Year: 2016

Insurance firms must be quick to adapt to changing consumer expectations

Posted on by Helen

The European insurance industry has been through a challenging few years; pressure is being applied to both the assets insurers manage and their capability to ensure returns on investments. In this difficult environment of negative interest rates and greater customer expectations, insurers are finding they need to innovate in order to survive.

Whereas insurers were once able to count on their cash to be a steady revenue stream, the highly challenging global economic climate has proven to be a risky environment in which to invest. Adding to insurer’s difficulties was the introduction of the European Union’s Solvency II regulations at the beginning of this year. They are a stringent set of rules governing capital requirements and the levels of risk insurers are able to expose themselves to. While designed to give customers extra confidence in insurers and modernise the way regulators supervise the industry, they have made competition a far more challenging task.

It is clear that not all companies will survive the current climate

In order to remain competitive, insurers are finding ways to offer more compelling products that can meet the changing expectations of customers. With Millennials expecting a more immediate and dynamic service from their insurers, some companies are struggling to modernise their offerings. This is a particular challenge for insurers who are still relying on outdated and inefficient data systems. In 2016, modernisation has become the key to survival.

Despite the challenges, the sector is presenting significant opportunities as well. World Finance had the opportunity to speak to Pekka Luukkanen, CEO of Nordea Life Finland, about Finland’s insurance sector, and how the company is taking advantage of digital technologies to stay ahead of competitors.

What are the biggest challenges for the insurance business?
European companies have been struggling with initially low and now negative interest rates for almost eight years. It is clear that not all companies will survive the current climate, especially since forecasts show that no significant changes to interest rates are to be expected in the next few years. The companies that have been unable to adapt in time, or have done the same thing for too long, are now in trouble. Unfortunately, the number of these companies is set to grow in the near future. An alternative scenario is that EU-wide insurance sector regulations will be loosened with the aim of providing relief to some companies. This would not be an easy decision: neither is it a desired development.

In general, it can be said that the prolonged period of low interest rates is making it harder to gain returns in the investment markets, forcing many insurance companies to develop their operations more rapidly than before. Challenges to operations are posed by stricter regulation, which despite its aims does not always improve the protection and service experience of customers, but instead makes operations more complex and increases costs for insurance companies.

In addition, operations are affected by demographic factors, such as an ageing population and longer life expectancies. This will increase indemnity costs for certain types of cover, including serious illness and permanent disability, in risk life assurance policies. Generally speaking, customers changing to doing business digitally will pose obstacles to companies operating legacy IT systems, thereby limiting their competitiveness. This means that those who simplify their operations will have a competitive edge.

What are the biggest opportunities for insurers?
A low rate of risk life assurance uptake, together with the inadequacy of social security will increase demand for the product. This is especially the case in Finland. Moreover, there is still a great need for saving and preparing for retirement, and in this area, the insurance sector will continue to play a key role. Companies with modern IT systems can take advantage of the acceleration of digitalisation in their operations. Insurers will be able to offer better customer experiences by analysing customer needs in more detail than before.

How is it that Nordea Life Finland differs from its competitors?
Nordea Life Finland has modern IT systems and, as the only major operator in Finland, it will have a single core insurance management system in the future. This will give us an overwhelming competitive edge, enabling us to carry out agile system development to reconcile great customer experiences with regulatory requirements. In addition, Nordea Life Finland has the best and most efficient insurance distribution channel, namely Nordea Bank Finland. Nordea Life Finland has also been able to renew its operations far better than its competitors and to adjust its business operations to meet the challenges of the operating environment, an example of which are the effects of Solvency II regulations. The company has also managed to improve the general quality of its operations, including in the European Foundation for Quality Management and ISO 9001, much better than its competitors.

How are you meeting changing customer needs and expectations?
Customer expectations will increasingly focus on the service experience and a customisable service package. Customers are no longer satisfied with just having an insurance product; needs arise after the product has been bought and customers will increasingly emphasise the benefits they gain from their insurance solution. This change is already very clearly visible in how customers do business with us: they want a full-service package that is available at any time, any place. There will no longer be any demand for traditional service concepts in insurance solutions that are not deemed absolutely necessary. In this kind of competition, the winner will be the service provider that is able to not only exceed customer expectations, but to demonstrate clearly to the customers the benefits they gain and, overall, to manage the flow of information available on its clientele as a whole.

How important is digitalisation in doing this?
Digitalisation offers the chance to do business with the insurance company at any time, anywhere. But it also requires simplification of the insurance solutions offered. Services must be extremely easy to use; every click or minute spent on accessing the service package becomes more important from the customer’s point of view. Digitalisation creates the expectation of the possibility for customers to personalise the service experience, which means we are no longer able to serve customers with exactly the same concept, just like many companies have done with traditional service models.

What are the benefits of migrating to a single insurance system?
A single core insurance system provides Nordea Life Finland with a unique competitive edge that enables us to develop our services extremely quickly and nimbly, with a focus on customer experiences. Moreover, a single insurance system will simplify the company’s operations, as every change needs to be implemented only once, unlike in a situation where we have many systems. The existence of a single, modern system also makes digitalisation development easier since it would be extremely difficult and expensive to build new service concepts into the old systems.

Likewise, what are the benefits of automating company processes?
Raising the rate of automation speeds up the handling of simple, high frequency tasks, freeing up employee resources for duties that require thinking and creativity. In addition, automation improves quality by minimising the risk of human error, thus lowering the overall operational risk. Moreover, a higher rate of automation enables us to comply with regulatory requirements without the need for additional resources since, for instance, all the work resulting from reporting requirements does not have to be done manually.

What are your plans for the future?
By pioneering new technologies we can devote more resources to improving the customer experience. We seek growth and are expanding into business areas where we can best take advantage of our strengths. For example, we have recently submitted a licence application to the Finnish Financial Supervisory Authority for establishing a captive non-life company that will complement our current risk insurance offering. The new company, being a subsidiary of Nordea Life Finland, will utilise our newly developed core insurance system. My prediction is that, five years from now, life assurance operations in Finland will look very different from today.

In the future, our company’s goal is to further increase our efforts in boosting growth in risk life assurance and to further develop insurance-linked saving through digital means in order to meet our customers’ changing needs. Our personnel, who are committed to their goals, will play a key role in these efforts. The company’s permanent goal is to continuously improve quality, which will continue to be channelled into great customer experiences.

Hanjin Shipping ends its European operations

Posted on by Helen

On October 24, South Korea’s troubled Hanjin Shipping won approval from the Seoul Central District Court to end its operations in Europe. According to Bloomberg, a court spokesman confirmed that the judge overseeing the shipper’s receivership had granted the request as part of the firm’s insolvency process.

The closure procedure, which is set to begin later this week, will shut down all of Hanjin’s existing European units, including its regional headquarters in Germany. Shares in the embattled firm plunged a further 12 percent following the announcement, as investors fear that liquidation may now prove inevitable for the South Korean giant.

Investors fear liquidation may now prove inevitable for the South Korean giant

The shipper’s bankruptcy would be the largest ever liquidation in the container shipping industry, which is currently suffering its worst downturn in six decades. Shipping firms across the globe are struggling to offset sluggish demand and a slowdown in international trade, with several smaller lines having already gone bankrupt.

Hanjin filed for bankruptcy protection in late August, after losing the support of its key lenders. On August 30, banks led by the state-run Korea Development Bank announced they would no longer be giving financial support to the firm, refusing a restructuring plan for Hanjin’s KRW 5.6trn ($5.4bn) debt.

Since entering receivership, Hanjin has been placed under a court order to sell its own ships and return its chartered vessels to their rightful owners. In early October, the troubled shipper began the process of auctioning off its US assets, which temporarily sent shares soaring at the firm. Aside from the sale of container ships, the auction is also set to include Hanjin’s Asia-US route network, with the deadline for bids set for November 7.

In separate negotiations, the shipping giant is also looking to sell its Long Beach Terminal in California to the Geneva-based Mediterranean Shipping Co., as it seeks to pay back its creditors. Last week, the firm announced it would be forced to cut 400 land-based employees in South Korea, or around 60 percent of its 700-person workforce.

Through an extensive programme of cost cutting and restructuring, Hanjin hopes to reposition itself as an intra-Asia operator. In December, the once-profitable shipper will submit a rehabilitation plan to the South Korean Central District Court, which will review Hanjin’s restructuring and then decide whether it should be liquidated or given a chance to survive.

British American Tobacco makes $47bn offer to buy out Reynolds

Posted on by Helen

British American Tobacco (BAT) has offered to buy out its US partner, Reynolds American, in a $47bn deal that would create the world’s largest tobacco company by sales. The merger would bring together several of the industry’s best-selling brands, including Camel, Lucky Stripe, Newport and Pall Mall.

The British tobacco giant, which already controls a 42 percent stake in Reynolds, is planning to acquire the remaining 58 percent in a cash-and-stock proposal that values the company’s shares at $56.50. BAT is offering a breakdown of $24.13 in cash and $32.37 in shares, representing a premium of 20 percent over the closing price of Reynolds’ stock on 20 October.

Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the
next decade

“We have been a shareholder in Reynolds since its creation in 2004 and have benefitted from its growth in the US market”, BAT’s Chief Executive, Nicandro Durante, said in a statement.

“The proposed merger of our two great companies is the logistical progression of our relationship and offers all shareholders a stake in a stronger, truly global tobacco and next generation products company.”

The proposal, which awaits approval from Reynolds’ board of directors, is expected to generate cost savings of $400m a year and will allow both companies to diversify their sources of profit growth. BAT is also looking to ramp up its manufacturing potential through the included acquisition of Reynolds’ two million sq ft production facility in Tobaccoville, North Carolina.

As smoking rates continue to fall in the developed world, BAT hopes that merging with Reynolds will bolster its presence in the lucrative emerging markets of Africa, South America, Asia and the Middle East, where cigarette sales are rising steadily. If approved, the deal will also further extend BAT’s footprint in the US market, where a wave of mergers and acquisitions has significantly consolidated competition in recent years. In the third quarter of this year, Reynolds held a 34.6 percent of the market share, making it the second-largest US tobacco company behind rival Altria.

The proposed acquisition is the latest in a flurry of consolidation activity in the tobacco industry, as companies attempt to combat declining sales in existing markets by cutting costs though strategic mergers. However, as BAT and Reynolds look to a future in the US tobacco market, product innovation may prove to be the new key to success. Sales of electronic cigarettes hit $6bn in 2015, and the market is expected to grow exponentially over the next decade, reaching a value of over $50bn by 2025.

Addressing the issue of underinsurance in Singapore

Posted on by Helen

Southeast Asia has seen rapid development and strong economic growth for several years. At the heart of this growth story has been the rise of Singapore. The city-state – despite being faced with a small domestic market, limited natural resources and high poverty levels when it became independent in 1965 – has managed to build itself a first-world economy.

An underappreciated element of this economic journey has been the integral role small- and medium-sized enterprises (SMEs) have played in both driving Singapore’s continued growth and creating new jobs. SMEs comprise 99 percent of all businesses in Singapore and provide employment for 70 percent of its growing workforce. Together, they contribute nearly half of Singapore’s GDP. These figures show the fundamental importance of SMEs to the national business context and Singapore’s ongoing prosperity, but also emphasise the need to ensure SMEs remain robust and insulated against the kinds of risks inherent in any modern operating environment.

Despite this, however, it seems many SMEs remain dangerously underprepared for dealing with common business problems – risks that, if continually ignored or underestimated, could threaten their long-term survival. This is compounded by the increasing macroeconomic uncertainty confronting Singapore, including factors such as slowing growth in China, fluctuating oil prices and, closer to home, local firms having to operate with evolving manpower challenges due to an ageing workforce.

Necessity, not commodity
Even in the face of this uncertainty, comprehensive research conducted recently by QBE Singapore, based on the results of a survey conducted on local SMEs, showed that as many as one in seven smaller Singaporean SMEs – that is, firms with between five and 20 staff members or revenue of less than SGD 1m ($740,000) – have no business insurance at all. Across Singapore’s wider SME landscape, this suggests 21,000 firms are potentially taking unnecessary risks.

Ignoring inherent dangers by approaching insurance as a one-size-fits-all commodity is not an option

Some might suggest indifference is to blame, or that perhaps smaller companies feel their risk exposure is too insignificant to warrant more comprehensive insurance. These ideas may be partly true, but the results showed a more worrying reality about perceptions of insurance itself. It emerged SMEs view insurance products (beyond the minimum, mandatory coverage) as mere commodities, rather than necessities for their business. As many as 53 percent of respondents suggested insurance was low on their priority list, while 56 percent believe that minimum cover for their business was sufficient and additional insurance was not essential.

We know, however, that this is not the case. Taking out a minor, additional policy to further protect a business can reap huge dividends and ensure longer-term survival. For example, a client of QBE in Singapore, paying a premium of SGD 1,240 ($922) per month, saw its storage facility burned down in a local factory building. The fire destroyed all stock, furniture, fixtures, office equipment, office contents, factory improvements and machinery. Simply for being prepared and protected against this risk, the company received a claim of SGD 20.6m ($15.33m).

As illustrated by this example, the value of the insurance process in identifying and financially protecting against risks cannot be underestimated. Agents and brokers can play an important role within this context, providing bespoke reviews of SMEs’ vulnerabilities and guiding them through the process of dealing with an accident or issue.

This approach is strongly valued by our customers, with our research highlighting the factors SMEs most appreciate when working with agents. Specifically, they seek out agents that can help save them time by fully answering and dealing with questions, while prioritising a pain-free and efficient process that does not take them away from running their business. These are extremely important considerations, given the leaner operating structures and time constraints of many smaller companies.

We also found SMEs value the knowledge possessed by the respective entity, agent or broker they are dealing with and the professional recommendations they make. That is to say, they do not just want a policy with bottom-dollar implications, but they also want a provider who can help them deal with a problem when it arises.

Of the companies surveyed, however, 64 percent of smaller SMEs and 51 percent of larger SMEs – that is, SMEs with between 21 and 200 employees or revenues of up to SGD 100m ($74.4m) – admitted the policies provided by different insurers all look the same to them. These statistics are significant because they highlight the lack of awareness concerning the different insurance products on the market, thus illustrating that companies are failing to take into account how more specific offerings best fit their individual needs.

Work to be done
Given the strong ecosystem of agents and brokers and their ability to distil and explain important insurance considerations, why are so many SMEs still underinsured and failing to understand what is available on the market? Part of the reason may be the prevailing and harmful view that cost is the most important factor in purchasing insurance, with almost two-thirds of all SMEs we surveyed expressing this view.

It might also have something to do with the different operating realities companies of varying sizes work with. Smaller SMEs have less concern for business risk than larger ones, and therefore less appreciation for insurance decisions or greater protection. This also stems from the fact smaller SMEs are often more focused on immediate-term considerations, such as retaining customers and reducing costs, compared to the forward-looking and strategic considerations often made by the bigger players.

Nevertheless, failing to make informed insurance decisions has the potential to hinder business continuity and future success. Every company must understand not only its obligation to itself and its employees, but also to Singapore at large – whether it be a small hi-tech parts manufacturer better protecting its equipment against damage or theft, a consultancy insuring itself against the loss incurred due to acting on poor advice, or a retail-focused company guarding against liability from customers who purchase their products. Ignoring inherent dangers by approaching insurance as a one-size-fits-all commodity is not an option.

Our advice in response to this dynamic is simple: first, all SMEs need to undertake a proper assessment of their businesses, making their brokers or agent – and even their insurers – work on behalf of their interests. From there, they must seriously consider whether adequate protection is in place – and whether ‘adequate’ protection alone is really enough to ensure their long-term survival.

While these findings are specific to Singapore, it is possible other markets may face similar issues as well. Of course, every country has its own regulations surrounding insurance and minimum cover, but the true value of preparation may not be widely comprehended among the SMEs vital to any modern financial ecosystem. While these organisations remain inwardly focused on their own profitability, financial survival through difficult economic times remains an ongoing concern that can only be mitigated through comprehensive risk management.

Ensuring future prosperity
Looking more broadly to the general business context in Singapore and beyond insurance-specific considerations, our research also uncovered the specific business issues that concern most local SMEs. Chief among them were talent-related issues in the form of staff acquisition, training and retention, which are vital issues, as SMEs employ over two-thirds of working Singaporeans. This is also an understandable concern given how employee turnover typically leads to increased training expenses, recruitment costs and the loss of company-specific knowledge.

The new ASEAN Economic Community will have further ramifications for local SMEs, particularly from a talent standpoint. SMEs are not only integral to the economic development and growth of Singapore, but also to the other ASEAN member states, accounting for between 88.8 and 99.9 percent of all companies in these countries. We expect sharing of talent and greater cooperation across borders to occur in the future.

However, a positive financial outlook moving forwards countered these concerns. Of the firms surveyed, 72 percent said they either expected sales to grow by the end of 2016 or to at least hold their financial position (that is, 28 percent expect growth and 44 percent expect to remain the same), while 40 percent expected Singapore’s general economic outlook to improve.

Overall, Singapore clearly remains an opportunity-rich environment in which SMEs can and will thrive – but with these opportunities also come significant threats. We see a need for increased awareness among local companies of the consequences of being underinsured and the benefits of protection – specifically, customised protection that supports specific needs. Education as to the operational freedom a comprehensive insurance plan offers, and better engagement by SMEs with these plans, will improve their prospects and allow business insurance to be the glue that helps hold the economy together.

Chinese GDP meets targets with 6.7 percent growth

Posted on by Helen

The Chinese economy grew at a rate of 6.7 percent in Q3 2016, in line with the government’s growth target of between 6.5 and seven percent for the year. The figure matches that of the two previous quarters, signalling that growth is stabilising for the world’s second largest economy.

Despite this year’s better-than-expected performance, it is likely that Chinese growth for 2016 will still be weaker than that of 2015, which saw the nation’s slowest growth in 25 years.

National debt currently stands at around 170 percent of GDP, while Chinese businesses have amassed $18trn in debt

Nonetheless, the steady GDP growth has eased investors’ fears over a potentially sharp slowdown in the Chinese economy, following a period of intense stock market volatility earlier in the year. In January, Chinese share trading was temporarily halted after the market dramatically plunged, leading global investors to question their confidence in China’s market regulator. Concerns over the nation’s currency have also lingered since China’s dramatic U-turn in monetary policy in the summer of 2015. In an unexpected move, Beijing chose to devalue its currency and allow it to weaken, as it looked to recover from its lower-than-expected export figures for the year.

Releasing the new data on October 19, China’s National Bureau of Statistics said the economy had faced “complicated and challenging domestic and external conditions” in the first three quarters of the year. Despite such challenges, impressive growth in retail sales and investment, which rose by 10.4 and 8.2 percent respectively, have bolstered Chinese GDP. Real estate prices have continued to soar, while property sales increased by almost 27 percent between January and September.

This stable yet slowing rate of GDP growth has been described by the Chinese National Bureau of Statistics as “the new normal”, while new economic guidelines focus on “making progress while maintaining stability”.

Although the latest official figures reveal a better-than-anticipated economic performance, debt still remains a pressing concern for the Chinese economy. National debt currently stands at around 170 percent of GDP, while Chinese businesses have amassed $18trn in debt.

As the world’s second biggest economy and the second largest importer of goods, Chinese growth has a significant impact on worldwide markets. The nation’s economic slowdown has already contributed to a drop in crude oil prices, and its continued muted growth is set to further impact the pricing of commodities across the globe.

How Indra Nooyi changed the face of PepsiCo

Posted on by Helen

Now the highly regarded CEO of PepsiCo, Indra Nooyi was born to a Tamil-speaking family in Madras (now Chennai) in India. Academically gifted, she was awarded a bachelor’s degree in Physics, Chemistry and Mathematics from Madras Christian College in 1974, which she followed up with an MBA from the Indian Institute of Management in Calcutta.

Nooyi began her career in India, holding several product management positions, firstly at Johnson & Johnson and then with textile manufacturing firm Mettur Beardsell, before moving to the US. There she returned to academia, gaining a master’s degree in Public and Private Management from the Yale School of Management. After graduating from Yale in 1980, Nooyi joined the Boston Consulting Group, before assuming senior managerial positions at Motorola and Asea Brown Boveri.

Nooyi’s influence is far-reaching, with her determination and perfectionism pushing her further through the industry than many expected

Nooyi joined PepsiCo in 1994 and had an almost immediate influence on the company’s strategic direction. An astute tactician, Nooyi oversaw a number of key restructurings during her first years with the company: in 1997, Pepsi elected to spin off its Pizza Hut, KFC and Taco Bell restaurants for $4.5bn. The company used the proceeds of the sale to slash its $8.5bn debt mountain by more than half, a move that also allowed the business to accelerate its share buyback strategy, giving it the financial flex to invest in further business development.

The following year, Nooyi played a key role in Pepsi’s acquisition of Tropicana. The $3.3bn deal was particularly significant for the company as it placed Pepsi in direct competition with rival Coca-Cola – the owner of soft beverage company Minute Maid – in the non-fizzy drinks market.

Further to this, in 2000 Pepsi made another strategic acquisition when it bought Quaker Oats. The $13.4bn price tag may have raised the eyebrows of some analysts, but the deal handed Pepsi control of Quaker’s popular and lucrative sports drink brand Gatorade.

Indra Nooyi first joined PepsiCo in 1994
Indra Nooyi first joined PepsiCo in 1994

A healthier outlook
One of Nooyi’s most controversial initiatives has been to redirect Pepsi’s considerable corporate spend away from junk foods and into healthier alternatives. To this end she reclassified Pepsi’s wide-ranging products into three categories, designed to give customers more information about the foods they consume: ‘fun for you’ (such as potato chips and regular soda), ‘better for you’ (diet or low-fat versions of snacks and fizzy drinks), and ‘good for you’ (for example, the recently acquired Quaker Oats oatmeal).

Dietary balance has been a key feature of Nooyi’s strategy since day one. In 2010, she declared that Pepsi needed to be part of the solution to “one of the world’s biggest public health challenges – a challenge fundamentally linked to our industry: obesity”. Under her steer, Pepsi has reduced the portion sizes of its ‘fun for you’ products and has delivered a marketing campaign to ensure its ‘diet’ products are promoted as aspirationally as its full-sugar equivalents. For example, Gatorade is now marketed specifically towards athletes, rather than being advertised as an everyday recreational beverage.

Today, the company has a diversified portfolio of products (see Fig 1). It still sells sugary drinks and potato chips, but it also has Tropicana, Naked Juice and Izze supporting the healthier end of its range. Since her inauguration at the company, Nooyi has also set Pepsi on a drive to reduce the salt, sugar and fat contents in its core products, while at the same time ramping up the production of its ‘good for you’ offerings, largely in response to the demands of modern society.

Design and innovation
One of Nooyi’s most visible achievements came in the complete overhaul of Pepsi’s branding. For this mammoth task, she recruited Italian design expert Mauro Porcini with the brief of reinvigorating the product design and logo. Porcini, having previously done impressive work to transform the image of 3M, got to work on reinventing one of the world’s most recognisable brands, and today Pepsi is pushing the design through the entire system – from product creation to packaging and labelling, to how a product looks on the shelf and how Pepsi’s consumers will interact with it.

pepsi-1Rather than focusing simply on the face of the product, Nooyi initiated a completely new approach to marketing. For instance, one of the project’s new creations is the Pepsi Spire, a unique touchscreen fountain vending machine. While competitors’ dispensing machines have focused on adding a few more buttons and different combinations of flavours, Pepsi has created a fundamentally different interaction between consumer and machine: the Spire is essentially a large iPad that communicates with the user, inviting them to interact with it. It tracks the customer’s habits, so that when purchasers swipe their ID, the machine reminds them of the flavour combinations they tried last time and suggests new ones, while at the same time displaying screenshots of the product being created.

Nooyi’s innovative ideas and overall success at the helm of one of the world’s largest food and beverage producers have earned her a wealth of awards. Every year between 2007 and 2014, Forbes listed her in its World’s 100 Most Powerful Women, while Fortune named her number one on its annual ranking of Most Powerful Women in Business for 2006-10. In 2008, US News & World Report named Nooyi one of America’s Best Leaders. Clearly Nooyi’s influence is far-reaching, with her determination and perfectionism pushing her further through the industry than many expected upon her inauguration. In 2015, she declared: “We ought to keep pushing the boundaries to get to flawless execution. Flawless is the ultimate goal.” It is an ideal that has seen her welcome success after success.

Global acclaim
Nooyi’s strategy to expand Pepsi’s operations into other areas has also resulted in a groundbreaking deal struck in Myanmar, where negotiations are now on track to build a separate plant and develop an agricultural area. This specialised site will produce Pepsi products to cater for the Myanmarese market, as well as create a wealth of job opportunities. Having visited the region following the World Economic Forum for East Asia meeting in 2013, she is said to have described the opportunity as “a story that is just beginning to unfold”.

Much of Nooyi’s current international strategy involves reaching out to emerging markets’ rapidly expanding middle classes. Her cross-category in-store programmes are designed to ensure the frequent purchase of Pepsi’s products in these markets; a demographic that accounts for some 35 percent of sales in emerging and developing regions.

Soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales

In 2008, Nooyi was elected Chair of the US India Business Council. The council’s remit is to create an inclusive bilateral trade environment between India and the US by serving as the voice of the industry, linking governments to businesses and supporting long-term commercial partnerships that will nurture the spirit of entrepreneurship, create jobs and successfully contribute to the global economy. As recognition of her work on the council, Nooyi was presented with the 2015 Global Leadership Award for her commitment to driving a more inclusive global economy and encouraging the creation of more roles for female leaders.

A testament to Nooyi’s vision
PepsiCo is currently the second-largest food and beverage company in the world, today boasting approximately $63bn in revenues. Some have argued this achievement is largely thanks to Nooyi, who has consistently taken the company in a profit-making direction (see Fig 2).

The fact PepsiCo retains its position as the market leader for global salty snack sales – and second position in the sale of beverages – is testament to the success of Nooyi’s ongoing marketing and positional strategies. Analysts have predicted Pepsi could soon also become the market leader in terms of beverages, thanks in large part to Nooyi’s plans to enter the booming health food market with an extended range of juices, sports drinks and reduced fat and sugar carbonated beverages. While certainly lucrative, this move into a healthier market is a far cry from PepsiCo’s roots.

The company as we know it today was formed in 1965 following a merger between Pepsi-Cola Company and Frito-Lay, Inc. At that time, Pepsi-Cola Company was manufacturing Pepsi-Cola, Diet Pepsi and Mountain Dew drinks. Frito-Lay’s products included Fritos corn chips, Lay’s potato chips, Cheetos, Ruffles potato chips and Rold Gold pretzels.

In 1998, the company bought Tropicana, and in 2001 it acquired Quaker Oats – as mentioned earlier, adding Gatorade to its product portfolio in the process. At the time, Gatorade held a staggering 83.6 percent of the US retail market for sports drinks and was the world leader in its sector, with annual sales of approximately $2bn. The combination of these companies has made Pepsi a widely diversified consumer staples firm.

Challenges and successes
One of the most challenging periods faced by Pepsi came in the mid-1990s, when the company struggled against major problems in its overseas beverages operations. These included vast losses that were posted by its large Latin American bottler and the defection of its Venezuelan partner to Coca-Cola.

pepsi-2In 1996, Pepsi was forced to swallow a special charge of $576m in relation to international write-offs and restructurings, while its international arm posted a huge operating loss of $846m. Among the moves initiated to turn around its international beverage operations was a drive to increase emphasis on emerging markets, including India, China, eastern Europe and Russia. Cola drinks had a less entrenched reputation in these areas, and so the opportunity to focus more on Pepsi or franchise-owned bottling operations – rather than relying on securing joint ventures – was seen as a lucrative expansion opportunity for the company.

More recently, PepsiCo has enjoyed a greater number of successes than failures. In 2015, for the first time in its history, Pepsi outsold Diet Coke to become the second most popular carbonated drink in the US. Regular Coke maintained its long-standing top position, but Diet Coke’s sales fell by 6.6 percent as consumers began to shun ‘diet’ products laced with artificial sweeteners. However, by the same hand, Diet Pepsi’s 2015 sales also fell by more than five percent, according to figures published by the trade publication Beverage Digest.

In response to slumping sales, Pepsi spent two years surveying consumers in order to formulate a new Diet Pepsi recipe. In 2015, Pepsi removed aspartame from its Diet Pepsi drink entirely in an attempt to boost sales.

However, the move was short-lived: one year later, Pepsi announced it would be reintroducing aspartame to Diet Pepsi, largely because a considerable portion of consumers did not like the taste of the new and improved version of the product. During the aspartame-free trial at the start of this year, US retail sales of Diet Pepsi fell 10.6 percent in volume terms in a single quarter, while its share of the soda market fell 0.4 percentage points to 4.1 percent, according to Beverage Digest.

However, Pepsi has been savvy in the way it has brought aspartame back into the fold. From September this year, drinkers were given a choice over which of two versions of Diet Pepsi they would prefer: one with aspartame – sold in light blue packaging and labelled ‘classic sweetener blend’ – and another containing sucralose, an artificial sweetener better known as Splenda, which will be sold in Diet Pepsi’s recognisable silver packaging. The company will also be rebranding Pepsi Max as Pepsi Zero Sugar.

pepsi-3US sales of full-calorie soft drinks have declined by more than 25 percent in the last two decades: soda consumption peaked between the early 1960s and the late 1990s, but is now in a sustained decline. In 2014, for the 10th consecutive year, consumption of soda fell by 0.9 percent in the US – Pepsi’s largest market (see Fig 3). Traditional soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales in recent years. It is this trend that has led PepsiCo down its new path of focusing on healthier food and beverages in place of previous consumer favourites.

Performance with purpose
In 2015, the company slashed the overall water use in its operations by about 3.2 billion litres in a drive towards improved water conservation. In doing so, it has saved more than $80m in production costs. Between 2011 and 2015, it reduced its water use per unit of production by 26 percent, exceeding its 20 percent goal. These actions were part of Pepsi’s broader sustainability agenda, which has delivered more than $600m in cost savings in the last five years through water, energy, packaging and waste reduction initiatives.

The firm has also partnered with non-profit organisations to provide safe water access to over nine million people in less affluent nations since 2006, exceeding its original goal of six million people by the end of 2015.

Pepsi has gone to great lengths to be seen as a company with a social conscience. Most visibly, in 2010 it announced that, for the first time in 23 years, it would not have any advertisements during the Super Bowl. Instead, the company spent its $20m advertising budget on a social media campaign branded the Pepsi Refresh Project. This was a seismic move for Pepsi, whose partnership with the Super Bowl had seen it spend more than $142m on advertisements over the course of the previous decade.

Under the Refresh campaign, customers submitted their ideas to Pepsi for ways to refresh their communities, with the proclaimed aim of ‘making the world a better place’. Pepsi then funded the projects that received the most votes. To date, more than $20m has been distributed across worthy causes including health, arts and culture, food and shelter, the planet, neighbourhoods and education.

Refresh was a huge success for Pepsi: according to feedback, consumers felt Pepsi was a brand that cared about the community. Moreover – and perhaps more importantly for its continued longevity and success – they felt Pepsi was a forward-thinking, innovative brand – something that Nooyi has pushed for since day one at the company’s helm.

SoftBank and Saudi Arabia to launch $100bn tech fund

Posted on by Helen

 On October 14, SoftBank and Saudi Arabia’s Public Investment Fund announced a new partnership, which will create a new tech fund. The SoftBank Vision Fund, which is set to be one of the world’s biggest private equity funds, aims to invest up to $100bn in tech companies worldwide.

The new tech fund, which will be based in the UK, will receive approximately $25bn from SoftBank and $45bn from Saudi Arabia’s sovereign wealth fund over the next five years.

“With the establishment of the SoftBank Vision Fund, we will be able to step up investments in technology companies globally”, said Masayoshi Son, Chairman and Chief Executive of SoftBank Group.

Saudi Arabia is increasingly looking to move away from
an economic overreliance
on crude

“Over the next decade, the SoftBank Vision Fund will be the biggest investor in the technology sector. We will further accelerate the ‘information revolution’ by contributing to its development.”

The deal marks the latest in a line of tech investments for SoftBank and Saudi Arabia’s Public Investment Fund. In July, SoftBank completed the world’s largest acquisition of a European technology company, purchasing microchip-designer ARM Holdings for a record $32bn. Expanding its tech ambitions further, the Japanese telecommunications giant has also recently invested in the US-based biotech firm Zymergen. Earlier this year, Saudi Arabia’s sovereign wealth fund injected $3.5bn into the ride-hailing firm Uber in a bid to diversify its holdings.

As oil prices remain low, Saudi Arabia is increasingly looking to move away from an economic overreliance on crude, with its Public Investment Fund thus investing in profitable non-oil industries. This strategic investment was outlined thoroughly in the Gulf nation’s 2030 economic plan, revealed earlier this year.

As part of its Vision 2030, Saudi Arabia intends to create an ambitious $2trn sovereign wealth fund in order to inject money into new assets, such as the rapidly evolving tech sector.

“The Public Investment Fund is focused on achieving attractive long-term financial returns from its investments at home and abroad, as well as supporting the kingdom’s Vision 2030 strategy to develop a diversified economy”, Deputy Crown Prince Mohammed Bin Salman said in a statement.

UK faces potential loss of £1.2bn following Lehman Brothers ruling

Posted on by Helen

On October 11, the British High Court ruled against the UK’s tax authority, HM Revenue & Customs (HMRC), with regards to its treatment of creditors’ interest payments following the collapse of Lehman Brothers bank in 2008. According to the Financial Times, as much as £1.2bn ($1.4bn) in taxes is now at risk after the court ruled in favour of PricewaterhouseCoopers (PwC), the European administrators of the investment bank.

The ruling means that those companies owed money by the failed bank will no longer be directly required to pay taxes on the interest that resulted from the full payment of £5bn ($6.1bn) made by Lehman Brothers International Europe’s creditors.

Those companies owed money by the failed bank will no longer be directly required to pay taxes on the interest

The dispute, which was regarding the tax treatment of the bulk of a surplus (to the value of £6.6-7.8bn), ensued over whether a ‘yearly interest’ should be applied. This is usually the case for interest payments of long-term loans from which tax is deducted at source. Given the size of the sum, HMRC sought an appeal, which has now been granted.

Russell Downs, Joint Administrator of Lehman Brothers International Europe, said: “We would hope and expect to work constructively with HMRC to develop an appropriate interim arrangement so that creditors do not face any unnecessary delays from the appeal as the joint administrators’ plan for a distribution of interest next year takes shape.”

The court’s ruling is significant because the tax in question will not be deducted at source, despite this being the norm for HMRC when it comes to non-residents. The ruling supported the defence’s argument, which stated that it is simply not possible to determine how much tax was due, as the number of non-residents that will receive a payment is unknown. HRMC maintained that the total tax “potentially runs up to £1.2bn”.

In a small win for HRMC, the court’s decision does not relate to any tax that has already been collected, meaning that rebates are not expected.

Justice Hildyard, the judge overseeing the case, stated that he was unconvinced by HRMC’s arguments about the nature of the interest payments, and that the concept of ‘yearly interest’ remains elusive.

Also considered were the concerns of administrators, including fears that they may come under huge pressure to make payments before the first year after administration is complete. This outcome may lead some creditors to receive interest payments without tax deductions, which Hildyard said were “without merit”.

An appeal is already in the pipeline, but given Hildyard’s hard stance on HRMC and his criticism of the organisation, it seems unlikely that his ruling will be overturned.

General Electric acquires LM Wind Power for $1.65bn

Posted on by Helen

On October 11, General Electric (GE) announced it had acquired Denmark’s LM Wind Power for $1.65bn, as the conglomerate seeks to establish itself as a world leader in the rapidly expanding renewable energies market.

LM Wind Power is one of the world’s largest producers of wind turbine blades, supplying approximately 50 percent of all blades used in offshore wind farms on turbines of over 5MW. The deal will allow GE’s renewable energy business to handle the design and manufacture of wind turbine blades in-house.

“This deal will merge the speed and focus of LM Wind Power’s entrepreneurial culture with GE’s world-class engineering and operational capabilities”, said LM Wind Power CEO, Marc de Jong.

The billion-dollar deal marks the latest move in GE’s ongoing green energy drive

“Our two organisations are highly complementary, and the transaction positions us well to respond faster to customer needs and enhance performance of wind turbines to ultimately reduce the cost of energy.”

Under the terms of the deal, GE will operate LM Wind Power as a standalone unit with the aim of encouraging its existing sales to the wind turbine industry, while attempting to expand on LM’s established working relationships. While the acquisition is subject to regulator approval, GE anticipates that the transaction will be finalised in the first half of 2017.

The billion-dollar deal marks the latest move in GE’s ongoing green energy drive. Last year, the conglomerate created a separate division for its renewable energy business in order to focus on developing advanced technology for use in wind, hydro and solar power. Since its inception, GE’s green energy unit has installed over 30,000 wind turbines worldwide, while its hydro generators and turbines account for more than 25 percent of global installed hydroelectric capacity.

In June of this year, GE formed part of a group of powerful energy companies that jointly pledged to cut the cost of offshore wind farms to €80 per megawatt hour by 2025. As volumes of wind farms increase, the cost of producing wind energy has begun to fall rapidly, and is expected to be cheaper than both coal and gas by 2027, according to the Bloomberg New Energy Finance research group. With this new deal promising to cut costs further, GE’s profitable renewable energies business looks set to go from strength to strength.

‘Fat fingers and algos’ is a thin explanation for sterling crash

Posted on by Helen

The ‘hard Brexit’ story appears to have completely blindsided market participants, who up until now were apparently positioned for a comfy, EEA-type deal that now seems a distant prospect. As a result, sterling has paid the price.

Just about every fear indicator is flashing red for sterling. Options volatility is soaring, bid ask spreads are unstable, and market-implied inflation expectations are skyrocketing. On October 7, sterling experienced a flash crash that drove the currency to a 31-year low. Trading conditions on Friday were the most unstable they have been since the day of the referendum result.

Trading conditions for sterling are the most unstable they have been
since the day of the referendum result

One of the leading explanations for this chaos is that the machines did it. But the often-cited ‘fat fingers and algorithms’ explanation for these events wears a little thin. The reality is, regardless of exactly what happened last week, sterling has been on a relentless downwards trend since June, and Friday morning was merely an extension of that. For what it’s worth, my running hypothesis of Friday morning’s events is that an initial collapse in bids – however it was triggered – was compounded by good old fashioned panic, machine or human.

This raises an interesting question: if the thinking machines are exhibiting behaviour that is, for all intents and purposes, akin to fear and panic as well as greed, does it matter who is pushing the button? Perhaps by gazing long enough into the abyss of the human heart, momentum-following and market-making algorithms have found us staring back at them.

But I digress. There has been a significant and unexpected deterioration in the political outlook for sterling over the last two weeks, so the moves in markets are not without justification. The various speeches, interviews and statements to the media have all suggested the UK is squaring up to a ‘hard Brexit’. This has blindsided markets, which were previously priced for a soft deal that would see the UK retain significant EU market access.

UK Prime Minister Theresa May’s attempts to paint soft/hard Brexit as a false dichotomy ring hollow, when the terms her government have set out strongly suggest the UK will lose a material amount of access to European markets. I’d suggest anyone arguing otherwise takes a look at GBP/EUR’s progress.

At this point, picking a bottom for the pound is an exercise in knife catching. You may get it right and impress everyone with a nice parlour trick, but there’s a greater chance of painting your living room red.

It’s not clear how much of Friday morning’s sell-off was a matter of panic and momentum, and how much it reflects genuine deterioration in the outlook for sterling over the previous week. But what is clear is that the pound is extraordinarily vulnerable at the moment, and the potential for further volatile moves is unusually high.

Brexit could benefit EU-Arab banking relations

Posted on by Helen

“Absolutely comfortable”, said Bank of England Governor, Marc Carney, defending his decision to cut interests rates to a historically low level in an attempt to mitigate the impact of Brexit.

UK Prime Minister Theresa May has since indicated the UK Government will not trigger Article 50 this year. With regards to Brexit negotiations, May is required to run head-on against those in the EU, who demand that all four freedoms at the heart of the EU – of people, capital, goods and services – remain sacrosanct.

London’s position as the European continent’s primary financial centre is under threat

Last week, the Minster for Brexit, David Davis, said the negotiation process for disengaging the UK from the EU will take up to three years. However, Chancellor of the Exchequer Philip Hammond has suggested it could take up to six years to complete exit negotiations. David Cameron, meanwhile, did like Pilate and washed his hands of the Brexit matter entirely, and so it seems nobody is ready to give a concrete indication of how long the UK’s exit from the EU will actually take, nor how the UK Government plans to lead this exit.

Competing for the top spot
Following the Brexit vote, London’s position as the European continent’s primary financial centre is under threat.

Shortly after the Brexit vote occurred, Lloyds Bank announced it will be cutting 3,000 jobs and closing 200 branches. HSBC, meanwhile, plans to relocate 1,000 employees to Paris. UBS decided to move 1,500 of its 5,000 employees from London to Frankfurt, and a number of American banks are also rumoured to be considering leaving London, even before the final outcome of Brexit negotiations.

British banks are putting pressure on May to negotiate the UK’s Brexit terms, including keeping the right to sell financial products across the EU (known as ‘passporting’), which could help keep banks in London. In this context, international banks are likely to wait and see if passporting negotiations are at all feasible before deciding where or how to shift jobs out of London.

European cities such as Paris and Frankfurt now battle for London’s financial crown. Paris is already a major hub for London-based HSBC, Europe’s biggest bank, while Frankfurt is the second largest financial centre on the continent. Dublin, meanwhile, offers exiled bankers a similar legal system conducted in the English language.

Cities such as Frankfurt have made considerable efforts to become Europe’s next financial hub, including setting up special hotlines for banks that want to discuss shifting operations out of London. Business France published leaflets outlining the joys of working and living in Paris, as per The Wall Street Journal. Taxation, labour laws, cost of living and lifestyle factors are decision drivers for banks trying to choose a new business-friendly gateway to Europe.

The main contenders
London profits from lower corporate tax rates and more flexible employment laws than Frankfurt and Paris. On the other hand, Frankfurt is the home of the European Central Bank and has a lower cost of living than London and Paris. However, it also has the reputation of being a boring city. Spokespeople from the city deny this, saying: “Frankfurt makes you cry twice: once when you get sent there, and once when you have to leave.”

Whether Dublin, Luxembourg, Amsterdam or other cities will become the new financial hub of the EU is not the major issue. More important, particularly for defending the preservation and existence of the EU, is that a large number of EU members respect the four freedoms of the union; especially the free movement of capital, services, goods and free movement of labour among countries with similar income level.

However, the current free labour movement among the 27 EU countries has become politically controversial, as large number of migrants from lower income countries are emigrating to higher income countries. This has caused some social fear and suspicion, and, as some would argue, led to the Brexit vote in the first place.

We sincerely believe that banks’ clients and customers are a major factor for banks to consider during Brexit negotiations. Clients want banks’ reassurance that there won’t be disruption in their services.

European banks have to push ahead with plans to aggressively penetrate the Arab financial markets

Looking outside the EU
More generally, while London’s role globally will be different after Brexit, it will remain at the centre of world finance. Indeed, London has one of the most advanced Arab banking – in particular, Islamic banking – financial markets in the Western world, and became a key destination for most Arab banks.

It is a fact – without going into detail – that jurisdictions of cities competing to become the new financial hub have to adjust fiscal and regulatory frameworks to enable and ensure playing fields for Arab banking (including Islamic banking) in the EU. Having said that, European banks also have to push ahead with plans to aggressively penetrate the Arab financial markets – especially the GCC markets, which are characterised as cash-rich and for their profitable business opportunities.

The business outlook for European banks worsened after the Brexit vote, which was followed by market volatility and the Italian banking crisis. These underscore the need for European banks to bolster their presence outside Europe and expand their fee income by bringing on new clients and projects from the Arab world, which remains a positive region – more so than any other part of the world.

In conclusion, relationships between the EU and Arab banks are fairly modest, and these have to be developed. We are thankful for the efforts rendered by the Union of Arab Bank to persistently initiate the dialogue to support enhancing the relations.

Substantial appetite for attracting liquidity from Arab countries and increased emphasis on alternative financial solutions after the last financial crisis is the cornerstone to further promising endeavours.

Mourad Mekhail is a former Wall Street banker. He earned his Master of Business Administration in International Economies from Trier University, Germany. Since 2011, Mekhail has served as Advisor to the Board of Directors at Kuwait International Bank, following his previous assignment as Head of International Investment.

How PetroRio bested the 2016 oil price crash

Posted on by Helen

PetroRio is the largest independent company in oil production in Brazil. It is the operator of the Polvo Field, located in the Campos Basin, which boasts Brazil’s seventh largest daily production of barrels of oil equivalent (BOE). PetroRio is the owner of Polvo A fixed platform and a drilling rig, currently in operation in this field. The platform is connected to the FPSO Polvo with capacity to segregate hydrocarbons and water treatment, oil storage and offloading.

The Polvo Field license covers an area of approximately 134sq km, with several prospects with potential for further explorations. Part of the success of PetroRio is the company’s corporate culture, which seeks to increase production through the acquisition of new producing assets, re-development, increased operational efficiency, and the reduction of production costs and corporate expenses. PetroRio’s main objective is to create value for its shareholders, with financial discipline and full respect for safety and the environment.

The company goal is to
reach a production of 100,000 barrels per day by the end
of 2017

Still burning bright
PetroRio stands out among the world’s big energy producers for one simple reason: for PetroRio, 2015 was a good year. Despite the challenges imposed by the oil price collapse, PetroRio achieved impressive results from the beginning of the year, when it initiated an aggressive cost reduction programme that comprised operational optimisations and renegotiations with its entire supplier base.

As a result, operating costs dropped 31 percent in 2015 compared to the previous year, while later in the year the company began a second round of renegotiations that generated further cost savings in the first half of 2016. Polvo Field’s operating costs in 1H16 were in line with the company annual target of $90m, which represents a 17 percent cut compared to the already low 2015 levels, while general and administrative expenses fell 67 percent between 2013 and 2015. In the second quarter of 2016, lifting costs declined to $28.17/bbl, the lowest since the beginning of PetroRio operations (see Fig 1).

In 2015, 3.056 million barrels were produced in the Polvo Field (100 percent of the field), with average operating efficiency of 94.4 percent, 1.1 percentage points higher than in 2014. This was an excellent result, considering some operational setbacks the company had to face.

The search for operational excellence is part of PetroRio’s day-to-day activities and the efficiency levels already achieved in the Polvo Field confirm this commitment. During 2015, four off takes were held totalling 1.799 million barrels sold, with revenues of BRL253.1m. PetroRio went through this challenging environment with strong determination and sturdy resilience, presenting a positive EBITDA of BRL150.1m, EBITDA margin of 59.3 percent, net income of BRL110.4m, a strong balance sheet, unlevered and with a comfortable cash position of almost BRL500m at the end of December 2015.

petrorio-1In addition to the cost savings achieved, in December PetroRio completed the purchase of Maersk’s remaining stake of Polvo in order to start a well-succeeded revitalisation programme. After the completion of the first phase in July 2016, which involved an intervention in two producing wells and the revitalisation of a third one that had been abandoned in 2008, a productivity gain of 20 percent was observed.

If maintained in the long run, this improvement has the potential to extend the field’s working life by one year and increase PetroRio’s proven reserve estimates by more than 10 percent, after having already tripled this figure versus the former operator expectations (see Fig 2). Certified developed proven reserves also increased by 45 percent in 2015 and the field useful life was extended by three years compared to the previous report. The company expects a similar gross addition on developed proven reserves in the next certification report after investments made in 2016, and believes one additional upside may come from the outcome of new prospects drilling, mostly sandstone, as new good-quality reservoirs were successfully accessed.

Turning the screws
Last year was a turning point for PetroRio. The company took the bold step of reinventing itself, switching its strategy from an exploration company to instead focus on the acquisition and development of producing fields. As such, PetroRio has undergone significant changes in recent years as part of its development process. Chiefly, this meant increasing oil reserves and obtaining a massive cost reduction, all the while maintaining the highest levels of operational safety. This model is to be executed as part of the company’s expected growth strategy that now relies on the acquisition of producing fields. This successful model implemented in the Polvo Field, which combines cost optimisation, careful reservoir management and a well redevelopment programme should enable the company to obtain additional gains in the new fields to be acquired.

On this topic, it is worth mentioning the Brazilian National Agency of Petroleum, Natural Gas and Biofuels recently granted PetroRio the ‘Operator A’ qualification, which allows the company to perform activities in deep and ultra-deep water, essential for its growth strategy. The current scenario offers good opportunities both in Brazil and abroad, and PetroRio is strategically positioned as one of the sector’s main candidates for value creation given its solid balance sheet, highly qualified technical staff and capital allocation discipline. The company goal is to reach a production of 100,000 barrels per day by the end of 2017. This will be achieved through mergers and acquisitions in order to further dilute fixed costs and capture additional gains when the oil price recovers.

In line with its strategic focus on producing fields and reducing exposure on exploratory risks, PetroRio completed the farm-out of the concessions held by the company in the Brazilian Solimões Sedimentary Basin to Rosneft for $55m, and did not renew the oil exploration licenses in Namibia. Therefore, the company is no longer exposed to commitments with the exploration project in the amount of $150m that would be originated from the automatic renewal of these licenses. Continuing with the process of divesting on non-strategic assets, four aircraft were sold during 2015 for $6.1m. Two others were sold in the first quarter of 2016 leaving only one aircraft, for which the firm is currently
seeking a buyer.

petrorio-2In addition to Polvo Field’s optimisation, another area that should be highlighted is PetroRio’s innovative capacity and entrepreneurial culture. This has proven to be of vital importance as the energy company has now become the first in Brazil to use a new technology for oil containment and collection in case of oil spills. At the same time, the new equipment, Side Collector, increases oil collection capacity, as well as being able to eliminate the need for a second dedicated vessel. This then goes towards promoting the firm’s expected annual cost savings of approximately $3m. This strong culture, focused on results, will consolidate PetroRio as Brazil’s largest independent oil and gas production company.

Lastly, on July 14, PetroRio completed 1,500 days without lost-time injuries on the Polvo A fixed platform, which is equivalent to more than four years or approximately one million working hours. This important milestone demonstrates the company’s commitment to reflecting the principles of economic, environmental and social sustainability in its values and culture.

PetroRio had what can only be described as a successful 2015. In the environment of seemingly unending soft energy prices, many firms around the world have wavered, unsure of how to move forward in this new climate. PetroRio has not been one of them. It has faced the decline head on and used it as an opportunity for reorganisation. Its strong corporate culture has allowed it to make the most of the tough international climate within which it finds itself operating; its hard-headed and practical approach has allowed it to face down the worst of the world’s energy price collapse. PetroRio can now boldly move forward – in spite of prices seemingly not recovering anytime soon – with confidence.

Global energy demand expected to peak by 2030

Posted on by Helen

The World Energy Council has released its World Energy Scenarios 2016 report in collaboration with Accenture Strategy ahead of the World Energy Congress in Istanbul, and has predicted per capita demand energy demand will peak before 2030.

Speaking at the launch of the report, Executive Chair of Scenarios at the World Energy Council, Ged Davis, described the energy industry as undergoing a ‘grand transition’. “Historically people have talked about ‘peak oil’, but now disruptive trends are leading energy experts to consider the implications of ‘peak demand’. Our research highlights seven key implications for the energy sector which will need to be carefully considered by leaders in boardrooms and staterooms.”

The report suggests three possible scenarios for the energy economy and how they would each affect the global energy mix.

The report predicts per
capita energy demand will reach a peak before 2030. It also suggests overall energy demand will double
before 2060

While the report predicts per capita energy demand will reach a peak before 2030, it also suggests that overall energy demand will double before 2060. The report also predicts that solar and wind will continue to make up a greater percentage of the global energy mix. While solar and wind currently make up about four percent of the industry, the report estimates their share could rise to between 20 and 39 percent by 2060.

Subsequently, the report forecasts a fall in the percentage of fossil fuels in the global energy mix. In all three of its scenarios, it also suggests that the global carbon budget will be broken in the next 30 to 40 years. One consistent factor across all three situations is a growing demand for natural gas.

“By 2060, all scenarios point to an increase in demand for gas, as well as a possible peak demand for oil within the 2035-45 timeframe”, said Nuri Demirdoven, Managing Director at Accenture Strategy. “Misspending, including misallocation of capital, has always been a risk for energy assets, and will continue to grow due to fundamental shifts in the industry. Leading companies across all scenarios will be those that adapt quickly and take two urgent steps: rethink the balance of their energy portfolio, and utilize business and digital technologies to transform how they deliver work and organize and manage performance across their businesses.”

GCC Investment & Development Awards 2016

Posted on by Helen

Since 2014, oil prices have fallen from above $100 a barrel to around $50 on the global market. This rapid softening of prices has been felt differently around the world: some market players have benefited, while others have lost out. Generally, those nations that are oil exporters have found themselves on the losing end of the deal – yet not all exporters have passively accepted this decline and become victims of market forces.

Many countries have seen the decline as providing a chance to pursue much-needed economic reforms. Principally, the Arab kingdoms that compose the Gulf Cooperation Council (GCC) have all taken the opportunity to reassess their economies and pursue reforms aimed at fiscal diversification. Necessity is the harbinger of change, and the oil price collapse has made clear that change in these economies is now in fact a necessity. As a consequence, GCC states have begun to implement a whole raft of exciting developments.

Years of rising commodity prices have allowed the GCC states to foster a dependency on oil

Since the 1970s, when global oil prices first began to significantly increase, GCC states have profited handsomely from the natural endowment of black gold their nations sit atop. The money that came from selling oil to a world growing ever hungrier for the stuff has dramatically and positively changed the lives of GCC members. Oil incomes have allowed a construction boom in both commercial and residential properties, and the skylines of the Arabian Gulf are now unrecognisable from those of the 1960s.

Vast oil revenues have also been able to fund generous welfare projects across the region – with, of course, minimal national debt – creating a prosperous life for many. Many Gulf states now have among the highest per capita incomes in the world. The basic essentials of life such as water – not to mention energy itself – can be provided at heavy discounts, while many Gulf states have been able to introduce some of lightest tax regimes in the world, thanks to the strong fiscal positions oil has put them in.

But now, with oil prices at historic lows, reform is on the table. Without discounting the huge and life-changing benefits oil has brought to the citizens of GCC member states, it has not been without its problems – problems the governments of these countries are now keen to tackle and to solve.

Clear as water
Principally, years of rising commodity prices have allowed these states to foster a dependency on oil. Being so lucrative, oil production has often been emphasised to the detriment of other industries. However, GCC member states are now recognising this, and are pursuing an exciting agenda to diversify their economies, placing them on a sound footing for the future.

One of the most exciting sets of reforms to come out of the GCC states is Saudi Arabia’s Vision 2030. The impetus behind the scheme comes from the kingdom’s young and energetic Deputy Crown Prince Mohammed bin Salman. In April, the prince unveiled his plan for bringing wide-ranging reforms to Saudi Arabia, aimed at reducing his country’s dependence on oil by building a solid foundation for a revived private sector and fostering a good business climate.

The 84-page plan’s most revolutionary move has been to open up the Saudi state oil company Aramco to public investment. The oil-producing behemoth is worth roughly $2trn, and, according to Vision 2030, roughly five percent of it will be offered up to investors in a planned IPO. Allowing Aramco to be traded publically will lead Saudi Arabia into a more open and transparent age. As the prince noted: “Aramco’s IPO would have several benefits, the most important of which is transparency.” Public listing will mean “Aramco would have to announce its earnings every quarter. It will be observed by all Saudi banks, all analysts and Saudi thinkers, as well as all international banks and think tanks”.

Transparency in general is a core aim of the kingdom’s reform plan. As the official Vision 2030 statement noted: “We shall have zero tolerance for all levels of corruption, whether administrative or financial. We will adopt leading international standards and administrative practices, helping us reach the highest levels of transparency and governance in all sectors. We will set and uphold high standards of accountability. Our goals, plans and performance indicators will be published so that progress and delivery can be publicly monitored.” Increasing transparency in the country will help to create a better environment for business, investment and entrepreneurialism.

Facing outwards
Saudi Arabia is also increasingly courting foreign investment as a means of bolstering its non-oil economy. The aim, according to Vision 2030, is to increase foreign direct investment in the country from the 3.8 percent of economic output it currently accounts for, to 5.7 percent in total. To achieve this, the Saudis hope to advance their country as a major centre of financial and capital markets that are open to the rest of the world.

“To this end, we will continue facilitating access to investing and trading in the stock markets. We will smooth the process of listing private Saudi companies and state-owned enterprises, including Aramco”, the plan said. Alongside this, so-called ‘special zones’ will be created in order to encourage both domestic and international investment. The King Abdullah Financial District – currently under construction – will be transformed into “a special zone that has competitive regulations and procedures, with visa exemptions, and directly connected to the King Khalid International Airport”.

Oil dependency has also meant the public sector has come to dominate the economy, crowding out private enterprises. As the report noted: “Although we believe strongly in the important role of the private sector, it currently contributes less than 40 percent of GDP.” This issue will also be addressed in order to create more commercial opportunities.

As the Vision 2030 document explained: “To increase its long-term contribution to our economy, we will open up new investment opportunities, facilitate investment, encourage innovation and competition, and remove all obstacles preventing the private sector from playing a larger role in development.” Reforms will be implemented to pave “the way for investors and the private sector to acquire and deliver services – such as healthcare and education – that are currently provided by the public sector”.

The goal will be to “shift the government’s role from providing services to one that focuses on regulating and monitoring them”. Saudi Arabia “will seek to increase private sector contribution by encouraging investments, both local and international, in healthcare, municipal services, housing, finance, energy and so forth”.

These reforms and aims, it is hoped, will create ample new investment opportunities for both national and international firms across the Gulf. While Saudi Arabia offers the most comprehensive vision of reform and renewal, many GCC states are implementing reforms aimed at building a strong, healthy and vibrant economy.

In the World Finance GCC Investment and Development Awards 2016, World Finance recognises a number of the firms that are spearheading the GCC member states’ diversification revolution, and are therefore set to take maximum opportunity from these changes.

World Finance GCC Investment & Development Awards 2016

Best Investment Management Company
Alistithmar Capital, Saudi Arabia

Best Investment Banking Company
KAMCO Investment Company, Kuwait

Best Diversified Investment Company
Jazan Development Company, Saudi Arabia

Best Direct Investment Company
Gulf Capital, UAE

Best Sovereign Wealth Fund
Qatar Investment Authority, Qatar

Best Fund Management Company
National Investments Company, Kuwait

Best Custodian
SICO Funds Services Company BSC (c), Bahrain

Best Private Equity Company
KFH Investment, Kuwait

Best SME Finance Programme
Al Dhameen Programme
Qatar Development Bank, Qatar

Best Islamic Bank
Kuwait International Bank, Kuwait

Best Structured Finance Company
Dubai Islamic Bank, UAE

Best Personal Finance Programme
Sharjah Islamic Bank, UAE

Best Project Finance Programme
National Bank of Kuwait, Kuwait

Best Employee Development
Abu Dhabi Islamic Bank, UAE

Best Customer Experience
Saudi Hollandi Bank, Saudi Arabia

Best Investor Relations
Union National Bank, UAE

Best Corporate Social Responsibility
Dolphin Energy, UAE

Best Remittance Company
QIG Financial Services, Qatar

Best Integrated Solar Energy Company
QSTec, Qatar

Best Real Estate Development Company
DEYAAR, UAE

Best Architectural Project Design & Management
Omrania & Associates, Saudi Arabia

Best Hotels & Resorts Development Company
IFA Hotels & Resorts, Kuwait

Best Financial Centre
Bahrain Financial Harbour, Bahrain

Best Healthcare Provider
Dubai Health Authority, UAE

Best Pharmaceutical Company
SAJA Pharmaceuticals Company, Saudi Arabia

Best Luxury Car Dealer
Al Ghassan Motors, Saudi Arabia

Best Fashion & Lifestyle Retailer
Alhokair Fashion Retail, Saudi Arabia

Best Industrial Development Company
Industries Qatar, Qatar

Best Real Estate Development Project
Capital Market Authority Headquarters
Al Ra’idah Investment Company, Saudi Arabia

Best Infrastructure Power Development Project
Qurayyah IPP
Acwa Power, Saudi Arabia

Best Transport Infrastructure Development Project
Dubai Canal Project
Roads & Transport Authority, UAE

Best Economic Infrastructure Development Project
Sohar Port & Freezone, Oman

Individual Awards

Business Leadership & Outstanding Contribution to the GCC Economy
Mohammad Abdullah Abunayyan
Chairman of Acwa Power, Saudi Arabia

Chairman of the Year
Abdullah Ali Obaid AlHamli
Chairman of DEYYAR, UAE

Corporate Finance Deals of the Year 2016

Posted on by Helen

The instability that has so characterised the global economy in recent times has made the conditions for both businesses and investors hard to predict. Risk-taking is less common and financial gambles are few and far between, out of fear of a volatile operating environment that has already taken so many prisoners.

As much as caution remains the defining sentiment of the corporate world, the promise of an economic recovery has done a great deal to give buyers the confidence to seek out acquisitions.

The promise of an economic recovery has done a great deal to give buyers the confidence to seek out acquisition

Accumulated cash reserves have played their part in the last couple of years, and the healthcare, media and technology, and telecoms sectors in particular have sparked something of a deal spree of late. Global mergers and acquisitions (M&A) reached record levels in 2015, with the volume of deals hitting $5trn, according to JPMorgan Chase. This was thanks in large part to growing activity in Asia and the overall globalisation of the market.

While activity has slowed down slightly this year, with global M&A volume until April 2016 sitting at $986bn – compared with $1.24trn the previous year – it remains relatively buoyant. With the majority of corporations having gone through a period of relative inactivity, a string of recent deals has underlined the merits of corporate financing, particularly in commodities, where consolidation has proved effective in combatting overcapacity.

That’s especially true of the oil and gas industry, where the number of deals has surged over recent times on the back of sliding oil prices. Consolidation has been the response to high debt levels in the sector – almost 10 times earnings before interest, tax, depreciation and amortisation, according to a recent report by McKinsey – enabling production firms to remain competitive at a challenging time. “Healthy companies may have been slow to start deals, but they’ll clearly want to be on the lookout to strengthen their competitive positions as new opportunities emerge”, the report noted.

Despite signs of buoyancy, however, the current market isn’t without its complications. According to a report by Deloitte: “These improvements notwithstanding, headwinds remain. The market may be challenged by an unexpected extension of the prolonged low interest rate environment, heightened regulatory scrutiny of potential transactions, and cautious acquirers and sellers – with valuations varying widely based on fundamental differences pertaining to each target.”

Such heightened regulation around mergers has become especially evident in the US, with regulators tightening their policies and cracking down on deals in order to combat anti-competitive activity and protect national security. According to Steven Epstein, Partner and Co-Head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP: “Antitrust regulators have more frequently been applying increased scrutiny to transactions, requiring more broad-based remedies as a condition of granting approvals, and more often commencing litigation to block transactions.”

The report added that merger reviews by the Committee on Foreign Investment in the US around security concerns have also increased, even among corporations not directly linked to known security risks. Indeed, a quick glance at some of the collapsed deals over the past year shows evidence of the current framework.

Geopolitical effects
Elsewhere, geopolitical risks have had their part to play in the current shape of the market. Last year’s Paris terrorist attacks and tensions between Saudi Arabia and Iran earlier on in 2016, combined with various other political battles, have contributed to an environment of uncertainty.

M&A activity in the Middle East slowed at the start of 2016, with outbound transactions dropping 85 percent year-on-year to Q1 2016, marking the lowest level for that period in six years. Over in the UK, M&A activity slumped in anticipation of the Brexit vote, and even now the market continues to struggle from lower levels of investor confidence, with activity in the country this year reaching its lowest point since 2011, according to Dealogic.

How the legal framework for deals might change once the UK’s negotiations with the EU have been made remains to be seen; regulatory changes for international mergers will likely depend on whether the UK remains a member of the European Economic Area, but until the negotiations are concluded, it’s likely the UK and its potential investors will continue to experience challenges.

Optimists predict overseas players may well be able to pluck opportunity from the weak currency, however, by snapping up bargain deals and helping to prevent an all-out slowdown in the short term. A large pool of cheap financing has propped up the UK market so far, and Asian investors in particular have been eyeing up UK assets.

The Asia-Pacific region has continued to power through with its successful spate of M&As, with volume from the region hitting $1.5trn in 2015 – almost twice the amount seen in 2013. China has dominated the scene, despite concerns from some that slumped growth there could cause a slowdown.

In the first four months of 2016, Chinese investors announced 70 percent of the biggest cross-border buyouts from Asia, according to JPMorgan Chase. The volume of Chinese M&A transactions reached $735bn last year – almost triple the sum seen in 2013 – thanks to a rising middle-class, a favourable regulatory and funding framework, and vast experience in completing cross-border deals. That is a powerful combination when combined with China’s overall shift towards technology-driven investments – a factor that means North America and Europe are its prime targets.

New technologies
It’s not just in the M&A market that change is causing ripples: across the broader sphere of corporate finance, digitalisation is bringing its own implications to bear, and with new technologies, financial structures are changing. For example, recent research by Accenture found 80 percent of traditional finance services will be carried out by cross-functional integrated teams by 2020.

Such technologies are of course bringing ample opportunity alongside the challenges. The increasing use of big data in financial departments means it is becoming easier than ever to predict performance, seek out potential new markets, and assess (and track) financial risks. Companies are already seeing the benefits as well as the drawbacks.

It is by making the most of those benefits and adapting to these changes that corporations will succeed in today’s climate, and it is herein that the World Finance Corporate Finance Deals of the Year recipients have thrived, weathering the storm that was the financial crisis and retaining their competitiveness during times of volatility.

By overcoming geopolitical challenges and making the most of the opportunities that the current M&A market presents, our award winners offer an insight into what it takes to succeed in today’s market and the ways in which the industry is likely to change in the coming years. They provide an example to which the wider industry should pay heed, thriving in the face of uncertainty and plucking opportunity from instability.

World Finance Corporate Finance Deals of the Year 2016

International Bond Deal of the Year
Terrafina

Corporate Issuer of the Year
Southern Copper Corporation

Cross-Border M&A Deal of the Year
Al Ahli Bank of Kuwait

Equity Deal of the Year
Teva Pharmaceutical Industries

Local Currency Deal of the Year
YDA Construction

Capital Markets Deal of the Year
Rönesans Holding

Sovereign Bond of the Year
United Mexican States

Sovereign Issuer of the Year
Republic of Peru

Quasi-Sovereign Bond of the Year
Pemex

Refinancing Deal of the Year
Gruma

Multisource Financing of the Year
Fibria

Green Bond Deal of the Year
Asian Development Bank

Global Debt Issuance of the Year
African Development Bank

High Yield Bond of the Year
Coltel

Cross-Border Deal of the Year
Itau Chile and CorpBanca

M&A Deal of the Year
Haitong Securities and BESI

Islamic Bond Deal of the Year
Emirates Islamic

Perpetual Bond Deal of the Year
ICTSI

Multi-Currency Deal of the Year
Naspers

IPO of the Year
Nemak IPO