Jim Armitage: Vodafone's German buy is a cause for celebration, but don't bet on more big deals
Outlook. Plus: Blue-blooded bank boxes clever on ENRC; Let's not belittle Citi's Baghdad adventure
Jim Armitage is the City editor of The Independent and London Evening Standard group of newspapers. He has been a reporter and editor for more than 20 years and was recently shortlisted for the Press Gazette financial journalist of the year and The Society of Editors financial journalist of the year awards. He contributes news, investigative reports and comment to the Independent titles plus a daily column in the Evening Standard.
Tuesday 25 June 2013
We should all be giving ourselves a huge pat on the back. Vodafone's €7.7bn (£5bn) takeover of Germany's Kabel Deutschland is the biggest deal by a British company for three years, and the largest takeover of a German company since Vodafone bought Mannesmann in 2000. Cue the opening bars of Rule Britannia.
I say we should be applauding "ourselves" because, as the Vodafone board admitted yesterday, much of the credit for pulling off this deal goes to the super-low interest rates at which big companies can currently borrow. And that's largely thanks to the quantitative easing programme underwritten by us British taxpayers.
To quote Andy Halford, Vodafone's chief finance officer: "the cost of funding in this deal is very low by historical standards."
He can say that again. Vodafone was able to bulk up its financial firepower a few months back by issuing $6bn of bonds at just 4 per cent. When you're borrowing at those levels, you can justify paying what analysts have been describing as "toppy" valuations like it is paying for Kabel.
What's more, it's considerably less than Vodafone's rival bidder for Kabel, John Malone's Liberty Media, would have to pay, following the downgrades of its credit ratings that followed its recent bumper takeover of Virgin Media.
There's no doubt that QE has, by transmitting lower interest rates to the corporate bond markets, made life far cheaper for big business. And they don't come much bigger than Vodafone.
The trouble is, QE has barely helped smaller and medium-sized businesses. They do not have the luxury of being able to tap the corporate bond markets. Instead, they are reliant on borrowing from banks which, despite themselves being helped by QE, are reluctant to pass on the largesse in the form of loans to businesses because they're under orders to shore up their balance sheets.
So why have we not been seeing more bumper takeovers? After all, this one may sound big, but it's less than a pint of milk compared with Vodafone's $172bn (£112bn) blowout on Mannesmann. The problem has been that QE, by depressing interest rates on bonds, has also made share prices surge. This makes target companies look worryingly expensive, particularly given the parlous state of the global economic revival.
So chief executives, and their chairmen and shareholders, have to be ever more convinced of the business case before pulling the trigger. Meanwhile, the bond markets, with their super-low yields, and share prices are looking wobblier than for years as the Federal Reserve considers withdrawing the QE stimulus.
In other words, don't bet on another Mannesmann-style deal any time soon.
Blue-blooded bank boxes clever on ENRC
So many investment banks are taking a fee out of the takeover of ENRC, one almost wonders what will be left when its oligarch founders succeed in their bid.
They are being advised by Société Générale, Sberbank and VTB Capital, ENRC's other shareholders by Credit Suisse and Lazard and Kazakhmys by Citigroup and JP Morgan.
But, of all these advisers, perhaps the most important do not have their name emblazoned on announcements. They are those famously discrete counsellors of governments around the world, Rothschild. The blue-blooded bank has been advising the Kazakh state on what to do with the increasingly embarrassing problem that is ENRC. Not since Sacha Baron Cohen has Kazakhstan's reputation overseas been so besmirched as by the rolling scandals surrounding ENRC. Yesterday's deal sees the country use its stake in the successful Kazakhmys operation to buy out the minority investors of the stricken ENRC. The government hopes that, once ENRC disappears from the London Stock Exchange goldfish bowl, the negative headlines will recede. It is probably right. And I wouldn't be surprised if the Serious Fraud Office drops its investigation, too.
But it's not just PR. The Kazakhs are seriously worried about an outright collapse of ENRC that could trigger mass job losses among it 60,000-strong workforce in Kazakhstan. Kazakh miners are a feisty bunch, capable of causing serious unrest. This deal means the government can ensure such an outcome does not happen.
It's clever work by Rothschild.
Let's not belittle Citi's Baghdad adventure
Delighted to see that Citigroup, the giant US investment bank, is opening up for business in Iraq.
After the carnage and mayhem the country's citizens have endured in recent weeks, it is a courageous move that we should all applaud. Hopefully, it will bring profits to Citi too, and encourage others in its wake.
Cynics will inevitably carp that the move to open a representative office in Baghdad merely highlights another case of US business interests trying to squeeze profit out of this unlucky nation.
They are wrong. Iraqis desperately need just the kind of long-term investment and trade finance that Citi will provide.
Only with Western financial backing and advice will the country manage to create industries outside oil, upon which the economy is currently massively over-dependent. Construction, agriculture, retail, consumer goods could all thrive there, were they to have finance that is unavailable locally.
Citi, and the smattering of other banks with representative offices in the country, will play the key role in this.
Also, by having boots on the ground, these banks will be able to spot new entrepreneurial talent. In a place where the brightest currently angle at getting safe jobs in the overstuffed oil bureaucracy, support for those with good business ideas could bring rewards for the country.
It doesn't seem too often that bankers deserve our hopes and praise. But this such an occasion.
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