CKI to buy Power Assets in $11.6bn deal

BY Richard Summerfield

Cheung Kong Infrastructure Holdings Ltd has announced plans to merge with its power utility affiliate Power Assets Holdings Ltd in an all shares deal worth $11.6bn, creating in the process an infrastructure giant.

The deal will see the infrastructure division of Hong Kong businessman Li Ka-shing, which already owns 38.9 percent of Power Assets; acquire the remaining outstanding share in the company. Following completion of the deal, all shareholders of the newly merged company will receive a special dividend of around $0.65.

In completing the deal, CKI will gain access to Power Assets' considerable cash pile, which CKI will utilise both to shore up its balance sheet and to pursue further expansion. At the end of June, Power Assets had around $7.47bn of net cash available, far outstripping the net cash available to CKI. We will continue to carry out deals in the future and then reinvest money into the company," CKI Chairman Victor Li said at a news conference announcing the deal. "As an infrastructure company, the larger we get, the larger deals we can do."

Once the deal has been completed, the newly merged company will control a number of businesses across a variety of sectors, including energy infrastructure, transportation infrastructure, water infrastructure, waste management and other infrastructure related businesses.

CKI has undergone a period of significant renewal in 2015. In January it restructured itself, creating two listed companies. Cheung Kong Property Holdings focuses on property, while CK Hutchison Holdings focuses on telecoms, retail, aircraft leasing and port assets.

In order to finance the deal, CKI will issue 1.36 billion new shares, according to a joint securities filing announcing the acquisition. Under the terms of the deal, Power Assets will delist from the Hong Kong stock exchange once the transaction has been completed. The two companies expect the deal to close in the first quarter of 2016.

The companies already have a solid history of collaboration; CKI and Power Assets have been involved in 11 infrastructure projects together in recent years. These projects included several high profile projects in Europe and the UK.

News: Li Ka-shing's CKI to buy out Hong Kong utility in $11.6 billion deal

Pay freeze hits FTSE 100 CEOs

BY Fraser Tennant

Pay restraint continues to hit senior executives with over a third of FTSE 100 CEOs experiencing a salary freeze this year, up from a quarter in 2014, according to new analysis by PwC. 

The ‘Taking stock – Review of 2015 AGM season’ report reveals that while almost all CEOs still receive a significant bonus each year, pay rose by a median 3 percent (meaning a CEO median base salary of £891,000 for 2015).

The PwC analysis also shows that organisations are improving their bonus disclosure policies and making pay more of a challenge to earn by requiring senior executives to hold onto shares for longer as well substantially beefing up clawback conditions.

“Remuneration Committees have again exercised pay restraint," says Tom Gosling, executive pay partner at PwC. “This continues the trend of largely static executive pay levels in real terms since the financial crisis. But with the average FTSE 100 CEO earning in a year what several ordinary people might earn in a working lifetime, remuneration committees need to make sure that pay-outs are fully justified by performance to help rebuild trust in business.”

Furthermore, the report states that: (i) bonus outcomes are also largely unchanged from the previous year; (ii) the maximum bonus FTSE 100 CEOs can receive as a percentage of salary has not changed since 2011; (iii) median bonus pay-outs have been unchanged for the past three years at 72 percent of the maximum award available; and (iv) CEOs at four out of five companies were paid more than half the maximum bonus and just 4 percent of companies paid zero bonus. 

Mr Gosling continues: “The consistency in bonus pay-outs is raising questions about how well variable pay is living up to its name. To build trust in the system, remuneration committees must continue to improve the quality of disclosure about how bonus targets are set and whether they are sufficiently stretching. This is likely to be where shareholders’ focus will shift next.

“There’s been growing dissatisfaction with long-term incentives, which are often seen as a lottery and too complicated. In response companies are looking for performance measures that more closely link to company strategy. At the same time they’re satisfying shareholder demands by increasing the length of time that shares must be held.”

The PwC report is based on analysis of FTSE 100 annual reports in the 12 months to 31 May 2015.

Report: Taking stock – Review of 2015 AGM season

M&A appetite in UK outpaces US and Europe

BY Fraser Tennant

The appetite and capacity for M&A deals among the UK's largest corporates is currently exceeding that seen in the US and Europe, according to the new edition of the KPMG Global M&A Predictor published this week.

The M&A Predictor – a tool that helps member firm clients to forecast worldwide trends in mergers and acquisitions – reveals that, between June 2015 and June 2016, the forward P/E ratios (KPMG’s measure of corporate appetite or confidence) of the UK’s largest corporates are forecast to increase by 13 percent.

In comparison, the P/E ratios for corporates in the US and Europe are forecast to be 6 percent and 8 percent respectively.

 “With the debt markets more accessible than they have been for some time, our view is that the capacity for deals by UK corporates is showing little sign of diminishing," declares Andrew Nicholson, KPMG’s head of M&A in the UK. “Couple this increasing buoyancy with a more stable economy and a greater convergence between vendor and purchaser price expectations, and all the signs are there that UK deal volumes will increase steadily over the coming months.”

However, despite Mr Nicholson’s view that the outlook for M&A in the UK remains bright, the M&A Predictor data also highlights the fact that increasing confidence still does not appear to be reflected in actual transaction levels (completed deal volumes fell in the UK and globally over the six-month period from January to June 2015).

“Globally, it feels like there has been a slight slowdown in the market,” concedes Mr Nicholson. “The continuing impact of low oil prices and political instability in some regions should not be overlooked and, of course, one wonders whether this will be exacerbated by the recent volatility seen in the capital markets. However, we continue to have strong expectations for deal activity in the coming months and there are real pockets of strength to be found.”

In terms of sector expectations, the M&A Predictor confirms the ongoing challenges facing the global energy sector, as evidenced by the 19 percent fall (accompanied by a drop in profits) in market capitalisations of the largest energy companies between June 2014 and June 2015.

Further afield, the M&A Predictor notes that the defensive healthcare sector appears stable (an 18 percent increase in market capitalisation and a 7 percent rise in appetite for M&A) as does telecommunications, with an 8 percent increase in M&A appetite.

Report: M&A Predictor - September 2015

Berkshire Hathaway boosts Phillips stake

BY Richard Summerfield

Fresh on the heels of the firm’s $32bn acquisition of Precisions Castparts, Berkshire Hathaway has announced that is has a taken a $4.48bn stake in oil refiner Phillips 66, making it the company’s biggest shareholder.

According to a filing made with the US Securities and Exchange Commission on Friday evening, Berkshire has amassed a 57.98 million share, or 10.8 percent stake in the company. The move marks a return to the business after divesting two-thirds of its stake last February.

In 2014, Berkshire traded a significant portion of its stake in the Phillips 66 unit for a chemical-business investment which was subsequently absorbed by Berkshire’s Lubrizol division.

However, Berkshire is believed to have begun rebuilding its holding in Phillips 66 in the second quarter of 2015, when it bought $3.09bn worth of equities in the firm. As a result of the conglomerates announcement, Phillips shares closed Friday at $77.23.

Since Berkshire traded away the majority of its holding in Phillips, the firm has continued to blossom. Since the spinoff, Phillips stock has more than doubled in value.

Berkshire’s disclosure underlines its belief that the energy sector is likely to be a growth area. This is Berkshire’s most significant energy investment in around two years, though it only represents a mid range investment by Berkshire’s standards. The conglomerate, which has a diverse portfolio of over 80 firms, typically takes much larger holdings, including $20bn stakes in Wells Fargo & Co. and Kraft Heinz Co. The firm also has a $10bn holding in Coca Cola and IBM.

Berkshire hopes that low oil prices will continue to drive demand for gasoline, diesel and other petroleum products. This demand has been ably demonstrated in the US over the last 12 months; since prices began to tumble last year, gasoline demand in the US has climbed to an eight year high. Following the company’s outlay in Phillips 66, Berkshire will hope this demand continues to grow.

News: Buffett's Berkshire takes $4.48 billion stake in Phillips 66

Schlumberger and Cameron agree $14.8bn merger

BY Richard Summerfield

Given the current volatility in commodities, it is little surprise that we are beginning to see more M&A activity in the oil and gas space. To that end, Schlumberger Ltd announced this week its agreement to acquire Cameron International Corp in a deal worth around $14.8bn, including the assumption of debt.

Under the terms of the deal, Cameron shareholders will receive 0.716 Schlumberger shares and a cash payment of $14.44. According to a statement released by the two firms, the agreement places a value of $66.36 per Cameron share, a premium of 37 percent to Cameron’s 20 day volume weighted average price of $48.45 per share. The deal has been approved by the board of directors at both firms. Pending shareholder, regulatory and other closing conditions, the transaction is expected to close in the first quarter of 2016.

Regulatory approval could pose an issue for the two companies. In November, Schlumberger's two closest rivals - Halliburton Co and Baker Hughes Inc - agreed to merge in an effort to lower costs in a pressurised market, but the deal was blocked by antitrust authorities in the US. However, the fact that there is little crossover between the services offered by Schlumberger and Cameron may allay any regulatory concerns.

The acquisition of Cameron is an important one for Schlumberger, given the company’s standing as one of the world’s largest producers of energy equipment. In the statement, Paal Kibsgaard, chairman and chief executive of Schlumberger, noted, “This agreement with Cameron opens new and broader opportunities for Schlumberger. At our investor conference in June 2014, we highlighted how the E&P industry must transform to deliver increased performance at a time of range-bound commodity prices. With oil prices now at lower levels, oilfield services companies that deliver innovative technology and greater integration while improving efficiency, which our customers increasingly demand, will outperform the market.”

The proposed merger of the two companies is not the first time they have been associated. In 2012 the firms established a joint venture – OneSubsea - to target the deepwater industry. OneSubsea is a supplier of heavy duty machinery which allows Big Oil firms to control the flows of oil and gas they find and bring it to the surface.

The acquisition of Cameron is expected to help Schlumberger achieve significant synergies, by lowering operating costs, streamlining supply chains and improving manufacturing processes.

Jack Moore, chairman and chief executive of Cameron, said, “This exciting transaction builds on our successful partnership with Schlumberger on OneSubsea and will position Cameron for its next phase of growth. For our shareholders, this combination provides significant value, while also enabling them to own a meaningful share of Schlumberger. Together, we will create a premier oilfield equipment and service company with an integrated and expanded platform to drive accelerated growth. By bringing together Cameron and Schlumberger, we will be uniting two great companies with successful track records, performance and value creation.  We look forward to working closely with Schlumberger to achieve a seamless post-closing integration and long term value for all of our stakeholders.”

News: Schlumberger to buy oilfield gear maker Cameron in $14.8bn deal