Investors in Ann Inc. seem to be betting that the private-equity firm Golden Gate Capital can fix Ann Taylor’s parent.
Ann Inc. reported third-quarter earnings Friday and in the words of Stifel analyst Richard Jaffe ”the wheels came off the wagon.” The company missed projections, said its inventory was way up at Ann Taylor because of product-shipment delays, and admitted its mix of merchandise wasn’t resonating with consumers.
Yet Ann’s stock barely budged, trading down less than 1% Friday. Golden Gate, a firm known for taking retailers private, has clearly put a floor on the stock since it revealed a stake of nearly 10% stake in March.
Mr. Jaffe wrote in a report Friday morning that Golden Gate premium makes the company’s stock hard to value. “We believe the stock is no longer trading on fundamentals.”
It’s unclear what Golden Gate’s plans for the retailer are. The fund appeared to up the ante last month when it signed a nondisclosure agreement with Ann, which gave it the opportunity to peer deeper into the company’s financials and precluded the fund from selling its stake.
At the time, the retailer said “given Golden Gate’s expertise in specialty retail and the positive interactions between the companies to date, it would be beneficial to continue discussions on a more detailed basis.”
Golden Gate wouldn’t comment on its plans Friday but investors and analysts are betting that the PE firm would either take Ann Taylor private or might simply take a more active role in its retail operations. In addition to Golden Gate, activist investor Engine Capital LP called in August for Ann to consider a sale.
Mr. Jaffe said a take-private deal could be difficult now with Ann’s stock trading at its current price of $38.23. It would be difficult for a PE firm to both give Ann Inc. enough of a take out premium and enough wiggle room on its interest payments on any debt it takes on based on the company’s current free cash flow, which is projected to come in at $86 million in 2014, according to FactSet estimates.
Still Golden Gate has proven its retail prowess on several occasions and any operational assistance it provides to Ann Taylor could be helpful, analysts say. Golden Gate won big in its investment in Zale Corp. which was acquired by Signet Jewelers Ltd. in May for $1.46 billion. In May, it purchased the Red Lobster chain from Darden Restaurants Inc. despite opposition from activists investors.
Yet not all its takeover attempts have been successful. In an unusual deal, it tried to provide backing for Jos. A. Bank Clothiers Inc.’s $2.3 billion hostile bid for rival Men’s Wearhouse Inc. Instead, the target, Men’s Wearhouse, ultimately prevailed and bought Jos. A. Bank.
Without a deal? Analysts at Stifel and Janney pointed to the external headwinds facing Ann’s, including weak mall traffic and a highly promotional retail environment, as well as some poor choices in merchandise that just hasn’t resonated with consumers.
Still analysts at Janney also think that the hope of a buyout will keep investors in the stock at these levels at least.
Actavis PLC’s $66 billion deal to buy Allergan Inc., announced Monday, is the biggest merger in a very busy year for mergers. The agreement appears likely to mark the end of a months-long tug-of-war between Allergan, the maker of Botox, and a team that included activist investor Bill Ackman.
In this week’s edition of the MoneyBeat Week podcast, the team looks at the deal from a few different angles. How did it come together? Why didn’t Mr. Ackman’s team raise its bid? And what does the recent flurry of merger agreements say about the state of the stock market?
On that last question, the concern is this: The last two peaks in deal activity coincided with the last two stock-market tops. Is this year’s record merger pace a warning sign for what’s ahead for investors in 2015?
It’s ups-and-downs in the health-care tech IPO market these days.
This week’s hottest IPO in the sector was Second Sight Medical Products Inc., maker of a technology to help the blind see (ticker “EYES”). It zoomed 122% in first-day trading Wednesday on the Nasdaq . That first-day pop was the third best of any U.S. listing this year, according to Dealogic.
Meanwhile, Neothetics Inc., which develops fat reduction drugs, was down 14% in first-day trading on Thursday.
Last week saw fibrosis treatment maker FibroGen Inc. jump 22% in first day trading, after debuting as the most highly valued clinical stage drugmaker in at least 10 years, with a market cap of just over $1 billion, according to research service IPO Boutique. That week also saw NeuroDerm Ltd., which makes treatments for nervous system disorders, drop 8.5% in first-day trading.
With the number of biotech IPOs surging more than 70% this year from last year—comprising about a third of the market, according to figures from BMO Capital Markets—one thing issuers have to consider is just the plethora of options available to investors, both in the form of new issues and recently public companies that are still new to them (and might be available for less than their IPO price).
“As supply has increased, buyers have become more discerning,” said Michael Cippoletti, head of U.S. equity capital markets at BMO Capital Markets. Investors are “currently favoring later stage issuers as well as orphan drug and oncology companies,” he said.
The result is what looks like a two-speed market. Since Labor Day about half the deals in the sector priced in or above their range, and half below. Among healthcare IPOs in the last 30 days, three heaare trading up more than 40% from their issue price, and three have broken below issue price, according to Syndicate Pro LLC, an IPO tracking service.
So while the Nasdaq Biotechnology index trading just 2% shy of its all-time high, set at the end of October, the IPO market is revealing that underneath that, conditions are not as rosy for the hot sector. Contrast this month’s IPO debuts to March, at the tech-and-biotech market peak, when not one of the 11 healthcare IPOs dropped in first-day trading.
What it suggests is that momentum money is coming out of the market, leaving it to the fundamental folks to price deals. Not as good a sign for people looking to make quick bucks.
The pay that CEOs and other executives receive is not aligned well with company performance, primarily because companies and boards lack the tools to accurately measure how much success executives are actually having in their jobs, a new study concludes.
The new report, from the nonprofit Investor Responsibility Research Center Institute and consultancy Organizational Capital Partners, set out to determine how well executive compensation among S&P 1500 companies was aligned with company performance and shareholder returns. “The expectation was that the analysis could usefully serve as a marker in the ground,” the firms wrote in its report, “and yet what it uncovered was unexpected.”
IRRCi is a research firm that was formed after its parent was sold to Institutional Shareholder Services. OCP is a corporate consultancy operating in the U.S. and Europe. You can read the full report here.
“The most common measurement tools and metrics used in enterprise performance measurement and the design of long-term incentives,” the authors write, “do not necessarily directly align with underlying sustainable value creation for shareholders.” That’s a turgid way of saying companies can’t really tell whether or not executives are doing anything to make the business better in the long run.
The report is aimed at institutional investors, corporate directors, and executive management. But inasmuch as it adds to the national discourse on executive pay, it seems the report should also have some appeal beyond those narrow groups. With so many focused on “say on pay” measures, it would help if there were better ways to actually gauge the value shareholders are getting for the pay they are doling out. The goal of the report is to make it easier to actually say what the pay should be.
The most common metric used to gauge an executive’s success: total shareholder return, which is the stock price’s appreciation plus any dividends. “Total shareholder return is, by far, the most dominant performance metric in long-term incentive plans,” they say.
The problem is that the stock price can be influenced by factors that have nothing to do with the executive, like central bank policies, regulatory changes, and geopolitical risks. Worse, executives can take actions that maximize short-term performance. That’s been the critique of International Business Machines Corp. and its $12 billion in buybacks in just the first six months of 2014. On top of that, the study found that most compensation plans have a long-term outlook that isn’t actually long-term, “three years or less,” the firm noted.
IBM isn’t the only company to be accused of financial engineering, and in fact buybacks tend to drive up stock prices, which drives up the value of executive stock options. But a larger problem the study uncovers is that boards don’t even have the proper tools to gauge just how well their executives are performing.
A company’s actual economic performance, the authors say, constitutes only about 12% of variance in CEO pay. “The remainder is based on other factors largely beyond management control,” they said, with 44% coming just from the size of the company and the its industry, and another 19% based on how much the company paid in the past.
“Earnings and EPS do not take into account the level of invested capital, cost of capital or future value built into enterprise valuation. So, for example, a company could boost higher earnings and higher earnings per share following a value-destroying acquisition, if that acquisition were paid for with debt that did not come due during the measurement period.”
There are, IRRC says, firms that are doing it right, building the business for the future, looking out at least five or ten years down the road. That kind of long-term focus, in fact, emerges as a key factor in determining an executive’s true value to a company. The report comes back to it several times, and conversely faults companies time and again for a short-term focus.
One key metric the report focused upon is “economic profit,” which is the net operating profit after taxes minus invested capital. In other words, profits, after accounting for what’s been reinvested in the business.
“A sustainable and viable business model must eventually provide consistent positive economic profit and a return on invested capital greater than its cost of capital. Without a reasonable expectation of positive economic profit then no amount of sales or earnings growth will create sustainable shareholder value,” they write.
Billionaire technology investor Peter Thiel thinks Bitcoin has a problem: the government won’t shoot you for it.
In a recent interview Web site Vox, Mr. Thiel linked the value of money to the requirement that taxes be paid in the government’s currency. “You will not be able to pay your taxes in Bitcoin. You have to pay them in dollars. If you don’t pay them with dollars, there will be people who will show up with guns to make you pay them,” Mr. Thiel said.
The idea that taxes drive the value of money—known as chartalism—goes back at least as far as German economist Georg Friedrich Knapp’s 1905 book “The State Theory of Money.” Its proponents contrast it with the view that money gets its value from either its link to a commodity or from its acceptance as a medium of exchange.
Of course, not being money doesn’t mean something isn’t worth a lot money. PayPal, the company Mr. Thiel founded, may have never evolved into a non-governmental, private currency. But it certainly garnered a lot of the ordinary government money known as dollars.
For activist investors, the hottest trend in retail ahead of the holiday season: REITs.
The activist hedge fund Marcato Capital Management LP wants Dillard’s Inc. to join the REIT party and said the retailer’s stock could jump by 75% if put its real estate into this structure.
Dillard’s stock, of which Marcato owns just under 5%, rose 9% Thursday after Marcato made its announcement. The stock is down roughly 2% Friday after Dillard’s reported third-quarter earnings and announced plans to buy back nearly 10% of its stock.
The list of companies seeking to split off their real-estate assets into a REIT this year is crowded with retailers like Sears Holdings Corp. as well as non traditional REIT candidates including a telecom company.
Dillard’s wouldn’t comment on the possibility and doesn’t host analyst calls, so management didn’t field any questions publicly on the topic Friday.
Investors, though, should keep an eye out for who it picks as its next CFO. “If it reaches outside the company for a real estate specialist, it might foreshadow a future REIT move,” the research firm Gordon Haskett Research Advisors wrote in a report Friday.
A REIT wouldn’t be new territory for Dillard’s, which used a REIT in 2011 for some of its real estate to take more tax deductions, Gordon Haskett noted.
Still investors question whether the Dillard family, which effectively controls the board through its Class B shares, would consider this move now, during a year when its stock is up nearly 20%, more than many of its peers.
Some investors say that the founding family would prefer to use REIT as a backstop should the company ever run into trouble.
Hoarding your child’s Halloween chocolate? You can stop now. (Also, shame on you!)
The world is not headed for a one-million ton shortage of cocoa beans – a key chocolate ingredient.
That’s the official word from the London-International Cocoa Organization, which monitors global supplies and consumption of the beans, following numerous press reports this week of a large, impending production deficit of the beans.
“There is no cause for alarm regarding the availability of chocolate for consumers to enjoy,” said the ICCO in a statement.
The London-based group issued a press release today that said while “supply deficits are likely to occur during the next several years, stocks of cocoa beans should cushion this development before production growth accelerates.”
Nevertheless, surging chocolate demand from emerging markets has boosted the cost of cocoa this year and eaten into the world’s supply, prompting chocolate makers like Hershey Co. and Mars Inc. to raise prices.
But there may be solutions to the world’s growing taste of chocolate. Researchers in far-flung cocoa-growing regions, such as in the Peruvian Amazon, are hard at work on finding a solution to a potential cocoa crunch, such as high-yielding varieties .
Along with demand, cocoa production has also been rising, hitting a record 4.345 million metric tons, according to the ICCO.
That has helped cool cocoa prices. ICE cocoa has dropped more than 15% from its more three-and-a-half-year peak of $3,399 a ton hit in September. Futures were trading 0.5% lower at $2,185 a ton.
So eat up, or maybe even share some with your deprived child.
A new report by a government watchdog is shedding some light on secret communications between two powerful forces: financial firms and a council of top federal regulators.
The report from the U.S. Government Accountability Office recommends improvements in the way the Financial Stability Oversight Council, created by the 2010 Dodd-Frank law, goes about identifying “systemically important” firms that could wreak widespread havoc on the economy if they collapsed.
So far, the council has labeled three nonbank financial companies as systemically important—American International Group Inc., General Electric Capital Corp. and Prudential Financial Inc.—and MetLife Inc. is deep in the process.
The companies generally have been tight lipped on their communications with the new panel, which is headed by Treasury Secretary Jacob Lew and whose 10 voting members also include Federal Reserve Chairwoman Janet Yellen. The “systemically important” designations are of keen interest to investors because they will subject the companies to potentially tough, but yet-to-be-determined capital and other regulatory standards.
The report by the GAO, released Thursday, recommends ways the council could improve transparency, among other suggestions. Meanwhile, it contains some detail about companies’ dealings with the panel. Without naming names, the report says that three of four companies that have gone deep into the evaluation process told GAO investigators they “generally were satisfied with their interactions with FSOC” during the evaluation process— which means, of course, that one said it isn’t satisfied.
The outlier is MetLife, according to a person familiar with the FSOC process. MetLife has repeatedly stated publicly that it doesn’t believe it poses any sort of systemic risk, and is appropriately regulated by state insurance departments.
A spokesman for MetLife confirmed that it is one of the companies that was interviewed by the GAO. AIG and Prudential declined to comment, and GE Capital didn’t comment.
The report says that officials from some of the nonbank firms were concerned “about the level and extent” of FSOC’s members’ representation in the process, saying they “communicated primarily with analytical staff rather than deputies or principals.”
Two companies told the GAO that while staff from many of the agencies represented on FSOC attended meetings, “some agencies never had any staff present at any of the meetings.” In addition to Treasury and the Fed, agencies that sit on the council include the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., the Comptroller of the Currency and others.
Two companies told the GAO that only one principal attended any of their meetings. “Officials from one of the companies stated that despite their requests, none of the other principals or any deputies came to the meetings,” the report says. Officials from another firm said that “FSOC turned down their request to meet with principals and that FSOC indicated to them that some principals felt uncomfortable meeting with a company before a determination. However, the officials said that FSOC later offered the company a meeting with all of the deputies.”
The spokesman for MetLife confirmed that it is the company that ultimately met with the deputies.
The GAO said that the council “frequently communicated with companies undergoing evaluation, but was unclear about companies’ ability to access certain officials.”More In SIFIs
GAO said that FSOC told it that the panel’s “interactions with companies included extensive discussions, generally related to information being analyzed by the Council. For example, over a 12-month period, staff from member agencies engaged with one company 20 times, including seven meetings with senior management and numerous telephone meetings, and considered more than 200 data submissions.”
In the report, the GAO outlined areas where it said improvements were needed to enhance “accountability and transparency of the designation process,” including better tracking of data to evaluate the quality of designation evaluations and more detail provided to the public about FSOC’s rationales for designations. The report also said that “data limitations” may have kept FSOC from including some types of nonbank financial companies in its scope of review.
Matthew Rutherford, acting under secretary for domestic finance at the Treasury Department, wrote in a letter to the GAO that FSOC is “committed to conducting its work in an open and transparent manner.” He said the council would consider ways to make more information public without disclosing private company information. The letter highlighted October comments by Mr. Lew that staff would continue to weigh changes to its evaluation process.
FSOC is in the process of determining whether to apply the systemically important label to asset managers or their activities.
Brian Reid, chief economist at fund-management trade group Investment Company Institute, said in an emailed statement, “We agree with the GAO’s conclusions that the FSOC designation process lacks transparency and would benefit from more meaningful engagement with companies under review.”
It’s a mistake no bank ever wants to make. Royal Bank of Scotland PLC on Friday said it made a mistake calculating its capital base for last month’s European stress test results. The bank counted deferred tax assets as good quality capital, skewing the ratio by which it passed the European Banking Authority’s “adverse scenario” test.
The good news is that it still passed the test. The bad news is that it only scraped by, with a core equity tier one ratio of 5.7% against the EBA’s minimum 5.5%. It previously thought it passed with a ratio of 6.7%.
If you’re unfamiliar with the ratios and how they are calculated, take a look at our explainer here.
And here’s the bank’s statement on what went wrong:
EBA Stress Test Result Correction
21 November 2014
The Royal Bank of Scotland Group plc (“RBS”) has recognised an error in its calculation of the modelled Common Equity Tier 1 ratio (“CET1″) for the 2014 European Banking Authority (“EBA”) stress test results, originally published on 26 October 2014. This led to RBS’s published CET1 stress test ratios being overstated. This error relates solely to the EBA stress test. RBS’s reported CET1 regulatory capital ratio as at 30 September 2014 of 10.8% is not affected.
Within its EBA calculations RBS correctly recognised tax relief on the theoretical stress losses incurred during the 2014-16 period. However, RBS’s modelled capital deduction for its Deferred Tax Asset (“DTA”) did not adequately reflect these cumulative tax credits within the published Capital Template.
As a consequence, using the Prudential Regulation Authority “fully loaded” capital definitions and defined approach, RBS’s full year 2016 CET1 under the modelled Adverse Scenario is 5.7% versus 6.7% previously reported.
This revised result was above the post-stress minimum ratio requirement of 5.5% used in the 2014 EBA stress test for the Adverse Scenario. Further detail is provided in the Appendix to this announcement.
There are no revisions to the results of the EBA stress test for either Ulster Bank Ireland Limited, or The Royal Bank of Scotland N.V..
RBS continues to make strong progress in improving our regulatory CET1 ratio on a CRR end-point basis. Our CET1 ratio improved by 220 basis points to 10.8% as at 30 September 2014, up from 8.6% as at 31 December 2013.
As part of our capital strengthening, RBS has also reduced its sensitivity to stress losses during 2014, including the on-going reduction of RBS Capital Resolution assets and our US asset-backed products business. In addition RBS disposed a €9bn pool of higher risk legacy Available For Sale securities. As a consequence, RBS estimates that if the EBA stress-test were to be repeated based on the Q3 2014 financials, our result would at least reflect the 220 basis point reported increase in CET1 ratio.
RBS remains on target to achieve a CRR end-point basis CET1 ratio of around 11% at 31 December 2015 and above 12% by the end of 2016.
The updated detailed results of the capital exercise, including refinement of a small number of other adjustments to the Capital Plan, will be available via the following link: http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-stress-testing/2014/results
The PRA continues to monitor UK banks against its own stress scenarios. These scenarios contain material methodology differences to those of the EBA test, thereby limiting the ability to draw direct comparisons between the two. The results of the PRA UK-variant stress test are expected to be disclosed on 16 December 2014.
Appendix – Impact of correction to published EBA and PRA ratios.
Under the originally published Adverse Scenario P&L, RBS correctly modelled €7.3bn (£6.1bn) of cumulative tax credit over the stress test period (2014-2016). However, RBS’s originally published Capital Plan did not adequately reflect the full amount of these cumulative tax credits.
As a consequence under the PRA’s “fully loaded” capital definitions, which do not allow any recognition of DTA within CET1, RBS’s FY 2016 CET1 under the modelled Adverse Scenario was overstated by €4.2bn (£3.5bn), which together with a consequent reduction in the capital base, is equivalent to 1% CET1 ratio reduction.
In addition, a small number of individually immaterial adjustments were made to RBS’s resubmitted capital plan. The cumulative impact of which was negative 6 basis points.
Restated outcome of the modelled Adverse Scenario as at 31 December 2016
PRA’s “fully loaded” capital definitionsEUR’m Original result(26 October 2014) Restated result Difference (restated vs. original) 3-year cumulative operating profit before impairments 8,179 8,179 No change 3-year cumulative stress banking book impairment (20,010) (20,010) No change 3-year cumulative losses from stress in trading book (4,166) (4,166) No change Common Equity Tier 1 capital 31,837 26,968 (4,869) o/w DTA capital deduction (4,956) (9,201) (4,245) Total Risk Exposure 476,639 477,214 575 Resulting PRA-advised ‘fully loaded’ CET1 ratio 6.7% 5.7% (1.0)%
RBS estimates that its result under the EBA published transitional capital definitions and prescribed approach, which allows greater recognition of DTA within CET1 at 31 December 2016, would be significantly higher than under the PRA approach.
The EBA stress test results are based on hypothetical adverse and baseline macroeconomic scenarios and a common methodology developed by the EBA (including a static balance sheet) applied across all participating banks. Neither the baseline scenario nor the adverse scenario should in any way be construed as an RBS forecast or directly compared to other information prepared by RBS. Citizens exposures are excluded from the credit disclosure template.
The PRA has required that the transitional CET1 ratio used in the stress test is under the PRA definition and not the EBA methodology (with one exception – explained below). In accordance with the PRA’s Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deductions to CET1 have been applied in full (without transition relief). The one exception referred to (which is in line with the EBA methodology) is that recognition in the CET1 capital position of unrealised losses / gains on sovereign exposures is phased in.
Forward Looking Statements
This announcement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those related to RBS and its subsidiaries’ regulatory capital position, risk-weighted assets, impairment losses and credit exposures under certain specified scenarios. In addition, forward-looking statements may include, without limitation, statements typically containing words such as “intends”, “expects”, “anticipates”, “targets”, “plans”, “estimates” and words of similar import. These statements concern or may affect future matters, such as RBS’s future economic results, business plans and current strategies. Forward-looking statements are subject to a number of risks and uncertainties that might cause actual results and performance to differ materially from any expected future results or performance expressed or implied by the forward-looking statements. Factors that could cause or contribute to differences in current expectations include, but are not limited to, legislative, fiscal and regulatory developments, competitive conditions, technological developments, exchange rate fluctuations and general economic conditions. These and other factors, risks and uncertainties that may impact any forward-looking statement or RBS’s actual results are discussed in RBS’s UK Annual Report and materials filed with, or furnished to, the US Securities and Exchange Commission, including, but not limited to, RBS’s Reports on Form 6-K and most recent Annual Report on Form 20-F. The forward-looking statements contained in this announcement speak only as of the date of this announcement and RBS does not assume or undertake any obligation or responsibility to update any of the forward-looking statements contained in this announcement, whether as a result of new information, future events or otherwise, except to the extent legally required.