BusinessDay 15 Feb 2018

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Thursday 15 February 2018 FINANCIAL TIMES COMPANIES & MARKETS @ FINANCIAL TIMES LIMITED 2015 Iran holds 100 traders and freezes accounts in dollar crackdown Operation to halt slide in rial viewed as signal of economic trouble NAJMEH BOZORGMEHR Iranian authorities have detained almost 100 currency traders and frozen bank accounts reportedly worth 200tn rials ($5.3bn) in the biggest crackdown on foreign exchanges in six years. The operation is aimed at tackling a slide in the value of the rial, which is down more than 10 per cent this year, caused by a dollar shortage that has spooked businesses reliant on hard currencies. Iran is facing renewed threats from Washington to reimpose sanctions lifted in 2015 and rumours of a co-ordinated move by the US and some Gulf states to up pressure on the Islamic Republic by further restricting its access to hard currencies. Iranians often obtain dollars via the United Arab Emirates. “The US is tightening its grip on Iran again,” said a former senior financial official. “Banking transactions and the physical transfer of US dollars into Iran from regional countries has been disrupted.” Although most international sanctions were lifted after the nuclear deal, global banks have been unwilling to do business with Tehran. Iran’s business community works with either lower-tier European and Asian banks or relies on trusted intermediaries mainly in the UAE to avoid the conventional finance system. “We still carry dollars in bags like when sanctions were in place,” said one analyst. “The currency market is always the first place to show a crisis is coming.” Tehran’s police chief said 90 dealers were arrested on Wednesday in an operation co-ordinated with the central bank. Ten currency exchange shops were shut down Bunge has revealed an exceptionally weak finish to 2017, results that will intensify questions over the future of the 200-year-old global agricultural trading house as an independent company. New York-listed Bunge on Wednesday reported a loss of $60m, or 48 cents per share, in the fourth quarter, from a net profit of $271m or $1.83 a year earlier. Adjusting for the effects of US tax reforms and a corporate restructuring the company earned 67 cents per share — half of what analysts forecast. The company buys crops from farmers for processing into ingredients and feeds or bulk shipment to customers around the world. International trade in grains has been breaking records, and Bunge said its main agribusiness handled 34.3m tonnes in the quarter, an increase of 4.6 per cent year on year. But ample supplies have made it difficult for merchants to extract profits from these flows, as farmers hold back and operators of 16 given closure warnings. Fars news agency, which is close to the powerful Revolutionary Guards, said 755 bank accounts held by currency dealers — with annual turnover of 200tn rials — had been frozen. Iran’s government has in recent days repeatedly called on people to refrain from rushing to panic buy hard currencies or follow speculators. Many foreign exchange shops are refusing to sell more than $1,000 to individuals. The rial, which enjoyed stability after the sanctions were lifted, has fallen 14 per cent this year in the unofficial market, unnerving Iranians who are also worried about inflation. In Tehran’s currency shops on Wednesday, one US dollar bought about 48,300 rials compared with an official rate of 37,054. “You can have as much euros or pounds as you want but not dollars,” one exchange office said. The last time authorities moved against currency dealers in this way was in 2012, when Iran was struggling with crippling international sanctions, rampant inflation and a falling currency. The government of Hassan Rouhani, which has sought to bring stability to the currency markets as part of its plans to revive the economy, has not clarified why there is a shortage of US dollars. But officials have ruled out suspicions that the central bank was seeking to manipulate the difference between the official and market currency rates to meet rising rial expenditures before the Iranian new year next month. Valiolah Seif, the central bank governor, blamed the currency fluctuations on the US which was trying to destabilise Iran’s economy. Bunge Q4 miss fuels questions over trading house’s future Archer Daniels Midland recently approached the 200-year-old group about a takeover GREGORY MEYER crops in storage bins in hopes of higher prices and customers refuse to pay premiums for long-term deals. High stocks of grain have also damped price swings. Bunge said its global grain trading and distribution business felt pressure “due to limited dislocation opportunities.” In Bunge’s agribusiness segment, “we are not expecting a quick turnaround,” the company said. It expressed a more sanguine view on the profitability of crushing oilseeds such as soyabeans, a business that has been hit by an abundance of soya meal and other animal feeds. On Wednesday, Bunge also disclosed it is in the process of exiting global sugar trading. Chief executive Soren Schroder has spoken for the past year about consolidating his industry in certain locations, such as the US. Archer Daniels Midland has made a takeover approach to Bunge, leading to inconclusive deal talks. Last year Glencore, the Swiss-based commodities trader, disclosed it had also approached Bunge about forging ties The rial has lost more than 10 per cent if its value this year © Bloomberg LAURA NOONAN Credit Suisse chief executive Tidjane Thiam has vigorously defended his bank’s creation of a $2.2bn financial product that lost 96 per cent of its value in a single night of market turmoil and is now being closed. The inverse volatility exchange traded note created by Credit Suisse in 2010 plummeted overnight after an equity markets’ sell-off on February 5 and will be formally redeemed by the Swiss bank on Thursday. Swiss regulator Finma has said that it has been in contact with the bank on the product; US markets watchdog the Securities and Exchange Commission has also questioned the bank about the product, known as VelocityShares. A person familiar with the situation said it was standard practice for regulators to communicate with a bank about such a significant announcement. “The prospectus is extremely clear,” Mr Thiam told analysts as the bank reported an expectationbeating set of fourth-quarter results. “It says things like your ETN has zero long-term value . . . like if you invest for more than one day you C002D5556 US inflation rises in test of investors’ nerves Strong price rise reinforces Wall Street fears of sharper interest rate increases BUSINESS DAY A3 Swiss bank says it is already enjoying better trading after tough fourth quarter MICHAEL HUNTER AND ROBIN WIGGLESWORTH US inflation has surpassed expectations for a second month running, reigniting investor nervousness that the robust economy is stoking price pressures that could force the Federal Reserve to raise interest rates more aggressively. The annual rate of headline inflation of 2.1 per cent for January was stronger than the consensus forecast of 1.9 per cent and in line with the rise seen in December. The core gauge of consumer prices, which excludes energy and food, stayed steady at 1.8 per cent, defying forecasts to slip to 1.7 per cent. Both readings were higher than expected for a second month in a row. The yield on 10-year government debt rose to as high as 2.89 per cent after the inflation data were released, approaching a four-year high. The dollar index jumped as much as 0.5 per cent before paring back gains. US stocks initially fell on opening in New York, but have reversed to post gains by mid-morning. The S&P 500 was up 0.5 per cent at 2,676.43 while the Dow Jones Industrial Average added 0.3 per cent to 24,705.81. The tech-heavy Nasdaq was outperforming with a 0.9 per cent gain. Month-on-month, a surge in gasoline prices helped drive headline prices higher by 0.5 per cent, a bigger jump than foreseen by any of the 74 economists polled by Bloomberg. Indeed, airfares were the only weak component, according to Michael Pearce, senior US economist at Capital Economics. “Overall we think the increase in core CPI inflation in January is a sign of things to come over the rest of the year,” Mr Pearce said. The US economic recovery has accelerated over the past year, lifted by a healthy global expansion and still-low are likely to lose all or a substantial portion of your investment.” Mr Thiam said that the extensive disclosures, coupled with the fact that Credit Suisse distributed it to market makers who then sold it on to final clients, meant that the bank was in a “reasonable position”. Asked by journalists if he would rule out creating a similar product again, he said that the bank was “client led” and created the ETN in response to client demand. “The ETNs are intended to be trading tools for sophisticated investors to manage daily trading risks,” he said. “The contribution of this product to our revenue is only like SFr10m per annum,” he added. “I made SFr5.7bn of revenue (last year). Any notion that this is material to us is (wrong), it is not material at all. It is something we do because clients want it to hedge. It’s a oneday product.“ Credit Suisse’s earnings commentary shows that the same market volatility that hit buyers of the VelocityShares product is helping the bank. Its revenue from markets rebounded by more than 10 per cent in the first six weeks of the year, offering the strongest evidence yet that the recent resurgence in volatility could lift investment banks out of a trading slump. Credit Suisse recorded an overall net loss of SFr983m ($1.05bn) for 2017, marking its third consecutive annual loss, after taking a previously announced SFr2.7bn ($2.9bn) hit as a consequence of US tax reforms that were signed off on December 22. Last year, Credit Suisse’s 12-strong executive board agreed a 40 per cent cut to their bonuses after shareholders protested at planned payouts in a year when the bank had made a big loss. On this year’s bonuses, Mr Thiam said: “I don’t think that the board is going to take that view that people should be paid or not at Credit Suisse depending on when the President of the United States decides to sign a piece of paper. “That has nothing to do with what we do. We’re generally paid for delivery. We delivered a profit . . . If he’d signed it (US tax reform) on January 1 we’d be standing here celebrating a return of Credit Suisse to profitability.” Credit Suisse’s head of investor relations Adam Gishen told Bloomberg that the bank’s total bonus pool would rise 3 per cent in 2017. interest rates around the world, and coupled with a recent tax cut package, expectations are mounting further. Retail sales disappointed in January, muddying the picture of a healthy US economy somewhat, yet concerns that robust growth could quicken inflation have pushed US government bond yields higher and ultimately contributed to a week of mayhem on global stock markets last week. Although markets have calmed down somewhat since then, the inflation figures for January had been anxiously awaited after signs of wage growth in the most recent US employment report rattled financial markets this month. Investors are now widely expecting the US central bank to raise interest rates at least three times this year — with the next quarter-point potentially coming in March — and there is now nearly a 20 per cent chance of at least four increases in 2018, according to Bloomberg calculations from the prices of Fed Funds futures.
A4 BUSINESS DAY C002D5556 Thursday 15 February 2018 FT ANALYSIS Investing: Activism enters the mainstream Traditionally seen as aggressive, a new wave of players is taking a different approach to getting a seat on the board LINDSAY FORTADO The founding class of shareholder activists, once scorned as “corporate raiders” and “greenmailers” out for short-term results at the companies they targeted, have grown up and spawned a new generation. They have even been granted their own moniker — the “sons of activists”. Managers such as Scott Ferguson, the first analyst Bill Ackman hired at Pershing Square in 2003; Alex Denner, a Carl Icahn acolyte; and Quentin Koffey, who spent seven years at Elliott Management before joining DE Shaw to launch its first activist practice, have struck out on their own and are garnering attention from investors and corporate management alike. Although more than willing to launch a proxy fight or file a lawsuit, many of the up and coming generation are eschewing the public disputes and open confrontation that made their former bosses famous. Instead their style of investing — more data-driven, eager to work with management behind the scenes and to hold positions for longer — shows just how activism has evolved. “The goal is the same, making money,” says Joseph Perella, the co-founder of Perella Weinberg Partners, the New York investment bank. “[But] there are more players in the activism space now and more importantly, they are much more institutional than back when activism was getting started in the 1980s.” Managers are now more focused on making money for their investors, rather than just themselves, he adds. Activists had one of their busiest years ever in 2017, deploying $62bn in campaigns, more than twice the amount of money spent in the whole of 2016 says Lazard. They are also more influential forcing change at global companies such as Nestlé, DowDuPont and Procter & Gamble — while managing the money of pension funds, university endowments and charities around the world. The biggest names in shareholder activism — Mr Icahn, Paul Singer of Elliott Management, Nelson Peltz at Trian Partners, Jeff Ubben of ValueAct and Barry Rosenstein of Jana Partners — are not necessarily slowing down, but the field is getting more crowded as their former portfolio managers strike out on their own. “They are definitely respected and companies do pay attention when one of these ‘sons of activists’ shows up at their doorstep,” says Rich Grossman, a partner at New York law firm Skadden Arps, which defends companies against activist campaigns. “Some of them have raised significant amounts of money in their own right and have substantial funds at their disposal.” Activism emerged in the 1980s, with the likes of Mr Icahn, now 81, and Mr Peltz, 75, buying stakes in companies and then leveraging them to lobby for change. They went on to lead campaigns against the likes of RJR Nabisco, AIG and Heinz. The most common requests were for spin-offs, a sale of the company, a management shakeup, board seats, share buybacks or a restructuring. Often criticised as being shortterm shareholders who bought stakes in companies and demanded money, or some type of pay-off, to go away — dubbed greenmail — activists have sought to rebrand themselves as “constructive activists”, or even “highly-engaged shareholders”. While some remain on the more aggressive side, many stress that they are holding positions for longer and not clamouring for share buybacks or quick sales, but rather urging changes they claim will help the company long-term. “Greenmail doesn’t really exist any more . . . the activist investors are acting for all shareholders now, not just to get a quick payout for themselves,” says Andrew Bednar, a partner at PWP. “Activists have had to become more operational, strategic and longer-term investors in order to deliver company changes that drive shareholder value. The quick sale for a premium is less common today.” The success enjoyed by activists has made some companies more receptive to settling behind closed doors rather than allowing battles to spill into the public arena, which has led to a less hostile style of activism. “Shareholders feel that there is no monopoly on good ideas,” says Mr Grossman who coined the phrase “sons of activists”. “They don’t always agree with the activists, but I think management teams and boards are in large part listening to what they have to say and evaluating what makes sense.” The number of public boardroom battles between activists and companies in the US, known as proxy fights, fell to a five-year low in 2017, according to data from FactSet, despite activists spending more money in their campaigns than ever before — Nelson Peltz has taken a $3.5bn stake to win a seat on the P&G board — as they aim for larger targets. Jim Rossman, the head of shareholder defence at Lazard, says that activism has now “gone completely mainstream” in terms of how many companies face attacks, and that it is now “rare” for him and his colleagues to advise a board that doesn’t have a director who hasn’t already experienced an activist campaign. “There is no company immune, there is no inoculation shot you can get to avoid activism if you’re a major global company,” he says. “It used to be you’d go into boards and they’d ask, ‘tell us who these guys are, are they really staying around, and are they serious, and can’t we just tell them to go away?’ That’s gone. There are now two or three people in every boardroom who have experienced it and can reference their own war stories.” But Marty Lipton, the godfather of shareholder defence and a founding partner of the law firm Wachtell, Lipton, Rosen & Katz, says that hedge fund activists are “changing and taming their strategies” because of a growing wariness of their intentions. “Shareholders are increasingly concerned about how the shortterm goals of activist hedge funds are undermining the long-term value of their investments. [They] are also worried about the impact these strategies have on other stakeholders, which can include local communities, employees and the environment,” Mr Lipton says. Despite their omnipresence, the older generation mostly underperformed the newer guard last year. Mr Ackman and Mr Peltz had lacklustre returns, while Mr Ferguson’s fund, Sachem Head, brought in close to 13 per cent, and Sarissa, run by Mr Denner, was up about 15 per cent, say people familiar with the funds. Marcato, an activist fund run by Mick McGuire, another former Pershing Square manager, returned more than 25 per cent last year. According to data from eVestment, activist funds with less than before the deal was announced. A year earlier, Ariad Pharmaceuticals was sold to the Japanese drugmaker Takeda for nearly $5bn, a 75 per cent premium. At the centre of both deals was Mr Denner, whose activist fund was among the largest shareholders in the target companies. Sarissa invests solely in biotech and pharmaceutical groups and Mr Denner, who spent about five years working The old guard: Paul Singer of Elliott Management; Bill Ackman of Pershing Square and Carl Icahn © FT montage; Bloomberg; Getty Images $5bn in assets under management outperformed those with more than $5bn over the past two years. Other members of the younger generation have already made names for themselves: Keith Meister, an Icahn protégé, has built Corvex Management into a $7.4bn fund; Mason Morfit took over at ValueAct from Jeff Ubben last year as its chief investment officer; and Jesse Cohn became the youngestever partner at Elliott Management aged 36. Marlin Naidoo, the global head of capital introduction and consulting at Deutsche Bank, who helps hedge funds raise assets from large institutional investors, says the younger generation are benefiting from investor appetite for new managers and inflows to activists. “Investors typically like something that is newer,” he says. “With a lot of the established managers, investors have had a decent amount of time to take a view as to whether they want to allocate to them or not.” To date the 48-year-old Mr Denner has been among the most successful of this new wave. Last month, Sanofi the French pharmaceutical company said it would buy Bioverativ, a US biotech group focused on haemophilia treatments, for $11.6bn — a premium of about 64 per cent to where it was trading for Mr Icahn, manages just over $600m at the fund, making him one of the more niche activists. In the Ariad campaign, Sarissa bought a 6.2 per cent stake in the company in late 2013, when the shares were trading at around $3. The company was struggling: its shares had plummeted after the US Food and Drug Administration put a partial clinical hold on enrolment for trials of its leukaemia drug, Iclusig, over concerns it caused blood clots. Within two years, Mr Denner had ousted Ariad’s chief executive, Harvey Berger, and won two board seats, including one for himself. The company, in its attempt to fend him off, adopted a poison pill strategy, blocking him from taking a larger stake than he already held. Despite that, Forbes estimates that Mr Denner made about $260m on the deal — after Takeda offered $24 a share for the drugmaker in 2017. “The best thing that ever happened to shareholders of Ariad is that he made quick work” of the company’s attempts to bar the door against him, says one person involved in the deal. “He bought the stock in the low single-digit dollars per share, became the chairman, found a new CEO and a few short years later sold the company for $24 per share in cash.”
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