SEC - companies cannot silence whistleblowers

BY Richard Summerfield

On 1 April, the Securities and Exchange Commission (SEC) announced its first ‘enforcement action’ regarding the use of what it deemed to be restrictive language in a confidentiality agreement.

The decision handed down by the SEC found that technology and engineering firm KBR Inc had violated whistleblower protection rule 21F-17, enacted under the Dodd-Frank Act. “By requiring its employees and former employees to sign confidentiality agreements imposing prenotification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew Ceresney, the SEC’s enforcement director, in a statement announcing the enforcement action.

The confidentiality agreements KBR’s employees were required to sign were discovered as a result of a lawsuit brought against the firm. In the suit, Harry Barko, a former employee of the company, accused KBR and Halliburton of inflating the cost of a military supply contract for US bases in Iraq.

As a result of the enforcement action against it, KBR agreed to pay a fine of around $130,000 to settle the SEC’S investigation and has also agreed to amend its confidentiality agreements, a step which has been welcomed by the SEC. However KBR did not admit any wrongdoing as part of the settlement. Furthermore, the company was not found to have specifically prevented an employee from reporting fraud. Indeed the firm’s use of confidentiality agreements pre-dated the enactment of the SEC’s whistleblower protection rules.

In a statement, KBR’s chief executive officer, Stuart Bradie, noted that the “SEC’s order acknowledges that it is not aware of KBR having ever prevented anyone from reporting to the SEC, nor has the company taken any action to enforce the agreement, and that is because we have never done so.” Mr Bradie added, “We are pleased to have amicably resolved this matter and look forward to putting it behind us.”

Yet with this action, and with a number of other enforcement actions imminent, the SEC has once again reiterated that it is willing to diligently implement the whistleblower protections it has at its disposal.

News: SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements

M&A booms in Q1 2015

BY Richard Summerfield

2014 was a notable year for global mergers and acquisitions (M&A) activity, with deal volumes and valuations reaching pre-crisis highs in some regions. This  boom continued into the first quarter of the year, according to data released by Dealogic.

In the first three months of 2015, $902.2bn worth of M&A activity was announced - the highest first quarter total since the $1.08 trillion worth of deals announced eight years ago.

The 14 megadeals – each valued in excess of $10bn – accounted for a significant amount of  announced transactions in Q1, worth a combined $267.4bn. It was the busiest Q1 for megadeals since  15 deals were announced in the first quarter of 2006.

Cross-border M&A also performed well, reaching $315.2bn - the highest first quarter volume since 2007 when activity reached $357.9bn.

The healthcare sector was the most targeted industry, with deal value of $126.5bn. The real estate space was the second most targeted industry last year with $113bn worth of announced deals  across 462 transactions, a leap of 38 percent from Q1 last year.

US targeted M&A climbed 28 percent, with a total of $415bn, up from $324.6bn. This was the highest first quarter total since 2007 when $430.7bn worth of deals were announced.

In Europe, seven of the region’s top 10 sectors saw a year on year increases in volume in the first quarter. In the construction sector, activity climbed to $11.7bn - a more than threefold increase on Q1 2014, which saw just $3.2bn worth of deals.

Report: Dealogic Global M&A Review First Quarter 2015

ChemChina to acquire Pirelli in $7.7bn deal

BY Fraser Tennant

China National Chemical Corp (ChemChina) has announced a $7.7bn deal that will see the state-owned company acquire Pirelli, the world's fifth-largest tire maker.

If the proposed deal for the 143-year-old Italian company is successful, it would be the largest overseas deal seen in China for two years, and another major addition to a growing list of high-profile acquisitions which currently include Volvo cars, Club Med and Sunseeker yachts.

A complicated deal, the acquisition would involve ChemChina paying approximately $1.96bn for a 26 percent stake in Pirelli (owned by Camfin, the holding company indirectly controlled by Pirelli chairman and chief executive Marco Tronchetti Provera) and then launching a bid to buy the rest of the tire maker’s stock.

“Pirelli’s excellent technology and management, and its well-known brand and sales channel, are what we hold high expectations on,” said Ren Jianxin, chairman of China National Chemical Corp. “The strength of Pirelli will add value to our tire business.”

Mr Ren, often referred to as China’s ‘merger king’, is keen to uphold what he sees as the Italian tire maker’s autonomy and reputation for quality. “We will not try to change Pirelli. Pirelli is Pirelli,” he said. “They are of two different tastes, and they’re not the same.”

To help facilitate this, Mr Ren has pledged to keep Mr Provera at the helm of Pirelli for at least the next five years.

Pirelli declined to comment on the deal other than to say that no other companies are bidding for the firm.

On this point Mr Ren warned that any counterbid for Pirelli would “hurt the Italian firm's investors and long-term strategy". He went on to say that his company was “worried that due to cheap liquidity there might be blind competition" but confirmed that no higher offer would be forthcoming as ChemChina had reached the limits of its budget.

And when asked if the acquisition meant that redundancies are likely at Pirelli, Mr Ren responded curtly by saying the deal was about “expanding scale and increasing market share". He also pointed out that despite ChemChina employing 120,000 people across all its operations, the company needed “more people to join” and there are plans in place to invite Pirelli's union members to visit China.

News: ChemChina to buy into Italian tire maker Pirelli in $7.7 billion deal

Unwanted European loans to top €100bn in 2015

BY Fraser Tennant

European banks are currently holding €1.9 trillion of unwanted loans - around 4 percent of European banking assets - according to new PwC research published this week.

The research, contained in PwC’s ‘Portfolio Advisory Group Market Survey 2015’, predicts that it will take another five years (at the minimum) for the banking sector to fully get to grips with the loans issue.

The PwC research also forecasts that portfolios with a face value of €100bn will trade in 2015.

Last year, banks sold loan portfolios with a face value of €91bn, an increase of around 40 percent of the total volume of loan portfolios sold in 2013.

The PwC research also shows that: (i) Italian banks hold more non-performing loans than any other European country, estimated by PwC to be some €185bn, which is roughly 15 percent of total non-performing loans across Europe; (ii) significant growth is expected in the number of transactions in Italy and other countries in Central and Eastern Europe; and (iii) loan portfolio transactions in Italy in 2014 totalled just €8bn and PwC expects a total of more than €15bn in 2015.

“There remains very significant investor interest in acquiring banking assets as the sector continues its unprecedented and much needed restructuring," said Richard Thompson, global leader for portfolio transactions at PwC. “There is significant competition between the numerous investor groups looking to acquire assets and, as a result, we’ve observed price increases in the market, making it much more attractive for banks to sell assets.

“Our research shows that investors’ return expectations are largely unchanged over the previous years, leading us to believe that investors are being more bullish as to their potential cash flow returns from these assets. In other words, more of the upside potential is being priced into these deals, particularly in the more liquid markets in the UK, Spain and Ireland.

“This trend favours the established investors in the market, which is likely to lead newer investors to focus on the emerging markets for loan transactions of, for example, the CEE region and Italy.”

Coinciding with the Market Survey this week is the publication of PwC's analysis of buyers and sellers of loan portfolios, which reveals that private equity (as well as other classes of investors) are currently holding more than €70bn to be spent on assets being sold by the European banking sector.

Report: Portfolio Advisory Group Market Survey 2015

2015 to be lending turning point

BY Richard Summerfield

2015 is likely to be the year that business lending grows and mortgage lending reaches an all time high in the eurozone, according to EY. In its report, 'EY Eurozone Forecast March', the firm notes that the wider eurozone is expected to be woken from its four-year slumber.

Business, consumer and residential mortgage lending are all expected to increase in 2015 for the first time since the dark days of the 2008 credit crunch. Much of this return to growth will be built on the boost that sliding oil prices have provided to much of the eurozone. Falling oil prices have had a positive effect on both consumer spending and appetites for credit.

EY estimates that business loans, which have decreased by €551bn since 2008, will increase by €53bn, or 1.2 percent, in 2015 - the first increase in lending since 2011. In 2016, business lending is expected to climb by €184bn. By the same token, EY forecasts that consumer credit lending will increase by 1.6 percent this year, reaching €573bn. Residential mortgage loans will also increase by around 1.9 percent in 2015.

Andy Baldwin, EY’s financial services leader for Europe, the Middle East, India and Africa (EMEIA), says “It’s taken six years to create the conditions to kick start growth in the Eurozone, but all the levers you can pull to stimulate demand have now been pulled, and there’s the additional stimulus of lower energy prices. So, if we don’t see growth in 2015 and 2016, we’ll have to conclude there are much more fundamental supply side issues to tackle."

EY does not believe that the ECB’s program of quantitative easing has yet had a lasting impact on the eurozone’s economy. As Mr Baldwin notes “The ECB’s QE program cannot take the credit for the improved outlook in lending, which is much more closely linked to cheap energy prices. And QE is a double edged sword - this level of economic stimulation is set to have a distinctly mixed effect on financial services. Investment banks and asset managers will benefit in the short term, but retail banks will find their profit margins squeezed, and insurers are facing an extra two years at least of punishingly low interest rates.”

Report: EY Eurozone Forecast