Category: Analyses

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Bending Some Rules While Upholding Others Unwisely?

Summary

The EU is at a cross roads. Top level political criticism by the likes of German Finance Minister Schauble of the right for ratings agencies to speak freely does not portend towards the EU being an open and dynamic project.

Rather the worry is that the EU establishment is going backwards in terms of all rights when faced with a financial crisis which they themselves helped create.

Analysis

The EU has already bent rules left right and centre to allow the bailout mechanism to exist. Meanwhile, a German court challenge could yet create problems with the EU’s attempted financial hegemony over nation states.

The EU political classes fear that selling central banks’ gold reserves would be somehow unreasonable. It is curious that closing the libraries beloved of hard working Germans is seen as fine in the new European order but selling the assets of the debtors is somehow to be avoided for reasons of political niceties that the EU does not observe in the breach elsewhere. It is even stranger that Mr Schauble seems to be so far removed from reality he does not appreciate just what a mess Germany has got itself in to in order to protect the replacement to the perennially strong German Mark.

(qv Note how pressurising an Italian off the board of the ECB is fine but actually having Greece and Portugal raise some much needed cash to settle their debts is apparently a step too far under the currently confused EU position…).

Meanwhile the Moodys downgrade has raised the ire of the EU. They previously have been keen to, er, downgrade the ratings agencies because their ratings were inaccurate.

Intelligent investors know that ratings are purely an indicative guidance tool. Curiously ministers seem to loathe the idea of a Portuguese ratings downgrade having previously pilloried the self-same agencies for being too lenient on markets in the good times! The EU has backed the ratings agencies into a lose lose situation when the key failing of the agencies was to be carried away with the political classes deluded Euro-euphoria…

The most charitable conclusion to be drawn from this issue is that the EU has become a little muddled due to the stress of not managing the Euro particularly well.

Less charitable conclusions have been drawn by the likes of Ambrose Evans-Pritchard in the Telegraph and they infer worrying parallels with the worst excesses of Europe’s most foul totalitarian regimes.

The EU dithered for years while believing their own ‘nirvana propaganda.’ Given the current crass and dictatorial flailing at messengers by EU leaders, the problem is that where the Euro ought to have had a fighting chance of survival, now the position is one where the currency is likely to be sabotaged by the utterly incompetent ‘management’ that overlaps at the top of the EU itself.


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Polkomtel Sale: Caveat Emptor! Plus is A Big Minus

Summary

“Plus” Polkomtel, a privately held Polish telco is still in the process of being sold. The rather long-drawn out sales process presumably reflects relative buyer apathy for a company which has appeared at best dysfunctional to some clients.

Bidders may wish to consider their options. After all the only telco holding stock currently is itself a global market leader and apparently happy to sell out of Polkomtel despite the many underlying attractions to investing in Poland’s growing economy.

Analysis

Mobile telecoms companies all harbor more or less ubiquitous marketing strategies consisting of big name stars and amusing or glamorous advertisements. Plus Polkomtel also markets with star names although customers might be inclined to believe that any correlation with a serious mobile telephony company is thereafter, modest, to put it mildly.

Plus appears to provide little, if any, concept of organized customer care. Customers report no clear line of responsibility or management for issues and little evidence the company actually cares about its clients other than to demand payment for services that are arguably mis-sold.

In recent days there had been media stories the sale process might be delayed due to a lack of satisfactory bids while apparently as many as four bidders may still be in the process, namely:

Polish billionaire Zygmunt Solorz-Zak, Apax Partners LLP, TeliaSonera AB and a group formed by Telenor ASA and Bain Capital LLC.

Some reports suggest only Solorz-Zak and Telia Sonera are still in the official bidding with an auction now being scheduled.

Either way, the bidders failing to get this business may ultimately have time to reflect more on avoiding a clunker of an investment than missing a business with upside. On the other hand, at a suitably distressed sale price, Plus Polkomtel may be a good investment for somebody with the time and energy to develop a coherent customer-centric management focus which can deliver.

The shareholders of Polkomtel are mostly major Polish industrial businesses businesses: KGHM (copper), PKN Orlen (oil), PGE (power) and coal miner Weglokoks.

Interestingly, the other shareholder is the leading international telco Vodafone. The fact that Vodafone (the only shareholder which actually answers complaints about Polkomtel incidentally) are seeking to sell is perhaps not the best indication that this is a dynamic growth oriented company. After all, the Polish consumer space is a bright and fast growing marketplace – why are Vodafone happy to sell their stake in a mobile provider? Having seen Polkomtel up close, it is always a cause for concern when the most knowledgeable shareholder about the business is also happy to sell.

The next round of bidding is apparently expected by June 10th. Prospective purchasers would be wise to concentrate on extensive due diligence in the meantime.

Plus Polkomtel is a huge case of caveat emptor.

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A Canadian Offensive

Summary

The Maple consortium of large Canadian banks led by the best Canadian Exchange Manager, Luc Bertrand, is likely to acquire the Canadian exchange TMX. The London Stock Exchange looks unlikely to be able to win the prize against a very strong bid.

Analysis

For outsiders, it was a strange day in Canadian markets when the board of TMX overlooked their Deputy CEO Luc Bertrand and chose an outsider, Tom Kloet as CEO in 2008.

As the CEO who took the Bourse de Montreal from unloved also ran to a 1.3 billion Canadian dollar franchise, there was widespread shock that Bertrand did not get the top job at TMX.

Three years on and Luc Bertrand has returned to centre stage as the head of the Maple group bid and already the bid appears to be building remarkable momentum.

The price offered is strong and includes a judicious quantity of cash for existing shareholders. The concept of building a silo for Canada ought to help strengthen the Canadian market infrastructure (although it is, admittedly somewhat controversial) and ultimately TMX would gain a top manager who has a proven track record of transforming exchange businesses.

LSE look to have been simply outplayed by a bid which while all Canadian is not protectionist per se although the nationalist issues will probably do Maple no harm in their pursuit of the exchange.

A revamped TMX with Luc Bertrand at the helm promises great things for the Canadian markets and indeed may be influential on market events overseas. Will it push LSE in to negotiations with NASDAQ? That seems logical although it is tricky to see which side will be willing to give ground in what could be a relatively complex deal to complete for political more than operational reasons.

 

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NASDAQ-NYSE: Perhaps It’s Just An April Fool’s Day Prank?

  • Patrick Young

Summary

The worst kept secret in exchange mergers, a NASDAQ ICE bid for NYSE Euronext has finally been announced on April Fool’s Day. This may be an unfortunate choice of date for a deal without many clear merits.

Analysis

That the NYSE Euronext deal has been launched on April Fool’s Day may yet make an amusing footnote in exchange history. While the current proposal from Deutsche Boerse has a credible business case behind it, the rationale for this bid is, at best, somewhat contradictory.

If it succeeds, InterContinental Exchange will garner the most significant assets: the LIFFE futures exchange and related derivatives business units. This is a fabulous franchise which would elevate ICE to the top rank of exchanges.

NASDAQ, on the other hand, seems content to plough the increasingly challenging furrow of bulking up its equities trading platforms, in particular in the ultra-competitive USA. It will gain an extra brand name in NYSE but it already has the NASDAQ name so the replication is hardly likely to benefit the bottom line.

For ICE this deal is a win win. At worst, they force Deutsche Boerse (DBAG) to pay more for NYSE – a disruptive tactic they have used before (to make CME pay more for CBOT for instance).

For NASDAQ it is really difficult to see any benefit whatsoever accruing from this deal which will merely make NASDAQ a larger dinosaur than it was already in danger of becoming.

For NYSE shareholders at least there is a prospect of a higher valuation on their shares.

Nevertheless, overall this appears to be a deeply flawed deal from the NASDAQ standpoint, based on a reactionary understanding of the exchange industry.

ICE shareholders will like it, presuming they think the bid can prevail and deliver the finest assets to Jeff Sprecher’s shrewd offices. NASDAQ shareholders ought to be concerned at the vision of management if they truly believe this is a deal that will help their future prospects.

As I have frequently remarked before “this is a derivatives world.” NASDAQ seem to be turning their back on the future with a somewhat ill-conceived, if not downright myopic, vision of the future of markets.

 

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Will Warsaw’s IPO Be Damaged by Non Disclosure?

  • Patrick Young

Summary

The Warsaw Stock Exchange ought to have set itself the highest possible standards of transparency for its IPO yet recent Polish media reports highlight that the exchange omitted to mention an ongoing criminal investigation by the Polish anti-corruption bureau.

Analysis

The issue lies not with the outstanding (and ongoing) investigation itself so much as with the fact that as a vendor the government ought to lead by example in terms of material disclosure while the stock exchange itself surely has to be seen to be as transparent as possible in its dealings in order to set a clear example to the many companies issuing on the exchange.

In this case the WSE (and one can argue the government) appear to have deviated from best practice in a manner that does not lead to greater investor confidence in either the WSE IPO itself nor other privatization issues.

This is a great pity as there is a great business case to be made for Polish investment. However, the management of WSE itself has made a distinctly strange call to try to keep hidden information that really ought to have been fairly and clearly disclosed in both the Polish Prospectus and the narrowly distributed English language documents.

Exchanges and governments must create confidence in markets. One way to do that is to be transparent in disclosing issues that are material to the valuation of a company. Whatever the nature of potential political machinations that might be behind any investigation, there is a clear need to divulge a criminal investigation that is not merely ongoing but has recently been extended in duration. Clients are capable of rational discussion of risk disclosures (as was evident with CBOE’s transparent policy on various outstanding legal issues) but exchanges and governments must make the information publicly available for fear of otherwise provoking a crisis of confidence in the transparency of the core institutions at the heart of traded markets.

 

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ASX SGX – The Defense of The Dinosaurs?

  • Patrick Young

Summary

Are ASX and SGX increasingly irrelevant as exchanges or do they have a role to play? – Indeed does their merger have greater relevance still for shareholders and traders? Then again there are significant regulatory issues to be overcome…could it all be smoke and mirrors?

Analysis

SGX CEO Magnus Bocker gained incalculable M&A experience from leading the independent OMX into the arms of NASDAQ during a frantic round of deal-making,.

Thus Bocker arrived at SGX as CEO with a subtly different pedigree to his forerunners.

The concept of doing a deal across borders is one which makes a great deal of sense for SGX although the notion of Australian openness to capital markets activity on a regional as opposed to a purely nationalistic basis, is essentially unproven.

With a Chi-X challenge mustering itself close to the gates of the ASX, this may seem like a curious deal. At the same time, the opportunities for synergy are great, if not the usual dull precision cost-cutting stuff. ASX is a rare bird, the IT pioneer and first mover of demutualisation which basically failed to take advantage of the situation and has for the past decade been run on a basis of extreme cost-cutting by a largely unimaginative management team. The returns have been squeezed but the innovative thrusts of ASX and SFE have been all but extinguished.

In the region, the masses are myopically fixated  with China,. From rare earth mineral corners to African investment, it seems China will dominate proceedings in the region, if not the world. Yet that is to entirely ignore the fact that SGX allied with ASX can create a fascinating parallel trading universe for investors with sound government practices at the core of the business model. There are going to be many opportunities within South_east Asia for decades to come at multiple different levels of scale, alongside the China option.

In essence, there is much more to this deal than merely the desperate act of two blacksmiths shops merging their operations to take on the insurgent motor car.

 

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Warsaw Stock Exchange – What Future Does An IPO Hold?

  • Patrick Young

Summary

The leading CEE bourse, Warsaw Stock Exchange is finally about to IPO . Despite a great deal of success the markets remain immature in Eastern Europe and while there are leaders, a huge amount of development remains.

How can WSE develop and what may hold it back? Where are the drivers for Growth?

Analysis

The Warsaw Stock Exchange is, alongside the Vienna Bourse’s conglomerate business, the largest stock exchange in the “New Europe.” From a standing (re-)start during the past 2 decades, WSE has grown to some 400 stock listings and this year has easily absorbed 2 large privatizations (Tauron and PZU) with relative ease.

After several false starts (an IPO was cancelled during the credit crunch, a rather bizarre closed auction process was run last year only for other exchanges while ignoring willing bidders…)., the WSE has begun a book building process that means 65% of the company may soon be publicly traded.

Government ownership was perceived to have held Warsaw back from achieving cross border mergers – although the new share structure leads me to wonder how a government voting control can amend that situation? Realistically, the government needs privatization revenues to pay for a relatively bloated budget (albeit a minnow by comparison with many European ‘norms’) but ultimately the WSE has many exciting opportunities. At the same time the spectre of Polish protectionism is an issue from several angles for this business.

Moreover, despite the growth opportunity, WSE is hardly a takeover target given a several hundred person payroll and a relatively modest size of operations. In financial terms, this business is a rounding error compared to the titans like Deutsche Borse or CME Group. On the other hand, Poland has been leading growth in the New Europe and the region has a great many opportunities. The WSE is probably missing as many opportunities as it can exploit right now.

Nevertheless, the management has been efficient in the growth stage but many lack private sector work experience which worries some investors. The business is a potential powerhouse, although much work remains to be done before any exchange in CEE/SEE is actually dominant.

 

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Save The Bulgarian Stock Exchange!

Summary

It is almost unbelievable that any government could seek to nationalize at a discount an operative stock exchange but that is exactly what the Bulgarian Ministry of Finance is currently seeking to achieve.

Analysis

The world is full of government’s seeking to boost their coffers and reduce their deficits.

Alas the Bulgarian Ministry of Finance appears to have taken a step too far with their plan to de facto nationalize the national stock exchange at a significant discount to the value of the cash it holds (regardless of the property, other assets and indeed the operating value of the business!).

Such an act can only harm the image of Bulgaria in the eyes of both domestic and foreign investors during a very challenging time for the world economy where competition within the “New Europe” alone is intense for investment.

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The Value of CBOE

Summary

The CBOE has been much hyped in some sectors of the press yet the world has changed significantly since the last major exchange IPO. While a terrific underlying business, CBOE may not be destined for as exciting a market debut as was the case for CBOT  and NYMEX during the bubble of 2006-2008.

Analysis

CBOE clearly has a strong monopoly on index products that a legal challenge by ISE appears relatively unlikely to change. Nevertheless, a separate legal challenge from ISE is less easy to pre-judge and then there are significant issues concerning the ‘stickiness’ of volume once the lock-up period ends.

That said CBOE has plenty of room to cut costs through closing the floor now management finally has control of the exchange’s destiny. Still the 600 person head count has a long way to shrink for CBOE to realize a similar lean frame as the ISE for instance.

The implied takeover mania may take some time to emerge as CME, NASDAQ, NYSE and ICE all have key regulatory issues to concern them right now. Deutsche Borse (DBAG) looks highly unlikely to show any interest in a bid as it already owns the much more technologically efficient ISE.

Overall, the CBOE IPO brings an interesting company to market but a large number of questions overhang the issue, as this article outlines. There may yet be a crazed scramble for CBOE stock from day one given the relatively small quantity of shares being offered but at the same time in a very volatile marketplace with exchanges under regulatory threats, there are also be sound reasons for investors not to get overly excited about the CBOE IPO as it looks fully valued.

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Is Jon Corzine the Brand MF Global Requires?

  • Patrick Young

Summary

Former Goldman Sachs Chairman Governor Jon Corzine is taking the helm of MF Global (NY SE ticker: MF)  in a move which is likely to reshape the entire business. One of MF Global’s problems has long been its brand – or lack of a genuinely deep balance sheet. How can brand Corzine transform the futures/options specialist brokerage?

Analysis

The arrival of Corzine as Chairman and CEO of MF Global marks a revolutionary change of trajectory in the venerable commodity brokerage. Nowadays a leading player in the exchange traded derivatives brokerage markets (an ‘FCM’), MF Global has been stabilized after a tricky period, thanks to the stewardship of former Cargill Investor Services CEO Bernie Dan who was more recently in charge of the Chicago Board of Trade. Corzine is being handed a better organized company to take to the next level.

Corzine has already stated his intention to move MF Global in to more proprietary trading (e.g. the existing US Primary Dealer – Treasury Bond trading – application) operations although he notes the fact that MF Global has a modest 1 billion dollar balance sheet which will restrict a headlong shift in to trading.

Amongst other things, we can expect Corzine to exploit the advantages of MF Global in being neatly positioned thanks to its existing connections to leading exchanges and those increasingly vital CCP clearing houses. Likewise, it would only seem sensible that Corzine will endeavor to exploit whatever new opportunities arise as a result of regulatory reform in the US and Europe.

The opportunities for MF Global remain considerable, although one thing holding it back has been its modest balance sheet and the fact that its brand did not necessarily resonate customer confidence (for a host of historical reasons as well as the more pressing issue of recent fears for customer deposits on a broader basis) . The efforts of Interactive Brokers to stress its balance sheet and security during the depths of the ‘credit crunch’ were instructive while MF Global had a much worse time due to legacy issues. How far the company will be rejuvenated under ‘Brand Corzine’ is a fascinating one but certainly he is a CEO/Chairman with a vastly higher profile than any of his predecessors, and indeed anybody else heading an FCM or similar brokerage operation anywhere in the world.

Given that Corzine is also a partner at key MF Global shareholder JC Flowers, it is fair to presume that he has a remarkable mandate for change which is likely to have an even greater impact than his terms as a Senator or New Jersey Governor.

The future for MF Global is certainly most exciting given its various existing business units and likely additions to the group in the future.