Takeovers/M&A
Today’s topics
- Takeovers
- Inflation
- COVID relief
Takeovers
It appears that the appetite for long dated quality real assets and infrastructure continues unabated. Sydney Airports (where we expect the bid as it stands to be rejected) and now Spark Infrastructure.
This continues our recent, pleasing run of corporate activity. CWN, ALU, IRE, SYD and now SKI, all stocks held in our direct equity portfolio, all with substantive premium to VWAP buyers.
There is a degree of froth, in the market, as a result of the nexus between requiring yield (income generating assets) and very low borrowing costs, which enables firms and prospective acquirers to table bids that might be a touch unrealistic, particularly if rates rise.
Still, good for us.
Inflation
US CPI out last night registered another upside surprise, with the year on year headline rate at 5.4%, and the core (stripping out volatile items like food and energy) at 4.5%.
Team “transitory” are pointing to details, suggesting that used vehicles are a function of temporary dynamics (as car rental companies rebuild fleets that were liquidated into the crisis) and reopening categories are by definition a temporary mismatch between supply (which can take a little while to come online) and demand (which can turn on a dime).
Team “inflationist”, led by the likes of Larry Summers, are pointing to an overheated labour market, and imperilled labour supply dynamic (e.g. generous unemployment benefits that reduce the desire to work) and a good old fashioned “too much money chasing too few goods” classical economic doctrine of too much interventionist monetary and fiscal policy.
The bond market is very much in team temporary, and for the most part so too are we. The bond markets view is very clear from the graph below, where otherwise you’d see treasury yields at or above 4-5% for CPI prints of this magnitude.
In our mind, it wouldn’t take much more than a hike or two to simmer down any de-anchoring of inflation expectations. We are sympathetic to Larry’s view only to the extent that we think 10 year yields can’t sustainably sit below any plausible estimate of inflation over the medium term (e.g. a 10 year nominal yield of say 1.4% versus a realised inflation outcome of 2% per annum) with a natural rate of interest that is close to one percent.
COVID relief
The NSW COVID relief package has two main pillars, namely support for individuals, and support for businesses.
If you’ve lost more than 20 hours of work per week, you can receive weekly support of $600. At lower levels of lost hourly work, the amount is under $400.
Businesses with turnover from $75,000 to $50m, that have lost 30% of revenue as a result of COVID, will see 40% of the payroll cost covered. The critical hurdle to receive the assistance is of course not to layoff workers.
The market was fully expecting support, and as such didn’t trade appreciably lower, in aggregate, at either the Melbourne outbreak, or in the lead into the Sydney one.
Clearly, if the outbreak drags on for a lot longer, this will change, but even a cursory glance at the Qantas share price suggests this is not the base case, for now. Lockdowns work, and we suspect this one will too.
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