Emerging market PE and VC investments outperform non-US developed counterpart in Q4 2015

BY Fraser Tennant

Emerging market private equity (PE) and venture capital (VC) investments outperformed their non-US developed market counterparts during the final quarter of 2015, according to a report released this week by Cambridge Associates.

The report, one of Cambridge Associates’ quarterly benchmarks indexes, attributes the strong performance of emerging markets to strong exit environments in both the European and Asian regions. The index also highlights a weak euro as being a factor in bringing down non-US developed market returns (when measured in US dollars).

"In Q4 2015, investors in emerging market PE and VC funds enjoyed the fourth-largest quarterly distribution in the history of the index," said Vish Ramaswami, managing director at Cambridge Associates. “2015 saw the index's second-highest full-year distribution. And although the index returned less last year than in 2014, strong performance by media and IT companies drove solid returns for private investors in emerging markets.”

Drilling down, the Cambridge Associates Emerging Markets PE and VC Index increased 5.1 percent for the quarter and 8.5 percent for the year, a drop of almost 6 percent from its double-digit 2014 year-end result. In comparison, the Global ex US (non-US developed) Markets PE and VC Index’ returned 2 percent in US dollar terms in Q4, bringing the return for the year to 5.7 percent, a marginal improvement over 2014.

"Distributions to investors in non-US developed market PE and VC funds outpaced contributions for the fifth consecutive year in 2015, reaching a record high,” said Andrea Auerbach, head of global investment research at Cambridge Associates. “These payouts largely benefited investors in funds launched in 2005 through 2008, 2010 and 2012, who received over 80 percent of distributions."

Media was by far the best-performing sector in emerging markets PE/VC in 4Q 2015, returning 30.2 percent for the quarter and 55.8 percent for the year to investors. The second-best performer (for the quarter) was found to be manufacturing with a 7.5 percent return, while IT posted a 21.2 percent return for the year. As far as jurisdictional sway is concerned, China dominates emerging markets PE and VC at present.

Cambridge Associates derives its emerging markets and non-US developed PE/VC indexes from data compiled from institutional quality funds raised between 1986 and 2015.

Report: Global ex US PE/VC Benchmark Commentary - Quarter and Year Ending December 31, 2015

Steinhoff and Mattress Firm get into bed together

BY Richard Summerfield

South African retailer Steinhoff International Holdings has taken its first tentative steps into the US market following the announcement that it will acquire Mattress Firm Holding Corp in a deal worth $3.8bn including debt.

Steinhoff has agreed to pay Mattress Firm shareholders $64.00 per share in cash for a total equity value of approximately $2.4bn, The company’s existing debt will see Steinhoff pay an enterprise value for Mattress Firm of approximately $3.8bn. The acquisition price represents a premium of 115 percent on Mattress Firm’s closing price of $29.74 per share at the close of trading on 5 August.

The deal is expected to close in the third quarter of 2016, the companies said. The transaction has been unanimously approved by the board of directors of Mattress Firm and the management and supervisory boards of Steinhoff.

Markus Jooste, CEO of Steinhoff said: “The boards of Steinhoff and its management team are enthusiastic about the opportunities this transaction creates. This transaction will allow Steinhoff to not only enter the U.S. market with an industry leading partner and a national supply chain, but it will also expand Steinhoff’s global market reach in the core product category of mattresses. The Mattress Firm brand and speciality retail concept are a strong complement to the Steinhoff group retail brand portfolio in the many geographies where the group operates.”

Steinhoff’s move for Mattress Firm is the latest in a series of deals completed by the company (in July, it agreed to pay nearly $800m for British discount chain Poundland), and will give the firm a footing in the US, with Steinhoff controlling around 25 percent of the country’s retail market for specialty mattresses. The company is already the world’s largest bed retailer. In Europe, Steinhoff already owns European home furnishings retailers Bensons for Beds and Conforama, a significant US operation of franchised and operated stores in 48 states. Mattress Firm has over 3500 retail outlets across the US as well as 75 distribution centres. The company generated $3.5bn in pro-forma sales last year.

In February, Mattress Firm reinforced its position as a leader in the US mattress retail market by completing a $780m merger with HMK Mattress Holdings LLC, the holding company of Sleepy's. Sleepy's was the second largest specialty mattress retailer in the US with over 1050 stores.

News: Steinhoff to buy Mattress Firm for $3.8 billion including debt

The blockchain is coming

BY Richard Summerfield

In recent years, many industries have been turned on their head by disruptive new technologies. According to a new report from EY, the blockchain is the latest development with the potential to revolutionise business practices across a wide spectrum of industries.

The report, 'Blockchain reaction: Tech plans for critical mass', identifies the blockchain’s potential uses and the threat it could pose to existing business models and practices.

“To date, blockchain has transformed only people’s thinking,” said Channing Flynn, EY’s global technology sector leader, tax services. “We don’t yet even know all the questions blockchain technology will raise, much less the answers. But waiting for the technology to take hold is too late. Now is the time to start defining the questions and influencing policy that will lead to answers.”

Cyber security could be hugely affected by the rise of the blockchain. As Paul Brody, EY’s Americas strategy leader technology sector, notes: “Blockchain shifts cyber security from depending on one to depending on many, and a large volume of people are much more trustworthy than any one individual.”

Furthermore, the blockchain has the potential to transform many industries, particularly those that rely on trusted intermediaries or that currently require strong central authorities to carry out transactions. It could replace those institutions with algorithmically based trust among peers, similar to the Bitcoin system, the most pre-eminent cryptocurrency, which has begun to flirt with the fringes of the mainstream.

Should the blockchain be fully embraced by organisations, however, it could do so much more. According to EY, the technology has the ability to disrupt business models and processes, as well as supply chains and customer relationships throughout the global economy.

With this in mind, companies that were slow to respond to the challenges and opportunities presented by the dawn of the mobile era and cloud computing need to embrace the disruptive and transformative elements of the blockchain. Failure to do so could see them pay the price down the road.

Report: Blockchain reaction: Tech companies plan for critical mass

Didi Chuxing to acquire Uber China in $35bn deal

BY Fraser Tennant

In a move that will bring to an end an intense rivalry in the ride-hailing market in China, transportation company Didi Chuxing is to acquire the business of taxi-booking app firm Uber Technology Inc in a $35bn deal.   

Once the transaction is complete, Uber China (owned by US-based Uber and the Chinese web services company Baidu Inc) will hold a 20 percent stake in the new company.  

Although the two firms have been rivals in the ride-hailing market for years, Didi Chuxing, which has the backing of Chinese internet giants Tencent and Alibaba, is the dominant force, with an 87 percent market share in China (around 14 million journeys every day).  

Beijing-based Didi Chuxing also has the backing of Apple, which invested $1bn in the firm in May 2016.

Conversely, and despite the support provided by internet giant Baidu, Uber China has been less successful, having failed to make a profit since its launch in 2014. Indeed, Uber revealed in February 2016 that it has been losing $1bn a year on account of its operations in China.  

"Funding their China dreams was becoming too expensive for Uber,” said Duncan Clark, chairman of Beijing-based consultancy BDA, in an interview with the BBC. “One thing to watch carefully is how quickly consumers feel the impact as subsidies are withdrawn."

The subsidies referred to by Clark, which are believed to be considerable, are a product of the rivalry between the two firms. Now that the acquisition has been announced, these subsidies are likely to be much less prevalent.

Coincidentally, the Didi Chuxing/Uber deal comes just days after the introduction of a new legal framework in China for taxi-ordering apps. Welcomed by both ride-hailing firms, the decision seeks to address a grey area which saw the business of normal taxi operators undermined due to the popularity of taxi-booking apps.  

The new rules, expected to take effect on 1 November 2016, are also likely to prevent ride-hailing firms operating below cost and to restrict the extent of the aforementioned subsidies.

Despite Uber’s decision to merge its China operations with Didi Chuxing, the firm has aggressive plans for expansion elsewhere, including a $500m investment in developing its own mapping system and the launch of its UberEats project in Australia and London.

News: Uber to Sell China Business to Rival Didi After Losing Billions

Analog Devices buys Linear Technology in $14.8bn deal

BY Fraser Tennant

In a move which will result in the creation of a major analogue technology company, Analog Devices Inc has announced that it is to buy Linear Technology Corporation in a deal valued at $14.8bn.

Under the terms of the definitive agreement, Analog Devices will acquire Linear Technology in a cash and stock transaction that will see Linear Technology shareholders receive $46.00 per share in cash and 0.2321 of a share of Analog Devices common stock for each share of Linear Technology common stock.

Analog Devices intends to fund the transaction with approximately 58 million new shares of Analog Devices common stock, approximately $7.3bn of new long-term debt and the remainder from the combined company’s balance sheet cash.

Upon completion of the acquisition (expected by the end of the first half of calendar year 2017), Analog Devices will be an industry leader across data converters, power management, amplifiers, interface and RF and microwave products.

“The combination of Analog Devices and Linear Technology brings together two of the strongest business and technology franchises in the semiconductor industry,” said Vincent Roche, president and chief executive of Analog Devices. “Our shared focus on engineering excellence and our highly complementary portfolios of industry-leading products will enable us to solve our customers’ biggest and most complex challenges at the intersection of the physical and digital worlds.”

The combined company will use the name Analog Devices, Inc.  and both Analog Devices and Linear Technology anticipate a combined company leadership team, with strong representation from both companies across all functions.

“For 35 years, Linear Technology has had great success by growing its business organically,” said Bob Swanson, executive chairman and co-founder of Linear Technology. “However, this combination of Linear Technology and Analog Devices has the potential to create a combination where one plus one truly exceeds two. As a result, the Linear Technology Board concluded that this is a compelling transaction that delivers substantial value to our shareholders, and the opportunity for additional upside through stock in the combined company.”

The transaction has been unanimously approved by the boards of directors of both companies and is subject to regulatory approvals in various jurisdictions, the approval of Linear Technology’s shareholders, and other customary closing conditions.

Mr Roche concluded: “I have no doubt that the combination of our two companies will create a trusted leader in our industry, capable of generating tremendous value for all of our stakeholders."

News: Semiconductor Industry Shrinks Some More With Latest Deal