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Us Defense Spending Bonanza Puts Niche Acquisitions In Play

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WASHINGTON – Rising U.S. government spending on the Pentagon is fueling a spree of deal making among defense companies.

The U.S. Republican party’s willingness to boost the Pentagon’s budget to nearly $700 billion last year, helped by December’s corporate tax cuts, is also pushing up valuations for even lesser known companies in the sector and making sellers more willing to entertain overtures.

On Monday, the same day that U.S. President Donald Trump presented his second annual federal budget proposal, weapons maker General Dynamics Corp. (GD.N) said it was buying CSRA Inc (CSRA.N) to expand its government services business.

“We have an increasing budget going forward, that gives us cause for optimism that the services market is going to come back to pre-2011 characteristics,” General Dynamics executive vice president of Information Systems & Technology Daniel Johnson told Wall Street analysts after the $6.8 billion deal was announced.

The cut in the U.S. corporate tax rate approved in late 2017, from 35 percent to 21 percent, has also made buyers more willing to spend a little extra.

“Executives see the budgets coming out of the Pentagon and see that it’s not a short-term fix,” said Bill Farmer, head of aerospace and defense investment banking at Teneo Capital, adding “you’ve also got the tax cut creating a lot of money.”

The net effect is a hot merger market where a broader group of weapons makers and government service providers are seen as attractive.

Companies involved in deals include U.S. military security services business Constellis, formerly known as Blackwater when it was founded in 1997 by former U.S. Navy SEAL officer Erik Prince. The company changed its name to Xe Services LLC in 2009 after a deadly 2007 shootout in Iraq tarnished its brand.

Apollo Global Management LLC, the New York-based private equity firm, purchased Constellis for about $1 billion in August 2016, but underscoring the strength of the current market, the sale of Constellis could fetch around $2.5 billion after less than two years.

The sale process for Constellis attracted industry participants such as Garda World Security Corp, Allied Universal Security Services, and G4S PLC (GFS.L) as well as private equity firms, people familiar with the deal said on condition of anonymity.

Constellis took initial bids last week, one of the people said, without elaborating on which companies ultimately bid. Apollo declined to comment.

Another example of a company with niche products attracting more robust values involved the recent sale of EaglePicher Technologies, LLC which makes the batteries used to power precision guided munitions like Paveway missiles and JDAM guidance kits that convert “dumb bombs” into “smart” munitions.

EaglePicher was sold to private equity firm GTCR for about $930 million or more than 11.5 times its estimated annual earnings of about $80 million, a strong valuation for such a niche player.

Part of the rich valuation comes from demand for precision guided munitions in several conflicts. Trump’s 2019 budget request seeks more than $10 billion in funding for tactical missiles. Saudi Arabia recently agreed to buy about $7 billion worth of precision guided munitions from U.S. weapons makers.

While some companies and private equity firms are looking to gain exposure to the defense spending trend, others are using the active acquisition market to unload their less profitable businesses.

L3 Technologies Inc (LLL.N) said in December it would sell Vertex, its aerospace and defense logistics support services unit. L3, under recently installed CEO Chris Kubasik, would rather focus on building its intelligence, surveillance and reconnaissance, and communication systems businesses which it believes will be more profitable in the future.

Reporting by Mike Stone;

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Gm Korea Seeks To Trim Benefits Wages Internal Letter

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SEOUL – General Motors Co will propose a base wage freeze and no bonuses this year along with a suspension of some worker benefits at its money-losing South Korean unit to cut costs, according to an internal letter that Reuters reviewed on Friday.

GM is bracing for a major showdown with its South Korean unionised workers, after the U.S. automaker announced last week it would shut a plant by May in the city of Gunsan, in southwest South Korea, and decide the future of its remaining three plants in the country within weeks.

GM executives have complained that South Korea’s relatively high wages and unyielding unions have contributed to its problems in the country.

To “improve the manufacturing competitiveness of GM Korea,” GM will propose freezing base wages this year and limit future wage increases below inflation, the letter said.

“It is impossible to pay 2018 bonuses/one-time payments in 2018,” GM said in the letter, sent to team leaders, laying out proposals for this year’s wage talks with the union.

GM Korea has paid about 10 million won ($9,285.83) in bonuses to each worker almost every year, company officials have said.

The proposal includes suspending benefits, such as school tuition for employees’ children, gold medals and travel expenses for long-serving workers, and free lunches.

GM has told its South Korean employees the company should trim benefits worth a combined 300 billion won, two sources told Reuters. One of the sources said GM has also asked employees to curb use of corporate cards.

A GM Korea spokesman declined to comment, while a union spokeswoman said it has not officially received the proposal.

TEMPORARY RELIEF

Meanwhile, GM on Friday dropped a request to use its South Korean factory in Bupyeong as collateral for debt, a person with direct knowledge of the matter told Reuters.

At around 5 percent interest, GM headquarters in Detroit has lent its South Korean unit nearly 3 trillion won, out of which 700 billion won comes due at the end of this month.

At a board meeting of its South Korean unit, GM also agreed to grant temporary relief in repaying the 700 billion won debt until the government completes its due diligence of the unit, the person with direct knowledge of the matter said.

South Korea said on Thursday it plans to quickly conduct due diligence on GM’s S.Korean operations and would discuss whether the government would provide financial support to the company.

This came after GM agreed to play “a responsible role” in normalising its South Korean operations while other stakeholders also “share the pain.”

“GM told board members that there is progress with its talks with the government, but little progress with talks with its labour union, which is a problem,” said the person with direct knowledge of the matter.

GM has been seeking concessions from the South Korean union, and government support to engineer a turnaround.

South Korea was once a major export base for GM, but saw slumping sales in recent years as GM scrapped its Chevy brand in Europe.

The ruling party on Friday urged GM to come up with a “viable, long-term turnaround plan” for its South Korean operations.

Reporting by Hyunjoo Jin; Additional reporting by Ju-min Park and Heekyong Yang;

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Asia Shares Rebound As Fidgety Us Rate Fears Shift Again

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SYDNEY – Asian shares rebounded on Friday as comments from a Federal Reserve official eased worries about faster rate rises in the United States, while the dollar ticked higher as investors dipped their toes back into riskier assets.

Indications were mixed for other global equity markets, with E-Mini futures for the S&P 500 up 0.3 percent but London’s FTSE futures slipping 0.2 percent.

Financial markets have fluctuated wildly this month as investors fretted about how fast the Fed might raise rates in the wake of data showing a pick up in U.S. inflation.

Even though broader U.S. price pressures still appear modest for now, markets are fully pricing in three rate hikes this year, one more than was seen just a few months ago. Some analysts even expect four.

That in turn has stoked anxiety that many central banks will start to tighten policy and raise borrowing costs, hurting corporate earnings and clouding the outlook for what had been expected to be another solid year of global economic growth.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.9 percent on Friday to add on to the previous week’s 3.9 percent gain.

It is still down more than 4 percent in February so far, however, after global equity markets were mauled at the start of the month by worries that inflation is picking up.

Japan’s Nikkei rose 0.7 percent.

China’s SSE Composite index and the blue-chip CSI300 both pared early gains after the government seized control of acquisitive financial conglomerate Anbang Insurance, in a dramatic move that underscores Beijing’s intent to crackdown on financial risk.

The gains in Asia followed a sell-off Thursday after minutes of the Fed’s last meeting showed policy makers were confident about the economic outlook. That prompted some investors to boost the chance of faster rate hikes.

St Louis Fed President James Bullard tried to tamp down expectations of four rate hikes in 2018, instead of the widely anticipated three, saying on Thursday policymakers need to be careful not to increase rates too quickly because that could slow the economy.

The Fed had caused a so called “taper tantrum” in May 2013 when it signaled it was time to stop pumping cash into the U.S. economy, a move that created havoc in financial markets particularly Asia.

But analysts are more upbeat about the outlook for the region despite prospects of rising U.S. inflation and rates.

“Financial market volatility has not dented our constructive view on Asia’s growth outlook for this year,” said Khoon Goh Singapore-based Head of Research for ANZ.

“Higher inflation and a larger fiscal deficit in the United States will likely see U.S. bond yields move higher, but improved fundamentals in Asia mean the region is better placed to weather this than in 2013.”

Analysts expect the market to be in a “holding pattern” ahead of a slew of important U.S. January activity data on Tuesday, followed by global surveys on manufacturing activity on Thursday.

CURRENCIES

The dollar was up 0.1 percent at 106.91 yen amid rapidly shifting views in U.S. monetary policy.

The yen, which tends to benefit during times of heightened volatility or uncertainty, rose almost 1 percent overnight.

The euro dipped to $1.2303 after gaining 0.4 percent the previous day. The common currency has lost more than 0.75 percent so far this week, following its ascent to a three-year top of $1.2556 on Feb. 16.

Oil prices eased from two-week highs, as high U.S. crude exports outweighted lower crude inventories in the world’s biggest consumer of the fuel.

U.S. crude was off 3 cents at $62.74 per barrel and Brent eased 7 cent to $66.32.

Spot gold slipped 0.3 percent to $1328.05 an ounce.

Reporting by Swati Pandey;

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With Easy Ride Trial Nissan Takes New Step Toward Being Uber Competitor

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YOKOHAMA – Facing a future in which self-driving cars may curb vehicle ownership, Nissan Motor Co is taking its first steps to becoming an operator of autonomous transportation services, hoping to break into a segment set to be dominated by Uber Technologies and other technology firms.

In partnership with Japanese mobile gaming platform operator DeNA Co, the automaker will begin public field tests of its Easy Ride service in Yokohama next month, becoming among the first major automakers anywhere to test ride-hailing software developed in-house, using its own fleet of self-driving electric cars.

Easy Ride, which Nissan plans to launch in Japan in the early 2020s, is meant to feel more like a concierge service on wheels, making – for example – restaurant recommendations while the car is on the move.

The announcement follows an agreement by Nissan and its automaking partners Renault SA and Mitsubishi Motors Corp earlier this month to explore future cooperation with Chinese transportation services conglomerate Didi Chuxing.

These moves mark a push by the automaker to avoid becoming the “Foxconn of the auto industry”: a mere vehicle supplier to ride- and car-sharing companies.

“We realize that it’s going to take time to become a service operator, but we want to enter into this segment by partnering with companies which are experts in the field,” Nissan’s chief executive, Hiroto Saikawa, told Reuters in an interview this month.

A person close to the deal has said that the agreement is intended to explore opportunities for Nissan and others to supply battery-electric cars to Didi Chuxing for a new electric car-sharing service it is setting up in China.

He noted however that Nissan and its alliance partners could explore a broader agreement, which might possibly involve Nissan providing self-driving taxi technology to the dominant Chinese ride-hailing service.

NICHE MARKET

Creating an upscale autonomous taxi service, rather than trying to beat other companies on price, could help Nissan against bigger competitors like Uber, market experts say.

“By doing something with a more premium feel, it could allow Nissan to charge more for its service and potentially relieve some of that profitability pressure they could face if they were to try to race to the bottom in terms of pricing,” said Jeremy Carlson, automotive analyst at IHS Markit.

Automakers are looking for ways to profit from the rise of car-sharing services, which along with self-driving cars, are likely to lead to a decrease vehicle ownership and chip away at future profits.

IHS Markit expects global sales of autonomous vehicles will soar to more than 33 million units in 2040 from 51,000 in 2021, while Goldman Sachs has predicted that the ride-hailing market will grow eightfold by 2030 to be five times the current size of the taxi market.

Nissan has embraced new technologies, launching the Leaf, the world’s first mass-market electric car, in 2010. The company was an early proponent of self-driving cars, pledging in 2013 that it would market fully autonomous cars in 2020.

Although it has been rolling out automated highway driving functions and self-parking capabilities in a growing number of its models, rivals ranging from Tesla Inc to Subaru Corp have installed increasingly advanced self-driving features in their cars.

GM and Daimler AG are building and expanding car- sharing services, and GM has said it plans to launch a self-driving taxi service next year.

Nissan also has its own car-sharing service using its ultra-compact battery electric models, but after years of trials, the service is available only in Yokohama, home to the automaker’s headquarters.

After bringing in Ogi Redzic, who previously led the automotive business group of mapping data firm Here Technologies, to head Renault-Nissan’s mobility services division in early 2016, Nissan in the past year or so has begun to gear up its strategy to compete in the new transportation area.

Its partner DeNA is one of the world’s biggest social gaming networks with 30 million users. The company’s expertise in developing real-time user interfaces and payment systems will help give shape to the taxi service platform.

The company already operates a user-sourced car-sharing app in Japan, and had been developing a self-driving taxi system with a Japanese robotics start-up before teaming up with Nissan.

Additional reporting by Norihiko Shirouzu in Beijing

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