Breakingviews – Corona Capital: Chocolate M&A, Disney layoffs

MILAN/NEW YORK/HONG KONG/LONDON (Reuters Breakingviews) – Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

Ferrero Rocher chocolates are seen in this picture illustration taken October 22, 2017. Picture taken October 22, 2017. REUTERS/Stefano Rellandini – RC1B29701580


– Ferrero/Fox’s Biscuits

– Walt Disney

BITE SIZE. The pandemic has thrown confectionary giant Ferrero a tasty treat. The maker of Nutella chocolate spread and Kinder eggs may swallow UK-based Fox’s Biscuits, says Sky News. Though the family owned Italian group won’t comment, a deal would fit its strategy of diversifying from chocolate confectionary into packaged sweets. Ferrero, which earned 11.4 billion euros in revenue last year, could easily afford the reported price tag of 250 million to 300 million pounds.

For Fox’s owner, a sale may also make sense. The maker of Crunch Creams and Viennese has done well while Britons snacked at home during lockdown. But it’s a tiny bite of the poultry-to-pies 2 Sisters Food Group empire. And Covid-19 has spurred British Prime Minister Boris Johnson to crack down on junk food. Yet as Ferrero’s $2.8 billion purchase of Nestlé’s U.S. candy business in 2018 showed, the company is happy to buck the health trend. (By Lisa Jucca)

THE NOT SO HAPPY PLACE. Walt Disney is laying off about 28,000 workers, mostly part-time workers and parks employees. Its Florida park, Disney World, has been open with limited capacity while Disneyland in California has been closed since March. The $227 billion company has reopened some parks abroad, but socially distanced entertainment will require fewer employees. Revenue from parks and experiences fell 85% in the latest reported quarter year-on-year.

That may be a preview of a transition that would over time have happened anyway. Theme parks used to be one of Disney’s main brand-builders for international audiences, but it’s a capital intensive business and the risks during Covid-19 are high. Streaming movies and TV is a better, safer way to reach global consumers, and the Disney+ service already has more than 60 million users. That may offer a steadier, if less thrilling, ride. (By Amanda Gomez)

FLIGHT RISK. Hong Kong’s Cathay Pacific is negotiating a hard landing. Its agreements with a local union expire next month, Reuters reported on Tuesday, leaving aircrew with less clout. The group has been able to resist mass redundancies thus far, in contrast to peers like Singapore Airlines and Qantas. Skeleton operations effectively halve cash burn to HK$1.5 billion a month; factor in recapitalisation efforts, and it has the liquidity to continue operations for another two years, according to Morningstar calculations.

However, desperate times call for desperate measures, and the International Air Transport Association’s recent forecast suggests passenger traffic won’t reach pre-pandemic levels until 2024. Cathay’s decision to decline Hong Kong’s government subsidies allows the company to consider substantial layoffs. Investors, who have seen the share price fall almost 50% this year, might be ready to endorse a difficult decision. (By Katrina Hamlin)

BEURDEN OF PROOF. BP’s recent week outlining its shift to a low-carbon company was all bright colours and slightly quixotic targets. Royal Dutch Shell’s, announcement on Wednesday focused on the drab reality right now. The Anglo-Dutch oil company warned of a $1.5 billion post-tax charge in the third quarter, a loss in its production arm and lower output, and up to 9,000 job cuts by the end of 2022.

Chief Executive Ben van Beurden wants to help his customers decarbonise by 2050 – not necessarily the same as making Shell’s carbon footprint emissions-free. To regain the initiative, his investor day in February needs to confirm a BP-style jump in renewables investment and generation capacity targets. Yet Shell’s shares – and those of peers – are off almost 10% in the last month on fresh Covid-related oil demand fears, while the FTSE 100 index has stayed flat. That will make green turns even trickier. (By George Hay)

WHERE ANGELS FEAR TO TREAD. The dreaded wave of Covid-stricken fallen angels – companies that are downgraded from investment grade to junk – may be receding, according to rating firm Standard & Poor’s. The agency reckons that 41 companies globally with $350 billion of outstanding debt have fallen below BBB this year as the virus crippled economies. But just one – French hotel operator Accor – lost its halo in August, the fewest since April. Better still, the share of companies at risk of falling below investment grade is also shrinking, helped in part by some credit rating upgrades.

Issuers rated BBB-minus on CreditWatch with negative implications accounted for 11% of investment-grade debt in August, down from 27% in April. A reduced danger of downgrades, along with central banks’ willingness to keep pumping cash into markets, will make a bond crunch less likely, even though the number of coronavirus infections is rebounding. (By Neil Unmack)

NO PAIN, NO GAIN. Light-touch lockdowns are a waste of time. At least, that’s the message from RBC analysts who crunched the numbers from a range of localised restrictions across Britain. The findings are a blow for those policymakers who hope that closing only “high-risk” venues like nail bars and stopping households socialising might contain the virus, while also limiting the economic fallout. In reality, it seems supposedly “lower-risk” places like pubs and restaurants have to shut as well.

Two cities are illustrative. Under “light” restrictions from the start of August, Bolton’s weekly new case count jumped from around 20 per 100,000 people to well over 200. Conversely, Leicester’s “hard” lockdown in July, which also shuttered entertainment venues, halved the number of new cases. The good news is that local lockdowns do work. The bad news is that they have to hurt. (By Ed Cropley)


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