ample room to extend loans, but it will take time for companies to start borrowing again. So this so-called multiply effect that we’re expecting to see has five to 10 years’ potential.”
Arabica coffee futures – the most popular variety of the beans consumed globally – have increased close to 90 percent in the past year to fetch the highest prices in over two years. Driving the increases is a spread of a disease in Central American crops, but, more crucially, a severe drought in Brazil has hit production.
Brazil produces close to 40 percent of the world’s Arabica beans, and certain regions such as Minas Gerais, which produces close to a quarter of the country’s beans, have had only a tenth of average rainfalls during the wet season.
“Data from 68 meteorological stations and 264 rain gauges tell us that the climate in Minas Gerais is changing”, said Coffee & Climate in a recent report. “Nearly all parts of the state experienced significant warming over the 1960-2011 period, with warm extremes increasing and cold extremes decreasing.”
Other coffee producing nations have also faced abnormal weather, and unseasonably cold weather has severely damaged crops in Vietnam, the world’s second largest coffee grower. Draught has also plagued other growing nations in South East Asia.
Central American coffee growers have also been affected by adverse weather, but in a different way. The spread of leaf rust, a fungus that ravishes crops, is said to be linked to climate change and the current outbreak has been the worst in four decades.
[I]f adverse conditions do not improve, price raises at the consumer end will
be inevitable
In Panama, the most severely hit country in the region, 86 percent of coffee plantations have been affected by the disease, while 74 percent of crops in El Salvador have been affected, according to the International Coffee Organisation (ICO).
“The loss in coffee production in Central America for this crop year, 2014, is estimated at $250 million,” Mauricio Galindo, head of operations at the ICO told Thomson Reuters Foundation. “Scientists close to the ICO link the fungus to climate change, which is causing higher temperatures and increased precipitation. Coffee leaf rust thrives in these conditions.”
According to Eco-Business, it is unlikely that consumers will face any significant price hikes this year, as “most big coffee houses tend to buy on what’s called the futures market – locking in a set price for their goods, often for years in advance. Traders are also holding large stockpiles of beans after a bumper harvest last year.”
However, if adverse conditions do not improve, price raises at the consumer end will be inevitable.
“People are realising every day that there’s damage, and that the losses will be hard to quantify,” Hernando de la Roche, a senior vice president at INTL FCStone in Miami, told Bloomberg. “Traders are jittery because of the uncertainty about the Brazilian harvest and what it would mean to world supplies.”
In what’s likely to be a plea to the shareholders of AstraZeneca, US drugs manufacturer Pfizer has announced it made a tentative approach to the British firm’s board in January that was rebuffed. Pfizer says that due to market conditions it is looking to discuss a takeover with the company again.
However, AstraZeneca’s board has once again declined to engage with Pfizer. The American firm is likely announcing its intentions in the hope that shareholders will be tempted to pressure the board to accept the proposal. The deal, if approved, would be one of the largest in the history of the pharmaceutical industry. The bid Pfizer made in January valued AstraZeneca at around £58.8bn. The current biggest deal in the industry’s history was Pfizer’s $111.8bn acquisition of Warner-Lambert in 2000.
The deal, if approved, would be one of the largest in the history of the pharmaceutical industry
In a statement, Pfizer’s CEO and Chairman Ian Read said the potential combination of the two firms would create value for both shareholders and patients. “The combination of Pfizer and AstraZeneca could further enhance the ability to create value for shareholders of both companies and bring an expanded portfolio of important treatments to patients. A potential combination with AstraZeneca aligns with Pfizer’s current structure and fully supports its existing strategy to build world-class businesses.”
He added that in light of the latest rejection they would be considering their options. However, under UK rules it has until May 26 to announce a firm intention to bid for AstraZeneca or end its interest. Last week AstraZeneca’s CEO, Pascal Soriot, announced his intention to sell or spin-off a number of non-core assets for around $15bn. The move came after a number of years of struggles that have seen sales tumble.
Soriot has been particularly dismissive of the potential for a merger, instead hoping that refocusing the firms operations would restore it to profitability. He told reporters last week, “Large acquisitions sometimes can work but sometimes they are very disruptive, so I think we are better off focusing on what we do well and partnering in other areas.”
Despite this scepticism from the board, Pfizer is hoping that it can get control of an important part of the European pharmaceutical industry. Read added in his statement that the scientific research by AstraZeneca would fit well with his firms operations. “We have great respect for AstraZeneca and its proud heritage as an innovation-driven biopharmaceutical business with a rich science-based foundation in both the UK and Sweden. In addition, the UK has created attractive incentives for companies to manufacture products and maintain and protect intellectual property, and we have seen that capital and jobs have followed these types of incentives.
“We believe patients all over the globe would benefit from our shared commitment to R&D, which is critical to the future success of the pharmaceutical industry, in the form of potential new therapies that help to fight some of the world’s most feared diseases, such as cancer.”
In 2012, the world’s second-largest mining company, Rio Tinto, reported a multibillion-dollar loss after CEO Tom Albanese made several expensive and unprofitable acquisitions. With haste, Rio’s board made tough decisions in order to get the firm back on track. Sam Walsh, then chief executive of Iron Ore, was called upon to get Rio Tinto firmly back in the black.
His calm and assured leadership style has put balance in to the company, which was reeling after the dramatic change in leadership and massive write-downs. Essentially, this is what it’s all about for Sam Walsh, who heralds finding the right balance as key to running any company.
Walsh replaced Tom Albanese as Rio’s Chief Executive in January 2013 when the group announced plans for a $14bn write-down after the takeover of Mozambique coal miner, Riversdale, which included a $11bn write-down on the value of its aluminium division.
This followed a major expansion of the division in 2007, when Albanese paid a whopping $38bn for Canadian aluminium manufacturer Alcan, at a time when the market was booming.
Albanese stepped down after the industry halted and the write-downs following his spending spree lead to shocked board reactions, as well as media reports that the firm had “lost its way”. “A write-down of this scale in relation to the relatively recent Mozambique acquisition is unacceptable,” said Chairman Jan du Plessis at the time. “We are also deeply disappointed to have to take a further substantial write-down in our aluminium businesses.”
Tom Albanese, former CEO of Rio Tinto. He stepped down in January 2013
Walsh was on holiday with his wife, Leanne, staying at the Raffles Hotel in Singapore when he got the call. He had been running the company’s iron ore business since 2004 and served as a Rio Tinto board director. Happy in Perth, he wasn’t looking for a promotion, when a swath of emails beckoned him to an emergency board meeting in London. Replacing his Hawaiian shirt with a tailor-made suit, Walsh got on a plane and was appointed chief executive within a few days.
“When I was asked to take on the role as chief executive of Rio Tinto, it was under pretty difficult circumstances,” Walsh said in a recent speech at the Australian-British Chamber of Commerce in Perth. “Put frankly, there was a crisis of cash and a crisis of confidence that permeated both inside and outside the firm”.
Up until then, Walsh had successfully run the firm’s Pilbara iron ore operations, fostering expansion and innovation. In the six months to June 30 last year, the iron ore business accounted for almost 90 percent of Rio Tinto’s earnings, as Chinese appetite for iron had boosted growth significantly. He was also responsible for the introduction of 150 driverless trucks, which are controlled from an operations centre in Perth, as well as the planned automation of a Pilbara railway system.
However, this was no guarantee that Walsh could turn around the firm’s sinking profits. Nevertheless, this is exactly what he did.
Shareholder approval
In his first year at the helm, Walsh brought Rio Tinto’s annual earnings to a $3.7bn profit after the $3bn loss in 2012. Through a more cautious business development tactic than that of Albanese, the CEO managed $2.3bn in cost savings – exceeding his $2bn target – as well as simplifying the business, divesting non-core assets, reducing capital and refocusing the business to what, in his words, matters: “delivering value to shareholders.”
Rio Tinto timeline
June 9, 2009
Pressure mounts with Chinalco’s President Xiao Yaqing after Albanese abandons the $19.5bn fundraising deal for a $15.2bn joint venture with BHP.
April 7, 2011
Rio Tinto takes control of Australian coal miner Riversdale Mining for $1.1bn.
November 29, 2012
Rio Tinto announces cost reductions by more than $5bn over the next two years and lower spending on exploration in an attempt to “roll back” unsustainable cost increases.
January 16, 2013
Tom Albanese steps down as CEO of Rio Tinto after a $14bn writedown.
January 17, 2013
Sam Walsh is appointed as the new CEO of Rio Tinto.
August 8, 2013
Rio Tinto announces operating cost reductions of $977m and a half-year profit of $1.7bn.
January 17, 2014
Rio Tinto breaks company records, producing 266 million tonnes of iron ore.
February 13, 2014
Rio Tinto unveils a $3.7bn earnings profit up from 2012s $3bn earnings loss.
“There was a lot to do and none more important than to provide a sense of direction and steady the ship,” Walsh said, when discussing his approach to the challenge. At the beginning of his tenure, Walsh said he would cut exploration and development costs by $750m – he ended up slashing them by $1bn, while also pulling capital expenditure down from more than $17.5bn to $13bn. However, it remains to be seen whether cutting exploration to this extent is a long-term benefit, as the firm remains overly dependent on iron ore and continues to reign in and divest Albanese’s diversification efforts.
Walsh’s strategy also involved a bold headcount reduction of 4,000 across the group’s managed operations, as well as 3,300 roles leaving the group through divested businesses. Rio Tinto’s financial results were also bolstered by strong operational performance as iron ore, bauxite and thermal coal set annual production records.
Finally, Walsh re-shaped the aforementioned aluminium business by closing, curtailing or divesting six non-core aluminium assets, including the suspension of production at the Gove alumina refinery to focus on more profitable bauxite operations.
The turnaround, and especially the divesting of bad businesses such as its African and Australian coal-mining units, even prompted shareholders to increase their stakes in the company. “We have been encouraged by the changes in Rio. They are focusing more on running the business for shareholders. They had those excursions into Alcan, Mozambique and elsewhere that really torched a lot of shareholder value, so we’ve welcomed the changes and would be prepared to add to our holding when we saw appropriate opportunities,” said Ross Barker, Managing Director of the Australian Foundation Investment Company, and a stakeholder of Rio Tinto, in an interview with The Sydney Morning Herald.
Walsh, a major supporter of the arts, said his successful leadership strategy all came down to finding the right balance for Rio Tinto. A strategy which, just like his favourite Puccini operas, has three parts.
“Many of the problems in failing businesses today have come because they fell out of balance. This is partly why we lost our way at Rio Tinto in 2012 – because we focused too much on growth and not enough on value, and because we focused too much on capturing the tonnes, while not focusing on the cash flow. So my personal mission is to transform our business to find the right balance between shareholders and stakeholders, employees and customers, assets and liabilities,” said Walsh.
His three-pronged strategy is based on identifying and dealing with points of tension within a business. He suggests that it’s all about retaining perspective, while focus is critical, when trying to get a business back on its feet. To this end, the first possible point of tension is that between “business as usual” and innovation.
Walsh himself has been known for his innovative projects – having helped create the high-tech Rio Tinto operations centre in Perth, a mine automation centre based on robotic technology, as well as future innovations – which will help push the firm towards the ‘mine of the future’.
“The choice for business in today’s fast-paced world is between innovation and stagnation. Finding a balance in this is how you truly find your competitive edge – not through reckless innovation, but targeted innovation. I’m talking about continued learning, incremental changes and measured transformation,” explains Walsh.
The second point of tension is between enthusiasm and experience, says Walsh, arguing that it’s crucial to strike the right balance between learning and tradition, especially nowadays where firms have a much flatter structure than the traditional hierarchy of previous years. “I love diversity of opinion. Ensuring that when things are being discussed, there’s a diverse range of perspectives around the table,” the CEO explains.
Those next in line
To this end, Walsh has ensured that he is surrounded by a strong leadership team. At 64, he is not ready to retire and recently told The Wall Street Journal that he intends to remain as the CEO of Rio Tinto for longer than his contract stipulates, should the board wish so. However, Walsh also said he would be happy to hand over to a better candidate after three years, if the board preferred that outcome.
Walsh speaks at Rio Tinto’s Annual General Meeting
Arguably, Rio Tinto’s Chief Financial Officer Chris Lynch could be next in line. The former BHP Billiton CFO and Transurban CEO, was hired by Walsh in February last year and has played a key role in the turnaround of Rio Tinto’s finances. However, Andrew Harding, the executive who moved across from Rio’s copper group to run its iron ore business is considered to be Walsh’s protégé, and could very well take over the business should the board want a change of leadership.
Sam Walsh CV
1971
Senior roles at General Motors
1986
Management at Nissan Australia
1991
Managing Director, Iron, Steel and Aluminium Foundries, Rio Tinto
1994
Managing Director of Sales and Marketing, Iron Ore, Rio Tinto
1997
Managing Director of Operations, Iron Ore, Rio Tinto
2000
Vice President of Rio Tinto Iron Ore
2001
CEO< Aluminium Group of Rio Tinto
2004
CEO, Iron Ore at Rio Tinto
2009
CEO, Iron Ore and Australia, Rio Tinto
2013
CEO, Rio Tinto Group
To this extent, Walsh has been praised for having put such a strong leadership team in place, which he himself considers imperative to running a strong business. His strategy has therefore been to ensure that leadership talent runs throughout Rio Tinto.
“I particularly like that Sam has put the next generation of leaders in positions where they can demonstrate their capability,’’ said former Rio Tinto Chief Executive and current Qantas Chairman, Leigh Clifford to The Sydney Morning Herald, when commenting on Walsh’s positioning of Rio’s future talent.
Walsh also hopes that this proliferation of talent and ideas will ensure that mistakes of a certain magnitude won’t happen again. This follows the financial impact after former CEO Tom Albanese in his eagerness to grow the firm made some poor purchases at a time when the market price was far above their real value.
“It’s about making sure that there is a balance between differing perspectives. So that one person can’t wake up with a huge idea in the bath one morning and then put it into practice and it costs the company billions. We need proper checks and balances,” said Walsh. In this respect, it’s clear that Walsh, who has spent more than 23 years at Rio Tinto, cares about the firm, its employees and its shareholders. This is also why he claims that the third point of tension that any leader should be aware of, is trying to keep a balance between head and heart, between rational processing and emotional commitment.
“You need to care passionately about what you’re doing in order to give your best. This is true at every level in business and life,” said Walsh. At Rio Tinto, Walsh has worked hard to generate passion about the firm and increase focus on the company’s values. A key point has been to improve the firm’s CSR strategies in order to change the destructive view of mining, implement better security for its employees and improve the firm’s initiatives on environmentally friendly production.
“He’s advocated a change in thinking so that Rio Tinto’s business is now more about prime assets, logistics, efficiencies, and treating the business with a sense of ownership,” commented Nic Tole, a leading energy and resources lawyer, who has advised Rio Tinto on several occasions. Walsh has implemented a shift in culture in order to get his 66,000 employees to view themselves as Rio’s shareholders and treat the company’s money as if it is their own.
“It’s about every single employee acting as if they’re owners. It sounds trite, but I’ve had people say, ‘If it were my business I wouldn’t be doing it.’ And I say, ‘Well, we’re not going to do it then,” Walsh told The Australian in January.
Challenges to overcome
In this respect, Walsh may very well rely on his employees and management team when facing the challenges ahead. Having achieved the financial goals set out for him, one could think that the intense cost-cutting strategy would be put aside. However, Walsh maintains that the job isn’t done yet. For 2014 the CEO hopes to cut annual costs by $3bn and reduce capital expenditure down to $11bn in 2014 and $8bn in 2015. Debt reduction will also remain a priority and furthermore, Walsh is working to restrict the demand Rio’s big divisions can make on resources.
The firm’s finances aside, there is one other major issue that might require the CEO’s focus in the coming year. With little critique of Walsh’s first year at the helm, shareholders and industry commentators have questioned Rio’s dependence on the iron ore business.
Currently supplying 90 percent of the firm’s overall earnings, the business is integral to the group’s future success. Aside from the record production of 266 million tonnes of iron ore in 2013, Rio’s management expects to increase this to 290 million tonnes by the third quarter of 2014, with a target of 330 million tonnes by 2015.
However, concerns about a slow-down in China’s economic growth along with geo-political developments in Crimea have seen the price of iron ore deteriorate, experiencing the largest price drop in one day in March, in more than four years (see Fig. 1). With Rio Tinto’s earnings still dominated by iron ore, shareholders like Aberdeen Asset Management have warned that things could get tougher.
‘’From now on the shape of that iron ore price curve is going to be critical to them. That’s one of the things we’ve been focusing on here as well,’’ said the Senior Investment Manager Andrew Preston. Similarly, analysts at JP Morgan said that iron ore price volatility is something to watch out for, but that it maintains an overweight stance on Rio Tinto.
That said, under Walsh’s leadership, shareholders are happy, the business is thriving, a solid management team is in place and production targets continue to be met. As such, Rio Tinto’s 2014 and the years to come could prove very interesting.
Rio Tinto in pictures
A truck at a gold and copper mine which is operated by Rio TintoHigh grade iron ore is loaded at a mine in Western Australia’s Pilbara regionA worker helps conduct a pour at Rio Tinto’s plant, Perth, AustraliaCape Lambert, an Australian sea port for exporting iron ore operated by Rio TintoThe worlds largest iron ore carrier, the Berge Stahl, is docked at the Rio Tinto port of Dampier, Western AustraliaRio Tinto’s Western Australian Pilbara rail network, the largest privately-owned rail system in the worldIron ore is transported at Rio Tinto’s Perth plant, Australia
Excluding the country’s typically volatile fresh food prices, Japan’s consumer prices rose 1.3 percent year-on-year and have somewhat reaffirmed the effectiveness of the country’s recent tax hike in boosting inflation.
The consumer price results should be seen as a success for the BoJ
The anti-deflationary results are most pronounced in Tokyo, where preliminary data suggests that consumer prices have surged some 2.7 percent year-on-year in April, signalling an impressive gain on the one percent equivalent a month previous.
Above all, the results show that Japan’s April tax hike is having the desired effect in terms of averting the deflationary trappings.
The results come hot on the tail of Japan’s contentious tax hike, which saw the powers that be bump up the sales tax from five to eight percent at the beginning of April. Although the vast majority of Japanese consumers greeted the rise with skepticism, the country’s central bank estimates that the rise will tag an additional 1.7 percentage points to April’s consumer inflation rate.
The consumer price results should be seen as a success for the BoJ, who have again succeeded in ridding the customarily volatile economy of its deflationary tendencies. What’s more, consumer price inflation illustrates the competency of Japanese business owners, who have succeeded in passing along the added expenditure to consumers; calming the nerves of some who feared they might not.
Now that the economy has set itself straight on the road to inflation, the question today is whether or not companies will raise wages to accommodate. Figures show that wages in real terms, as of February, fell 1.9 percent year-on-year, which suggests that businesses are yet to reward the BoJ’s efforts with any wage increases.
Shinzo Abe has taken pains to make clear the merits of companies raising wages, however, many remain unwilling to instigate a rise until the country consistently reaches its two percent inflation target.
Iran’s efforts to boost its sanctions-battered economy have forced it to slash the generous subsidies it offers for domestic petroleum. The move caused a massive jump in prices of as much as 75 percent, although the price of $0.28 a litre is still comparatively low compared to the rest of the world.
Iran’s petrol subsidies were designed to placate citizens hit by sanctions imposed by western leaders over the country’s nuclear ambitions. The rise in price will not prove popular with the public, despite relations between Iran and the West improving, as petrol has reportedly been cheaper than bottled water.
The rise in price will not prove popular with the public…as petrol has reportedly been cheaper than bottled water
This move has been planned for a number of months, however, Interior Minister Abdolreza Rahmani Fazli told IRNA, Iran’s state news agency. “We have been preparing for two months to implement these plans in provinces, cities and rural areas. Considering the planning, it is expected that the second phase of target subsidies will take place without any problems or displeasure from people”, he said.
President Hassan Rouhani believes cutting the petrol subsidies is a necessary move in order to get the economy back on track. With unemployment figures at around 25 percent, Rouhani is desperate to find money to help bolster job prospects. Relations with the US and other western leaders have softened after the historic Geneva deal last year saw sanctions loosened in return for a halt on developing nuclear power.
The IMF said recently that despite Iran’s economy shrinking by 1.7 percent in 2013, 2014 would represent a recovery for the country as a result of the sanctions deal. Masood Ahmed, the IMF’s Director for the Middle East and Central Asia, said that he believed the economy would boom after stabilising this year.
Ahmed said that, depending on the domestic and international political situation, things are looking up for the country. “These projections are dependent both on the progress in dealing with policy issues within Iran but also on what happens in terms of the international environment within which Iran is working.
“And we do think that if there is a permanent improvement in that international environment, if there is a set of policy measures on which the Iranian authorities have begun to embark that are followed through, this should have an impact in terms of generating growth rates in the medium term that are substantially higher than the numbers that we are looking for.”
Though 105 million tonnes of bananas are consumed each year, the banana industry barely gets a second thought from most consumers. So when Fyffes and Chiquita merged into a powerful banana conglomerate recently, not a lot of people paused to consider what it would do to everyone’s favourite snack. However, the recently founded ChiquitaFyffes will have annual revenues of $4.6bn according to projections, making the deal much more than just monkey business.
The banana industry is huge not only in volumes of exports, but also in the way it affects national economies. Entire countries in the Caribbean and Latin America revolve around the farming and distribution of bananas, which makes the Fyffes Chiquita merger incredibly significant.
Together, these two companies will employ over 32,000 people in over 70 countries, and will have a market value exceeding £1bn. They also have a combined history that has essentially shaped the banana industry into what it is today.
Fyffes, based in Dublin, was the first company to import bananas into London in the late 19th century, and remains Europe’s largest distributor of the product. Chiquita, based in North Carolina, largely distributes to North America. The new company, ChiquitaFyffes, will dominate around 14 percent of the global market.
The merger also marks a highly significant moment in the banana industry. For years the industry has been blighted by political scandal, and held back by low market prices. But as the two biggest banana players join forces, they hope to challenge these norms.
“The combined company will… be able to provide customers with a more diverse product mix and choice,” said Ed Lonergan, Chiquita’s CEO. “This is a milestone transaction for Chiquita and Fyffes that brings together the best of both companies which, we believe, will create significant value for our shareholders and offer immediate benefits for customers and consumers worldwide. This is a natural strategic partnership that combines two complementary companies of long history and great reputations that have built upon an unwavering commitment to exceed our customers’ expectations. We will maintain our brands, all of which are valued by both customers and consumers.”
The business of bananas Though the merger is nothing short of Homeric in proportions, so too are the challenges the new company will face. The global market for bananas is held back by the simple fact that consumers are just not willing to shell out the big bucks for the product, excepting small premiums for a Fairtrade or organic label. The trouble is that despite the fairly low production costs, a banana price war between supermarkets and other retailers has meant the banana producers have been operating at a loss.
The global market for bananas is held back by the simple fact that consumers are just not willing to shell out the big bucks for
the product
Fairtrade International, the company behind the blue label so many shoppers look for in their products, estimates that only about 20 percent of the prices paid by consumers for bananas make it back to exporting countries. And as supermarkets and wholesalers continue to keep the price low, banana producers often lose out.
Five corporations control around 80 percent of the bananas produced globally. Often, small independent banana producers are forced to sell their crops to the likes of Fyffes and Chiquita at extremely low rates, or risk not being able to shift the produce in the export market.
But larger distributors have still managed to keep their businesses profitable; just a few weeks before the merger was announced, Fyffes revealed its before tax profits for 2013 were up 9.8 percent to €28.7m. And though the company trades other fruits as well, it describes profits in its banana division as “broadly satisfactory”, though there had been a drop from 2012.
Fyffes is by far the smallest of the major banana players, with Chiquita, Dole Food Company and Fresh Del Monte trading significantly more fruit per year; but the merger will mean that ChiquitaFyffes, when it is fully operational, will be a true force to be reckoned with.
At the moment the two companies do not compete for market share as they operated in different North American and European markets, but as they pool their resources, the new enterprise will emerge head and shoulders ahead of its competitors globally, and dominate sales in both Europe and the US.
“The first three [companies] on a global scale are not too far away from each other, whereas Fyffes was a good deal smaller. Now a firm number one has been created, there will be some impetus for further consolidation in the sector,” David Holohan, analyst at Merrion Stockbrokers, told the BBC.
Chiquita EBITDA
$70m
2012
$118m
2013
But being big does not necessarily mean that ChiquitaFyffes will be immune to some of the issues facing the industry. What the new company will be able to do, however, is to shift the wind in its direction. By combining operations, the new company will have more streamlined operations than either of its predecessors could have hoped for, and is expected to generate at least $40m a year in synergies as early as 2016.
Savings will come primarily from logistics and procurement, according to a Chiquita review of the merger. “Uniting two leading companies in the produce industry enhances scale, scope and portfolio diversity: upon completion of the transaction, the combined company will become the leading global banana and other fresh produce company with greater scale and efficiency,” it reads.
“As part of a larger, more diversified organisation, on the basis of current volumes, ChiquitaFyffes will become the largest global entity in the banana category with sales of more than 160 million boxes annually. The company will maintain its significant presence in the packaged salads and healthy snacks category. The company will also have stronger positions in the melon and pineapple market segments as the number one importer in the US and number three distributor globally, respectively.”
Crop killer However, although demand remains high, ChiquitaFyffes will be born in the midst of the most serious threat the banana industry has ever faced: Black Sigatoka. The virus has been spreading across the Caribbean and towards South America for some time, leaving behind nothing but ravaged plantations. The global collective appetite for the larger, sweeter banana varieties means these are almost exclusively cultivated in monocultures that span millions of hectares across Latin America, leaving the crops particularly vulnerable to diseases and plagues.
In the 1950s, a fungus known as Panama Disease completely wiped away what was then the world’s favourite banana: the Gros Michel. However, before all commercial varieties were wiped out, growers managed to breed the Cavendish – the banana we still eat today. Compared to the Gros Michel, the Cavendish is smaller and less flavoursome. It is also more fragile and must be exported more carefully in refrigerated containers, but it has still grown to account for close to 95 percent of banana exports globally.
Farmers have resorted to spraying crops weekly, which increases costs considerably. Soon, even highly concentrated doses will no longer be enough
And now it is under threat from yet another fungus. Black Sigatoka has proven itself curiously resistant to the fungicides already widely deployed in banana plantations. Farmers have resorted to spraying crops weekly, which increases costs considerably. Soon, even highly concentrated doses will no longer be enough.
Bananas today are seedless clones, the species propagated by replanting cuttings of successful trees. This method of planting has been cheap and efficient for many years, but has also left almost the entire global export bananas susceptible to the same disease.
Huge amounts of resources will have to be invested in research and development in the coming months and years in order to breed another, even more resilient, variety, and even then there are no guarantees.
In many ways the merger has been an attempt to address some of these issues. By pooling the resources of its constituent companies, ChiquitaFyffes will be much better positioned to find alternative ways to deal with the dangers facing the industry. Though Fyffes was the smaller company going into the deal, it has retained the bulk of the executive roles according to the Chiquita review of the merger. David McCann, currently the Fyffe Executive Chairman, will assume the role of CEO in the new company, bringing with him Tom Murphy and Coen Bos as Finance Director and COO respectively. Lonergan will take the helm as chairman.
Though the deal is still pending approval from US and EU regulators, McCann is not mincing his optimism. “This deal will be transformative and offer exciting opportunities for the new business. We are looking forward to working with the Chiquita team to build a combined company, which is well positioned to succeed in our highly competitive marketplace and which will create significant value for our shareholders.
“Our outstanding employees will benefit from working for a larger, more diverse business, which offers opportunities for growth. We believe we will be able to use our joint expertise, complementary assets and geographic coverage to develop a business that can run smoothly and efficiently to better partner with our customers and suppliers.”
For such a small country, Qatar has been punching above its weight in recent years. This includes spreading its economic influence into global investment strategies. Ahmad Meshari, Acting CEO of Qatar First Bank, shares his insight on the Gulf state’s significant potential.
World Finance: What is the proportion of local versus foreign national customers at your bank?
Ahmad Meshari: We are based in Qatar, all despite the fact that Qatar is a small country but it has a huge potential of investments, so banks are taking advantage of that amount of money which has been allocated for the development of the country over the coming ten years. So the majority of our clients are Qatari, both individuals and companies. However, we have an investor base which is composed of GCC based individuals and institutions, so we have that kind of mix between GCC and local investors.
World Finance: Tell me a little more about some of the international companies setting up shop on Qatar.
Ahmad Meshari: So Qatar is one of the fastest growing economies in the world, the GDP per capita is $98,000. The real GDP growth is forecast to reach 6.8 percent, so that gives an indication of how the economy is vibrant, and how the economy is very strong in Qatar. That made Qatar and positioned it as the right place to invest, and the establishment of Qatar Financial Centre in 2007 made Qatar an attractive place to have offices for international companies to come to the country, to have an onshore platform to do the investment from their side. There are a lot of names coming in the financial sector at least: JP Morgan, CitiBank, and the rest of the big players in the banking industry worldwide.
World Finance: Ahmad, many Gulf banks have been pursuing investment opportunities overseas, especially since the 2008 financial crisis, in some cases even replacing European banks as investors. Now have you seen that with your own clientele?
We embarked on some investments in the UK, because we saw they were very attractive and very profitable to the bank
Ahmad Meshari: I’ll talk from our own side, as a bank. So Qatar First Bank has a focused strategy, on the geographical distribution of its investment, and also the sector’s. We focus mainly on the GCC, the MENA region, and Turkey. However, we embarked on some investments in the UK, because we saw they were very attractive and very profitable to the bank, and the real estate sector because it’s a prime location, residential properties which makes sense to go an invest in because of the high demand of those kind of properties in London.
World Finance: Can you tell me which sectors you intend on expanding investment opportunities in the future?
Ahmad Meshari: We have, again, a focused strategy on the sectors that we invest in, so we focus mainly on energy, health, real estate of course, and industrial sectors. To the geographical distribution, again, GCC, MENA, and Turkey.
World Finance: Now when people think of Qatar, oil wealth obviously comes to mind. Can you tell me what role has the oil industry played in strengthening the local banking sector?
Ahmad Meshari: The Qatari government has put a high level commitment to create a competitive economy in the country, and to wisely utilise the wealth which is generated from the energy sector to build up a proper platform and structure for all industries to build on, and to develop on. Part of that, of course, is the financial sector. So banks are enjoying a full support from the government to ensure the stability of the banking sector.
World Finance: Other than oil, what other sectors is the government exploring locally?
Ahmad Meshari: Qatar has utilised the wealth which has been generated from the energy sector to diversify its economy. You can see Qatar has established Qatar Investment Authority, which built the fortune of the country for new generations and to take the focus away from the oil-driven economy. Through diversification, stepping into different sectors, you can see Qatar investing here in the UK by buying a lot of investments.
One example is the Harrods acquisition by Qatari government, and in the rest of Europe acquired automobile manufacturing, luxury items, so the government is having this focus to diversify its economy from being driven by a single source of wealth into the diversified model.
World Finance: Europe is slowly recovering from the 2008 recession. Do you have any advice for the local banking sector in terms of how to encourage people to spend and invest?
Ahmad Meshari: As a banker in general I should think beyond the profit generation out of the client. So they should go more on the educational side of their clients, because with this, clients will be more educated, and they will pick the right products, and they will even ask for the right products, and they will have the theme of saving. So this will reflect positively on the banking sector. And they need also to adopt new models of doing business in the sector.
