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Week in Review, February 18

A round up of some of the week’s most significant corporate events and news stories.

Snapchat prepares to tempt investors with picture show

“JPMorgan hearts Snap Inc” read the large white sign, complete with red heart, that appeared on the photo stream of Snapchat’s chief strategy officer Imran Khan on Friday, writes Hannah Kuchler.

Venice Beach with Snapchat logo © FT montage

The company behind the photo messaging app is getting ready for an investor roadshow that will travel to London, New York, Boston and San Francisco, as it prepares to go public in early March.

Snap Inc plans to price the initial public offering between $14 and $16, which would lead to a market capitalisation of up to $18.5bn, or a total valuation of up to $22.2bn, if you include shares issued to employees, the overallotment or greenshoe option given to the underwriters, and a bonus delivered to chief executive Evan Spiegel on a successful listing.

This appears to be lower than the $20bn to $25bn that some people close to the company were hoping for. Investors have raised concerns about the company’s stock structure, which concentrates power in the hands of the co-founders and gives ordinary shareholders no votes. They are also wary of increased competition and a slowing of user growth in the fourth quarter of last year.

Snap is trying to sell itself as a “camera company”, focused on encouraging the creation of pictures and snaps as conversation, distinct from social media companies, which give a higher priority to the consumption of content. But the camera company moniker could confuse investors, who see it as very different to the Kodaks of yesteryear. They prefer to ask whether it could be a huge success like Facebook, up 250 per cent since its IPO, or could struggle like Twitter, down 61 per cent since listing in 2013.

Much may ride on how potential shareholders perceive Mr Spiegel, the 26-year-old co-founder, who is deeply involved with the direction of its product. The S-1 regulatory filing makes it clear that Snap believes it needs to innovate incessantly, coming up with more imaginative ways of playing with pictures like filters, lenses and its first venture into hardware, Spectacles. It will be down to Mr Spiegel to convince investors that Snap can be a new type of tech company entirely.

● John Gapper: Be wary of Snap’s charms
● News: Offer of voteless shares riles investors
● Lex: Snap as clickbait
● Analysis: Unconventional IPO will test staid investors
● FT View: Snap’s royal share structure

Son’s Fortress deal boosts SoftBank’s fund ambitions

Masayoshi Son © Bloomberg

Like many of the deals done by Masayoshi Son, SoftBank’s $3.3bn takeover bid for US alternative asset manager Fortress Investment Group was unexpected this week, writes Kana Inagaki.

The foray into the world of hedge funds and private equity appeared to be a radical departure for the Japanese telecoms and internet group founded by Mr Son.

However, analysts say the all-cash offer, which represents a premium of 29 per cent to Fortress’s closing price on Monday, makes strategic sense.

The deal would give Mr Son access to Fortress’s $70bn in assets under management and its 1,100 employees, just as SoftBank is turning into an investment powerhouse with the imminent launch of its record-setting $100bn SoftBank Vision technology fund.

Fortress boasts investment expertise across a wide range of industries, although technology is not chief among them.

The sale price is a far cry from the valuation placed on Fortress when it floated in February 2007, the first of the private equity groups to go public at the peak of a leveraged buyout boom. Its initial public offering valued Fortress at $7.4bn, but it surged to $14bn within minutes of its market debut.

Meanwhile, there was unusually large options trading activity — more than eight times the normal level — on Fortress shares, ahead of the deal’s announcement.

The size of the bets raised eyebrows and led several market experts to suspect that someone was trading on information leaked about the acquisition.

● Lex: SoftBank/Fortress — costly colleagues

Rolls-Royce £4.6bn loss takes heavy toll on its stock

Rolls-Royce is known for many things: Quality, engineering, reliability. But after this past week the world’s second-biggest aero-engine maker is now also known for racking up one of the largest annual losses in UK corporate history.

Britain’s premier engineering company reported a £4.6bn annual pre-tax loss on Tuesday, the biggest since it was founded in 1906. But that is not why the shares have fallen from roughly 740p to 670p since the loss was announced.

That headline figure was largely because of a £4.4bn revaluation of financial instruments it used to hedge against dollar risk, as required by accounting rules twice a year. But the revaluation of a hedge book that stretches over five years has no impact on cash, and does not reflect the operational performance of the business.

More serious was the £671m charge from the global settlement for bribery and corruption offences, which also depressed profits and is real money that will have to be paid out.

The shares also fell because the results were accompanied by some less than encouraging comments about the coming year. Even though the company beat expectations with underlying profits of £813m, against consensus forecasts of £687m, this was still down from last year’s £1.4bn.

This year will only see “modest growth”, according to chief executive Warren East. In addition, the promised improvement in cash flow has yet to materialise. This year will see free cash flow of roughly £100m, equivalent to 2016, he said.

● Lex: Rolls-Royce — altitudinally challenged

Nestlé and Danone suffer sales woe as volatility bites

Mark Schneider, chief executive of Nestlé © Reuters

Switzerland’s Nestlé and France’s Danone this week reported the slowest sales growth for two decades, highlighting strategic challenges facing the world’s largest food companies.

The deceleration revealed in the groups’ 2016 results showed the impact of global economic volatility and price deflation, as well as struggles they have faced reacting to consumer shifts towards healthier eating.

At Nestlé, the sales figures provided a gloomy backdrop to the first public appearance of Mark Schneider as the Swiss group’s new chief executive. He previously headed German healthcare company Fresenius. Organic growth at the world’s largest food and drinks company slowed to 3.2 per cent in 2016 — lower even than the company had expected last October.

With the economic outlook uncertain, Nestlé forecast little improvement in 2017, saying it expected a growth rate only between 2 per cent and 4 per cent.

But Mr Schneider swore allegiance to the traditional “Nestlé model” based on relentless sales expansion and leveraging its size. Business history showed that “sooner or later, the guys that persistently expanded the business came out ahead”, he said.

At Paris-based Danone, like-for-like sales increased 2.9 per cent to €21.9bn in the year to December 31.

Sales at the world’s largest yoghurt maker were particularly weak in Europe, reflecting tougher market conditions in Spain and the spluttering relaunch of its digestive health brand Activia which had “not delivered” a hoped-for turnround.

● Lex: Nestlé — dry powder

Verizon close to discount on Yahoo deal over data breach

© AP

It is getting hard to keep count of how many accounts records Yahoo has lost in data breaches, writes Hannah Kuchler.

First, there was an attack that affected 500m accounts, then one that affected 1bn, and this week, there was even confusion over whether a third had taken place.

For Verizon, the telecoms group that agreed to acquire Yahoo for $4.8bn last summer, it is even harder to put a dollar figure on the potential cost of these breaches, which have emerged since the deal was signed. Concerned about the impact of potential lawsuits and users avoiding Yahoo, Verizon’s lawyers have been trying to cut the price. Yahoo claims it has seen no dip in usage since the attacks were announced in September and December respectively.

On Wednesday, people involved in the negotiations said both companies are close to agreeing a $300m discount on the deal, in what would be one of the first times that discovery of a cyber attack has led to a renegotiation of an acquisition price.

If the deal is completed, it will mark the end of a long saga for Marissa Mayer, Yahoo’s chief executive, who joined the company from Google in 2012. After her efforts at a turnround flailed, investors pressured her to explore a way of separating the main business from its more valuable stake in Chinese e-commerce group Alibaba. Yahoo has said she plans to continue running the core business, which stretches from Yahoo Mail to fantasy football, as part of Verizon.

● Video: Yahoo’s new data breach in 90 seconds