Walt Disney is about to awaken the financial power of the Force. The media conglomerate appeared to have fallen for a hokey religion when it paid $4 billion for Star Wars maker Lucasfilm in 2012. Now, as it prepares to unleash the first of six new movies in the space saga, it may be on track to more than triple its money.

Advance ticket sales for “The Force Awakens” smashed records even before its Dec. 18 opening. That gives the movie a good shot at displacing “Avatar” as the top-grossing movie of all time. The 2009 hit pulled in $2.8 billion in global box-office revenue, according to Rentrack data.

As with “Avatar” before it, debuting in December avoids the glut of wannabe-blockbuster movies that usually come out in early summer. So no Jedi mind trick should be required to persuade moviegoers to shun other flicks in favor of the continuing adventures of Luke Skywalker, Han Solo and Princess (now General) Leia Organa – along with new characters.

Assume the film directed by J.J. Abrams rings up a more conservative $2 billion in worldwide ticket sales – a Breakingviews estimate that takes the average box-office receipts of the top 10 movies released around Christmastime. Factor in production and marketing costs as well as theater revenue splits, and pre-tax profit would be about $700 million.

Meanwhile, revenue from licensing and the oodles of toys, action figures, books, clothing and other items that will carry the Star Wars mark could hit $500 million over the next year, according to Macquarie’s Force-enhanced gaze into the future. Apply Disney’s consumer-product operating margin of 40 percent, and that adds another $200 million of operating earnings. Home entertainment and video streaming may yield another $300 million.

Tally it up and Disney could squirrel away $1.2 billion before tax in the next 12 months – and that doesn’t factor in any revenue from amusement parks, TV spinoffs and the like. It’s unlikely to do as well on the five movies to follow – past Star Wars sequels brought in, on average, 25 percent less. On that basis, and after handing over 30 percent to the Republic of Uncle Sam, the company run by Bob Iger could earn an average of $669 million in each of the next six years.

On Disney’s current stock market multiple of around 20 times 2016 earnings, Lucasfilm would be worth $13.3 billion. That may be insignificant next to the power of the Force, but it’s a payoff even Jabba the Hutt would be happy with.

Published December 2015

(Image: REUTERS/Carlo Allegri)



Bank capital hawks are about to bump up against the realities of politics. Basel-based standard setters are due to finalise capital adequacy reforms that banks call Basel IV over the next 12 months. The catch is that these tweaks to the pre-existing Basel III framework conflict with European policymakers’ growth plans.

Basel IV is needed to harmonise assessments of credit, trading and legal risks. European banks’ measurements of their risk-weighted assets – a key determinant of their capital requirements – are suspect, insofar as they sometimes produce low results and differ by jurisdiction. U.S. peers, by contrast, typically carry fuller risk-weightings on their balance sheets: they lend less to corporations and offload lower-risk mortgages to government-sponsored enterprises.

The full implementation of Basel IV may take several years. But the key question is whether European lenders, once it does kick in, will need to maintain their key common equity Tier 1 ratios at the current level of about 12 percent of RWAs.

graphic-Bank rule zealots will be forced to back down

(Source: Barclays research, Reuters Breakingviews. REUTERS/Dominic Elliott)

Bank of England Governor Mark Carney’s answer to that question, for the UK at least, is no. Though he backs greater harmonisation in measuring asset riskiness, Carney argues that the UK regulator already forces banks to hold capital in anticipation of RWA reforms. So UK banks will only need to exceed a 9.5 percent common equity Tier 1 ratio under Basel IV and they won’t need new capital.

Euro zone politicians and regulators could follow Carney’s lead. European Central Bank President Mario Draghi is keen to jumpstart Europe’s securitisation market, but Basel IV could raise the relevant capital requirements by 2.2 times, according to an ISDA-led lobbying group. European politicians care more about improving the euro area’s anemic growth rate, which the International Monetary Fund puts at just 1.7 percent in 2016.

Brussels will want a slight uptick in lending to continue. So Basel IV will be in its sights, given Barclays analysts reckon it could knock 2.2 percentage points off lenders’ common equity Tier 1 ratios. European financial services commissioner Jonathan Hill has already commissioned a review of the net effect on economic growth of various post-crisis rule changes. Its conclusion may be that Basel IV should either result in lower capital requirements, or be substantially watered down.

Published December 2015

(Image: REUTERS/Toby Melville)



Power suppliers have long enjoyed a natural monopoly. But the arrival of budget batteries coupled with cheaper solar power will allow a growing number of consumers to pull the plug on old-fashioned electricity networks in 2016 and beyond.

Solar panel prices have already plummeted, and batteries look set to follow in the near future as manufacturers hone new technologies and ramp up production. Tesla says it can slash the cost of its own batteries by more than a third with a bigger, better factory. That’s plausible: costs dropped by 14 percent on average every year between 2007 and 2014. Broker CLSA reckons they will tumble by a further 70 percent over the next five years.

The prospect of being able to generate, store and manage their own power may prompt some customers to leave the grid. In parts of developing economies where electricity has yet to arrive, power networks may not be needed. More than a fifth of India’s population does not have access to electricity. Rather than waiting for infrastructure to expand, Prime Minister Narendra Modi’s government is offering a 30 percent subsidy to encourage homeowners to use solar to become self-sufficient.

Energy companies’ initial responses to this potentially existential crisis have ranged from denial to defensiveness. Doing nothing is not a great option, but actively resisting the shift is worse. In Australia, industry lobbyists initially tried to fight special subsidies for renewable energy and raise fees for homes with solar panels. Though such bullying tactics will burn solar homeowners in the short term, it only encourages them to seek ways to harvest and hoard their own energy.

Some power companies have decided to embrace change. Australian utilities AGL Energy and Origin Energy now sell solar panel and battery sets to their own customers. Though there’s a risk the move will dim demand for conventional electricity, the bet is that clients will stay connected to the grid in order to sell their extra volts back to the utilities. In that case, the grid will survive as an exchange where energy is traded between large and small producers and consumers.

Others would be wise to heed their example and take action. Battery power is about to deliver an electric shock to the old system. Utilities will have to see the sunny side if they are to survive.

Published December 2015

(Image: REUTERS/ Amir Cohen)



Newly launched headsets from Facebook, HTC, Sony and others will help turn the immersive artificial environments of virtual reality into what could soon become a $10-billion-a-year commercial reality.

For decades the dream of VR has remained unfulfilled. Nintendo’s 1995 “Virtual Boy” console, for example, was an infamous flop, complete with red-and-black wireframe graphics. Later equipment often made users nauseated, as eyes and body received conflicting information.

But advances in processing power now make for far smoother, more compelling experiences in VR and augmented reality, its less intense cousin. Tech giants and venture capitalists reckon the duo may become the next big computing platform after mobile. Investors have poured some $4 billion into AR and VR firms since 2010, PitchBook says.

This should start bearing fruit in the first half of 2016, as HTC’s Vive, Facebook’s Oculus Rift, and Sony’s PS VR headsets go on sale. Samsung’s low-end Gear VR is already out, while Microsoft is working on the HoloLens visor. Developers like Japan’s Bandai Namco, Capcom and Square Enix are preparing games in genres from horror to romance.

As usual, early adopters will be gamers and gadget enthusiasts. Wider adoption will require vaulting a couple of hurdles: that no one looks good wearing a clunky VR headset poses a marketing challenge; and the hardware needs apps with broader appeal. But that should come. There are many potential uses: students could attend distant lectures; fans could sit front row at sold-out concerts; architects could walk the halls of unbuilt buildings; and so on.

The initial financial impact will be modest, but this could ramp up quickly. Nomura analysts estimate sales of home-based VR kits will be sub-$2 billion in 2016, largely in hardware. By 2020 that could be $10.4 billion, with 45 percent in software.

Major beneficiaries will include programming houses and hardware specialists like Nvidia, the graphics chipmaker. Among the bigger players, success in VR would be a big boost for HTC, whose handset business is ailing, and help cement Sony’s dominance in console gaming. It would also vindicate Facebook boss Mark Zuckerberg’s bold, $2 billion bet on Oculus. The tech industry could be about to change reality again.

Published December 2015

(Image: REUTERS/Benoit Tessier)



The runaway mergers and acquisitions train is barreling into its third year. Global merger volume in 2015 shattered the $4.1 trillion annual record set in 2007. As measured against worldwide GDP, the rate nearly doubled to more than 6 percent in just two years. To understand why this level of activity could stay on track for a while longer, look at North America’s railroad mega-deal.

Canadian Pacific in mid-November disclosed a $28 billion offer to buy U.S. peer Norfolk Southern. The Calgary-based railway operator is grappling with low growth. Its revenue is projected to increase by just 2.4 percent in 2015 compared with almost 8 percent for each of the last two years. It’s not alone: S&P 500 Index constituents suffered a collective third-quarter sales drop of 3.9 percent, according to FactSet. That stark reality will be a motivating force for mergers.

graphic-Rail megadeal holds ticket to runaway MA train

(Source: Thomson Reuters, IMF GDP figures. REUTERS/Jeffrey Goldfarb, Rob Cox)

The shareholder roster at Canadian Pacific offers more insight. Its biggest investor was hedge fund billionaire Bill Ackman’s Pershing Square. He originally unveiled a stake in late 2011 when the company’s stock was trading at about $60. It more than tripled in three years before sinking back to around $130. Activist investors like Ackman have doubled their funds to some $130 billion in two years and piled into nearly every industry. Their pushiness will drive plenty more deals like Canadian Pacific’s.

Further consider the nature of the rail bid. It involves a Canadian company stalking an American one. Cross-border transactions tend to pick up as merger momentum gathers steam. About 44 percent of deal volume in 2007 included a buyer and seller from different countries, according to Thomson Reuters data. In 2015, it was about a third, suggesting there may be capacity for more.

Similarly, Canadian Pacific’s offer was unsolicited. Such aggressive approaches, including ones eventually withdrawn, accounted for 15 percent of M&A in 2007 compared with about 14 percent in 2015. Lofty valuations could make targets more demanding and eager suitors increasingly frustrated.

Finally, the rail tie-up is messy. That tends to be a hallmark of deals near the end of an M&A boom. Merger partners become harder to find, testing competition limits or leading to mission drift. Norfolk Southern rejected its rival’s overtures on Dec. 4 in part because it suspected the combination wouldn’t be approved by regulators. Don’t expect that to stop many other buyers just like Canadian Pacific from trying.

Published December 2015

(Image: REUTERS/Lucas Jackson)



The following is a fictional memo from the office of the chief executive of a big American bank to employees sent on the occasion of the British referendum on European Union membership:

Dear colleagues,

You are by now aware of the British electorate’s vote last night to leave the European Union. While we had hoped for a different outcome given our considerable investments in the United Kingdom, we have been preparing for this possibility for the past two years. Fortunately, we are in a position to act quickly.

Thanks to the work done by our “Brexit Task Force,” which we formed in late 2015, we have architected a cross-platform contingency plan that will see many of the functions now performed by the London-based broker-dealer migrate to regional EU centers. While this transition will not be simple, and there will be some employee dislocation, we expect clients will not notice a significant difference.

In the past 12 months, the company has invested $50 million in scenario planning related to the referendum. As part of that process, we have effectively routed nearly 85 percent of the bank’s retail and commercial lending activities through our Dublin-based banking subsidiary.

Our facilities management team has procured options on additional office space in preparation. Front-office customers will be served from our Client Performance Hubs in Frankfurt and Madrid. Support and administrative functionality will gravitate towards our Center of Compliance Excellence in Gdynia.

Overall, we expect to migrate less than 20 percent of our current operational workforce in the UK, numbering about 5,600 people in total, over the coming two years.

Many of you have asked why we did not campaign harder for Britain to stay in the EU given the investments we have made in the City of London over the past few decades. The short answer is that we felt the optics of a large Wall Street bank visibly trying to sway opinion would backfire. The financial services industry is still rebuilding public trust after the 2008 crisis.

We had hoped that Prime Minister David Cameron’s efforts to renegotiate the terms of Britain’s membership in the EU would bear fruit. Unfortunately, the numerous attacks perpetrated in many European cities in recent months by supporters of the so-called Islamic State have weakened the domestic political positions of German Chancellor Angela Merkel and other counterparties critical to the reform process.

I appreciate your patience as we work towards a new, dynamic operating structure for the bank in Europe. The Brexit Task Force will be toiling diligently to identify which positions in London may be transferred to the continent on a going-forward basis, and to plan for the effect of lifting the financial transactions tax, and the cap on banking bonuses for UK-based employees.

In the meantime, I urge you to continue your dedication to serving our customers and to upholding the value principles of the bank. Britain’s participation in the EU may draw to a close, but business continues as normal.


Bank CEO

Published December 2015

(Image: REUTERS/Toby Melville)



China will “friend” Facebook again in 2016. Chinese censors blocked access to the $300 billion social network barely a year after it launched there in June 2008. Yet founder Mark Zuckerberg is going to great lengths to leap the Great Firewall. Rivals have shown that foreign groups can play by local rules.

Even though China’s 668 million web users can’t access Facebook, the Silicon Valley company says the People’s Republic is one of its largest advertising markets as Chinese businesses eyeing overseas markets target Facebook’s 1 billion daily active users. That’s significant as ads brought in more than 95 percent of the company’s $4.5 billion in revenue in the three months to September.

Now Zuckerberg is eager to connect his social network to the world’s largest internet population. The 31-year old CEO hosted a meeting with China’s internet policy chief in 2014 and met with visiting President Xi Jinping in October. The hoodie-clad founder is also learning to speak Mandarin.

None of this will necessarily sway Chinese bureaucrats. Yet there are signs that relations with U.S. tech groups are thawing, provided the latter bend to local rules. Jobs networking site LinkedIn, for instance, censors certain content on its Chinese site, while note-taking app Evernote has disabled a note-sharing feature on its Chinese service. Both store local data in China as well. These strategies are paying off: LinkedIn already had around 4 million mainland users when it formally launched its Chinese service in February 2014. Now it has 10 million.

What might a Chinese Facebook look like? Posts deemed too sensitive from accounts in China would be blocked in the country, while censors could also filter content from abroad. If this proved too complicated, Facebook could even opt to launch a separate service, such as an event planning app, to test the waters.

Finding a local partner would help to seal the deal. Google, which retreated from the People’s Republic five years ago over censorship concerns, will introduce a Chinese app store in 2016, Reuters reported on Nov. 20. A partnership with local smartphone maker Huawei, which makes Google’s handsets, should give it a boost. Facebook could persuade another domestic manufacturer like Xiaomi to pre-install its app on Chinese phones.

Re-entry would only be the beginning as Facebook would face a fierce fight with local networks like Tencent’s ubiquitous WeChat. Zuckerberg will need all the Chinese friends he can get.

Published December 2015

(Image: REUTERS/Ted S. Warren/Pool)

Revellers in unicorn costumes from the Grande Rio samba school participate in the second night of the annual Carnival parade in Rio de Janeiro's Sambadrome February 21, 2012. REUTERS/Nacho Doce



A capital squeeze may stimulate an orgy among unicorns. Plentiful money has detached valuations on many hot private tech firms from reality. There are 144 of these private companies worth $1 billion or more, according to CB Insights. Curiously, about a third are valued at $1 billion on the dot. As capital becomes more expensive in 2016, selling to rivals or mating with other unicorns will become appealing.

Few of these young companies are cash-flow positive, so most will need capital infusions to survive. That spigot is slowly dwindling. Fidelity Investments recently marked down the value of its Snapchat and Zenefits holdings, and BlackRock slashed the value of its Dropbox stake. If massive asset managers pull back, private firms will be dependent on tinier venture capital outfits, which may be more demanding in their terms.

Even hardened angel investors are becoming skeptical. Marc Benioff,’s founder, says he will no longer invest in unicorns because they have “manipulated private markets to obtain these values.”

Going public is an option. American technology firms’ proceeds from initial stock sales so far this year are $6.1 billion – a fifth the amount they raised last year, according to Thomson Reuters data. Global trends are similar. Claims that remaining private allow founders to retain a long-term focus look suspect. Super-powered voting stock allows insiders to treat public companies as their fiefdoms. But the stretched private valuations make it harder for unicorns to go public. Insiders do not want the ignominy of a so-called down round. Floating at a reduced price also creates the impression something has gone wrong. That can make it difficult to lure customers and talented engineers.

M&A may be a better option. Two of China’s private taxi apps, Didi and Kuaidi, combined in February to gain scale against Uber, and the combined valuation ballooned. Didi Kuaidi recently invested $100 million in U.S. based Lyft. Lyft could seek shelter from Uber by selling itself to Didi Kuaidi or partner Hertz.

Other unicorns that have run into trouble could also find comfort in the arms of bigger, more mature rivals. Benefits manager Zenefits might make a nice target for Workday or ADP. It’s easy to see how cloud-storage firm Dropbox might drop nicely into the portfolio of Microsoft.

Insiders may not wish to sell at public market valuations. Tacking on a change of control premium would help narrow this gap. And a lack of cash flow and scarcer private capital may eventually force their hands.

Published December 2015

(Image: REUTERS/Nacho Doce)



Here are two predictions about the UK labour market for 2016. Banks with swollen cost bases and anemic growth will lay off tens of thousands of people. And chronic skills shortage will stop the country from building the houses it needs to offset rising prices. In an ideal world, that means that bankers ought to think about becoming builders.

Banks have a problem that isn’t going away. Expenses are too high for returns to exceed costs of equity, especially because once-proud fixed income divisions now have to hold lashings of capital. Almost every bank has launched multi-year cost-reduction programs: HSBC is cutting up to 25,000 jobs by 2017, Standard Chartered plans 15,000 by 2018, while Barclays said in 2014 it would aim for 19,000 by end-2016. In sum, these three plus Lloyds Banking Group and Deutsche Bank will lay off 77,000 staff, with over a third likely to be in the UK.

British homebuilding has the opposite problem. The sector has lost 300,000 workers since 2008 as builders retrained away from a denuded sector. At the very least, it needs to build 80,000 houses a year above the 141,000 it managed in 2014 to keep pace with household formation, according to consultant Arcadis. With the average home having required 1.5 workers annually to get built, that implies Britain needs to find at least 120,000 new house builders.

It’s sadly unlikely that sharp-suited corporate financiers will suddenly opt for a life of hod-carrying. But the culture clash between life on a construction site and that of a fixed-income trading floor, where the deepest cuts are occurring, may not be so great. This may even apply to pay: the deficit of bricklayers is sufficiently extreme for skilled tradesmen to be able to demand annual incomes of over 60,000 pounds. By way of comparison, the average compensation for Barclays’ 132,300 employees in 2014 was just over 67,000 pounds, although those facing the chop may be towards the higher end of the scale.

Were the UK government minded to bring house prices back under control, it would probably have to publicly fund most of the extra houses needed. That could provide the delicious irony of masters of the universe becoming salaried employees of the state. But if any financial types fancy a pivot into something undeniably socially useful, they should head sitewards.

Published December 2015

Image: REUTERS/Mike Segar



On Oct. 18, Zambian President Edgar Lungu called off soccer games and closed bars and restaurants for a day of national prayer. “I personally believe that since we humbled ourselves and cried out to God, the Lord has heard our cry,” Lungu told the 15 million people of the landlocked African nation. Sadly for Zambians, God heard things differently.

Lungu implored his people to pray for the national currency, the kwacha. Having dropped by nearly half since he took over in January – almost perfectly tracking the sliding price of his country’s chief export, copper – Zambia needed some divine intervention. Since imploring his people to genuflect, the kwacha has fallen another 14 percent.

Zambia is a cautionary reminder of how quickly the prospects for growth and prosperity can shift, especially in Sub-Saharan Africa. A year ago, Zambia was expected to lead its neighbors in boosting economic output. In June of last year, the World Bank forecast Zambia’s gross domestic product would be nearly 7 percent greater by the end of 2015. The country even warranted a shout-out in our Breakingviews 2015 Predictions book.

As it stands, the country will be lucky to expand by more than 5 percent by the end of the year. While that’s certainly better than, say, Italy, it needs to grow far faster to pull Zambians out of poverty. Gross domestic product per capita in Zambia is below $2,000, or just an eighteenth of Italy’s. It’s a similar story from Accra to Zululand.

While the World Bank calculates that Sub-Saharan Africa’s GDP growth has been faster than the developing world’s average, excluding China, since the 2008 financial crisis, progress is threatened on too many fronts. Just a few of them are of domestic manufacture. While bad economic thinking and corruption are still rampant in much of Africa, Mother Nature, alongside myriad problems in the rest of the world, is set to take an unusually high toll.

Zambia and its neighbors Botswana and South Africa account for about a quarter of Sub-Saharan Africa’s GDP. The oil spigot that is Nigeria comes in for about a third. The nations on the southern tip carry considerable weight in determining the region’s growth picture. So a potentially devastating water shortage there comes at a terrible moment.

Water is needed to grow food for people and animals. It’s also critical to the mining industry – not simply as a raw material used in the process of extraction, but to generate energy. Zambia gets nearly all of its electricity from three major dams, including one at the usually glorious, now dry, Victoria Falls. As a result, copper production has slowed just as the metal’s price has dropped. Many mining operations are only managing to stay open by using generators powered by expensive, imported diesel fuel.

All of this comes as the mining and energy business globally is reeling from the crash of the commodities super-cycle. Mines are closing and jobs are being cut across the industry. South African platinum producer Lonmin, which traces its roots back to British imperialist Cecil Rhodes, just detailed a bankruptcy-avoidance plan that sees it shedding some 6,000 jobs.

Meantime, the effect of sparse rainfall is leading to rising food prices. The National Agricultural Marketing Council of South Africa reported a 4.1 percent increase in basic food prices in the year to July. “This could have a negative impact on household food security in South Africa, affecting the affordability of selected staple foods (bread) as well as various food items making a contribution to dietary diversity,” the council warned.

This sort of inflation is particularly worrying in poor nations where the percentage of wages dedicated to sustenance can be higher than 40 percent of household income. The rising cost of putting food on the table threatens to further erode social stability in South Africa. Recent protests, some of which have turned violent, over university tuition would pale in comparison to riots by the poor in the cities and the townships fueled by empty stomachs.

As if Planet Earth weren’t dealing parts of Africa a bad enough hand, the Federal Reserve’s prospective tightening of interest rates is sucking capital away from riskier nations, and an actual increase is likely to continue the trend. The financial pressure has manifested itself starkly in currencies like the South African rand, which is down 22 percent in 2015, along with Zambia’s kwacha. Cheaper currencies add to the cost of importing food.

Some African own-goals make matters worse. As foreign direct investment is already drying up, Nigeria recently meted out a whopping $5.2 billion fine on the South African mobile phone operator MTN for failing to deactivate 5.2 million unregistered phones. By almost any measure, the punishment was disproportionate to the crime, and is double what MTN is expected to earn this year. Moves like this, and South African President Jacob Zuma’s lackluster economic stewardship, make it harder to attract foreign capital to the region.

Rising food and energy costs may be a function of climate, or God. Sliding commodity prices and currencies owe more to the slowdown in China and the monetary policy of foreign central banks. Throw them together with Africa’s perennial corruption and mismanagement, and it’s hard to see a particularly bright spot on the continent in the coming year.

Published November 2015

(Image: REUTERS/Siphiwe Sibeko)