Everything You Need to Know on Wednesday: Brookfield Seeks Close to €10 Billion Debt for Grifols Bid

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,389.30, up 0.53% from previous close

● Cooling inflation leaves door to Bank of Canada rate cuts 'wide open'

● Powell confronts policy crossroads with all eyes on Jackson Hole

● Brookfield seeks close to €10 billion debt for Grifols bid

● Couche-Tard will have to raise equity in Seven & I bid: analysts

Today, the Canadian dollar is trading at 73.45 cents US, a slight increase as previous close.

S&P/TSX 60 Index Standard Futures are trading at 1,389.30, up 0.53% from previous close.

The inflation rate in July cooled to 2.5 per cent, its slowest pace since March 2021 and down from 2.7 per cent in June, Statistics Canada said on Tuesday.

The core measures of inflation, the data the Bank of Canada prefers to look at when making monetary policy decisions, also decelerated annually in July. Statistics Canada said consumer price index (CPI) common was 2.2 per cent, CPI-trim was 2.7 per cent and CPI-median was 2.4 per cent.

“As we had last July, significant increases in a lot of costs on a month-over-month basis, it’s good it wasn’t replicated this year,” said Dawn Desjardins, chief economist at Deloitte Canada. “It does give scope for the inflation rate to either continue to tick down because of that base-year effect or hold steady, I don’t think we’re seeing a lot of upward pressure on prices.”

Even shelter inflation, one of the main price pressures, slowed in July to 5.7 per cent year over year, down from 6.2 per cent in June, caused by downward pressures in rent, mortgage interest costs and fuel oil.

Year-over-year mortgage interest costs fell slightly to 21 per cent in July from 22.3 per cent in June. Similarly, year-over-year rent inflation slowed to 8.5 per cent in July compared to 8.8 per cent in June. Fuel oil and other oils rose by 3.5 per cent in July, compared to a 10.5 per cent increase in June.

Economists say the slowdown in inflation only reinforces the case for the Bank of Canada to cut its policy rate in September and at its meetings for the rest of the year.

Chair Jerome Powell will usher in the next chapter in the U.S. Federal Reserve’s inflation battle on Friday, when he’s expected to set the table for an interest-rate cut while reassuring investors that policymakers can stave off a sharp economic slowdown.

The hotly anticipated speech at the Fed’s annual gathering in Jackson Hole, Wyoming, comes at a high stakes moment for the U.S. central bank and the US$27 trillion Treasury market. Powell and his colleagues appear on course to lower borrowing costs just seven weeks before the presidential election, a precarious task that will put the Fed chief and his colleagues under intense public scrutiny. It also comes as officials pay increasing attention to the cooling labour market after years of laser focus on price pressures.

“The question is: Will we have a policy error? That’s why the market’s teetering on edge around the Jackson Hole statement,” said Joseph Brusuelas, chief economist at RSM US LLP. “What we need to hear from the chairman is where the Fed is on the potential policy pivot.”

Investors have been on edge as they try to anticipate the pace and size of the cuts ahead. July’s labour-market figures set off a serious bout of market volatility in early August, when the S&P 500 Index of U.S. stocks lost more than six per cent in three trading days. Treasuries rallied and, for several days, traders predicted the Fed would launch rate cuts in September with a larger-than-usual move of 50 basis points.

Powell and fellow policymakers have mistepped before. They have deftly guided inflation back toward their two per cent target, but that came after they failed to move quickly enough to stem rising inflation during the pandemic. Fed officials are now determined to avoid a similar wreck on the employment front just as price pressures cool.

The Toronto-based investor has asked banks to put up the funds to refinance Grifols’ existing debt, which includes loans and high-yield bonds, according to the people, who asked not to be named because the talks are private. Participating banks would commit to offer the financing before selling it on to investors.

The funds could be needed as the take-private purchase would trigger a clause that allows bondholders to demand the company pay them back at above par — well above where some of its bonds are currently trading.

Grifols’ 2028 bonds headed for a record gain after the Bloomberg report was published, jumping more than 6 cents to near 94 cents on the euro, while the company’s shares climbed as much as 6.4 per cent in Madrid.

The debt-raising plans follow the firm saying last month that Brookfield and the Grifols family had agreed to consider a bid. Including debt, the deal would likely rank as the biggest takeover of a publicly-traded European company since at least 2022, according to data compiled by Bloomberg.

Couche-Tard would need to raise between $12 billion and $18 billion of equity to keep leverage down and cover the transaction price, which hasn’t yet been announced, TD Cowen analyst Michael Van Aelst wrote in a note to clients Monday. They will also need to navigate the synergies, which could add over $2 billion in Ebitda within three years of the deal’s closing, according to Cowen’s calculations.

But if the Circle K operator can pull it off, there’s a potential 30% in upside to its earnings per share, Van Aelst said.

A portion of the deal is likely to come through equity financing, which could lead the company to pursue a US listing, according to Raymond James Financial Inc. analyst Bobby Griffin.

“Lastly, while there are still a lot of unknowns and questions, our initial take on this potential deal is favorable (early investor feedback has been favorable as well),” Griffin said in the Monday note.