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Spotlight turns to Goldman Sachs after Morgan Stanley deal

NEW YORK (Reuters) – For months, the watercooler chatter around big Wall Street banks focused on whether Goldman Sachs Group Inc (GS.N) would finally pursue a major deal. Instead, Goldman’s top rival beat it to the punch.

On Thursday, Morgan Stanley (MS.N) said it plans to acquire E*Trade Financial Corp (ETFC.O) for $13 billion, cementing its position as a hub where individuals manage their finances. If successful, it will be the biggest acquisition by a big Wall Street bank since the 2007-2009 financial crisis.

It also underlines Goldman’s position as an outlier as the only big U.S. bank to not do any transformative deals during or since that time. Unlike Morgan Stanley, JPMorgan Chase & Co (JPM.N) or Bank of America Corp (BAC.N), which all executed major transactions during or after the crisis, Goldman looks much the same, analysts say.

Instead of opening its own wallet to expand, Goldman is trying to grow a fledgling retail bank, create a treasury-services business, and expand in asset management, corporate lending and trading — largely all from the ground up.

Asked about the matter in January, Goldman Sachs Chief Executive David Solomon dismissed the idea.

“We’re not out there looking to buy a big bank,” Solomon told Bloomberg TV.

A Goldman Sachs spokesman declined to comment on whether Morgan Stanley’s deal affects its own strategy.

Goldman was among a litany of financial firms that were rumored as suitors of E*Trade over the past year or so, as the retail trading firm looked for an acquirer. Analysts who follow Goldman and sources inside the bank have told Reuters it would not be a good deal for a variety of reasons, including technology, culture and price.

Morgan Stanley’s stock fell 4.5% on Thursday after announcing the deal. Goldman was down 2%.

With Goldman’s stock value weak and with it doing less business with average investors, the E*Trade deal would have been too expensive, said David Hendler of Viola Risk Advisors.

“Morgan Stanley is better positioned to acquire E*Trade because of its higher stock valuation and more significant cross-over into its network of brokers and workplace assets than Goldman Sachs,” said Hendler.

Goldman’s share price as of Thursday’s close was 1.1 times its stated tangible book value as of the fourth quarter compared with 1.3 times tangible book value for Morgan Stanley.

Goldman entered the retail space a long time after Morgan Stanley or other U.S. rivals.

It purchased $16 billion worth of deposits from a General Electric Co (GE.N) subsidiary in 2015, and has since bought a few relatively small companies to expand its presence in retail and wealth management: a personal-finance startup called Clarity Money, a retirement platform called Honest Dollar and an investment-advisory firm called United Capital.

But none of those deals gave Goldman a big pool of retail deposits or other kinds of businesses that could offset a sharp decline in trading revenue.

Michael McTamney, an analyst of big banks and brokers for credit rating service DBRS Morningstar, said Morgan Stanley’s move deal puts more pressure on Goldman.

“Goldman Sachs has, historically, been a build-up-themselves organization as opposed to making acquisitions,” McTamney said. Now there will be more questions from investors about whether acquisitions are needed, he said.

DEALMAKER IN CHIEF

Associates say that Solomon is staking his legacy on turning Goldman into a global, full-service financial services firm that can compete with rivals. His predecessor, Lloyd Blankfein, has expressed regret about not acquiring during the crisis for the same kind of growth

A longtime dealmaker, Solomon became CEO in 2018 and was instrumental in a turnaround plan that preceded his elevation. At Goldman’s first-ever investor day in late January, his management team set ambitious targets to grow the bank’s consumer division over the next five years.

Goldman may be able to do that without an acquisition, but a deal would help, said Dick Bove, a senior research analyst at Odeon Capital.

“If they acquire a bank, which will bring in low-cost deposits, I think that would be a big plus,” he said.

“Goldman, clearly under Blankfein, missed the boat.”

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Commentary: Why Trump’s border wall would backfire on him

The stalemate between Donald Trump and congressional Democrats over funding for the border wall has been politically damaging for the president. Most Americans blame him for the longest government shutdown in history. Plus he has been put in a difficult strategic corner as he needs a way to resolve the shutdown without looking like he has abandoned a signature promise of his election campaign. Democrats dismissed his proposed deal to end the partial government shutdown in exchange for temporary protections for “Dreamers” and other immigrants.

The problem for Trump is that while his fixation on the wall might play well to his supporters, actually building it would be a political disaster for him. His insistence provides red meat for his anti-immigrant base who believe that the border with Mexico is porous, allowing millions of undocumented workers as well as criminals, drugs and terrorists to wantonly flood into the United States. By demanding the wall, Trump is sending a message to his voters, that he understands their concerns, and as a master builder is willing to rock the Washington boat to get something done.

However, if the wall were ever to begin to get built it would create problems beyond pushing away the swing voters he needs to be competitive when he runs for reelection in 2020.

First, most experts on immigration agree that the wall will not solve any of the problems cited by Trump. The number of undocumented workers has been declining in recent years; most narcotics are brought into the United States either at existing checkpoints or through other ports of entry; very few terrorists have come across the border illegally since the September 11 attacks, and, contrary to Trump’s assertions, people making illegal crossings are not disproportionally criminal elements. Building a wall that would in large part span a hot and inhospitable desert would address none of the problems that anti-immigration activists would like to see solved.

Second, the wall will be extremely expensive. Trump is currently asking for about $5 billion to begin construction on the wall, but if the wall were ever to be completed the final price would likely be much higher. Five, 10 or even $20 billion for a government expenditure that helped address a real problem, like climate change, the opioid crisis or health care would be, even from a political perspective, a much wiser use of resources for the administration than a wall that eventually will likely be a symbol of Trump’s petulance.

A third point is that the wall will probably never be completed. If Trump is not reelected, stopping construction on the wall will be one of the very first actions taken by any Democratic president. Even if Trump wins a second term, something that looks less likely with each passing month, Democrats will have future opportunities to cut the funding because public support for the wall has never been strong. This leads to the real possibility that a few miles of uncompleted, rusting half-built wall somewhere on the U.S.-Mexico border in Arizona or Texas will be the lasting physical monument to the Trump presidency.

The fourth problem is the question of who will build the wall. Various defense contractors will bid for it. The firms that will be interested in this unusual, but extremely lucrative project will have to do whatever they can to keep bidding costs low. Whoever gets the project will then be faced with the challenge of hiring not only skilled and well-compensated workers for much of it, but finding lower-paid and less-skilled workers for other parts of the construction. Anybody who has studied the data or spent time on building sites in the United States over the last few decades knows that the construction industry relies heavily on undocumented immigrant workers – many from Mexico. The temptation to rely on that labor pool will be very strong in the borderlands where the wall is being constructed. If that does occur, the political fallout is not likely to drive up the president’s poll numbers.

The Democrats have provided little indication that they will give Trump his wall, but they could score a valuable strategic win if they wrestle generous policy concessions from him in exchange for a compromise. After Trump’s recent proposal, Democrats insisted that they would only negotiate on border security once he reopens the government. Getting, for example, a real path to citizenship for Dreamers – not the temporary protections he offered – in exchange for a wall that seems impossible to build and will ultimately be an embarrassment for Trump, would not be a bad outcome for House Speaker Nancy Pelosi. Ironically, congressional Democrats’ unwillingness to give in to the president may be what spares him this humiliation.

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JPMorgan, UniCredit seen frontrunners to handle payments firm SIA's $4 billion Milan listing: sources

LONDON/MILAN (Reuters) – Italian payments firm SIA is moving ahead with preparations for a share listing on the Milan bourse and is expected to pick JPMorgan (JPM.N) and UniCredit (CRDI.MI) in what would be one of southern Europe’s largest floats this year, sources said.

SIA, which is being advised by Rothschild (ROTH.PA), has sent out requests for proposals to banks for potential roles in organizing the deal and is looking to fill them in the coming weeks, the sources said.

It plans to issue shares worth 1 billion-1.5 billion euros ($1 bln-$1.6 bln) in a deal that could value the business at more than 4 billion euros excluding debt, another source said.

JPMorgan (JPM.N) and UniCredit (CRDI.MI) are expected to be frontrunners for the global coordinators spots, two of the sources said.

SIA, JPMorgan, Rothschild and UniCredit declined to comment.

SIA’s listing comes after European initial public offerings (IPO) dropped to a seven-year low last year.

Yet European stock markets are near record highs boosting investors confidence and offering a window of opportunity for IPO candidates after a flurry of secondary share sales were well received this year.

Milan-based SIA is controlled by state lender Cassa Depositi e Prestiti through investment vehicle FSIA Investimenti, which owns a 57% stake.

The company said earlier this month that it had started preparations for a Milan float which could take place before the summer.

SIA provides payment services for the banking sector and has the London Stock Exchange among its clients.

Its services include a capital markets software which aims at improving transparency during the IPO or rights issue process – though it is not clear if it will be used for the potential listing.

SIA, which has core earnings of 201 million euros, has also explored a tie up with another payments firm as an alternative option, said a source. Its bigger rival Nexi (NEXII.MI) remains a possible merger partner, the sources said, adding the IPO is its main focus.

The payments sector has seen a flurry of deals in recent years, with Worldline’s acquisition of Ingenico valued at 15 times expected core earnings.

In 2019, Fiserv Inc (FISV.O) bought First Data Corp for $22 billion, while Fidelity National Information Services (FIS) (FIS.N) secured control of Worldpay for about $35 billion.

Italy’s Nexi has seen its share price rise nearly 90% since its IPO last year and trades at around 17 times expected core earnings, according to Refinitiv data, while Dutch company Adyen (ADYEN.AS) trades at a hefty 75 times.

“The global shift from cash to electronics payments is far from complete,” said Jupiter fund manager Guy de Blonay, adding European payment stocks are expected to keep rising this year.

“Online payments should continue to grow steadily,” he said.

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South Africa's Grand Parade to sell Burger King franchise

JOHANNESBURG (Reuters) – South Africa’s Grand Parade Investments (GPI) Ltd (GPLJ.J) said on Wednesday it will sell its 95.36% stake in Burger King franchise and all of Grand Foods Meat Plant to ECP Africa Fund for 697 million rand ($46.53 million).

The investment firm had signed a long-term master franchise agreement with Burger King in 2012, betting on South Africa’s lucrative fast-food market, consumer appetite for flame-grilled burgers and their price appeal.

However, South African retailers have been struggling to boost sales as a slowing economy, high unemployment rate and rising fuel costs reduced consumers’ spending power.

GPI has traded at a significant discount to the value of its underlying assets, Chief Executive Mohsin Tajbhai said, adding that the South African firm implemented a “value-based strategy” two years ago, aimed at reducing the discount at which the group’s share price trades relative to its intrinsic net asset value (iNAV).

“The board considered the sale of GPI’s stake in Burger King South Africa in the context of the group’s strategy of unlocking value for all shareholders and has decided that the best way forward is to initiate a controlled sale of assets,” Tajbhai said.

The Whopper Burger maker, which launched its restaurant in the South African port city of Cape Town in 2013, competes with market leader McDonald’s Corp (MCD.N) and other restaurant chains such as RocoMamas.

Burger King, which has 92 restaurants across the country, generated a profit of 11.7 million rand for GPI last year, aided by higher sales from new restaurants and improving same-store sales.

Grand Foods Meat Plant operates a burger-making plant, with Burger King being its largest customer accounting for more than 90% sales.

Meanwhile, ECP Africa, a private equity fund manager focused on Africa, has 60 investments that include Eco bank, MTN Cote d’Ivoire and leading bottler of carbonated soft drinks, Atlas Bottling Corp in Algeria.

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'Massive passive' funds squeeze stock pickers

NEW YORK (Reuters) – A $4.5 billion buyout of Legg Mason Inc (LM.N) by rival Franklin Resources Inc (BEN.N) announced on Tuesday is the latest example of how a decade-long shift into low-cost, index-tracking products is pushing stock-picking funds to join forces to remain competitive.

Mergers and acquisitions within the U.S. asset management industry have increased since 2014, according to data from Refinitiv. Nearly 200 deals took place last year, the most since at least 2000.

Past deals between stock pickers include Federated Investors’ 2018 purchase of a majority stake in Hermes Fund Managers, leading to the combined firm Federated Hermes Inc (FHI.N), and Henderson Global Investors’ 2017 acquisition of Janus Capital to form Janus Henderson Group PLC (JHG.N).

(Graphic: U.S. fund managers up for sale png link: here).

The comparatively low costs of exchange-traded funds have forced actively managed funds to slash their fees, pushing active firms to merge in order to preserve their profits, said Larry Tabb, founder of capital markets research firm Tabb Group.

“It forces what used to be storied asset management firms to start acquiring or be acquired,” he said. “The larger funds need to become even bigger.”

(Graphic: Active managers eclipsed by passive giants png link: here).

The largest passive managers now eclipse active funds in assets under management, which has helped to spur consolidation.

In 2019, passive U.S. equity funds overtook active funds in net assets under management, according to Morningstar Direct. As of Dec. 31, passive U.S. equity funds managed $4.78 trillion in net assets while active funds managed $4.58 trillion.

(Graphic: The rise of passive funds png link: here)

BlackRock Inc (BLK.N) alone has more than $7 trillion in total assets under management, while Vanguard Group has more than $5 trillion. A combined Franklin Resources and Legg Mason would manage about $1.5 trillion in assets.

At the same time, since the bull market for U.S. equities started in 2009, passive large-cap funds have largely outperformed their active counterparts, according to Morningstar Direct.

(Graphic: Active management, smaller returns png link: here)

Last year’s performance followed that trend. Passive U.S. large-cap blend equity funds – in which neither growth nor value stocks dominate – posted a 30.1% return in 2019, whereas active U.S. large-cap blend equity funds returned 27.8%. The benchmark S&P 500 .SPX index rose 28.9% last year.

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Bunge bids for two Brazil soy plants, building lead over Cargill

SAO PAULO (Reuters) – Bunge Ltd has offered to buy two soy processing plants in Brazil from local crusher Imcopa, the U.S. grains trader said on Tuesday, reinforcing its position as the country’s biggest oilseeds processor.

Two sources familiar with the transaction told Reuters that Bunge agreed to pay about 50 million reais ($12 million) for the plants while assuming debt of around 1 billion reais related to the assets, located in the state of Paraná.

In a statement, Bunge confirmed making a bid for the assets, adding that it was awaiting a court decision to continue with the process. It declined to give more details.

Bunge was the only company to submit a bid in the auction, according to one of the sources.

Imcopa, now restructuring debt in bankruptcy court, said in a statement that it had received one offer for the plants on Monday, although it did not name the bidder.

Bunge is already Brazil’s top oilseeds processor, and the move will help it expand a lead over rival Cargill Inc, which has two-thirds as many crushing and refining facilities, according to data from national oilseeds group Abiove.

According to Abiove data from 2018, Cargill owned eight active oilseed crushing units in Brazil and Bunge owned 12.

“Bunge not only intends to acquire the two industrial plants … (it also) intends to hire a significant number of the current employees,” according a filing Bunge made to the bankruptcy court dated Nov. 26.

On Imcopa’s website, the company touts capacity to crush 1.5 million tonnes of soybeans per year, producing up to 240,000 tonnes of soy protein concentrate.

The minimum asking price of each of the plants was 25 million reais in an auction scheduled for Feb. 17, according to bankruptcy court documents. The debt attached to the plants was 1.043 billion reais in December 2018, public records show.

Last year, Imcopa ended a leasing contract with Brazilian brewer Grupo Petrópolis for use of the two crushing plants, alleging a breach of contract, and put the assets up for sale.

The leasing agreement was set to expire in 2024. Petrópolis declined to comment on Bunge’s bid to assume control of the two Imcopa plants.

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Citigroup mandated for Turkish gas distributor Enerya sale – sources

ISTANBUL (Reuters) – STFA Investment Holding and Swiss Partners Group Holding (PGHN.S) have mandated Citigroup for a potential sale of Enerya, a leading natural gas distributor in Turkey, three sources familiar with the matter told Reuters.

The sources, who requested anonymity, said the two partners were considering options including selling all shares in the company.

STFA Investment Holding and Swiss Partners Group, which took a 30% stake in Enerya in 2014, declined to respond to questions on the plan.

Citigroup Inc (C.N) did not immediately respond to a request for comment.

Enerya sold 1.4 billion cubic meters of natural gas in the nine distribution regions that it controls in 2018, according to the Energy Market Regulatory Authority’s (EPDK) most recent data.

This level of sales indicates that Enerya controls 6.4% of the annual 22 billion cubic meter natural gas distribution sector in Turkey, or some 6% of the natural gas customers in the country.

STFA Investment Holding said in its 2017 operating report, the latest one available, that Enerya’s annual sales were 1.7 billion lira ($281 million).

One energy sector source said the distribution sector, whose tariffs are set by the EPDK, had a fixed profit margin and offered a steady flow of revenues.

“The number of subscribers is clear, the consumption volume is clear. It is a company that offers very stable revenue and profit,” the source said. “Companies which bring natural gas to Turkey or those who are already present and who want to increase their gas distribution activities may show interest.”

The source added that despite Turkey’s very low asset valuation levels, “I don’t think a new foreign investor is likely to show interest” because the country has been seen as a risky bet since a currency crisis in 2018.

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Jupiter snaps up Merian as UK fund managers consolidate

LONDON (Reuters) – British money manager Jupiter Fund Management (JUP.L) has agreed to buy rival Merian Global Investors for an initial 370 million pounds ($483 million) in shares, in a deal that will make it Britain’s second-largest retail funds provider.

The deal is the latest among actively run fund managers, which are facing rising regulatory costs and pressure on fees as more investors turn to passive funds aiming to do no more than track the makeup of a benchmark index such as the FTSE 100.

Jupiter, long considered a merger target in its own right, said the deal with Merian would accelerate its growth plan, adding scale and diversifying its fund range.

After losing more than 50% of its value in 2018 as certain key funds shed assets, the firm recovered somewhat last year after the appointment of former Janus Henderson co-CEO Andrew Formica, with many expecting his arrival to lead to new deals.

Despite announcing outflows of 4.5 billion pounds in 2019 in a trading statement alongside news of the deal, the Merian tie-up’s helped send Jupiter shares up 8% early on Monday, making it the top gainer in the FTSE 250 mid-cap index .FTMC.

“This is an exciting acquisition that enhances our position as a leading UK asset manager, provides increased scale and diversification into attractive product areas, and creates stronger future growth prospects for the business,” Jupiter chief executive Andrew Formica said in a statement.

For Merian, it marks a quick return to listed status as part of a larger firm, less than two years after it was created through a private equity-backed buyout from Old Mutual under the leadership of stock-picker Richard Buxton.

Since then, the firm has struggled with poor performance and outflows of client cash, prompting the firm to announce a major restructuring in December.

The deal should also prove a windfall for Buxton and other management shareholders. They will collectively own around 1% of Jupiter stock after the deal completes and have the potential to earn an extra 20 million pounds if certain targets are met.

After completion, Merian investors will own around 17% of Jupiter. TA Associates, the private equity firm that helped Merian get off the ground and which was previously invested in Jupiter, will hold a stake of around 16%.

“We look forward to becoming a long-term shareholder and partner with Jupiter once again,” said Chris Parkin, managing director of TA Associates.

“Our substantial stake in the combined firm underlines our belief that this transaction will deliver significant strategic benefits and returns to shareholders.”

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Jupiter to buy Merian as UK fund managers consolidate

LONDON (Reuters) – Jupiter Fund Management (JUP.L) said on Monday it had agreed to buy Merian Global Investors for an initial 370 million pounds ($482.52 million) in shares, in a deal that will make it Britain’s second-largest retail funds provider.

The deal is the latest in the actively managed fund management sector, where rising regulatory costs and pressure on fees from cost-conscious investors has pushed smaller firms to join forces and share the burden.

Jupiter, long considered a merger target in its own right, said the deal with Merian would accelerate its growth plan, adding scale and diversifying its fund range.

“This is an exciting acquisition that enhances our position as a leading UK asset manager, provides increased scale and diversification into attractive product areas, and creates stronger future growth prospects for the business,” Jupiter Chief Executive Andrew Formica said in a statement.

For Merian, it marks a quick return to listed status as part of a larger firm less than two years after it was created through a private equity-backed buyout from Old Mutual under the leadership of stock-picker Richard Buxton.

Since then, the firm has struggled with poor performance and outflows of client cash, prompting the firm to announce a major restructuring in December.

Jupiter will take on around 29 million pounds in Merian debt and will also pay a further 20 million pounds to Merian shareholders if certain targets are hit. After completion, Merian investors will own around 17% of Jupiter.

TA Associates, the private equity firm that helped Merian get off the ground and which was previously invested in Jupiter, will hold a stake of around 16%.

“We look forward to becoming a long-term shareholder and partner with Jupiter once again,” said Chris Parkin, Managing Director of TA Associates.

“Our substantial stake in the combined firm underlines our belief that this transaction will deliver significant strategic benefits and returns to shareholders.”

In a trading statement alongside news of the deal, Jupiter said its assets under management at the end of 2019 were 42.8 billion pounds, from 42.7 billion pounds a year earlier. Outflows during 2019 were 4.5 billion pounds.

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Jupiter in advanced talks to buy Merian Global Investors

(Reuters) – Britain’s Jupiter Fund Management (JUP.L) confirmed on Saturday that it is in advanced talks to buy asset manager Merian Global Investors from private equity firm TA Associates.

“The board of Jupiter sees this as an attractive opportunity to acquire a high quality independent active manager that would represent a strong fit with Jupiter in both investment management philosophy and culture,” the company said in a statement bit.ly/2uFmUX3, adding that the talks are still ongoing.

The talks, which Jupiter said have been underway for “some time,” come less than two years after Merian was created through a private equity-backed buyout from Anglo-South African financial services company Old Mutual in June 2018.

Merian, which like other active asset managers has faced pressure to lower costs as more investors opt for cheaper, index-tracking funds, had in December revealed plans to restructure its business and cut jobs.

Bloomberg had first reported on the negotiations between Jupiter and Merian.

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