Week in Review, August 19

A round up of some of the week’s most significant corporate events and news stories.

Mixed results for US chains battling rise of online rivals

A host of US retail companies reported earnings this week, revealing patchy but less dire results than analysts had forecast, as heavy investments by big box retailers appeared to pay off, writes Anna Nicolaou.

© AFP

The US retail sector is experiencing huge upheaval, as online shopping and in particular ecommerce behemoth Amazon have upended traditional business models, and consumer tastes evolve.

Those best equipped to withstand the disruption have been companies with deep pockets, such as Walmart, which reported that ecommerce revenues rose 60 per cent in the second quarter. Comparable sales rose 1.8 per cent, the 12th consecutive quarterly rise.

Target, whose cheap-chic offerings have garnered a loyal middle-class following, also offered positive news, reporting a 1.3 per cent rise in comparable sales, its first gain in five quarters. The growth follows Target’s announcement in March of a turnround plan to sacrifice $1bn of profit margin this year in order to compete better against Amazon online.

Urban Outfitters, the teen-focused apparel company. reported adjusted earnings per share of 45 cents, topping the consensus for 36 cents and sending shares soaring 16 per cent as a sign of life for stores struggling with declining mall traffic.

Other retailers fared worse, however. Dick’s Sporting Goods, the Pittsburgh-based sports chain, sharply lowered its earnings and sales outlook on Tuesday, while Coach also warned its sales in this fiscal year could come in below Wall Street expectations, sending shares tumbling.

Ryanair fury as Lufthansa sizes up Air Berlin assets

Air Berlin became the second large European airline to go bankrupt this summer after it was forced to file for insolvency on Tuesday when its biggest shareholder pulled its funding, writes Tanya Powley.

The German government and Lufthansa have stepped in to keep Air Berlin flying after Etihad withdrew funding © FT montage; Getty Images

Germany’s second-largest carrier was saved from a full collapse after Berlin stepped in with a €150m loan to keep the airline flying through the busy summer months while it negotiated the sale of parts of the business to Lufthansa and one other airline.

The move was triggered when Etihad, the Abu Dhabi-based airline that owns 29 per cent of Air Berlin, decided not to pump in any more money after providing a series of cash injections over the past six years to keep it afloat.

Air Berlin’s insolvency comes just four months after Alitalia, the Italian carrier, entered administration after its employees rejected a restructuring plan and Etihad, which also owns a significant stake in Alitalia, said it would provide no more funding.

Air Berlin has been under pressure after racking up losses of about €2bn over the past six years. The situation has worsened as Etihad has faced its own challenges, forcing it to unravel its strategy of buying minority stakes in airlines to drive traffic to its hub in the Gulf. Etihad made losses of $1.9bn in 2016.

Air Berlin’s collapse has sparked a fierce battle over the rights to prime German take-off and landing slots, with Ryanair, Europe’s biggest low-cost airline, branding a state bailout of the airline as a “conspiracy” to protect national carrier Lufthansa.

China Unicom in line for $11.7bn of private capital

China Unicom, the country’s second-largest mobile operator, will receive a $11.7bn capital injection from some of China’s biggest ecommerce and internet groups, including Alibaba, Tencent and Baidu, writes Don Weinland in Hong Kong.

As part of the deal China Life Insurance, the country’s largest life insurance group, will buy the largest stake in China Unicom © Reuters

The investment is the latest step in the government’s efforts to pump private capital into declining state-controlled businesses.

Ten groups will buy a total of 35.19 per cent of Unicom’s Shanghai-listed unit. Of this, Alibaba, Tencent, Baidu and one other group, JD.com, will hold a combined 12.6 per cent.

State-backed companies will also invest. China’s biggest life insurance company China Life, as well as a government-controlled fund that invests in companies undergoing reform, will take large stakes.

China Life will buy by far the biggest stake of any single group, at 10 per cent. Unicom’s parent company will maintain a 36.67 per cent holding.

Tencent president Martin Lau described the ownership reform scheme as “a very momentous step in the development of the country”.

The round of investment had been anticipated for months and was announced on Wednesday.

So-called “mixed-ownership reform” — the introduction of private capital into state groups — has been touted by Xi Jinping, leader of China’s communist party, as a means of revitalising state groups.

However, industry watchers say private investment in state groups has produced few, if any, results over the past two decades.

Top management at state companies is still chosen by government agencies and bears little connection to commercial performance, experts say.

KPMG and PwC fined over substandard external audits

US and UK regulators shone a light on poor practice at accountancy firms this week, slapping both KPMG and PwC with hefty fines for audit failures, writes Hannah Murphy. 

© Bloomberg

KPMG was on Tuesday hit with a fine of more than $6.2m by the US Securities and Exchanges Commission over its audit of oil and gas company Miller Energy in 2011. Miller had overvalued certain assets by more than 100 times and last year settled accounting fraud charges with the SEC.

A day later, PwC was fined £5.1m by the Financial Reporting Council — the largest ever penalty issued by the UK’s accounting watchdog — for “extensive misconduct” relating to the audit of a smaller consultancy firm RSM Tenon. 

PwC admitted to five separate instances of misconduct in its 2011 audit of the company, which was later forced to restate its accounts for that year after discovering “significant errors”.

RSM Tenon was put into administration in 2013 after building up major debts and sold to rival Baker Tilly. 

Regulators are keen to improve the quality of external audits. So far this year, the FRC has launched investigations into the audit of UK companies including Rolls-Royce, BT and Mitie — which involve KPMG, PwC and Deloitte respectively.

Akzo Nobel ends bitter spat with largest shareholder

Akzo Nobel, the Dutch paintmaker behind the Dulux brand, agreed a truce with the activist investor Elliott Advisors following a bitter feud over the company’s rejection of a €27bn takeover offer, writes Michael Pooler.

© Bloomberg

The Amsterdam-based group announced an agreement with its largest shareholder, which holds a 9.5 per cent stake in Akzo and for months has berated its management and brought legal challenges against the company.

A dispute blew up earlier this year over the Akzo’s refusal to engage in buyout talks with its US rival PPG Industries. A combination would have created a dominant player in the $130bn global paints and coatings market.

Under the peace deal, both parties will suspend all ongoing litigation for at least three months. Elliott has unsuccessfully pursued a legal case to force the removal of Akzo’s chairman, Antony Burgmans, who was seen an obstacle to a deal with PPG and is retiring next year.

For its part, Akzo nominated two new board members and said it intended to nominate a third, in consultation with its major shareholders.

In exchange Elliott Advisors, which is the UK arm of the New York-based hedge fund, will back the appointment of a new chief executive. Thierry Vanlancker is taking over from Ton Büchner, who resigned last month due to health reasons.

The accord also included “alignment” on Akzo’s plan to split itself into two separate entities. As part of its defence against PPG, Akzo pledged to separate its speciality chemicals division, leaving a core business focused on paints and coatings.

Elliott, which led a band of dissenting shareholders who publicly criticised the Dutch company’s handling of the PPG episode, said it “look[ed] forward to building upon the recent constructive dialogue”.

This week Elliott also revealed it had increased its stake in BHP Billiton, with a 5 per cent cash position in the group’s London-listed shares. Elliott has alleged the miner has underperformed its peers, needs to return more cash to shareholders and exit its US shale operations.

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