BY LIAM PROUD AND KAREN KWOK

SoftBank’s Vision Fund is due a writedown. The Saudi Arabian-backed tech investor, with $97 billion at its disposal, reported a 27 percent gain on $28 billion of investments as of September. That success will reverse in 2019.

Since its inception in 2017, the fund has invested at optimistic-looking valuations. Take WeWork, the money-losing office sublessor. The Vision Fund and SoftBank invested at a $20 billion valuation in 2017, according to the Wall Street Journal, or 13 times 2018 sales using Moody’s Investors Service estimates. SoftBank bought chip designer ARM in 2016 for around $31 billion and transferred a stake to the fund.

Those prices might make sense to Chief Executive Masayoshi Son, who touts his 300- year investment vision. But they look toppy through the lens of traditional venture-capital and private-equity methods, which SoftBank says it uses. The enterprise value of IWG, WeWork’s listed competitor, is just below one times its 2019 sales, using Refinitiv estimates, making WeWork’s multiple look stratospheric.

ARM’s valuation is set to suffer from a recent tech selloff and a slowdown in sales of Apple’s iPhones, which contain its chip designs. Shares in semiconductor rival Nvidia, in which the Vision Fund also owns a stake, fell more than 40 percent in the two months to Nov. 30. That has left Nvidia’s enterprise value at about seven times estimated 2019 sales, using Refinitiv data. Even at a generous 50 percent premium, debt-free ARM would be worth about $24 billion using Bernstein’s 2019 sales estimate, one-fifth less than SoftBank’s acquisition price.

Venture funds take writedowns all the time. Yet SoftBank is unusually vulnerable. Its size means marking down holdings could create a domino effect. The Vision Fund is also using debt, which totalled about $5.6 billion in September, to help fund its activities. Its capital structure unusually also includes preferred instruments, amplifying losses for other investors and requiring it to make cash distributions.

Moreover, Son’s partners, including Saudi and Emirati sovereign-wealth funds, might take fright at writedowns. Any losses risk undermining Son’s investing logic, which includes the notion that huge investments in emerging tech stars in and of themselves improve the chances those companies become winners. Both providers and recipients of funds, as well as investment staff, could lose faith. That would slow Son’s momentum and force him to think about the shorter term for a change.

First published Dec. 17, 2018.

BY ROB COX

France knows a thing or two about meddling investors. The government regularly sticks its nose in private industry’s affairs. Moguls like Vincent Bolloré have long thrown their weight around public boardrooms at home and abroad. But few large French companies have undergone the cage rattling that regularly rocks their American cousins. Pernod Ricard, the booze group, got a taste of that when Elliott Advisors turned up with a 2.5 percent stake on Dec. 12. More is coming.

Executives of enterprises included in the benchmark CAC-40 index can partly blame President Emmanuel Macron for their rising activism anxiety. As economy minister in 2015, the former Rothschild banker ordered a stealth stake increase in carmaker Renault to double the state’s voting rights. That not only legitimised hedge-fund style manoeuvres in Parisian capital markets. It also set the stage for the current standoff with Nissan, in which Renault owns a large stake.

Similarly, attempts to take control of Telecom Italia by Vivendi not only backfired in 2018, they signalled vulnerability up the chain of command. Bolloré owns 25 percent of the media conglomerate, which may be worth about 30 percent less than the sum of its parts. A breakup could unlock that discount.

Investors could also gain by lobbying Renault to sell its 43 percent stake in Nissan. The shareholding is worth $16 billion, almost as much as Renault’s total market cap of $20 billion. The arrest of Chairman and Chief Executive Carlos Ghosn in Tokyo exposed a disparity in governance between the two partners. Should that lead to a rupture in the automakers’ alliance, investors will pressure Renault to release money tied up in Nissan.

Then there’s Danone. The 44 billion-euro yogurt juggernaut has no controlling shareholder and has underperformed rivals Unilever and PepsiCo, its one-time predator, for five years running. Or Saint-Gobain, whose shares have trailed those of Asahi Glass over the past half-decade. In late November the 18 billion-euro building materials group rushed out a plan to accelerate asset sales and cost savings — a telltale sign of boardroom agitation.

In the past, the French establishment has closed ranks to protect domestic champions from unwanted foreign intruders. Yet whether it’s in glass, cars, music or dairy, corporate France needs to brace for an activism unlike its home-grown variety.

First published Dec. 12, 2018.

BY GINA CHON

If Facebook can negotiate a difficult year ahead, it may be on its way to becoming Silicon Valley’s version of JPMorgan. A decade ago, financial firms were taking a whipping from politicians, just as tech companies are today. As Jamie Dimon’s bank shows, those who survive the process can end up even stronger.

Mark Zuckerberg’s social network faces a world of pain from Washington in 2019. A new Democratic majority in the U.S. House of Representatives has tougher privacy rules on its agenda. Several Democrats want to see those modelled after Europe’s new data protection law, known as GDPR. Facebook’s stock has tumbled, partly because of the Washington spotlight.

Now think back to the period after the financial crisis, when Congress was drawing up onerous Dodd-Frank legislation designed to make banks safer. JPMorgan was the poster child for bad behaviour. It faced a renewed backlash after a $6 billion trading loss in 2012, and paid $13 billion a year later for mis-selling mortgage securities. Dimon’s bank had to hire thousands of additional compliance personnel.

Yet now, JPMorgan is back on top. Dimon is head of the Business Roundtable, a Washington group made up of the chief executives of the largest U.S. companies. And its market capitalization of around $370 billion is almost twice its peak before the crisis hit. Meanwhile, community lenders’ share of U.S. commercial banking assets declined at a faster pace after Dodd-Frank was passed in 2010, according to a Harvard study.

Banks have advantages that social networks don’t — governments need them to exist, for starters. Yet there are still parallels with tech. About 60 percent of companies said they plan to spend at least $1 million to comply with GDPR, according to a recent survey by PricewaterhouseCoopers. At around $400 billion in market capitalization, Facebook can keep up far more easily than the average startup.

That’s not to say 2019 will be fun. Facebook’s growth in North America is flat, and lawmakers will insist on grilling Zuckerberg and his peers in public — which is tough because he lacks Dimon’s charisma. Even if a divided Congress can’t pass substantive laws, Europe might. But if doing so puts a moat around companies like Facebook they could come out even tougher.

First published Dec. 17, 2018.

BY GEORGE HAY AND LAUREN SILVA LAUGHLIN

Even by his own standards, Donald Trump has been contradictory on oil. The U.S. president spent much of 2018 berating the Organization of the Petroleum Exporting Countries for keeping crude prices high by undersupplying the market. At the same time, he exacerbated the problem by reinstating export sanctions on Iran. An early December cut by OPEC and Russia is an irritant, but relatively low prices still look attainable.

On current projections, the reduction of 1.2 million barrels per day removes much of a potential glut caused by epic pumping by Saudi Arabia, Russia and the United States, now a net oil exporter. Combining the International Energy Agency’s forecasts for oil demand in 2019 and its estimate for non-OPEC supply, the oil-producing bloc only needs to pump 31.6 million bpd to balance the market – 1.4 million below its October output.

Given Trump’s targeting of Iran’s 3 million barrels of daily production, the OPEC+, existing OPEC countries and others like Russia who are acting along with them, reduction is unhelpful. At worst, the combination could leave supply too tight, pushing prices up again.

Yet there are reasons the president can hope for a more favourable outcome. Demand growth could undercut IEA expectations – Wood Mackenzie estimates an increase of just 1.1 million bpd for 2019 while U.S crude production is seen jumping to 12 million bpd, up from 9.4 million a day in 2017. Most powerfully of all, Trump has greater scope to tell Saudi’s crown prince what to do.

The White House gave Saudi Crown Prince Mohammed bin Salman a pass in November on whether he was involved in the murder of journalist Saudi Jamal Khashoggi. The president could use this leverage to call for an end to the 18-month-old blockade of Qatar or even of the war in Yemen, which the Brookings Institution says costs Saudi $50 billion annually.

But the most obvious power play involves oil, where Trump could insist MbS resist future OPEC+ cuts. That would make any potential squeeze temporary, and allow Trump scope to enforce sanctions against Tehran.

The fly in the ointment is U.S. Congress, which could yet override Trump and punish MbS and Saudi. To keep prices low as a 2020 election nears, that may necessitate keeping Iranian crude flowing by renewing waivers allowing big importers to continue. That would make Trump look inconsistent – something he appears to easily let roll.

BY PETER THAL LARSEN

Theresa May has survived a confidence vote from her party. Now officials in the British prime minister’s office are trying to save her deal to leave the European Union. Breakingviews has obtained a copy of their make-believe memo.

Dear Prime Minister,

Congratulations on winning the no-confidence motion. We always suspected that Conservatives, who had trouble counting the 48 letters required to call the vote, would never find the 158 members of parliament they needed to remove you. Still, it’s reassuring to know that your political enemies are even more inept than the ones in your cabinet.

You asked for new ideas about how to salvage your plan to leave the European Union. After more than two years of Brexit debate, we regret to inform you the cupboard is bare. However, now you have saved your job, we have a proposal that could save the deal. It requires you to call a referendum.

Wait! Before you file this in the rubbish bin, consider your position. Your Brexit plan was heading for a hefty defeat in parliament until you postponed the vote on Dec. 3. A whirlwind tour of European capitals produced little except footage of your car door not opening as you pulled up in Berlin. At least Angela Merkel realises how awkward it is to be stuck in a transition period.

The best you can hope for from the EU is vague reassurances on the Northern Ireland backstop, or some kind of legal appendix. That’s unlikely to win over the Brexit fanatics in your party, including the 117 who voted against your leadership, or the Democratic Unionist Party on whom your government’s slender majority depends. So despite the triumph, parliament will still reject it when it finally comes to a vote.

You could keep delaying the decision, maybe even until the last minute on March 28, and hope your opponents buckle. But the longer you wait, the bigger the risk of a chaotic and damaging “no deal” will loom. The pound will tumble back down, and the economy will suffer even more. Meanwhile, opposition MPs could always intervene by voting to reverse the Brexit process. And even though you’ve seen off the no-confidence vote in your leadership, parliament could still launch one in your government. You cannot count on Jeremy Corbyn, the Labour leader, being hopeless indefinitely.

That’s where the second referendum comes in. If you wait, parliament might take over and launch one. Better to seize the initiative and call it yourself. Doing so would allow you to dictate the timing, and the question on the ballot. We recommend offering the people a simple choice between your deal or staying in the EU. Advocates of a “no deal” Brexit won’t like it, but after their defeat they have little choice but to back you. And you’ll put Labour in a tight spot. Will Corbyn risk alienating his pro-Brexit supporters by campaigning to remain?

True, this strategy has several drawbacks. For one, you have ruled out a second referendum. But you insisted you would not call an election in 2017, and then called one. You spent two years insisting that a “no deal” Brexit was better than a bad deal, but now warn it would cause “significant economic damage”. You said your deal was the best on offer, before heading to Europe to ask for improvements. The public won’t be surprised if you change your mind again. It’s what you do.

Finally, you might lose the referendum. It won’t be so easy to charm voters with false promises of extra money for healthcare, or to scare them by suggesting Turkey is about to join the EU. The pro-Europeans will be more organised. You might finally have to come clean about the costs of Brexit. Amazingly, though, despite the mayhem of the past two-and-a-half years, opinion polls suggest about half the country is still in favour of leaving the EU. And this time the government will be campaigning to leave, not remain.

You keep saying that you want to deliver Brexit. You will either go down inhistory as the prime minister who took Britain out of the EU, or the prime minister who tried and failed to do so. Now that you’ve promised not to contest the next general election, another referendum is your best — and maybe your only — chance of it being the former.

Yours,

The Last Resort Unit, Downing Street

First published Dec. 12, 2018.