The year of the orange blossoms
The orange blossom, with its fragrance and unmistakable delicacy, is one of the symbols of Sicily. In the language of flowers, the meaning of orange blossom is very profound. It symbolises fidelity in love and is, par excellence, the flower dedicated to weddings, as a representation of virginity. Legend has it that a Spanish king, having received an orange tree as a gift from a beautiful girl, had it planted in the garden of his castle. When an ambassador passing through his kingdom asked the king to give him a sprig of orange blossom, the king replied that he would never give anyone a single branch of the plant he cared so much about.
Orange blossom
The ambassador, having received the king’s refusal, turned to the gardener for a branch of orange blossom and paid him 50 gold coins for the service, money with which the gardener could finally give his daughter a dowry so that she could be married. On her wedding day, the girl adorned her hair with a branch of orange blossom in honour of the plant that had given her the opportunity to marry, and the orange blossoms have remained inextricably linked to the day ever since.
A few months ago Glaxo was worth 11x earnings and was a sell or neutral for most analysts. The consumer division to be spined-off and listed was worth between £30bn and £35bn according to them. A year later the stock was up 30% and over the weekend it emerged that Unilever had offered £50bn for the division, an offer deemed insufficient by Glaxo.
Today, while we have an army of new companies with folkloric exaggerated valuations, we have another army of old companies trading at very modest valuations, not only in relative terms, but also in absolute terms.
M&A activity in 2021 was the largest recorded in history. However, it will only pale in comparison to what we will see in 2022. High liquidity, the need for synergies to limit cost increases and deglobalisation are some of the reasons. If the need to acquire capacity in the new digital world drove M&A in 2019-2021, in 2022 regulation and competition will drive consolidation in many traditional industries (broadcasters, newspapers, retailers, telecoms, banks). But digitisation is not the only great telluric movement of these years. Energy transition and e-mobility are profoundly changing dynamics, necessitating radical change and consolidation. Finally, COVID has physically and culturally changed our society, and industries such as airlines, tourism, and entertainment will have to restructure themselves profoundly in order to survive in the new world. The previous levels of competition and marginality are no longer adequate.
According to a survey by EY, 49% of large companies are ready for M&A if they find the right target and about 2/3 of these are looking for targets abroad.
The huge, fixed-income market (>$100 trillion) is becoming less investable, freeing up large resources to invest elsewhere. The technology bubble is now gradually deflating and is less attractive for new money. Meanwhile, the private equity market is growing every day. According to S&P Global, some USD 3 trillion now sits unused in VC and PE funds, and although SPACs no longer generate as much excitement as they used to, USD 500 billion raised by them is waiting in the wings for opportunities.
Ahead of us lies an exceptional consolidation season that will shatter previous records and help close the laughable valuation gap that now exists between traditional and “technology” companies, leaving it to each reader to define what is and what is not a technology company.
Our products will not fail to benefit from this irresistible trend in front of us.
France: Cuba without the sun?
Emmanuel Macron
Francois Hollande won the presidential election back in 2012 with a series of populist proposals. One of them stood out from the others in severity: raising the marginal tax rate to 75% for personal incomes above one million euros. After his election the rule was introduced and led to the loss of hundreds of distinguished citizens and a reduction in tax revenue. In 2014 the rule was abolished. Emmanuel Macron, Hollande’s advisor at the time, has always been against the rule and colourfully called it ‘Cuba without the sun’. Many years ago, while living and working in Paris, I still remember an emblematic scene in a post office. A single counter was open and the queue was beginning to stretch, while behind the counter there were other not-so-busy employees. Suddenly a little old lady started shouting, demanding that another counter be opened immediately. The door was opened immediately. The scene struck me positively. In Italy this would hardly have happened. In France, the ‘public thing’ was truly felt as public.
Under his presidency, Macron has experienced how difficult it is to reduce the country’s social protection and has had to adapt. He has adapted a lot. In fact, not only has he given up reducing social protections, but he has come up against a series of populist and anti-democratic initiatives with the sole aim of staying in the Elysée. Minority shareholders in large French companies such as Engie and Carrefour have noted how little respect for private property matters to Macron if it can help him gain votes. And there do not currently seem to be any institutions in France capable of sanctioning behaviour clearly contrary to private property. But it won’t last.
On Friday it was EDF‘s turn. The government headed by Macron decided to limit the increase in the price of energy produced by EDF to 4%. This was motivated as a manoeuvre to safeguard the consumer. However, this is not the case. It saves the wealthy citizen along with those who need help. At the same time, it penalises the saver invested in EDF, who is counting on his savings to enable him to spend a barely acceptable old age, as well as the big money investor. The manoeuvre therefore risks taking from those who have less and giving to those who have more. The manoeuvre certainly helps a desperate Macron to increase his electoral support and, after all, that is his only goal.
Today EDF trades just above tangible equity, seemingly a gift for a utility central to the country and the world’s only major nuclear utility. However, when certainty about the rules is lacking, investors stay away. The government has said it will help the utility overcome the large costs it will have to bear. But we are back to statements with no regulatory backing and no visibility, more in line with the South American tradition than the European one. At this point the only hope for the 18% of minorities that remain invested is that the state will manage it in line with electoral appointments. With this move, Macron has certainly positioned France well to contend with Italy for the sceptre of banana republic, an excellence in Europe that until now has been entirely Italian, but which we would like to do without. So we can only thank Macron.
Operationally, we would consider the company in the event of a capital increase, an act that would make clear the damage and injustice done and would probably require a process of revision of the protections guaranteed to private investors. Just as the old lady at the post office was very clear about her rights, the French people will not be able to put up with this young president’s volatile and undemocratic behaviour for long.
UBS, the exorcist
Scene from the 1973 film “The Exorcist”, based on the novel by William Peter Blatty
Poor Credit Suisse. It needs an exorcist immediately. A good one. After the many scandals that have dogged the bank over the last two years, it was announced this morning that the bank’s new prestigious chairman, Antonio Horta-Osorio, has resigned after twice failing to comply with COVID restrictions. In recent weeks a number of rumours have circulated in the market. They referred to a potential merger between Credit Suisse and UniCredit or BNP. Not to mention a few large US banks. We believe such rumours make sense, but the chance of them leading to anything is minimal. Why? Because Switzerland is small and protectionist. The disappearance of the new president who was supposed to outline a new strategy, and possibly a new alliance, removes the credibility of an international alternative. Moreover, if something becomes credible UBS will take a step forward. The only question is whether it makes sense for UBS to wait or would it be better to make the first move. A merger now, with markets expanding and rates in reverse, could limit the human costs of layoffs and would free up the potential of Credit Suisse now under formaldehyde after so many scandals. The Credit Suisse brand would survive as the largest retail bank in Switzerland, which would be duly spined-off and listed independently. The new super UBS would surpass Fidelity (over USD 4 trillion AUM), positioning itself as the fourth largest asset manager in the world, after Blackrock, Schwab and Vanguard, and the largest for wealth management and active management. It would have a powerful presence in Asia and Europe. It would have room to grow in the US.
Just as in the famous 1973 film, The Exorcist, the sacrifice of the young Jesuit father Damien Karras led to the liberation of little Regan, so we hope that the exit of Horta-Osorio will lead the poor Swiss bank into the salvific and purifying embrace of UBS, to the delight of shareholders, clients and the Swiss authorities.
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