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Kroger CFO: Ocado's UK experience, technology are 'phenomenal' assets

Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Technology, Media & Telecom

Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Energy

Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018


Kroger CFO: Ocado's UK experience, technology are 'phenomenal' assets

For Ocado Group PLC, delivering groceries in Kentucky may not be so different from driving them through the streets of London, Kroger Co.'s CFO said May 17.

Kroger Executive Vice President and CFO J. Michael Schlotman said the grocer is considering sites around the country, including near cities where it has a strong presence, for automated warehouses designed to fill customer orders. Kroger plans to open up to 20 warehouses over the next three years and deploy Ocado's robots and software to fill orders, according to the terms of a distribution deal it announced May 17. Schlotman was speaking at a BMO Capital Markets-organized conference in New York that was webcast.

Ocado fine-tuned its technology in the U.K., a market that some industry analysts have said is better suited to grocery delivery than the U.S. due to its comparatively small geographic size and densely populated cities.

But Schlotman said Kroger could use Ocado's technology to fill orders in many parts of the U.S., including more sparsely populated areas, faster than Ocado is able to deliver them in the U.K.

With significant operations in and around London, for instance, Ocado's delivery trucks often fight traffic to make home deliveries on time, he said. In the same amount of time that some Ocado deliveries take to reach outer neighborhoods of London, orders could travel from a warehouse — which Schlotman called a "shed" — near Kroger's headquarters in Cincinnati to Lexington, Ky., about one hour away.

"I can probably get to a house in Lexington from the Northern Kentucky shed faster than Ocado gets from their shed to some of the homes in London because of traffic," he said.

Kroger also has the option to use the warehouses it builds with Ocado to fill orders that customers can pick up at its stores through the grocer's Clicklist service, Schlotman said. In results for its entire 2017 fiscal year, the supermarket operator said it offers the pickup service at about 1,000 stores out of the roughly 2,800 it runs across the U.S.

"Even if the American consumer never goes to home delivery in a big way ... this will be a phenomenal asset for us," Schlotman told the audience in New York.

Schlotman's comments — and Kroger's partnership with Ocado — come months after Kroger outlined a transformation strategy aimed at shaking up its digital presence. The initiative, called "Restock Kroger," includes efforts to expand the company's order fulfillment and distribution capabilities.

Some of those options, such as Clicklist, have been developed within the company. But Schlotman said Kroger's deal with Ocado would replace some of the company's in-house efforts.

"This partnership will actually be in the place of some of the things that we were trying to build ourselves," he said. Under the deal, he said, Kroger will take the lead on building warehouses, while Ocado will license its technology to the grocer.

Using third-party players for delivery is not new for Kroger: The chain began working with delivery startup Instacart in November 2017 and expanded the number of its stores that offered Instacart delivery as recently as March.

When asked about Instacart's pricing practices by an analyst at the May 17 conference, Schlotman pointed to the service's practice of charging more for some Kroger products than Kroger does in its stores.

"We don't like it when Instacart charges a different price because it creates a false impression of what our prices really are," he said, adding that fulfillment services that the company manages directly give Kroger more control over price perception among customers.


Technology, Media & Telecommunication
Judge OKs AT&T/Time Warner, Opening A Potential Bidding War For FOX Assets

Highlights

A federal judge approved the AT&T – Time Warner Merger, setting the stage for a frenzy of media consolidation. First up: a bidding war over 21st Century Fox.

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Jun. 14 2018 — A U.S. district judge on June 12 approved AT&T Inc.'s acquisition of Time Warner Inc. with no restrictions, which should open up the media M&A floodgates in a world that is increasingly moving toward digital consumption of content. First up to bat: competitive bidding for most of 21st Century Fox Inc.

Comcast Corp., emboldened by the decision that the merger did not violate antitrust laws, offered on June 13 to purchase most of 21st Century Fox for $79.17 billion in cash, a 19.7% premium to Walt Disney Co.'s stock offer of $66.14 billion, worth $68.36 billion based on the close of Disney's stock June 13.

On a cash flow basis, the deal would be expensive, at 14.1x 2018 cash flow, although this drops to less than 10x when $2 billion in synergies are factored in.

Although the offer from Comcast is attractive, we think a competing offer that allowed shareholders to choose cash or stock may have been more attractive to some shareholders that have a low basis in their shares. Since this deal was widely expected to be announced, Disney has had plenty of time to consider whether it will bid higher, and if so, if it will do so with a mix of stock and cash. Should the board decide Comcast has the better deal, Disney would have five days to come up with a counter offer.

As the table below shows, the regional sports networks are the most expensive piece of the company, valued at an estimated $19.14 billion in the Comcast offer.

Disney-Fox deal: What will the Department of Justice think?

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Listen: Kagan MediaTalk - Episode 2: TV’s Summer Soccer Fever

The following post comes from Kagan, a research group within S&P Global Market Intelligence. To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

In this second episode of Kagan MediaTalk, senior research analysts Justin Nielson and Tony Lenoir discuss the upcoming FIFA World Cup, to be held in Russia June 14-July 15, and what soccer's biggest international stage means for the U.S. TV ecosystem.

In addition to being hosted on Soundcloud this podcast is also available on iTunes, Stitcher, and TuneIn.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Credit Analysis
50 Years Of Altman Z-score, And PD Model Fundamentals – Case Study General Motors

Jun. 11 2018 — The year 2018 marks the 50th anniversary of the Altman Z-score, which was designed to gauge credit strength of publicly traded manufacturing corporates. Until this day, the model has been used by financial practitioners to obtain a condensed picture of the financial strength of a company, and serves as a benchmark for credit risk assessment models.

As a part of providing data and tools for a comprehensive analysis of credit risk, S&P Global Market Intelligence has developed a family of PD Model Fundamentals (PDFN). The PDFN is a statistical model that produces probability of default (PD) values over a one- to more than thirty-year horizon for public and private banks and corporations of any size. The model maps the PD values to credit scores1 (i.e. ‘bbb’), based on historical observed default rates (ODRs) extracted from S&P Global Ratings’ database (available on CreditPro® ) PDFN also offers a global coverage of over 250 countries and more than 20 segments, regions, and industries.

PDFN incorporates both financial risk and business risk to generate the overall PD value. This innovative approach captures, in a statistical PD model, important credit risk drivers as identified by S&P Global Ratings’ extensive experience in corporate credit assessments, and provides users with a well-rounded measure of credit risk, where different sources can be easily identified.

We apply the credit assessment metrics to analyze one of the most publicized bankruptcy events in the last decade, the case of General Motors (General Motors Company, formerly General Motors Corporation). In Figure 1 we present the historical evolution of credit risk for General Motors (GM) from January 2005 to May 2018, accompanied by bankruptcy related Key Developments. We compare assessed credit score by PDFN, Altman Z-score, and corresponding S&P Global Ratings Issuer Credit Rating.

At the beginning of 2005, PDFN indicates a credit risk score of ‘bbb-‘, while the S&P Global Ratings Issuer Credit Rating is ‘BBB-‘. The credit risk score indicates that General Motors had adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Likewise, the Z-score indicates a rather problematic financial situation, placing General Motors in distressed zone category.

In the following months, the credit quality of General Motors rapidly deteriorated. PDFN signals highly increased probability of financial distress already at the beginning of 2007, more than two years in advance. The implied ‘ccc’ credit score suggests high vulnerability to adverse business, financial, or economic conditions with at least a one-in-two likelihood of default. A few months before default, PDFN indicates a credit score of ‘cc’, thus expecting default to be highly likely. Similarly, the S&P Global Ratings Issuer Credit Ratings shows decaying credit quality, albeit the credit rating changes are more sporadic and have larger increments. The Z-score starts to show a significant deterioration of credit quality one year prior to default, but with a notable lag in comparison with PDFN.

After completion of the post-bankruptcy reorganization, creditworthiness of General Motors improved, and PDFN indicates a fairly stable credit risk profile with an implied score of ‘bbb’. In comparison, S&P Global Ratings Issuer Credit Rating initially shows a greater conservatism in light of the reorganization processes. Since then, the credit rating has improved steadily, converging with PDFN estimate. Z-score shows a somewhat steady estimate of credit risk, with a slight deterioration in the recent years.

Figure 1: Historical evolution of credit risk for General Motors (GM)

The shaded area denotes the period of reorganization between the bankruptcy announcement and reemergence of General Motors (GM) as a public company on the New York Stock Exchange (NYSE). Dashed vertical lines denote bankruptcy related Key Development (see corresponding numbers for details). The Z-score scale has been selected to match the credit score level at the beginning of the period.

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

General Motors (GM) – Key Developments:
(1) Nov 8, 2008: GM heads towards bankruptcy
(2) Dec 31, 2008: GM expects to receive $13.40 billion in funding from U.S. Department of The Treasury.
(3) Feb 14, 2009: GM contemplates bankruptcy
(4) Jun 1, 2009: GM filed for bankruptcy
(5) Nov 17, 2010: GM has completed an IPO and starts trading on NYSE

PDFN incorporates both financial and business risk dimensions to generate an overall PD value as well as an assessment of each individual dimension (financial and business risk). It also comes equipped with a useful analytic tool, the contribution analysis, which allows users to identify drivers of risk, in absolute or relative terms, to define potential paths to creditworthiness improvement or deterioration.

Figure 2 presents the current credit risk profile of General Motors as provided by the PDFN based on last twelve months of data. The contribution analysis indicates that overall business risk is strong, but the company’s financial position is aggressive and is currently the main driver of overall PD estimate. A deep dive analysis shows a weak total equity position which in addition to profitability (EBIT/Total Assets) and efficiency (EBIT/Revenues), resulting in limited financial flexibility (Retained Earnings/Total Assets), represent the risk factors with the largest driver for the assigned credit risk score for General Motors.

Figure 2: Credit risk profile of General Motors (GM)

Source: S&P Global Market Intelligence (as of May 30th, 2018). For illustrative purposes only.

This case study exemplifies the value of PD Model Fundamentals, in providing predictive insights into companies’ creditworthiness and dynamic estimates of PD value and mapped credit score. Our model was trained and calibrated on default flags and is able to signal deterioration of credit quality well in advance of the actual bankruptcy event. The combination of both financial risk and business risk enables a comprehensive overview of a company's creditworthiness, while also providing an in-depth review of a company's credit risk profile to identify and distinguish the main sources of risk. S&P Global Market Intelligence leverages leading experience in developing PD models to achieve a high level of accuracy and a robust out-of-sample model performance. The integration of PDFN into the S&P Capital IQ platform allows users to access a global pre-scored database with more than 45,000 public companies and almost 700,000 private companies, obtain PD values for single or multiple companies, and perform a scenario analysis.

1 S&P Global Ratings does not participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the uppercase credit ratings issued by S&P Global Ratings.

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Credit Market Pulse March 2018 Issue

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Webinar Replay: Outlook On Credit Markets And The Implications For Systemic Risk

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.