Digital disruption driving deals

BY Richard Summerfield

2017 is likely to see increased mergers and acquisitions (M&A) activity in the media and entertainment (M&E) sector, according to EY’s latest Media & Entertainment Capital Confidence Barometer, released earlier this week.

Much of the dealmaking activity in the M&E space in the coming year will be likely be driven, in part, by digital disruption and convergence. The emergence of digital disruption and sector blurring in particular has proved a key driver of recent dealmaking in the M&E space, with 31 percent of the executives surveyed by EY citing convergence as the biggest disrupter in the industry of late. Increasingly, companies are expanding into previously uncharted territory. Sixty-seven percent saw digital disruption as the main catalyst for deal aking in the coming year.

In a statement announcing the report, John Harrison, EY's Global Media & Entertainment Leader, Transaction Advisory Services, said, “Unprecedented, unrelenting advances in technology and the swift emergence of new platforms and services are driving change in consumer behaviours, upending long-standing media ecosystems and blurring sector lines. Companies are aggressively seeking the innovation needed to position for future success and are looking to acquisitions, alliances and joint ventures to catalyse transformation.”

Despite the political and economic uncertainty permeating the globe, there is an underlying confidence in the M&E industry, particularly when it comes to dealmaking. In spite of persistent macroeconomic challenges, 73 percent of respondents perceived the global economy as stable or improving.

From a dealmaking perspective, 85 percent of respondents expressed confidence in the quality of acquisition opportunities available to M&E companies in the year to come. Furthermore, 94 percent of respondents claimed they had stable to positive confidence in the likelihood of closing a deal in 2017. More than half of respondents (56 percent) claimed that they expect their company to actively pursue an acquisition in the next 12 months, up from 46 percent in July 2016. Forty-eight percent said they have five or more deals in the pipeline.

Cross-border dealmaking is likely to be particularly prevalent in 2017, with 42 percent of executives claiming that their companies will be targeting a cross-border acquisition in the coming year. The US, France, the UK, Germany and China are the top five most likely destinations. The UK was the most sought after investment destination in EY’s previous report.

Report: Media & Entertainment Capital Confidence Barometer

New ‘Basel IV’ capital requirements proposed for banking sector

BY Fraser Tennant

In what is a crucial period for the European economy, new proposals for setting the capital requirements for the banking sector have been officially unveiled by the Basel Committee on Banking Supervision (BCBS).

The proposals, supposedly the final set of revisions being made to the Basel III Framework (part of the BCBS’s continuous effort to enhance the banking regulatory framework), clarify rules on combating money laundering and terrorist financing in correspondent banking. Many commentators have dubbed the latest modifications, ‘Basel IV'.

The first accord, Basel I, had three objectives: (i) to make sure banks held sufficient capital to cover their risks; (ii) to level the playing field among international banks competing cross-border; and (iii) to facilitate comparability of the capital positions of banks.

The BCBS’s revised proposals are intended to ensure that banks conduct correspondent banking business with the best possible understanding of the applicable rules on anti-money laundering and countering the financing of terrorism. According to the BCBS, the draft proposals reflect growing concerns in the international community about banks avoiding these risks by withdrawing from correspondent banking, which may, in turn, affect the ability to send and receive international payments in entire regions.

"The proposed revisions develop the application of the risk-based approach for correspondent banking relationships, recognising that not all correspondent banking relationships bear the same level of risk," says the report.

The proposals follow the publication by the Financial Action Task Force (FATF) of its guidance on correspondent banking services (October 2016). The BCBS seeks to clarify the expectations of banking supervisors, consistent with the FATF standards and guidance.

In response to the BCBS’s proposed revisions (as well as those already globally agreed), the European Commission has published its first proposals for calibrating capital and liquidity requirements in the form of a Capital Requirements Directive and Resolution (CRD V and CRR II) – proposals which address the market risks inherent in banks’ trading activities, as well as introducing the concept of “proportionality".

“Europe’s move to implement ‘proportionality’ is an important step," said Colin Brereton, PwC’s EMEA FS advisory services leader. “As in the US, the largest EU banks will remain subject to the full scope of regulation; ultimately, this should improve the ability of smaller banks to compete, to the benefit of bank customers.”

The consultation on the BCBS’s proposals is open until 22 February 2017.

Report: Basel Committee on Banking Supervision - Consultative Document

Executive pay crackdown announced by May

BY Fraser Tennant

Tighter controls on executive pay designed to curb the excesses of the “privileged few” have been proposed by UK prime minister Theresa May this week as part of an anti-elitism drive to regulate company behaviour and create a more equal country.

The proposals contained in the ‘Corporate Governance Reform’ Green paper are part of Ms May’s attempt to restore public trust in business practices and close the gap between those at either end of the corporate ladder (an increase in inequality being one of the main reasons for Brexit).  

In a statement outlining its intent, the UK government stated that it would bring to an end the behaviour of "an irresponsible minority of privately-held companies acting carelessly – which left employees, customers and pension fund beneficiaries to suffer when things go wrong".

Ms May’s drive to tackle unsavoury corporate behaviour focuses on five specific areas: shareholder voting and other rights; shareholder engagement on pay; the role of remuneration committees; pay disclosure; and long-term pay incentives. One of the main components of the prime minister’s plans is the question of whether a new pay ratio requirement should be introduced.

However, a proposal to have workers represented on company boards has already been sidelined. Business minister Greg Clark indicating that the government was unlikely to change the unitary boards system currently in place.

Providing a stark illustration of the disparity between pay in the boardroom as opposed to the shop floor, is a TUC study (September 2016) which found that, in 2015, the average FTSE 100 boss earned 123 times the average full-time salary. Furthermore, the median total pay (excluding pensions) of top FTSE 100 directors increased by 47 percent between 2010 and 2015, to £3.4m. In contrast, the average wages for workers were found to have risen by only 7 percent over the same period.

The TUC research also found that those companies with high pay inequality between bosses and workers tended to perform less well overall.

“Two thirds of people think executive pay is too high, so we support the Government’s intent to help rebuild trust and strengthen accountability in this area,” said Fiona Camenzuli, a partner in PwC’s Reward & Employment team. “Enhanced shareholder powers and engagement, greater focus by boards on pay fairness, appropriate employee and stakeholder voice in the boardroom, and making pay plans simpler and longer term can all contribute to making pay work better to support the long-term performance of UK companies. The Green Paper presents a wide range of sensible options and we encourage a robust debate, based on evidence, to determine the right policy proposals.”

Following consultations on the Green Paper, a White paper is expected in early 2017. “It will be a consultation that will deliver results,” said Ms May.

News: ‘Corporate Governance Reform’ Green paper

Global growth bolstered by US

BY Richard Summerfield

Donald’s Trump ascent to the presidency in the US caught many off guard, and though a number of the president-elect’s policies caused concern during the bruising race to the White House, his planned tax cuts and public spending increases will see global growth pick up faster than previously expected in the coming months, according to the Organisation for Economic Co-operation and Development’s (OECD) twice yearly Economic Outlook.

The OECD’s outlook suggests that the US is expected to be the best performing large advanced economy in 2017, growing 2.3 percent, with the eurozone growing 1.6 percent, and the UK just 1.2 percent. Only 1 percent growth is predicted in Japan. Furthermore, US growth is forecast to improve to 3 percent in 2018, the highest rate since 2005, as tax cuts on businesses and households come into effect and the administration’s infrastructure investment programme begins in earnest.

During his presidential campaign, Mr Trump pledged to boost infrastructure investment in the US by as much as $1 trillion. Though the new administration’s willingness to invest in infrastructure development has won the approval of the Paris-based think-tank, the OECD has distanced itself from another of Mr Trump’s often repeated policy positions: withdrawing from international trade agreements. It is these agreements, the OECD argues, that will help return strong growth to the global economy.

Fiscal initiatives, though, will play a key role in delivering greater global growth. “The global economy has the prospect of modestly higher growth, after five years of disappointingly weak outcomes,” said OECD secretary-general Angel Gurría, while launching the Outlook. “In light of the current context of low interest rates, policymakers have a unique window of opportunity to make more active use of fiscal levers to boost growth and reduce inequality without compromising debt levels. We urge them to do so.”

An extraordinarily accommodating monetary policy, will, according to the OECD, be the primary means by which the global economy will be boosted, although the think-tanks’s endorsement does not provide governments with a “blank cheque”, said Mr Gurria. Amid persistently low interest rates, policymakers have the opportunity to boost growth by utilising expansionary fiscal initiatives. According to the OECD, fiscal measures such as “high-quality infrastructure investment, innovation, education and skills” may lead to higher growth by 2018.

Report: Economic Outlook

KKR to buy Calsonic in $4.5bn deal

BY Richard Summerfield

Private equity firm KKR & Co has agreed to acquire auto parts maker Calsonic Kansei Corp from the company’s majority shareholder Nissan, for around $4.5bn. The deal represents KKR’s biggest ever deal in Japan.

According to a statement announcing the deal, KKR will pay 1860 yen per Calsonic share held - a 28.3 percent premium over the company’s closing price on Tuesday, the day before the deal was announced. The firm beat competition from a number of other rival private equity firms, including Bain Capital and MBK Partners.

Calsonic’s main customer is Nissan, Japan’s second largest car maker, which accounts for 85 percent of its business. However, the company also supplies parts to a number of other car manufacturers including Renault, Isuzu, Daimler and General Motors.

Yasuhiro Yamauchi, chief competitive officer of Nissan, said in a statement: "This agreement was reached because we share common interests and goals. Nissan is hoping to further increase the competitiveness of Calsonic Kansei – one of our most important partners – and KKR recognises the company's potential. This is also the best choice for Calsonic Kansei and its shareholders."

The acquisition of Calsonic will come from KKR Asian Fund II. The firm has been active in Japan through its pan-regional private equity funds since 2010. Though the country has been a key market for KKR, the deal for Calsonic is a rare one in Japan. Multibillion dollar deals in Japan have been hard to come by in recent years; many Japanese companies often unwilling to divest their units through drastic restructuring.

Once the deal for Calsonic is complete, it will become the fourth KKR owned firm operating in Japan. The firm has previously acquired human resources services company Intelligence Ltd, Pioneer DJ, the DJ equipment business which Pioneer Corporation divested in early 2015, and Panasonic Healthcare, which was carved-out of the Panasonic Corporation for $1.67bn in 2013.

Hiro Hirano, a member of KKR and CEO of KKR Japan, said: "Calsonic Kansei is a best-in-class auto-parts manufacturer that supplies high-quality products to the world's largest automotive brands. As a partner to Calsonic Kansei's management team, we aim to assist the company in achieving its growth ambitions and make available our international network and industry expertise to continue Calsonic Kansei's success globally."

News: KKR to buy Nissan-backed supplier Calsonic for up to $4.5 billion