BY ED CROPLEY

Shipping giants are heading for port, but not in the traditional sense. Companies like Denmark’s A.P. Moller-Maersk and Germany’s Hapag-Lloyd are riding a record valuation wave thanks to a year of sky-high container rates. Gobbling up land-based logistics rivals would be one use for the cash burning a hole in their pockets. It would also serve as a handy buffer against future supplychain crunches.

Pandemic upheaval has benefitted the shipping industry. Government support, such as cheques mailed out to U.S. households, fuelled a consumer spending spree. Freight rates have soared. In September, a container from China to New York cost $22,000, eight times its 2019 price. That has boosted shipping firms’ bottom lines. Market leader Maersk’s EBITDA will nearly treble in 2021 to over $23 billion, according to analyst estimates compiled by Refinitiv. The firm, which the market valued at $59 billion in mid-December, is likely to be carrying over $17 billion of net cash in 2022.

The normal response would be for chief executives like Maersk’s Soren Skou to splash out on ever bigger boats. Yet March’s blockage of the Suez Canal shows the dangers of excessive bulk. And the arrival of lots of new vessels in three or four years may overwhelm demand for container space, cratering freight prices and shipping company margins.

A smarter move may be to invest in getting containers seamlessly from port to customer. Danish shipping and freight specialist DSV bought the logistics unit of Kuwait’s Agility Public Warehousing in April for $4.1 billion for just such a reason. France’s CMA CGM and Maersk both pulled similar moves in December. At $51 billion, DSV is too big even for Maersk. Switzerland’s Kuehne und Nagel, at $34 billion, would also be a challenge. However, its shares shed 25% in September and October as freight rates eased.

If those trends continue, the company could come into play in 2022. U.S. land-transport specialist CH Robinson Worldwide, now worth $13 billion, would be another option. Bringing sea and land services under one roof would allow for cost savings. It would also make it easier for operators to plot a course through future supply-chain bottlenecks and charge a premium for speedier delivery. Danish wind turbine giant Vestas Wind Systems, which has struggled to get parts throughout 2021, signed just such a deal with Maersk in November. In 2022, there are a lot of incentives for sailors to step ashore.

First published December 2022

BY AIMEE DONNELLAN

Big Pharma will need to tool up in the data arms race. Drug giants like AstraZeneca are pouring $160 billion a year into unearthing new treatments. Artificial intelligence could provide a shortcut, by helping discover new treatments and getting them to market sooner. That makes firms like Exscientia, Relay Therapeutic and Recursion Pharmaceuticals hot property. 

The pandemic has given a tangible example of the value of machine learning, a kind of computer programme that processes vast amounts of data quickly and spots trends that humans might miss. Technicians at UK-based BenevolentAI realised by running patients’ medical history and previous trial results through their algorithms that Baricitinib, an arthritis treatment, might also help Covid-19 sufferers. 

Machine learning could help drugmakers develop new remedies, not just rebadge old ones. Take gene therapy, which involves tinkering with patients’ DNA to prevent diseases such as cancer. By analysing millions of potential patients’ genetic codes and medical history, an artificial intelligence programme could identify those most likely to benefit from a treatment. That could mean faster trials and more efficient drugs. 

Time is money in the pharmaceutical industry. It can currently take as long as 10 years to get a drug developed, tested, approved and on the market. That leaves perhaps just another 10 years before patents expire and other drugmakers can copy it. But pharma executives reckon machine-learning tools could get a treatment to market two years earlier, implying 12 years before loss of exclusivity, or 20% more revenue over a drug’s life.  

Big Pharma is already busily buddying up with artificial intelligence tech firms. Pfizer, for example, is working with IBM Watson to develop cancer treatments. Yet companies will increasingly need to bring machine learning technology in-house to fully analyse data and secure proprietary access to the results. 

Several machine learning specialists have listed in recent years. And UK group BenevolentAI merged with a Dutch blank-cheque company founded by Michael and Yoel Zaoui. The combined market value of Exscientia, Schrodinger, Relay, Recursion, BenevolentAI and AbCellera Biologics is less than $16 billion, equivalent to just one-tenth of Big Pharma’s annual R&D costs. Given the potential benefits, it’s unlikely those companies will stay independent for long.

First published December 2021

BY SHARON LAM

Canada often has little choice but to bend to the heftier market forces of its neighbor to the south. The cannabis business was an exception after Ottawa legalized weed in 2018 and gave Canadian companies a lead. They’ve been angling for a stake in the larger U.S. market. But they need to act soon to make the most of the remaining early legalization buzz.

There were about $2 billion in cannabis sales in Canada in 2020, according to Bernstein analysts. That pales beside $17.5 billion in legal sales in the United States, where pot remains illegal at the federal level. Even without a change in that situation, Bernstein expects the American market will be worth some $40 billion a year by 2026.

The introduction in November by Republicans in Washington’s House of Representatives of legislation to decriminalize marijuana is one move that has lit up still higher hopes. But there’s already enough at stake to encourage multistate operators – or MSOs – like Green Thumb Industries and Cresco Labs to ramp up production capacity and strengthen their balance sheets.

Meanwhile the high after Canada legalized the business is fading. Unrealistic heady valuations for pot companies have come down; Ontario-based Canopy Growth recently pushed back its profitability expectations; Hexo and others have slashed their workforces.

And they are running out of time. Valuation multiples relative to revenue are still higher for Canada’s operators, roughly in line with technology names like Meta Platforms and Netflix, despite the bigger potential upside of legalization to the south and what Bank of Montreal reckons is a more profitable U.S. operating model given MSOs’ ability to vertically integrate, among other things. That suggests that even if the feds don’t make marijuana fully legal, the differential may not last.

Canadian purveyors with the merger munchies need to find their targets before then. One structure that is being used is a kind of option on federal action. Canopy Growth boss David Klein, for instance, shelled out nearly $300 million in October for the right to acquire Colorado-based edibles maker Wana if the United States makes pot legal, after striking a similar deal with Acreage. There’s risk in committing capital up front, but the moment may pass if Canadian firms don’t grab it.

First published December 2021

BY AIMEE DONELLAN

After a strong run for clicks, bricks will be back on the agenda in 2022. Amazon.com and Ikea are among the many retailers planning to rent or buy new locations. In theory, it’s a good sign for embattled landlords. With so much available space, however, their negotiating leverage is weak. As a result, property stocks will be driven deeper into the bargain bin.

For the past decade, shopkeeping titans including Zara owner Inditex and H&M have been rapidly shifting their businesses online. During the pandemic, that trend accelerated with online purchases in the United States soaring to represent a record 20% of total sales in 2020, according to e-commerce research firm Digital Commerce 360. That has pummelled the valuations of mall owners such as Unibail-Rodamco-Westfield, Land Securities and Klépierre, which depend on a steady stream of tenants vying to occupy their stores. The trio trade at an average discount of about 40% to their net asset value.

The provisional end of lockdowns is changing behaviour again. Shoppers are seeking out human interaction, prompting brands to scramble for more physical space. Shoemaker Allbirds, freshly capitalised from its U.S. initial public offering, intends to open hundreds of stores. Ikea recently paid $500 million for Topshop’s former flagship building on Oxford Street. In China and India, some 90% of retailers told commercial real estate services provider CBRE they intend to expand their store portfolios in 2022.

These evolving trends demand a fresh look at property owners and managers. The trouble is that the volume of empty storefronts leaves them in a weak spot. In Midtown Manhattan retail hubs, for example, the vacancy rate is 30%, according to the Real Estate Board of New York. On London’s Oxford Street, it’s 14%, more than five times the 15-year average, says real estate consultancy Knight Frank.

Under the circumstances, retailers can demand rock- bottom rents and extra perks. In regional parts of Britain, Legal & General and others are offering new tenants two years of free rent. Mall owners Hammerson and Landsec also have revised leasing terms. Short-term contracts and ones linked to merchant revenue, previously shunned as uneconomic, are on display. It’s hard to invest in landlords when they’re effectively giving away the store.

First published December 2021