— Central SOEs Depart from Big Four, EY Takes the Biggest Hit; High Rates Squeeze Affirm’s Profit; Software AG Rejects Bain’s Offer; Chicago Megaproject Delayed Three Years; Goldman’s Marcus Hits Record Savings Rate; WeWork Restructures with Strong Results; Related to Build Luxury Hotel at Miami Airport
1. Central SOEs Departing Big Four Hit EY the Hardest
n recent years, the Chinese government has advised state-owned enterprises to end their relationships with the U.S. Big Four accounting firms upon contract expiration and instead hire domestic auditors, in an effort to reduce risks related to data security.
Currently, the policy applies only to state-owned firms, though it could later be extended to private enterprises as well.
In 2021, the Big Four audited one-quarter of the 98 central SOEs in China. Among them, Ernst & Young (EY) derived 12% of its China revenue from SOE audits, while the other three firms each generated less than 4% from such business.
Howard Shatz, senior economist at RAND Corporation, stated that central SOEs have global operations and highly complex organizational structures, meaning that losing these clients would represent a substantial revenue loss for audit firms.
Central SOEs’ vast business scope and complex structure translate into extremely high audit fees.
______
2. High Interest Rates Squeeze Affirm’s Profit Margins
Buy-now-pay-later firm Affirm Holdings reported on Tuesday that its transaction margin revenue fell 9% to $167 million last quarter, and noted that higher funding costs will likely continue to weigh on revenue in the coming quarters.
Affirm said elevated benchmark interest rates and wider spreads are its primary challenges. Although the company has made pricing adjustments, it expects these to take several quarters to fully materialize in earnings.
In the first quarter, Affirm’s total revenue rose 7% to $381 million, with gross merchandise volume per customer up 34%. The company posted a net loss of $205 million, slightly better than analyst expectations. It forecast full-year revenue of $1.48 billion to $1.55 billion.
Affirm’s CFO said the company delivered strong results despite a challenging market environment.
______
3. Software AG Rejects Bain’s €2.5 Billion Offer
German software company Software AG has rejected a €2.5 billion ($2.7 billion) acquisition offer from Bain Capital and instead opted to continue negotiations with Silver Lake Management, despite Silver Lake’s lower bid.
On Tuesday night, Bain said it was willing to raise its offer to €34 per share, or even €36 under certain conditions. Software AG, however, quickly announced it would not pursue discussions with Bain, citing less favorable terms compared to Silver Lake’s €32 per share offer.
Bain’s bid was non-binding and subject to due diligence and financing. The firm had planned to merge Software AG with its portfolio company Rocket Software to leverage cross-selling opportunities.
Software AG stated that Silver Lake’s proposal better aligned with its long-term strategic direction.
______
4. Three-Year Delay for Chicago’s Mega Lincoln Yards Project
Chicago’s massive Lincoln Yards riverfront development project has been delayed three years due to the lack of approval from outgoing Mayor Lori Lightfoot.
Sterling Bay CEO Andy Gloor expressed bewilderment over the delay, noting that the project could generate substantial economic benefits, including significant construction and permanent job creation. He estimated the total economic impact at $8 billion to $10 billion.
Lightfoot is soon to leave office, but much of Chicago’s business environment has already deteriorated. Major corporations like Citadel and Boeing have relocated to other cities.
Construction on Lincoln Yards began in 2021 and is expected to take 10 years. Upon completion, it will offer 14 million square feet of office, lab, and residential space, including 6,000 housing units. One building is already completed, and many companies have expressed leasing interest.
The mayor’s decision to stall the project is surprising, given its potential to generate up to $10 billion in economic value.
______
5. Goldman’s Marcus Hits Record-High Savings Rate
Goldman Sachs’ online banking unit Marcus has recently raised the yield on its high-yield savings account to a record 4.15%, matching the interest rate offered through its Apple Card partnership with Apple.
Amid the current market environment, many financial institutions have increased their savings rates, allowing consumers to earn solid returns without sacrificing liquidity.
However, with the Fed potentially pausing or reversing interest rate hikes in the near future, high-yield rates may not last much longer.
In a time of high inflation and investment uncertainty, savings accounts and fixed-income options are seen as safer choices.
______
6. WeWork Restructures with Strong Q1 Results
On Tuesday, coworking giant WeWork reported an 11% year-over-year revenue increase to $849 million for the first quarter. The number of all-access members rose 36% year-over-year to 75,000.
In addition, the company narrowed its net loss to $299 million.
CEO Sandeep Mathrani noted that corporate demand in the U.S. and Canada noticeably increased in April.
WeWork also disclosed that it raised $1 billion in new financing and reduced its total debt by $1.2 billion. Mathrani said the restructured capital stack has made the company’s balance sheet and liquidity healthier. He added that the support from major shareholders and bondholders demonstrates confidence in WeWork’s model and future.
WeWork’s flexible leases are particularly suited to small and mid-sized companies that prefer to avoid long-term commitments.
______
7. Related to Build Luxury Hotel at Miami International Airport
Billionaire developer Stephen Ross’s Related Companies and Jeffrey Soffer’s Fontainebleau Development plan to jointly build a luxury hotel inside Miami International Airport.
The development will include 451 hotel rooms, a pool, large event spaces, valet parking, and a 24-hour restaurant and bar.
The four-star hotel will be designed by Arquitectonica and Concourse D.
The developers will lease a 1.8-acre site for 50 years. According to filings, the lease is projected to generate $240 million in revenue for Miami-Dade County over that period.
Reports indicate Miami International Airport served 50.6 million passengers last year, breaking its 2019 record.
______
This content is sourced from Financial Times, Bloomberg, and The Real Deal, among other financial news outlets.