Banker Who Fled Kim Jong Il Says New Leader to Open N. Korea

December 29, 2011, 6:03 AM EST By Jiyeun Lee and Eunkyung Seo

(Updates with central bank comment in 11th paragraph. See EXT2 for more coverage on North Korea.)

Dec. 29 (Bloomberg) -- Kim Jong Un may relax state controls over North Korea’s economy and ease the isolation entrenched by his late father’s nuclear weapons program, according to a banker who fled the communist state after years working for the regime.

Kim’s Swiss education and his reported fondness for basketball -- a sign he’s a team player -- may make him more open to change than his late father, Choi Se Woong, former deputy governor of the North’s Korea Reunification Development Bank, said in an interview in Seoul this week.

“It’s better for North Korea to have Kim Jong Un as their leader than anyone else,” said Choi, 50, who defected to the South in 1995 and is the son of a former North Korean finance minister. “Kim Jong Un will seek to start a market economy but it will be uniquely North Korean-style, different from China, South Korea or any other capitalist country.”

Choi joins the growing number of people saying Kim will push for a more open North Korea as he takes over from his father Kim Jong Il, who passed away this month after a 17-year reign. Templeton Emerging Markets Group Executive Chairman Mark Mobius said last week he expects the North to adopt China-style deregulation, and a poll of South Koreans this month showed almost half expect the North to become more open under new leadership.

‘Exquisite Toys’

North Korea’s gross domestic product, about one-fortieth that of the South, shrank in four of the past five years after attempts to liberalize the economy failed under its stated policy of self-reliance. Still, it sits on deposits of minerals estimated at almost 7,000 trillion won ($6 trillion), according to South Korea’s state-run Korea Resources Corp.

“It’s a country with undiscovered minerals and the technique to make missiles,” Choi said. Have you seen the exquisite toys they make, like helicopters? Just think what it would be like if these skills were applied to manufacturing.’’

Kim may pursue more projects such as in Gaeseong, home to a joint industrial complex where South Korean-built factories employ workers from the North, said Choi, now a managing director at Eugene Investment & Futures Co. in Seoul.

Any economic opening in North Korea would follow Myanmar, also known as Burma, another undemocratic Asian nation subject to sanctions. Secretary of State Hillary Clinton this month became the highest level U.S. official to visit Myanmar in more than five decades as the nation moved to release political prisoners. Clinton pledged to upgrade relations if Myanmar takes further steps to ease repression.

‘Last Stalinist Regime’

North Korea and Myanmar are among the few countries remaining largely disconnected from international commerce in a region that’s leading global economic growth.

“The sustainability of the world’s last Stalinist regime will ultimately be under greater pressure following a transfer of power and within the broader global context of political change, with nascent political reforms in Burma evidence that change is not limited to the Middle East,” Citigroup Inc. analyst Tina Fordham in London wrote in a note this month.

The South’s Bank of Korea said today it will monitor changes in the North because escalating geopolitical risks may unnerve financial markets, which could cause consumption and investment in the South to contract “severely.”

‘Knock-on Effects’

“The bank will keep a close eye on the evolution and knock- on effects of risk factors such as the situation in North Korea,” the South Korean central bank said in a statement.

Kim, who’s thought to be 28 or 29, isn’t too young to lead the nation because his father also had decision-making responsibilities in his 20s, Choi said. Though Kim Jong Il formally began to assume the nation’s highest posts three years after North Korean founder Kim Il Sung died, he had been groomed for decades.

The younger Kim may have attended the Liebefeld Steinhoelzli school in Berne, Switzerland during the 1990s under the alias Pak Un. Joao Micaelo, who attended the school at the time, told the Daily Telegraph last year he and Pak Un bonded over the difficulties of learning German, and their passion for NBA basketball and Michael Jordan.

North Korea, which refuses to abandon its nuclear weapons program in the face of global sanctions, has depended on economic handouts since the mid-1990s. Food aid is currently needed for about 5 million people, with one in three children physically stunted from a lack of nutrition, according to a report from the United Nations and World Food Programme.

North Korea’s Elite

Previous attempts to liberalize the North’s economy have backfired. In 2002, North Korea started its “most drastic” effort by letting prices and wages fluctuate, resulting in the spread of the black market, said Bahng Tae Seop, a senior fellow at the Samsung Economic Research Institute. That led to a widening gap between the poor and elite, Bahng said.

Choi was one of the elite. The second son of Choi Hee Byeok, who was finance minister during the 1980s, he attended the nation’s top college in Kim Il Sung University. Then he was a currency and gold dealer at Daesong Bank in charge of foreign- currency management for the North’s Workers’ Party before rising to the deputy governorship at the KRDB.

Though he fled 16 years ago to seek a better life, Choi said he’s still in touch with North Korean mentality and expects a smooth transition.

“North Koreans think it’s a ‘must’ that political power be inherited to the heir,” he said. “Kim will probably open up gradually and selectively, while tightening internal grip to keep his power.”

--Editors: Young-Sam Cho, Brian Fowler

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Takeovers Slump to Lowest in Year as Debt Crisis Saps Confidence

December 29, 2011, 6:34 AM EST By Serena Saitto

Dec. 29 (Bloomberg) -- The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012 as cash-rich companies hold off on major purchases.

Mergers and acquisitions have slumped 16 percent from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010, according to data compiled by Bloomberg. For the year to date, announced takeover volume has risen less than 3 percent to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal.

Tightening credit markets, the risk of a euro-zone collapse and stock-market swings have deterred companies from pursuing transformational deals that would spur sales growth, M&A bankers said. Earlier in 2011, more favorable conditions emboldened acquirers to part with stockpiled cash, such as Johnson & Johnson’s $21.3 billion bid for Synthes Inc. and Express Scripts Inc.’s $29.1 billion offer for Medco Health Solutions Inc.

“There’s definitely pent-up demand for M&A as well- capitalized companies continue to focus on opportunities for strategic acquisitions,” said Yoel Zaoui, co-head of global M&A at Goldman Sachs Group Inc. “The key driver for M&A, however, is confidence, and in Europe, at the moment, that is lacking.”

Seven of the year’s 10 biggest deals were announced before August, when European markets fell the most since October 2008 amid a global stock rout and Standard & Poor’s cut the U.S. credit rating. Goldman Sachs is the top adviser on global takeovers for 2011, with $537 billion of deals this year, followed by JPMorgan Chase & Co. and Morgan Stanley, Bloomberg data show. This year’s growth in M&A volume compares with a 24 percent jump in 2010.

‘Wait and See’

Europe’s financial crisis will stifle lending, push the region into recession and weigh on the U.S. economy through early 2012, Jan Hatzius, Goldman Sachs’s chief economist, said on a Nov. 30 conference call. The euro zone’s unemployment rose to 10.3 percent in October, the highest since the currency began in 1999.

As the European crisis deepened, “dealmakers entered a wait-and-see mode, and that’s where we are now,” said Paul Parker, global head of M&A at Barclays Plc in New York. “Offsetting forces such as companies’ cash piles and low valuations should drive the recovery of M&A activity in the second half of the year.”

The MSCI World Index of about 1,600 companies trades for 12.6 times reported earnings, showing equities in developed economies are cheaper than they’ve been more than 95 percent of the time since 1995, according to data compiled by Bloomberg. Those companies are also sitting on $5.3 trillion in cash, the data show.

Antitrust Hurdles

Companies that did tap funds this year may not be able to complete their purchases as regulatory scrutiny threatens to derail more takeovers. Express Scripts’s offer for Medco, which would create the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans, has prompted state inquiries over whether the combination would command too much market power.

AT&T abandoned efforts to buy T-Mobile USA from Deutsche Telekom AG this month after the U.S. Justice Department sued the companies in August, saying a combination would substantially reduce competition. Companies contemplating similar deals may hold off until the next presidential election in the hope that a Republican White House would make it easier to win approval for big transactions, said Jeffrey Silva, a Washington-based policy analyst with Medley Global Advisors.

European Deals

Deutsche Boerse AG and NYSE Euronext this week delayed the deadline for completing their merger until March 31 as the exchange operators try to persuade European Union regulators to approve the deal. While the U.S. cleared the combination, the EU has told the companies that concessions they offered to allay antitrust concerns don’t go far enough, two people familiar with the talks said this month.

Dealmaking involving European companies rose 2.2 percent this year, bolstered by the first half. For the fourth quarter, announced volume sank 14 percent from the previous three months to $161.4 billion. Valuations have also dropped, making the MSCI Europe Index even cheaper than the MSCI World Index at 10.8 times earnings. That may create opportunities for buyers from nations such as China.

“Chinese companies have been very successful at buying natural resources in emerging markets, and they are now very supportive of buying industrial assets in Europe,” said Thierry d’Argent, global head of M&A at Societe Generale SA in Paris.

Asia Pacific

French dairy-product maker Yoplait and the aviation unit of Royal Bank of Scotland Group Plc both attracted interest from Chinese bidders this year, according to people with knowledge of those negotiations.

The value of acquisitions involving Asia Pacific companies rose 3.8 percent to $698.4 billion this year, according to Bloomberg data. The biggest deal was Nippon Steel Corp.’s proposed takeover of Sumitomo Metal Industries for about $22 billion, including debt. That was followed by BHP Billiton Ltd.’s purchase of Houston-based oil and gas explorer Petrohawk Energy Corp.

Foreign buyers also spent more on Asia Pacific in 2011 than any year since 2007, according to the data. The largest overseas bid was SABMiller Plc’s $10 billion takeover of Australian beer maker Fosters Group Ltd., the data show. Among Asian countries, Japan overtook China as the biggest acquirer of foreign assets for the first time since 2008 after the March 11 earthquake spurred companies to retrench.

Japan’s Takeovers

“Japanese industries had been shrinking, and companies needed growth drivers,” said Kenji Fujita, head of M&A advisory at Mitsubishi UFJ Morgan Stanley Securities Co., the Tokyo-based investment banking venture of Morgan Stanley and Mitsubishi UFJ Financial Group Inc. “The earthquake raised the urgency for that.”

Japan’s Kirin Holdings Co. bought Brazilian beermaker Schincariol Participacoes e Representacoes, and China Petrochemical Corp., or Sinopec, agreed to purchase a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

Still, after a record-high volume of $161 billion in 2010, the volume of announced deals involving Brazilian companies tumbled to $98.3 billion this year as the Brazilian real strengthened while the country’s economy slowed.

“I’m glad to leave 2011 behind,” said Flavio Tavares Valadao, head of corporate finance at Banco Santander do Brasil SA, based in Sao Paulo. “Deals are difficult to make and companies are worried for the future.”

Brazilian Deals

Santander worked on Telefonica SA’s merger of its Brazilian fixed line unit, Telecomunicacoes de Sao Paulo SA’s with its mobile unit, Vivo Participacoes SA. The Spanish bank also advised Spain’s Iberdrola SA on the acquisition of Brazil’s Elektro Eletricidade & Servicos SA for 1.77 billion euros ($2.3 billion).

Dealmakers predict that technology, industrials, natural resources and health care will continue to be the sectors most actively consolidating, especially if European policy makers can prevent financial turmoil from spreading to more countries.

“Companies need to have more confidence that we aren’t going to have a break-up of the euro,” said Mark Shafir, global head of M&A at Citigroup Inc. “If you got that cleared up, then the first half of next year could be a lot better than the second half of 2011 has been.”

--With assistance from Aaron Kirchfeld in Frankfurt, Jeffrey McCracken in New York, Takahiko Hyuga in Tokyo, and Jacqueline Simmons and Matthew Campbell in Paris. Editors: Julie Alnwick, Jennifer Sondag.

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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Wendy's Reenters Japan with Exotic Fare

December 29, 2011, 5:36 AM EST By Cheng Herng Shinn

(Updates with analyst comments in eighth paragraph.)

Dec. 28 (Bloomberg) -- Wendy’s Co., the third-biggest U.S. fast-food chain, added goose-liver pate and truffles to burgers as it invests as much as $200 million on a return to Japan two years after leaving the country.

The Japan Premium sandwich sells for 1,280 yen ($16) at Wendy’s in Tokyo’s Omotesando luxury shopping district, the first of a targeted 100 shops. “We think the fast-food market here is ready for something different,” Ernest Higa, chief executive officer of Wendy’s Japan LLC, said in an interview at the restaurant’s opening yesterday.

Wendy’s is re-entering Japan under a plan to expand outside the U.S., where it got 92 percent of revenue in 2010, after posting losses in six of the past eight quarters. The Dublin, Ohio-based chain is focusing on the world’s second-biggest fast- food market first as it looks for operating partners in China and Brazil.

“Japan is the most important of the three to me, because we are actually selling burgers here today,” Darrell Van Ligten, international division president, said in an interview in Omotesando. The company expects to eventually expand to about 700 restaurants in Japan, compared with about 3,300 for McDonald’s Corp.’s local unit, the nation’s biggest fast-food burger chain.

Competitive Environment

Wendy’s ended a 30-year run in Japan in 2009 after its partner Zensho Holdings Co. declined to renew the agreement, saying it would focus on building its main Sukiya chain of beef- bowl restaurants.

“Our partner had a pretty significant business which was their primary focus,” Van Ligten said. “Given the size of the different businesses, Wendy’s wasn’t as much of a focus area as we would have liked it to be.”

In coming back to Japan, the burger chain is counting on its premium menu to lure customers in a “very, very competitive” environment, Higa said.

“This is an aging society which has more single people who just want a meal fast, but restaurants are too expensive so fast food is the correct sector to be in,” Kyoichiro Shigemura, a Tokyo-based senior analyst at Nomura Holdings Inc., said by telephone today.

Wendy’s menu pits it against Japanese rivals including Mos Food Services Inc.’s Mos Burger in terms of taste and Lotteria Co., which has a 1,800 yen Matsuzaka beef burger, for premium items, Shigemura said. “The competition is really stiff,” he said.

Slowing Growth

Japan’s outlook for slow economic growth adds to the pressure on Wendy’s to find a new niche in the industry.

The Bank of Japan last week said the economy’s rebound from the March 11 earthquake has come to a pause, lowering its evaluation for a second straight month because of the local currency’s strength and a cooler global expansion.

McDonald’s Holdings Co. Japan forecasts sales of 304.5 billion yen this year, a third straight annual decline and 25 percent less than 2008 revenue.

“With the economic situation, you need to bring something that is unique and exciting,” Higa said. The “new fashion” of high-end fast food will give the chain what it needs to thrive, he said.

Wendy’s Japan is a joint venture between Wendy’s Co., which owns 49 percent, and closely held Higa Industries Co., with 51 percent.

Wendy’s intends to triple the number of restaurants outside the U.S. to about 1,000, Chief Executive Officer Emil Brolick said on a conference call last month, without giving a time frame.

--With assistance from Subramaniam Sharma in New Delhi and Shunichi Ozasa in Tokyo. Editors: Dave McCombs, Garry Smith

To contact the reporter on this story: Cheng Herng Shinn in Tokyo at hcheng52@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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Guide To Overseas Investing

Italy Sells EU7 Billion of Bonds as Yields Fall at Auction

December 29, 2011, 6:03 AM EST By Alessandra Migliaccio

(For more on the euro crisis, see EXT4 )

Dec. 29 (Bloomberg) -- Italy sold 7 billion euros ($9 billion) of bonds and its borrowing costs fell in the country’s final debt sale of the year.

The Treasury in Rome sold 2.5 billion euros of bonds due in 2014, less than the 3 billion euro maximum for the sale, to yield 5.62 percent, down from 7.89 percent at the previous sale on Nov. 29. The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29. Italy also sold about 2 billion euros of bonds due 2021 and a floating-rate security due 2018.

The sale came one day after Italy auctioned 9 billion euros in treasury bills for 3.251 percent, about half the rate from the previous auction on Nov. 25 after the European Central Bank last week offered banks unlimited funds for three years.

The ECB’s measures “have clearly helped” and yesterday’s sale augurs well for today’s “more challenging auction of longer-term paper,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mail.

Prime Minister Mario Monti will probably outline new measures aimed at boosting growth in Europe’s third biggest economy that may include moves to open up closed professions, change labor laws to spur hiring and steps to lower fuel prices. The economy contracted 0.2 percent in the third quarter and probably also shrank in the three months through December, meaning Italy may have entered its fourth recession since 2001.

Yesterday’s auction was Italy’s first since the ECB loaned 489 billion euros to European banks in a bid to keep credit flowing to the 17-nation economy while lawmakers tackle the sovereign debt crisis. Italian lenders borrowed 116 billion euros as part of the tender on Dec. 21, according to a person with direct knowledge of the loans.

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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Hedge-Fund Managers Miss Big Commodity Rally

December 28, 2011, 1:16 PM EST By Elizabeth Campbell

(For more commodity columns, click CMMKT.)

Dec. 27 (Bloomberg) -- Hedge funds reduced bets on higher commodity prices to the lowest level since 2009 just as raw materials headed for their biggest weekly rally in two months.

Money managers cut their combined net-long position across 18 U.S. futures and options by 15 percent to 454,512 contracts in the week ended Dec. 20, the lowest since March 2009, data from the Commodity Futures Trading Commission show. The Standard & Poor’s GSCI gauge of 24 commodities climbed 4.5 percent last week, erasing this year’s declines and pushing the index toward its third consecutive annual advance.

While the S&P GSCI is 15 percent below the 32-month high reached in April, prices gained last week on signs the U.S. economy is proving resilient. Durable-goods orders rose in November by the most in four months, and jobless claims unexpectedly fell to the lowest in more than three years. Concern that shortages will emerge in commodities from copper to crude oil spurred Goldman Sachs Group Inc. to stick with a bullish outlook this month even as funds cut their holdings.

“Commodities are in the process of bottoming,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “You’re going to find out that the U.S. economy is going to continue to grow much faster than people thought. You’re going to see people coming back to commodities.”

Commodity Rally

Last week’s gain in the S&P GSCI was the biggest since Oct. 14 and left the gauge up 2.2 percent in 2011. It rose 20 percent in 2010 and 50 percent a year earlier. The MSCI All-Country World Index of equities climbed 3.1 percent last week, paring this year’s decline to 9.3 percent. The U.S. Dollar Index, a measure against six trading partners, dropped 0.4 percent. The yield on 10-year Treasuries climbed 18 basis points, or 0.18 percentage point, to 2.02 percent, Bloomberg Bond Trader prices show.

Twenty of the 24 raw materials tracked by the S&P GSCI rose last week. Gasoline surged 8 percent to $2.6872 a gallon. Wheat capped six consecutive daily advances, the longest winning streak since January. Oil added 6.6 percent, the biggest weekly gain since October. The commodity gauge climbed as much as 1.4 percent today.

Commodities will return 15 percent in the next 12 months, led by industrial metals and energy, because the global economy is likely to avoid another recession, Goldman said in a report Dec. 1. That’s still the bank’s view, Sophie Bullock, a London- based spokeswoman for the bank, said in an e-mail Dec. 15.

Durable Goods

U.S. bookings for equipment meant to last at least three years rose 3.8 percent after no change in the prior month, a period that was previously reported as a contraction, data from the Commerce Department showed on Dec. 23. Sales of new U.S. homes rose in November to a seven-month high, the department said the same day.

The S&P GSCI is still headed for a 0.7 percent monthly decline after Europe’s debt crisis escalated. Funds are net- short, or betting on price declines, in copper, cocoa, soybean meal, wheat, soybean oil and natural gas, CFTC data show. Crude- oil holdings fell 11 percent to the lowest since Oct. 18, and net-long positions in gold dropped 13 percent to the lowest since April 2009.

European Central Bank President Mario Draghi said Dec. 19 that lenders in the euro region will experience “very significant” funding constraints next year and there are “substantial downside risks” to the economy. The Dollar Index rallied 2 percent this quarter as investors sold other assets for the perceived safety of the currency. The gauge declined in six of the past nine years and is 31 percent lower than at the start of that period.

‘Hefty Declines’

“Going into 2012, there’s a very, very high probability that we can see some fairly hefty declines in the commodity markets,” said Stephen Hammers, the Nashville, Tennessee-based chief investment officer at Compass EMP Alternative Strategies Fund, which has about $500 million of assets. “There’s a tremendous amount of uncertainty about what is going to happen around the world in terms of the global economy.”

Pacific Investment Management Co., the world’s largest bond fund, said the U.S. may stagnate next year. Europe may contract and Chinese growth may slow, Saumil H. Parikh, who leads Newport Beach, California-based Pimco’s cyclical economic forums, said in a report posted on its website on Dec. 22.

The economy in China, the biggest consumer of everything from nickel to soybeans, may expand 8.5 percent next year, down from 9.2 percent this year and 10.4 percent in 2010, according to the median of 19 economist estimates compiled by Bloomberg.

$490 Million

Investors pulled $490 million from commodities funds in the week ended Dec. 21, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals outflows totaled $1.59 billion, and non- precious-metal commodities had net inflows of more than $1 billion, said Cameron Brandt, the director of research.

“Commodities, ex-gold, had one of their better weeks,” Brandt said. “We are seeing some more durable faith in the U.S. recovery at the moment.”

Confidence among U.S. consumers climbed more than forecast in December, to a six-month high, according to the Thomson Reuters/University of Michigan sentiment index. The increase to 69.9 from 55.7 in August is the biggest four-month increase since the period ended June 2009.

Builders broke ground in November on more U.S. houses than at any time in the past 19 months, led by a surge in multifamily units, the Commerce Department said Dec. 20.

China Copper Imports

Refined-copper imports by China climbed to the highest since June 2009 last month, the General Administration of Customs said Dec. 21. Global oil demand will rise 1.4 percent next year, with China accounting for more than a 10th of the total, according to the Paris-based International Energy Agency.

A measure of 11 U.S. farm goods showed speculators cut bullish bets in agricultural commodities by 7.9 percent to 202,544 contracts, the lowest since March 17, 2009. Investors trimmed bullish bets on coffee by 48 percent to 2,954 contracts, the lowest since Aug. 9.

“People are focusing too much on the day to day in Europe,” said Michael Cuggino, who helps manage about $15 billion of assets at Permanent Portfolio Funds in San Francisco. “There’s an overall environment that remains favorably biased towards an increase in commodity prices heading into 2012.”

--With assistance from Mark Shenk in New York. Editors: Millie Munshi, Patrick McKiernan

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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