Brexit will be “hard” and pose “complex” operational challenges for banking industry, says new report

BY Fraser Tennant

Brexit will be “hard” and pose “complex” operational and transformational challenges for banking services in the European Union (EU) and beyond, according to a new report compiled by PwC on behalf of the Association for Financial Markets in Europe (AFME).

“The report, ‘Planning for Brexit – Operational impacts on wholesale banking and capital markets in Europe’, aims to provide policymakers and other industry stakeholders, both in the EU27 and the UK, with a fact-based analysis of how these challenges are likely to affect the financial services industry”, said the AFME in a statement.

To compile the report, PwC gathered information from previous case studies and from 15 banks spanning a range of sizes, activities, origins and legal entity structures. They include those EU27 headquartered, UK headquartered and non-EU headquartered banks.

One of the key findings in the report is that the Brexit transformation will be highly complex for wholesale banks as it contains many interdependent activities. Those firms providing a significant proportion of current industry capacity need to execute transformation programmes which will extend beyond Article 50 timescales. In some cases this may be up to three years after Brexit has been completed or even longer if the post‐Brexit trading relationship between the EU and UK remains unresolved for a protracted period.

Furthermore, in executing their transformation programmes, banks will be heavily dependent upon timely approval of licences by their new EU regulators – a critical step in the implementation of new business models which is likely to occur at a time when regulators will see a peak in requests following Article 50 activation.

In order to assist the wholesale banking and capital markets industry support European corporates and continue to help growth across all of Europe, the report recommends that policymakers: (i) clarify with each industry participant as soon as possible the structure of any interim business models that may be deemed acceptable immediately post‐Brexit; and (ii) clarify as soon as possible any future permanent terms for the provision of wholesale banking and capital markets services between the UK and EU post‐Brexit.

The report also states that, following Brexit and agreement of any new market access arrangements, an implementation period of at least three years must be provided to allow banks to complete their adaptation and 'grandfather' transactions that are in force at the time that the UK leaves the EU.

News: Banks must plan for 'hard' Brexit, industry report warns

Tesco’s Booker prize

BY Richard Summerfield

British supermarket chain Tesco PLC has announced that it is to acquire food wholesaler Booker Group plc in a deal worth around £3.7bn.

Under the terms of the merger, Booker shareholders will receive 0.861 new Tesco shares and 42.6 pence in cash for each Booker share held. Based on Tesco's closing share price of 189 pence on Thursday 26 January, the day before the deal was announced, the deal represents a value of 205.3 pence per Booker share – a premium of about 12 percent.

Booker stakeholders will control around 16 percent of the newly merged company once the deal has been completed. The companies believe that the merger will create synergies of at least £200m in the first three years. Though implementation costs could be around £145m, the savings will likely come from procurement, distribution and central functions. The deal will boost earnings per share in the second full year of the deal, the companies said in a statement.

Booker, a cash and carry wholesaler which supplies food to 120,000 independent retailers nationwide, as well as owning the Londis, Budgens and Premier brands, will provide Tesco with an entrance into the food service industry. Booker also supplies a number of high-street restaurant chains and pubs.

The deal and subsequent transition into the catering sector is the latest step in Tesco’s remarkable turnaround. Just two years ago Tesco was in the midst of an accounting scandal and experiencing a declining share of the UK’s grocery market. Today, however, the company is on a much firmer footing.

Dave Lewis, Tesco’s chief executive said: “Tesco has made significant progress in turning around our UK retail business. This merger with Booker will further enhance Tesco’s growth prospects by creating the UK’s leading food business with combined expertise in retail, wholesale, supply chain and digital. Wherever food is prepared and eaten – ‘in home’ or ‘out of home’ – we will meet this opportunity with the widest choice and best service available.”

Charles Wilson, chief executive of Booker, said: “Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve. We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders.”

Tesco has heralded the advantages of the deal, claiming that the tie-up will grant suppliers access to additional customers. The firm also believes that independent retailers will be given more choice. Tesco will gain exposure to around 120,000 independent retailers, 107,000 small businesses and 450,000 caterers by absorbing Booker.

But given the size and scale of the new company, there is an expectation that the UK Competition and Markets Authority will place the deal under intense scrutiny. The takeover, should it go ahead, would create the UK’s biggest wholesale and retail food business, with combined annual sales of more than £60bn. Tesco currently enjoys a 28 percent share of the UK grocery market.

News: Resurgent Tesco surprises with $4.6 billion swoop for wholesaler Booker

Cisco to acquire AppDynamics for $3.7bn

BY Richard Summerfield

Cisco Systems Inc. has announced that it is to acquire software startup AppDynamics in a deal worth $3.7bn.

The deal, which is expected to close before April, came on the eve of AppDynamics’ planned public offering. The IPO, due to be launched on Wednesday, would have been the first major tech offering of 2017. AppDynamics had intended to launch its IPO in December 2016; however the company decided to delay its offering due to uncertainty over the US presidential election.

The $3.7bn price dwarfs the $1.72bn market value that AppDynamics was seeking via IPO. Cisco agreed to pay around $26 a share, well above the company’s original price range of $10 to $12 a share.

Cisco, which has been synonymous with computer networks and hardware, has become increasingly focused on software under the leadership of CEO Chuck Robbins. The company is pivoting toward new business lines, including the Internet of Things, and has begun to make acquisitions in the space. In 2016 Cisco acquired Internet of Things platform maker Jasper Technologies for $1.4bn.

“Applications have become the lifeblood of a company's success. Keeping those apps running and performing well has never been more important. Unfortunately, that job has only gotten harder, as IT departments and developers struggle with a tangled web of disconnected, complex data that's hard to understand," said Rowan Trollope, Cisco senior vice president and general manager of Cisco's Internet of Things and Applications Business Group. "The combination of Cisco and AppDynamics will allow us to provide end to end visibility and intelligence from the network through to the application; which, combined with security and scale, and help IT to drive a new level of business results."

AppDynamics, founded in 2008, will continue to be led by the company’s chief executive and president David Wadhwani. "AppDynamics is empowering companies to build and successfully run the applications they need to compete in today's digital world," said Mr Wadhwani. "With digital transformation, companies must re-define their relationships with customers through software. We're excited to join Cisco, as it will enable us to help more companies around the globe."

News: Cisco Pays $3.7 Billion for Software Maker AppDynamics

Significant rise in fraud and risk incidents in 2016, confirms new report

BY Fraser Tennant

Fraud, cyber and security incidents are now the “new normal” for companies across the world, according to a new report by Kroll, the global risk consulting company.

In its ‘2016/17 Annual Global Fraud and Risk Report: Building Risk in a Volatile World’, Kroll highlights the escalating threat to corporate reputation and regulatory compliance. Eighty-two percent of the global executives surveyed stated that their company had fallen victim to fraud in 2016 , up from 75 percent in 2015.

Kroll also found that cyber incidents were particularly commonplace, with 85 percent of executives confirming that their company had suffered a cyber incident over the past 12 months. Furthermore, over two-thirds (68 percent) reported the occurrence of at least one security incident over the course of the year, with the theft or loss of intellectual property cited as the most common type.

Although the Kroll report highlights the widespread concerns over external attacks, the data indicates that the most common perpetrators of fraud, cyber and security incidents over the last year were current and former employees. Junior staff were cited as key perpetrators in two-fifths (39 percent) of fraud cases, followed by senior or middle management (30 percent) and freelance or temporary employees (27 percent). Former employees were also identified as being responsible for 27 percent s of reported incidents.

“It’s becoming an increasingly risky world, with the largest ever proportion of companies reporting fraud and similarly high levels of cyber and security breaches,” said Tommy Helsby, co-chairman at Kroll Investigations and Disputes. “The impact of such incidents is significant, with punitive effects on company revenues, business continuity, corporate reputation, customer satisfaction and employee morale.”

In terms of the impact that fraud and security concerns have on overseas expansion, 69 percent of executives admitted that their company has been dissuaded from operating in a particular country or region due to fraud concerns and security threats.

Mr Helsby concluded: “With fraud, cyber and security incidents becoming the new normal for companies all over the world, it’s clear that organisations need to have systemic processes in place to prevent, detect, and respond to these risks if they are to avoid reputational and financial damage.”

Report: ‘2016/17 Annual Global Fraud and Risk Report: Building Risk in a Volatile World’

BAT smokes out mega $49.4bn deal to acquire Reynolds

BY Fraser Tennant

A mega deal which creates the world's biggest listed tobacco company, British American Tobacco (BAT), has agreed a $49.4bn deal to acquire its US rival, Reynolds American Inc.

Under the terms of the agreement, Reynolds shareholders will receive for each Reynolds share $29.44 in cash and 0.5260 BAT ordinary shares, represented by BAT American Depository Receipts (ADRs). The cash component of the transaction will be financed by a combination of existing cash resources, new bank credit lines and the issuance of new bonds.

Shareholders in Reynolds since 2004, BAT will acquire the 57.8 percent of Reynolds it does not already own.

“BAT has consistently executed a winning strategy and has a proven track record of delivering strong results and returns for its shareholders while successfully investing for future growth,” said BAT’s chief executive, Nicandro Durante. “Our combination with Reynolds will benefit from utilising the best talent from both organisations. It will create a stronger, global tobacco and NGP business with direct access for our products across the most attractive markets in the world.” 

With a strong track record of successfully integrating acquisitions, BAT is committed to Reynolds American’s US workforce and manufacturing facilities. Moreover, the combined business will be the only truly global company in the fast growing Next Generation Products (NGP) category, with a unique opportunity to leverage scale and insights across the largest and fastest growing NGP markets and categories.

The BAT/Reynolds transaction will see leading brands such as Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Newport and Natural American Spirit under common ownership, with direct access to the most attractive markets in the world. 

“We look forward to bringing together the two companies’ highly complementary cultures and shared commitment to innovation and transformation in our industry,” said Debra A. Crew, Reynolds American’s president and chief executive. “BAT is the best partner for Reynolds American’s next phase of growth, and together the two companies will create the leading portfolio of tobacco and next generation products for adult tobacco consumers.”

Unanimously approved by the Transaction Committee of independent Reynolds directors established to evaluate the BAT offer, as well as the boards of BAT and Reynolds, the transaction is expected to close during the third quarter of 2017.  

Mr Durante concluded: “We believe this transaction will drive continued, sustainable profit growth and returns for shareholders long into the future."

News: BAT agrees to buy Reynolds for $49 billion