2021/2022 Edition

February 2022

Porsche is preparing its arrival on the Stock market

Volkswagen, by entering into an agreement with the family-run holding company Porsche SE, is preparing to launch Porsche on the stock market in order to fund its shift towards electric vehicles.

The luxury car manufacturer Porsche AG is 100% owned by Volkswagen and its main shareholder is the holding company Porsche SE, which is controlled by the Porsche-Piëch family.

The group had planned to invest tens of billions of euros for its energy transition by developing new engines, its batteries, its new technology of "synthetic fuel". Thus, they would compete with young brands such as Polestar, a couple of Chinese competitors and the giant Tesla. It plans to sell 50% electric vehicles by 2030.

"The automobile sector is changing fundamentally. Volkswagen is determined to play a leading role in a world of zero-emission and autonomous mobility," said Volkswagen CEO Herbert Diess.

"An IPO of Porsche AG would give us additional flexibility to further accelerate the transformation. Porsche AG would benefit from increased entrepreneurial freedom while continuing to benefit from group synergies."

According to Bloomberg Intelligence, the luxury carmaker’s value could be between 60 billion and 85 billion euros. This would boost the parent company's market value and bring it closer to Tesla's. Indeed, Volkswagen's market capitalization is around 112 billion euros, which is minimal compared to Tesla's stratospheric capitalization of more than 885 million dollars.

Moreover, following the announcement of the agreement for the IPO project, Porsche's share price rose by 10.2% and Volkswagen's by 15.2%.

 

In addition to this, Porsche SE’s capital will be divided equally between ordinary shares, which have voting rights, and preference shares, which do not have voting rights but receive a dividend benefit. The latter will be listed on the stock exchange, while the ordinary shares will be in the hands of Volkswagen and Porsche SE. Indeed, at most 25% of the preference shares will be put on the market. Thus, the free float of Porsche AG could reach up to 12.5% of its total capital.

 

Volkswagen also announced that its current shareholders will receive 49% of gross proceeds due to the investment of the Porsche AG shares.     

Nvidia abandons its plan to buyback ARM

On february 8th, the news was announced : the ARM buyback agreement by Nvidia at Softbank was abandoned. This transaction could’ve been the most important in the semi-conductors sector, with an estimation standing high at 66 billion dollars. How did they give it up and what are the consequences for the different actors? 

​The japanese group had bought 100% of ARM -the anglo-saxon company specialized in microprocessors- in 2016 for 32 billion dollars and envisaged to go public with it. A buyback agreement by Nvidia, an American group, ended up being concluded in September 2020, and put ARM’s value at 40 billion dollars. This announcement severely destabilized the sector for different reasons.

​First, ARM’s function is to conceive processors that are going to be used by numerous smartphone manifacturers and other electronics, such as Apple or Microsoft. These last two were very dependent on the English group and its chips. If it had gone under Nvidia’s control, which is another ARM client, it could’ve been problematic concurrence-wise. The main worry was a restriction on certain technologies. It is for this reason that concurrence authorities in the US and Europe conducted thorough research.

​Moreover, the semi-conductor sector (because of how necessary it is in the making of electronic components whose use it growing steadily) has become a major strategic issue. For the United Kingdom, ARM is thus a major trump card and its cession to the American group would endanger the UK’s national security.         

Its because of the extent of these regulatory impediments that the operation was abandoned.

​For Softbank, this represents a big miss. Part of the transaction would’ve been in Nvidia shares, and its price has strongly risen these last few months. This is the reason why the deal went from 40 to 66 million dollars. Nvidia is thus going to have to pay a 1.25 billion dollar clearance for giving up the contract.  The Japanese group should publicize ARM shortly, but the location of the rating is not obvious. On the one hand, New-York seems to be suitable to a major fundraiser. But, on the other hand, the british government would prefer London for sovereignty reasons.

 

If for the semi-conductors, the main acquisition has failed, its biggest IPO could very well be there sooner than we think.

Hector Lorand

Warren Buffet delivers its famous annual letter to the Bershire Hathaway shareholders

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On Saturday, February 26, Warren Buffett sent his famous letter to the shareholders of Berkshire Hathaway (BH) commenting on the results, investment strategies etc... of 2021. Berkshire Hathaway is a business conglomerate led by Warren Buffett and Charlie Monger.

 

Warren Buffett mentions the "Four Giants". These giants are the pillars of the BH business model.  The first giant is all the insurance companies that BH owns.

 

- Berkshire Hathaway now owns 5.55% of Apple, up from 5.39% in 2021. However, Buffett says that this increase in assets is not due to a buyout but to Tim Cook's strategy of buying back Apple shares. Indeed, these repurchased shares are destroyed, which makes the mass of shares decrease and thus increases the importance of the remaining shares.

 

- BNSF Railway is a railroad company, 77.4% of which is owned by the conglomerate. This company generated 6 billion in 2021, Buffett says that this is a net result where all kinds of compensations such as depreciation, interest etc. have been taken out. They transported 535 million tons of goods in 2021.

 

- Berkshire Hathaway Energy (BHE) is a company that is 91.1% owned by Berkshire Hathaway. It specializes in renewable energy exclusively solar, wind and electricity distribution. In 2021, it has made a net profit of 4 billion dollars, whereas it only made 122 million in 2000 (the year Berkshire Hathaway bought part of it). Buffett congratulates it and says that the production of renewable energy and its distribution is a strategy erected since 2007 contrary to modern companies using "green-washing".

In part of his letter, Buffett talks about his decision to buy back BH shares. Indeed, during the last year, BH bought $27 billion worth of its own stock. He explains this by saying that there are three ways to increase the value of the shareholders' investment:

- The first is simply to increase BH's profitability over the long term. This can be done either by increasing the size of the organization internally, or by acquiring new companies. According to Buffet, increasing the size of the organization is more profitable but less accessible.

- One can also buy shares of public companies, however, he deems that few of them are interesting.

 

The last way is to buy back your own shares. Warren Buffett says that this gives a larger part of BH to the shareholders, in fact, he has been buying back shares for 2 years (about 9% of the company, i.e. a total of 51.7 billion dollars), which has given 10% more BH to the shareholders than before. However, Buffett specifies that he buys only at the estimated fair price. He adds that these buyouts are limited given the conglomerate's investors. They have a long-term vision and are not short-term speculators who would increase the volatility and therefore the opportunities for buybacks.

Rémi Schmitt

Special edition : russian-ukrainian conflict

Crypto-assets and the Ukrainian conflict: what role could they play?

Since the beginning of the war in Ukraine, and when economic and financial sanctions are tightening against Russia, a new arsenal could play a significant role for the first time in an armed conflict: crypto-assets.

Indeed, they have emerged as an alternative to the various consequences of this war. For Russia first of all, the ruble is experiencing a significant fall (about 30% against the dollar) related to the conflict and sanctions decided jointly by Western countries, the increase in policy rates from 9.5% to 20% has not yet had the desired effect. Faced with this depreciation, bitcoin has appeared as a "safe haven" in a country where its use was already well developed. This is also the case for "stablecoins" whose price volatility is less significant than for crypto-assets like bitcoin. Moreover, it is a tool to circumvent the sanctions and the eviction of several Russian banks from the SWIFT system. Nevertheless, the cypto-assets and the blockchain could not replace such a system in the long term, as commodities and energy exchanges are linked to transactions of significant volumes and amounts.

 

For Ukraine, their use should allow to partially finance the war and humanitarian support. The Ukrainian government has reportedly raised nearly $60 million from cryptos following a government call for donations. NFTs (Non-Fungible Tokens) are also becoming essential to help finance the conflict and to help populations in difficulty. This was the case with the sale of an NFT of the Ukrainian flag by an organization, Ukraine DAO, which has raised 6 million dollars.

 

The new use of crypto-currencies during this war calls for regulations by the various stakeholders. The Ukrainian government has thus asked platforms such as Binance to prevent operations and transactions from Russia, but this request was rejected. The neutrality of crypto-assets and their decentralized functioning would either way limit the impact that these actions could have.

French banks challenged by the war in Ukraine

Firstly, a desire to protect the population

At the end of February 2022, optimism was back on the financial markets and announcements of record profits for the 2021 financial year fell at the pace of results publications. Like BNP Paribas and its record profit of 9.5 billion euros, a record that the CEO, Jean-Laurent Bonnafé, described as "very good performance". The Crédit Agricole and the Société General have experienced the same fate with a record increase in profits. 

But as soon as this wind of optimism blew,  a storm began again, with Ukraine engulfed in a war.

The two French banks most affected are BNP and Credit Agricole. Indeed, the first owns 60% of UkrSibbank.. These two banks represent 7000 employees in Ukraine. The two banks have a relatively similar policy in approaching this conflict.

The first measure was to secure the staff with a strong exodus to the Polish subsidiaries.

The French banks have made it a point to help the local population as much as possible. This has meant keeping certain branches in the largest cities so that the population can have access to cash, and then implementing a number of measures to make the situation more flexible, such as deferring payment dates and eliminating fees and penalties for late payments.

The strong impact of international sanctions on Russian subsidiaries of French banks

The night of Saturday to Sunday, February 26 was the scene of new historic sanctions against Russia. The exclusion of certain banks from the SWIFT network, which provides a secure network allowing more than 10,000 financial institutions in 212 different countries to send and receive information on financial transactions between them.

 

But this conflict could be even more damaging for some banks. Indeed, Société Générale is well established in Russia through its subsidiary Rosbank, which represents nearly 2% of the group's net income. The impact has been very quickly observable with the price of Societe Generale falling by nearly 11% a week after the opening of the conflict, and by more than 22% in one month.

To remedy this situation, Société Générale could, according to some investors, "do a complete or partial write-off of their assets in their accounts", i.e. reduce the valuation of Rosbank to zero.

But international sanctions are not the only threats to French banks, indeed, it is easy to imagine that Russia will implement measures, some as Jerome Legras, director at Axiom, believes that "This could lead to retaliation from the Russian authorities, for example in the form of nationalization of Russian subsidiaries of European banks.

This is what happened on Friday, March 4th with the adoption in the Duma of a "package of anti-sanctions laws which, according to the Russian government spokesman, "increase the stability of the Russian economy and protect citizens from sanctions", for example by amnesty on foreign capital which allows Russians to repatriate goods and capital without risk of prosecution. The anti-sanctions laws also give the government the possibility to increase pensions and the minimum wage, "if necessary".

The French and European banking system does not seem to be in great danger, however, as the chairman of the supervisory board of the European Central Bank (ECB), Andrea Enria, was already reassuring on February 10, shortly before the invasion of Ukraine by Russian troops, that the impact of a conflict in view of European interests remain "globally contained", were "not a major cause for concern".

 

It remains to be seen whether this will be true over time and how the economy will react under the threat of a long war, which could lead to stagflation...

The impact of the cession of Russia’s SWIFT messaging system on its raw materials exports

Following the invasion of the Ukrainian territory by Moscow's armed forces and the related sanctions: the United States, the European Union, the United Kingdom and Japan announced this Saturday morning that they were going to cut off the access of part of the Russian banks to the international payment system SWIFT. But what will be the real impact of this cut on the export of raw materials from the largest country in the world?

An unprecedented sanction with a suffocating impact

First of all, it is appropriate to briefly recall what SWIFT is. It is the acronym for "Society for Worldwide Interbank Financial Telecommunication". It is a kind of secure messaging system that facilitates, amplifies and accelerates cross-border payments in order to make international exchanges more fluid.

Its role is essential in that it is the vector for the transfer of several trillion dollars each year and has been the main cog in the financing of international trade for several years.

These sanctions thus plan to deprive the Russian Central Bank (RCB) of part of its important international currency reserves, even if certain exemptions could apply to energy, given the dependence of certain European states on Russian gas. This is not only a concern for Germany, but for Italy as well.

However, Amrita Sen of Energy Aspects reminds us that "even if we try to exempt energy transactions, SWIFT can still strongly disrupt energy trade flows in the short term, at least until buyers switch to other systems, such as Telex".

 

Russia produces 10% of the world's oil and supplies 40% of the gas used in Europe. It is also the world's largest exporter of grain and fertilizers, the largest producer of nickel and palladium, the third largest exporter of coal and steel and the fifth largest exporter of wood.

 

The looming exclusion of the world's eleventh largest economy (which supplies one-sixth of the world's raw materials) from the SWIFT system is therefore unprecedented since the beginning of trade globalization.

Limited alternatives for Russia despite the Chinese opportunity

Following the announced sanctions, it is clear that the flow of Russian raw materials to the West will be severely disrupted, if not totally interrupted, for several days, if not weeks, while possible exemptions are clarified.

 

In addition, it is interesting to see that some traders explain that Russian banks, such as Surgutneftegas Bank, are not on the sanctions list for the time being and could therefore continue to trade in dollars, but add that it will take time for these changes to take effect.

 

A senior official of a major Western oil trader reminds us that "many companies will consider Russian oil to be sanctioned and will not touch it, even if it is allowed."

 

Despite this, the flow of Russian energy and raw materials to Asia, and particularly China, is expected to continue.

 

China and Vladimir Putin's Russia have developed alternative circuits to SWIFT, with Beijing encouraging the use of its own system, CIPS (Cross-Border Interbank Payment System) and Moscow having its own interbank messaging system, SPFS.

 

Despite the fact that Russian officials have stated that their country could divert its exports to China in the event that flows to Western countries are disrupted. This scenario should be approached cautiously, as such a detour would not work for gas and Beijing's ability to receive the delivery of additional volumes of oil is limited.

 

This sanction, put in place by the "big fish" of NATO (according to the expression coined by Hubert Védrine), will hurt Russian raw material exports.

The next few months will be decisive for Russia in order to keep the financial manna from these lucrative exports.