UPDATE-BREAKINGVIEWS-Corona Capital: Vaccine hopes, Windfall taxes

(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

By Breakingviews columnists

NEW YORK/LONDON/HONG KONG, May 18 (Reuters Breakingviews) – C orona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

LATEST

– Vaccine hopes

– Windfall taxes

CHECKERED FLAGS IN VACCINE RACE. Moderna’s vaccine for Covid-19 hasn’t even completed one lap, but Wall Street assumes it’s heading for victory. The U.S. biotech company said on Monday that interim results from an early trial were promising. That tacked nearly $7 billion onto its now-$31 billion market capitalization. With late-stage clinical trials scheduled to begin in July, there could be a vaccine by fall.

Or that’s the theory. Moderna said the initial eight patients tested produced the same or greater concentrations of antibodies that can neutralize the virus as “generally seen” in recovered patients. But it’s unclear if antibodies are key to eliminating the virus. Some recovered people have very low levels. Moreover, even though the trial was small, several volunteers had severe temporary adverse effects. It’s far too early to assume this will pass the finish line, much less take the prize. (By Robert Cyran)

EASY TARGETS. UK grocer executives and their investors could be victims of their own success. That’s if the UK government introduces a windfall tax to raise much needed cash from businesses which have thrived during the coronavirus lockdown. Punters are keen. A recent YouGov survey found that 53% of people would support a so-called “excess profit tax.”

Hitting the grocers could be harder than it sounds. True, both Tesco and J Sainsbury enjoyed record sales in March, as customers rushed to stock up on loo roll and pasta. But Tesco boss Dave Lewis recently warned the group will take a hit of up to 925 million pounds from virus-related costs, like hiring 45,000 extra staff. The government may struggle to tax online giant Amazon.com, which books most of its UK revenue through a Luxembourg subsidiary. Still, retailers would only have themselves to blame. Ocado recently paid CEO Tim Steiner a 59 million-pound pay packet for 2019. Tesco churned out a 635 million-pound dividend in April, despite benefitting from state support on property taxes. Such largesse will make it difficult to plead poverty. (By Aimee Donnellan)

M&A MATTERS. JPMorgan’s dealmakers have some tips for chief executives contemplating a merger or acquisition. Having crunched the numbers on mega-deals struck during the last crisis, the bankers’ first lesson is that CEOs should take the initiative. Over three-quarters of the deals reviewed began with a buyer’s approach. Second, pay up: the median U.S. control premium during 2008 and 2009 was around 36%, compared with 27% from 2000 to 2019.

That’s because equity markets plummeted, meaning CEOs could offer more relative to prevailing share prices. Still, it confounds the logic for corona-crisis dealmaking today. The S&P 500 is down just 11% this year, compared with a much steeper fall in 2008, meaning CEOs have little room to sweeten control premiums. Meanwhile, the earnings they’re buying are just as uncertain, given the chance of a second virus wave. Little wonder M&A has shrivelled. (By Liam Proud)

EMIRHAD? Dubai-based airline Emirates is making drastic turns to weather the coronavirus storm, cutting 30,000 jobs, or a third of its workforce, according to Bloomberg. It’s also accelerating the retirement of its 100-plus A380 superjumbos. If that doesn’t restore stability, Emirates could try a more radical manoeuvre – a merger with local rival Etihad.

There are plenty of impediments, not least tensions between their respective homes, flashy Dubai and staid but uber-wealthy Abu Dhabi. That probably rules out the most obvious cost-saving – squashing their two hubs, now 60 kilometres (40 miles) apart, into one. But Abu Dhabi already bailed out Dubai in the financial crisis, and it needs to do something with Etihad, which made a $1.3 billion operating loss in 2018. Copying International Consolidated Airlines’ holding-company structure for British Airways and Spain’s Iberia might spare national blushes and reap some of the benefits of flying in formation. (By Ed Cropley)

RECKLESS DRIVING. Tianqi Lithium, a producer of the key ingredient for electric-vehicle batteries, is in talks with lenders to restructure its debt. Prices for the white metal have collapsed on the back of rapid expansion of mines. China’s easing of subsidies for battery-powered vehicles meant demand was already moderating, and the coronavirus promises to delay any recovery.

That’s left the Shenzhen-listed company in a rut. Its market value is now less than the $4.1 billion it paid for a minority stake in Chilean miner SQM in 2018. Total debt will remain at nearly 9 times EBITDA over the next 12 months, Moody’s wrote in April. Selling equity and strategic assets will help, but a reset of loans is a tacit admission that any proceeds will be underwhelming in a buyer’s market. (By Sharon Lam)