From the Securities Lending Trading Desk

Mega merger news this week in the health care sector as CVS Health announced plans to acquire Aetna for $69 billion in cash and stock. We are seeing shares in Samsung Heavy Industries plung to a record low after the company announced plans to raise much needed capital.  Meanwhile in Europe, the Steinhoff CEO resigned following the company admitting accounting irregularities. 

Below please find this week’s edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

The week started out with mega merger news in the health care sector, CVS Health announced plans to acquire Aetna for $69 billion in cash and stock. The merger would create a company with revenue greater than any other US company except Walmart. It is also believed that this merger will reshape the industry and result in more mergers in the sector, as companies look to gain synergies, cut costs, and provide defence against competition from the likes of Amazon. This merger also comes with a hefty termination fee for both sides. According to Bloomberg, “CVS Health Corp. could owe Aetna Inc.$2.1 billion if the drugstore chain’s acquisition of the health insurer fails and Aetna would owe CVS $2.1 billion if the deal fell apart because of opposition from Aetna shareholders or board, or if the company took a better offer”. Despite the lofty fee potential, some analysts suggest there is only a 70% change of this merger being approved by regulators. The lower percentage is due to the fact that drugstores and health insurers have been unsuccessfully trying to merge in recent months, for example, Aetna recently had to pay insurer Humana Inc. a $1 billion as the merger was blocked by a federal judge. With this deal not expected to close until fourth quarter 2018, demand has been sparse, however we expect this sector to remain in focus.

After trading of Wins Finance Holdings (WINS) was halted for six months, the stock finally started trading again last week. The stock price plunged nearly 78% in the first day of trading, closing at $84.99. In its last day of trading in June, WINS had jumped from $81.00 on 6/6 to $205.01 on 6/7 and Nasdaq halted the stock. In August, the index announced plans to de-list the Chinese loan guarantor for alleged violations of listing rules. In addition, the FTSE Russell announced “Because WINS did not resume trading by November 29th (the Wednesday before the first Friday of December) it is to be removed from all indexes with notice”. As the stock price has continued to decline throughout the week we have seen more client sales as long holders look to minimize exposure on this volatile position.

 

Asia Pacific
Shares in Samsung Heavy Industries plunged to a record low last week after the company announced plans to raise much needed capital. The world’s third-largest shipbuilder said it intends to raise as much as 1.5 trillion won ($1.4 billion) through a rights issue as it seeks to reduce its 3.3 trillion won ($3.6 billion) short term debt burden. Samsung Heavy and its rivals in the shipbuilding sector are experiencing a difficult time of late as a result of a prolonged slump in demand for new vessels and offshore drilling rigs. Whilst the final terms of the rights offer will not be approved until sometime in early 2018, we witnessed strong securities lending demand for Samsung Heavy which saw its share price fall sharply by nearly 40% in trading last week.

Temporary relief seen for Australian retailers as Amazon fails to deliver on its online shopping hype. The arrival of American e-commerce giant Amazon.com has been placing pressure on retailers in Australia in recent months. But the latest launch of Amazon last week has left shoppers in despair as their prices were not as competitive as expected. As a result established domestic department stores such as Harvey Norman and JB Hi-Fi experienced a healthy short-term bump to their share price as their immediate concerns have abated. However, investors are still sceptical over their long-term prospects as Amazon has substantial advantages over the retailers in its fulfilment and logistics operations. We continue to see long term securities lending demand for Harvey Norman and JB Hi-Fi with both companies seeing their share price decline by nearly 20% this year.

 

Europe
Steinhoff CEO resigns following the company admitting accounting irregularities. The multinational furniture company and retailer’s market capitalization dropped 88% last week after the company declared that it would announce its 2017 results unaudited. Steinhoff is South African-headquartered, Dutch-registered and German-listed, with the majority of its revenue derived from Europe. There is concern that contagion may spread to its creditors, most of which are located in South Africa. Steinhoff remains an active name and is monitoring the situation closely.

GVC holdings betting big on Ladbrokes Coral acquisition. News announced this week that GVC Holdings are in advanced talks to acquire the UK bookmaker Ladbrokes Coral Group Plc for up to 3.9 billion pounds. The offering by GVC is that of a cash and stock deal valuing it at 160.90 pence as well as a contingent value right worth as much as 42.80 pence a share. The contingent right value will be determined by the outcome of a regulatory review into electronic betting terminals that could dramatically reduce the wagers in high street bookmakers. The move by GVC highlights that even more consolidation is happening in the gambling industry as high street shops begin to lose out to the growing online gambling space. Lending fees for GVC have gradually increased as news broke on Thursday, however with no timescale set as yet for completion we expect demand to stay relatively tepid in the short term.