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Millennium & Copthorne mulls capital return if First Sponsor float proceeds

Millennium & Copthorne Hotels New Zealand, which operates 22 hotels across the country, is mulling a capital return if the float of Chinese investment First Sponsor Group goes ahead.

The Singapore Exchange has issued an eligibility to list letter for the proposed initial public offering, which will probably be in the third quarter if it proceeds, the Auckland-based company said in a statement.

“In connection with the proposed FGSL (First Sponsor Group) IPO (and as mentioned in the offer document for our recent rights issue), MCK (Millennium) is considering undertaking, return of capital whereby MCK’s investment in FSGL would be returned to our shareholders,” it said. “MCK wishes to emphasise that no decision has been made as to whether (or when) the proposed capital return will take place and there currently is no certainty that the proposed FSGL IPO will proceed (or as to its timetable).”

Last month Millennium raised about $112 million to maintain its investment in First Sponsor in a capital raising, repay debt and refurbish properties. It has previously said it expects to retain a 31 percent stake in First Sponsor if the float proceeds.

First Sponsor, which has property development interests in China, raised funds to pay for further development in Chendgu City, Sichuan Province, and new land acquisitions in Dongguan City, Guangdong Province.

Shares in Millennium rose 4.8 percent yesterday to 66 cents, and have shed 7 percent this year.

NZ dollar rises above 86 US cents as investors chase yield

The New Zealand dollar rose above 86 US cents overnight, as investors seeking higher yields anticipate a rise in the nation’s benchmark interest rate tomorrow.

The kiwi touched a week high of 86.20 US cents early this morning and was trading at 85.97 cents at 8am in Wellington from 85.78 cents at 5pm yesterday. The trade-weighted index advanced to 79.90 from 79.76 yesterday.

Traders have priced in a 97 percent chance for a rate hike by New Zealand’s Reserve Bank tomorrow, according to the overnight index swap curve. The nation’s central bank last month became the first to raise rates this cycle and is expected to increase the benchmark rate by another 25 basis points to 3 percent tomorrow to head off the threat of future inflation.

“A rate hike, as universally expected by the market, could still initiate a rally, as New Zealand further solidifies its upward interest rate track, against a global backdrop of struggling economies and near zero interest rates,” Peter Cavanaugh, client advisor at Bancorp Treasury Services, said in a note.

In New Zealand today, March data is released on migration at 10:45am and credit card spending at 3pm.

Traders will be eyeing China’s initial manufacturing PMI report for April to gauge the pace of a slowdown in Asia’s largest economy. The HSBC flash report, scheduled for release at 1:45pm New Zealand time, is expected to edge up from 48 last month but remain below the 50 level which signifies contraction.

The New Zealand dollar was little changed at 91.75 Australian cents from 91.72 cents yesterday ahead of Australian inflation data scheduled for release at 1:30pm New Zealand time.

The kiwi touched a week high of 62.41 euro cents overnight and was trading at 62.27 cents at 8am from 62.18 cents yesterday ahead of the release of Eurozone flash PMI data today.

The local currency was little changed at 51.09 British pence from 51.07 pence yesterday ahead of the release of the Bank of England minutes from its last meeting, which may show policy makers are moving closer to raising borrowing costs.

The kiwi touched a week high of 88.42 yen overnight and was trading at 88.22 yen at 8am from 88.05 yen yesterday.

While you were sleeping Drug deals bolster sentiment

A raft of merger and acquisition activity in the global drug sector helped underpin equities on both sides of the Atlantic, as did better-than-expected earnings from companies including Netflix and Travelers.

Shares of Allergan soared, last up 15.3 percent, after Canada’s Valeant Pharmaceuticals offered to buy the company in a deal worth some US$46 billion. Separately, Novartis, GlaxoSmithKline, and Eli Lilly also announced deals.

“The Novartis-Glaxo deal and rumours about a potential AstraZeneca acquisition by Pfizer are giving the pharma sector a decent run,” Witold Bahrke, a senior strategist at PFA Asset Management in Copenhagen, told Bloomberg News. “It’s also fuelling further M&A expectations, which is helping equities today. The yo-yo market is set to continue, with ups and downs amid continued geopolitical uncertainty.”

In afternoon trading in New York, the Dow Jones Industrial Average advanced 0.62 percent, the Standard & Poor’s 500 Index added 0.68 percent, while the Nasdaq Composite Index climbed 1.18 percent.

Gains in shares of Home Depot and JPMorgan Chase, up 2.4 percent and 1.8 percent respectively, led the Dow higher.

Shares of Facebook rose, last up 3.1 percent, after Credit Suisse upgraded the stock to “outperform”.

Solid quarterly earnings helped lift shares of companies including Netflix, Comcast, United Technologies and Travelers, respectively up 5.9 percent, 2.3 percent, 1 percent, and 0.4 percent.

To be sure, it wasn’t all good news. Shares of McDonald’s slipped 0.2 percent after the company posted another quarterly decline in sales.

On the housing front, a National Association of Realtors report showed that existing home sales fell 0.2 percent to an annual rate of 4.59 million units, the lowest level since July 2012. It was still better than economists had anticipated and provided reason for optimism that the housing market is stabilising.

“The negative housing momentum, which was exacerbated by severe weather conditions during the winter months, may be starting to fade,” Gennadiy Goldberg, an economist at TD Securities in New York, told Reuters.

Meanwhile, demand for a US Treasury auction of US$32 billion of two-year notes drew lacklustre demand in a sign that the Federal Reserve has not managed to alleviate concerns it might lift borrowing costs sooner than anticipated.

“A weak auction shows the market has lost some confidence in the Fed’s ability to clearly articulate its message,” Thomas Simons, a government-debt economist in New York at Jefferies, one of the primary dealers that are required to bid at the auctions, told Bloomberg News before the sale. “When the Fed will ultimately raise rates remains a big question.”

In Europe, the Stoxx 600 Index ended the day with a 1.4 percent increase from the previous close. The UK’s FTSE 100 gained 0.9 percent, while France’s CAC 40 rose 1.2 percent, and Germany’s DAX rallied 2 percent.

Chicken Little – Sky ain’t about to fall (ANZ)

The “bubble” is not about to burst, and we don’t find “Chicken Little” style commentary useful – say ANZ’s Morning Brief authors.

That said, New Zealand is facing challenges, as we have highlighted many times before, and with euphoria sky high according to both business and consumer confidence surveys, it’s perhaps timely to remind readers of that. New Zealand is navigating a potent combination of legacy issues from the last business cycle (a weak balance sheet and high debt levels) and opportunity (high commodity prices and growing exposure to Asia) – while addressing a fairly urgent and demanding to-do list in terms of housing shortages and a city rebuild along the way.

It’s an outlook fraught with tensions and frictions, and a bun-fight for resources.

Net immigration is set to touch a decade high.

NZ screen industry revenue fell in 2013 after drop-off in movie making

The New Zealand screen industry’s revenue dropped 4 percent in 2013, from a record high in 2012, as decline in production of feature films more than offset gains from local television and movie theatres.

Total revenue for the sector was $3.15 billion in 2013, down from $3.29 billion a year earlier, according to Statistics New Zealand. The screen industry includes feature films, production, television broadcasting, distribution and movie screenings.

The production and post-production sector contracted 12 percent to $1.46 billion in 2013, while broadcasting, which makes up 44 percent of the industry’s total revenue, was $1.38 billion, up from $1.31 billion the previous year. Declines in production sales were largely attributable to a 17 percent drop in gross revenue for feature films.

Overall funding flowing through to the sector declined 7.7 percent to $585 million, as a nominal 1 percent gain in New Zealand government funding was overshadowed by a 17 percent decline in overseas investment received for production.

Combined broadcasting and film screening eclipsed the size of production revenue by 6 percent in 2013, as the content-producing side of the sector was impacted by the “lumpy” nature of the project-based film industry, Statistics NZ said.

“While revenue has fallen this year, it reached a record high in 2012 – this shows the project-based nature of the industry,” said Jason Atwell, screen industry statistics manager at Statistics NZ. “Funding for a project leads to a spike in revenue, which drops once the project is completed.”

The broadcasting and screening sector also caters more to a domestic audience and gains made by those businesses indicate Kiwis are consuming more media, Statistics NZ said. Increases in broadcasting also capture a rise in digital media.

“Exhibition revenue has been steadily increasing over the past four years,” said the government’s data collector. “Some of this could be a result of 3D technology making a visit to the cinema an experience with added depth in an age where streaming movies at home is becoming easier.”

Auckland remained the centre for television broadcasting and production, with Auckland-based business bringing in gross revenue of $1.37 billion worth of television broadcasting.

The nation’s capital remains the film-making hub, with gross revenue of $748 million, half the sector’s total earnings, coming from Wellington production and post-production companies. Of that, $700 million came directly from feature films.

Jilted Abano suitors turn guns on chair, NZX, and Grant Samuel

A rebel shareholder group that attempted an unsuccessful takeover bid for Abano Healthcare has launched a campaign to unseat its chairman, Trevor Janes, in a coordinated attack that also questions decisions by NZX Regulation and a valuation by investment house Grant Samuel.

Healthcare Industry and Steamboat Capital, which jointly hold some 19 percent of Abano shares, have also launched a website to publicise their call for a shareholders’ meeting on May 27 to re-run the part of the Nov 26 annual meeting at which Janes, a director since 2005, was re-elected as chairman.

HIL is associated with Peter Hutson and Steamboat with James Reeves, who were involved in an Archer Capital-led takeover bid last year for Abano, which has dental businesses on both sides of the Tasman, as well as diagnostics, rehabilitation and audiology interests.

Janes unveiled a Grant Samuel valuation report at last year’s annual meeting, at the height of the Archer takeover attempt, which valued Abano shares at over $9 apiece.

The Archer indicative bid was initially between $6.97 and $7.14 a share for 100 percent of Abano. In correspondence issued today, Hutson and Reeves say a revised indicative offer of $7.80 a share was never put to shareholders, and that Janes misrepresented the potential for alternative bids, which were never forthcoming, at the annual meeting.

Janes wasn’t immediately available to comment.

HIL and Steamboat describe the events leading up to Nov. 26 as “Black November”, with a critique commissioned from Korda Mentha suggesting Grant Samuel had overvalued Abano shares by between $2.44 and $2.89 a share.

A mid-point valuation of $6.46 per share was justified, says the Korda Mentha report, which says Grant Samuel’s earnings multiples on Abano earnings were too high and should not have included earnings from dental practices not yet acquired.

HIL and Steamboat seek Janes’s replacement as chairman in the first step toward replacing the whole board because they believe the company is underperforming. They believe the annual meeting vote can be rerun because, they allege, Janes was wrong to describe himself as an “independent” director of Abano.

That’s because he is also deputy chair of the Accident Compensation Corp and a member of ACC’s investment committee, thereby creating a “disqualifying relationship” for him under NZX Listing Rules, they allege.

At this stage, the dissident shareholders say they are not making a formal request for a meeting re-run under the Companies Act, but are “giving the company the opportunity to do the right thing.”

A spokeswoman for Abano said the company would be responding to the claims “as soon as possible” today.

HIL is also seeking explanations from the Head of Regulation at NZX, where Janes is a member of the Markets Disciplinary Tribunal, about the publication of the Grant Samuel report on the NZX corporate disclosures platform at the same time as the annual meeting.

“The NZX is responsible in the first instance for policing the filing of valuation reports lodged on the NZX platform,” Hutson said. He seeks a meeting to discuss “the process by which such a document was able to be loaded onto the NZX platform, given its materiality and relevance to an AGM taking place simultaneously” and “what actions the NZX proposes to take to correct the current position.”

Hutson asks how NZX would undertake a review, “mindful of the role of the NZX chairman (Andrew Harmos) as advisor to Abano and the fact that several Abano directors sit on the NZX Disciplinary Tribunal.”

Harmos’s law firm, Harmos Horton Lusk, advises Abano on legal matters. NZX Regulation also last month granted a waiver for independent directors in relation to ACC board members, effectively deeming Janes an independent at Abano, despite ACC’s 6.8 percent shareholding.

“The issuing of a ‘unique’ waiver last month by the NZX to ACC, and which appears to potentially benefit Mr Janes, raises serious questions,” Hutson wrote.

In a letter sent today to the Abano directors, Hutson and Reeves say the company needs “fresh leadership and new standards, starting at the top”, a board with relevant skills, and a new approach to executive remuneration based on results.

“Abano’s long-run dental earnings before tax, interest, depreciation, and amortisation at 10 percent is less than half that of a typical ‘one man band’ standalone dental practice,” they say. “We believe that Abano’s corporate dental model is simply not working. The ballooning debt, calls for investor cash, and flat dividends barely covered by profits, are unacceptable to us as shareholders and are avoidable.”

They call for an immediate halt on planned acquisitions of new dental clinics in Australia and New Zealand while the Abano business model is refreshed.

NZ manufacturing grows for 19th month, employment surges to 7-year high

New Zealand’s “buoyant” manufacturing sector expanded for the 19th consecutive month in March as domestic demand for goods and fast-growing Asian economies fuelled economic momentum through the first quarter of 2014. The employment index reached a seven-year high.

The BNZ-BusinessNZ seasonally adjusted performance of manufacturing index increased to 58.4 in March, from an upwardly revised 56.5 in February, and 53 in March last year. A reading above 50 indicates expansion in the sector.

The PMI averaged 57.1 in the first quarter of 2014 with the manufacturing sector in a “buoyant mood” making the most of strong domestic demand and increased exposure to fast growing Asian economies while negotiating a high kiwi dollar and global uncertainty, BNZ said. But the Reserve Bank’s tightening of monetary conditions to stem any inflationary pressure means borrowers must manage risk around their debt, BNZ warned.

“There is every reason to assume that such momentum can be sustained for a while yet, but we caution that the operating environment may change significantly for many” said BNZ head of research Stephen Toplis. “This is not to say that all and sundry should rush out and fix their borrowing rates, as fixed rates are already pricing in a significant increase in the cash rate. But understanding interest rate risk at this juncture is a must.”

The central bank kicked off a tightening cycle in March, lifting the official cash rate a quarter-point to 2.75 percent and it anticipates raising the OCR another 2 percentage points over the next two years. Further interest rate hikes are “highly dependent on the combination of the movements in the New Zealand dollar and commodity prices,” BNZ’s Toplis said.

All five of the seasonally adjusted main diffusion indices in March expanded, for the first time since October, as finished stocks edged up to 51.1. The biggest gainer was employment up 1.6 points to 56.3, its highest level since November 2007, while deliveries of raw material slipped slightly to 57.1.

BNZ’s manufacturing index showed broad based expansion across New Zealand, with all four regions above the 50 cut off point. Canterbury/Westland picked up 6.2 points to be the strongest reading of 59.9 while Otago-Southland was the only region to slip after a strong February reading.

Meanwhile, the ANZ Truckometer, which measures economic activity using real time traffic data, showed a monthly decline in the Heavy Traffic Index of 1.1 percent, while the Light Traffic Index lifted 1.1 percent. For the March quarter both indexes rose, indicating economic growth will continue into the middle of the year, ANZ said, but also warned that growth may be crimped by interest rate hikes and the strong kiwi currency.

The last three months of 2013 “may well have been the peak of quarterly growth in the current upswing,” said ANZ senior economist Sharon Zollner. “Headwinds will soon start to blow harder. The Reserve Bank is raising interest rates as inflation pressures mount, and debt levels remain high. Fiscal policy is tight. The exchange rate remains at eye-watering levels.”

“Prolonging the expansion will require spending restraint on the part of households, and an ongoing focus on productivity growth by firms,” said ANZ’s Zollner.

NZ dollar jumps to 3-year high as traders pull back US interest rate bets on dovish Fed minutes

The New Zealand dollar jumped three quarters of a US cent against the greenback to its highest since July 2011 after the Federal Reserve minutes from its last meeting in March pushed out expectations of when the Fed will start raising interest rates.

The kiwi jumped as high as 87.25 US cents from 86.47 cents immediately before the release of the minutes at 6am New Zealand time. The local currency was trading at 87.12 US cents at 8am from 87.01 cents at 5pm yesterday. The trade-weighted index edged lower to 80.76 from 80.83 yesterday.

The dollar index, which measures the greenback against a basket of currencies, plunged to a one-month low after the Federal Open Market Committee meeting minutes from March 18-19 showed policy makers were concerned that projections for an interest rate rise were overstated and could be misconstrued by the market. The more accommodative stance from the Fed minutes prompted traders to pull back bets on rate hikes.

“The broad message from the FOMC minutes is that the FOMC was happy with market pricing and the pace of the US recovery. That means the post-meeting reaction in rates (bringing forward hikes) needed to be unwound,” ANZ Bank New Zealand strategist Carrick Lucas and senior foreign exchange strategist Sam Tuck said in a note. “While the pricing move had mostly been unwound already, the USD selling post the minutes looks like the final capitulation of that positioning.”

The New Zealand dollar is likely to trade between 86.40 US cents and 87.50 cents today, ANZ said.

New Zealand’s Reserve Bank started hiking rates last month to head off rising inflation and a string of increases of between 25 and 50 basis points is expected over the next couple of years as stimulus provided by low interest rates is gradually removed while the economy recovers.

“The key global economies appear stuck with low interest rates for a while yet and, with the RBNZ as the only major central bank looking to unwind monetary policy quickly, the NZD can only go higher,” Bancorp Treasury Services said in a note, adding that the record high 88.41 US cent level is “under threat”.

In New Zealand today, traders will be eyeing the BusinessNZ Performance of Manufacturing Index for March, scheduled for release at 10:30am.

In Australia, the focus will be on March employment data to be published at 1:30pm New Zealand time, which may show the unemployment rate rose to 6.1 percent from 6 percent.

The New Zealand dollar was little changed at 92.80 Australian cents from 92.82 cents yesterday.

Traders will also watch China’s trade figures today for signs of how Asia’s largest economy is tracking. China is the largest trading partner for New Zealand and Australia.

The kiwi weakened to 51.88 British pence from 51.95 pence yesterday ahead of the Bank of England meeting tonight. It slipped to 62.87 euro cents from 63.09 cents yesterday and was unchanged at 88.81 yen.

While you were sleeping Fed support intact

Wall Street rose, extending gains after the latest Federal Reserve meeting minutes eased concern that US policy makers had been planning to raise interest rates sooner than had been anticipated.

The Fed released minutes from the March 18-19 Federal Open Market Committee meeting were released at 6am New Zealand time. Fed Chair Janet Yellen’s comments at the end of that meeting, saying rates could rise as early as the first half of 2015, had triggered concern the central bank was becoming less accommodative.

And the FOMC minutes showed some policy makers were wary of exactly that misinterpretation by investors.

“A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March SEP [summary of economic projections], with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function,” according to the minutes released today. “However, several participants noted that the increase in the median projection overstated the shift in the projections.

“Most participants favoured providing an explicit indication in the statement that the new forward guidance, taken as a whole, did not imply a change in the Committee’s policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance,” the minutes showed.

In afternoon trading in New York, the Dow Jones Industrial Average added 0.97 percent, the Standard & Poor’s 500 Index rose 0.75 percent, while the Nasdaq Composite Index increased 1.36 percent. The Dow was up about 0.5 percent prior to the Fed minutes being released.

Shares of Merck and Boeing advanced, last up 2.9 percent and 2 percent respectively, propelling the Dow higher.

“People are taking solace in the idea that the Fed may be more accommodative than previously thought, for longer than previously thought,” Steve Sosnick, equity-risk manager at Timber Hill/Interactive Brokers Group in Greenwich, Connecticut, told Reuters.

Two-year notes also rose as a result, pushing yields three basis points lower to 0.37 percent.

“It’s dovish for the rates market because it initially sold off because they thought participants were expecting a sooner and faster hiking cycle,” Shyam Rajan, an interest-rate strategist at Bank of America, one of 22 primary dealers that trade with the Fed, told Bloomberg News. “The fact that they are playing it down is bullish.”

There were more reasons for optimism. Shares of Alcoa rose, last up 3.4 percent, after the company reported earnings that were better than anticipated, setting a positive tone to the start of the quarterly US results season.

In Europe, the Stoxx 600 Index finished the session with a 0.4 percent increase from the previous close, as did France’s CAC 40. Germany’s DAX rose 0.2 percent, while the UK’s FTSE 100 gained 0.7 percent.

Telco regulation ‘always going to drive a pricing sea-change’, judge says

The law change allowing Telecom to carve out its Chorus network unit to participate in the government’s ultra-fast broadband scheme “was always going to drive a pricing sea-change” for the company’s regulated services, according to a High Court judge.

Justice Stephen Kos today turned down an appeal by Chorus to have the regulator’s initial pricing principle (IPP) set aside, and for the commission to redo the process after its first decision ordered Chorus to slash prices for access to its copper lines.

The judge said the commission did what Parliament prescribed in finding an IPP price based on international benchmarks relatively quickly and cheaply, and that the appropriate response by unhappy parties was to request a more fulsome final pricing principle under the legislation.

“The IPP outcome was not evidently irrational, however unpalatable it may have become to Chorus,” the judge said.

Justice Kos said the commission was aware Chorus wanted a higher price to be determined under the IPP, and the draft price it proposed “involved a very substantial reduction” from the $21.46 price under the old regime.

“As to regulatory shock, the commission was plainly aware of the submission,” the judgment said. “But the new statutory regime was always going to drive a pricing sea-change.”

Chorus appealed the commission’s final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in its draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

At last month’s hearing, Chorus claimed the regulator erred in law when setting the price Chorus can charge for access to its UBA services in that it didn’t have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government’s goal of building a nationwide fibre network.

The commission rejected the claim, arguing that the change in regulation, rather than the decision, had shocked the market.

Justice Kos today said the regulator’s benchmark range of prices followed “a process probably more extensive than Parliament had in mind” and wasn’t limited when the commission reached its determination. It also exercised permissible judgement when applying a section of the law designed to minimise the risk regulation would have on investment and innovation in the sector, he said.

“Despite the combined intelligence and force with which Chorus’s submissions were delivered, I am left unpersuaded that the commission erred in law in setting the IPP price for UBA,” the judge said.

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