Financial Review

M&A Boatload

Sinclair Noe — September 6, 2016

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DOW + 46 = 18,538
SPX + 6 = 2186
NAS + 26 = 5275
10 Y – .05 = 1.54%
OIL – .06 = 44.38
GOLD + 22.70 = 1350.40

Stocks posted modest gains but it was good enough for a record high close for the Nasdaq Composite. Also, the Russell 2000 index briefly touched a 52-week high of 1,254, and closed up fractionally just above 1,253.

We have a boatload of M&A activity:
Bayer has raised its offer for Monsanto to $127.50 a share, bringing the total value of the potential deal to over $65 billion, which would be the largest all cash takeover on record. It’s the second time Bayer has raised its bid, having started at $122 a share back in May before offering $125 in July.

Any merger would still be subject to regulatory approval.  It’s also the latest in a string of deal activity in the chemical sector: ChemChina looks to buy Syngenta for about $43 billion, while Dow Chemical and DuPont are in the process of a $130 billion tie-up.

ChemChina has secured commitments from 17 lenders on a $12.7 billion loan for its purchase of Syngenta. ChemChina agreed to buy Syngenta for $43 billion earlier this year in a deal that would transform it into the world’s largest supplier of pesticides and agrochemicals. It received takeover approval from the U.S. last month, though the deal is still subject to antitrust review by regulators worldwide.

General Electric has agreed to acquire two European 3-D printing companies for a combined $1.4 billion, tapping into manufacturers’ growing demand for digital technologies. Both Arcam and SLM Solutions make machines that can print metal parts used in aircraft components such as turbines. While GE’s Aviation unit has so far been the most active in using the 3D printing technology, parts are also being designed in its Power, Oil & Gas and Healthcare units, as well as across GE’s services businesses.

Volkswagen’s trucks division announced a partnership with Navistar. VW plans to invest $256 million in Navistar at $15.76 a share — a 12% premium to Friday’s closing price — for a 16.6% stake in the company. Navistar said cost savings will come from procurement and technology collaboration, rather than job cuts.

Enbridge, Canada’s largest pipeline company, said it would buy Spectra Energy Corp in an all-stock deal valued at about $28 billion to create the largest North American energy infrastructure company. Enbridge’s biggest-ever deal comes as the company has been steadily expanding its North American pipeline network, which carries the bulk of Canadian crude oil to the United States.

EOG Resources said it would buy privately held Yates Petroleum Corp for $2.5 billion in stock and cash, acquiring acreage in the Permian Basin, one of the country’s most cost-effective oil fields.

Danaher Corp said it would buy molecular diagnostics company Cepheid in a deal valued at $4 billion, including debt, to strengthen its diagnostics business. Danaher will pay $53 per share in cash, a premium of 54 percent to Cepheid’s closing share price on Friday. Danaher develops technology for the dental, life sciences, diagnostics and environmental industries. Sunnyvale, California-based Cepheid develops molecular systems and tests for institutions to perform genetic testing for organisms and genetic diseases.

Navidea Biopharmaceuticals shares jumped as much as 76% this morning after the company said it had agreed to sell its Lymphoseek product to Cardinal Health for all current and future oncology diagnostic applications in North America. Under the deal, Navidea will receive additional payments of up to $310 million, tied to Lymphoseek sales.

Avolon Holdings, part of China’s acquisitive HNA Group is nearing a deal to buy the aircraft leasing assets of U.S. lender CIT Group for between $3 billion and $4 billion. CIT’s commercial air unit is one of the world’s top 10 lessors with about 330 aircraft.

Carl Icahn is buying out Federal-Mogul Holdings, the maker of Champion spark plugs. Icahn Enterprises already owns 82% of the company. The price of $9.25 a share is 86 percent more than Southfield, Michigan-based Federal-Mogul’s closing share price of $4.98 on Feb. 26, the day before Icahn Enterprises’ original proposal of $7. The bid was increased to $8 in June. Icahn also owns service and retail chains Pep Boys and Auto Plus.

MasterCard is expanding its deal with payment processor PayPal Holdings. PayPal’s partnership follows a similar deal with MasterCard’s larger rival Visa in July. PayPal will allow users to select a credit or debit card as the default payment method and share data on transactions made through MasterCard’s tap-and-pay feature, which allows the shopper to wave a card or mobile phone over a reader to pay. As part of the deal, MasterCard will allow PayPal users to withdraw cash from their accounts using a debit card and also waive the digital wallet fee it currently charges PayPal.

Last week, the ISM’s August report on the manufacturing sector came in weak, with the index falling below the 50 mark that delineates expansion from contraction. This morning the ISM’s nonmanufacturing index fell to 51.4 in August from 55.5 in July, and while it remained above the 50 mark, it was a sharp drop and the lowest reading since 2010.

The ISM reports undercut the whole theory of a second half rebound and it’s also undercutting the odds of a Fed rate hike in September. The Atlanta Fed’s GDPNow tracker pegs third quarter GDP at 3%, but the ISM report implies GDP for the quarter at about 0.5%. There is still plenty of talk that the Fed should not keep rates at emergency levels but the data makes that a tough move.

Congress returned from a seven-week recess today with only a few weeks to pass a stopgap spending bill to keep the government running before funding runs out on September 30. So, 3 weeks to come up with a budget – what could go wrong?  Lawmakers will likely clash over money to fight the Zika virus, as well as a bill to restore full lending authority to the U.S. Export-Import Bank.

The Reserve Bank of Australia held rates unchanged overnight in what was Glenn Stevens’ final meeting after 10 years as governor of the central bank. The Aussie dollar rose after the decision. On Thursday the European Central Bank is due to make its latest monetary policy decision, and expectations are low for any meaningful change in policy.

The ECB has passed the €1-trillion-euro mark for its purchases of government bonds, putting pressure on policymakers to address the scarcity of available assets when they meet in Frankfurt this week. Despite being well beyond the halfway point of the €1.7-trillion-euro program, inflation remains virtually non-existent. The latest figure from Eurostat showed euro area prices rising by 0.2% in the year to August – well below the central bank’s inflation target of just under 2%.

South Korea’s Hanjin Shipping plans to file for court protection in about 10 countries, including Canada, Germany and the U.K., this week, and later expand that to 43 jurisdictions to protect its ships from being seized by creditors. The world’s seventh-largest container operator by capacity filed for bankruptcy protection on Friday in the U.S. under Chapter 15, which deals with international insolvency matters. Hanjin’s court hearing is scheduled for today.

ITT Educational Services has shut down its for-profit technical schools, closing more than 130 campuses and leaving as many as 40,000 students stranded in one of the largest college closures in American history. ITT has been under investigation for misleading students. Last month, the feds demanded the company produce an additional $153 million in collateral, nearly double its $78 million in cash on hand, to cover possible losses that the government might incur if the company were to suddenly fail. ITT said it terminated the “overwhelming majority” of its more than 8,000 employees.

Students now enrolled at the company’s technical schools will be able to cancel any federal student debt they incurred for their education if they decide against transferring their credits elsewhere. Other former students are pushing to have their debts canceled by alleging that the company defrauded them into taking out the debt by advertising false job-placement rates.

21st Century Fox said it has settled a lawsuit with former anchor Gretchen Carlson, whose allegations that former Fox News chief Roger Ailes sexually harassed her led to his exit from the company. Terms of the settlement weren’t disclosed, but it is believed the settlement is in the range of $20 million. Also it is reported that a “handful” of settlements with other women who came forward alleging harassment have also been reached.

An Ohio woman has filed a proposed class action lawsuit against Mylan Pharmaceuticals in an Ohio county court, claiming sharp price hikes for the company’s EpiPen device violated the state’s consumer protection law and amount to price gouging. Mylan has raised the US price of EpiPen from less than $100 when it acquired the product in 2007 to more than $600

Apple has a big event scheduled for tomorrow; they are expected to unveil their new iPhone 7; they will do this amid much fanfare and hoopla. The new iPhone 7 will have several new features but still be very similar to the iPhone 6, with the major exception that it will be new and shiny.

A new skyscraper in downtown Los Angeles has become the tallest building west of the Mississippi River. Construction workers on Saturday placed a 10-ton spire atop the Wilshire Grand Tower. The spire looks like scaffolding, or maybe a radio tower, but it adds 160 feet to the 73-story building, making it 1,099 feet high. The tower is 81 feet higher than the nearby US Bank Tower, which had held the tallest building record since 1989.

The Wilshire Grand still has some construction work scheduled. When the $1billion building opens in early 2017, it will include an observation deck, a shopping mall, an Intercontinental Hotel, several luxurious high-altitude restaurants and office space.

Really tall buildings, earthquakes – brilliant.

Financial Review

No Small Thing

Sinclair Noe — May 13, 2015

 

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DOW – 7 = 18,060
SPX – 0.64 = 2098
NAS + 5 = 4981
10 YR YLD + .02 = 2.28%
OIL – .62 = 60.13
GOLD + 22.10 = 1216.10
SILV + .61 = 17.19

U.S. retail sales were flat in April. Americans went out to eat more and made plenty of Internet purchases, but we cut back on gasoline, autos, home furnishings and electronic goods, among other things. While March’s retail sales were revised up to show a 1.1 percent increase instead of the previously reported 0.9 percent rise, that was not enough to offset the general weak tone of the report. Retail sales excluding automobiles, gasoline, building materials and food services were also unchanged. Core retail sales correspond most closely with the consumer spending component of gross domestic product.

You can’t blame the bad winter weather for this report. The American consumer is acting in a most bizarre manner…, they are not spending, they are saving. The most recent data, from March, shows that Americans saved 5.3% of their pre-tax income, down from 5.7% in February. But the average savings rate so far in 2015 is higher than it was last year and in 2013. Savings spiked following the recession, but it was widely expected the savings rate would eventually fall back to the pre-bubble rates of 3% or 4%. Yea, that’s not happening.

Saving is a good thing but a recent survey by Moody’s Analytics showed some interesting demographic details. Younger people, under age 35 are not saving; they overspend and go into debt. Older people, over age 55, are saving at a 13% pace. This likely indicates that older people did not save enough and now they are playing catch-up. This also means that younger people are saddled by student debt and fewer good-paying job opportunities; as a result of not saving when they are young, they will never realize the full power of compounding on their savings. Low savings activity among today’s under-35 generation means that wealth inequality will continue to grow worse as time goes on. And in the short-term wages are likely to remain low because consumers are not spending.

The prices paid for imported goods fell 0.3% in April, as the lower cost of goods such as food and industrial supplies offset a rise in petroleum. Excluding fuel, import prices fell by 0.4% last month. For the past 12 months import prices have declined by 10.7%, mostly because of a steep drop in oil in the second half of 2014 and a stronger dollar. In a separate report, inventories at U.S. businesses rose 0.1% in March, compared with 0.2% growth in the prior month.

So, flat retail sales point to weak GDP growth and import prices are deflationary. Remind me again why the Federal Reserve is talking about raising interest rates.

For the first time since 2010, all four of the Eurozone’s largest economies (Germany, France, Italy and Spain) recorded growth. And for the first time since first quarter of 2011, the currency area grew more rapidly than both the U.S. and U.K. The Eurozone economy expanded by 0.4% at the start of the year, marking a pickup from the 0.3% growth recorded in the final quarter of 2014.

China released a flurry of data today that broadly missed estimates, suggesting that more monetary easing may be needed to kick start the world’s second largest economy. Industrial output rose 5.9% in April from the year-ago period, accelerating from 5.6% in March, although it missed forecasts. Retail sales and fixed asset investment also missed estimates.

Chicago may have to pay banks as much as $2.2 billion after Moody’s Investors Service dropped its credit rating to junk. The credit rating agency’s decision to cut Chicago’s $8.1 billion of general obligations two ranks to Ba1, one step below investment grade, allows banks to demand that the city repay debt early and exposes it to fees to end swaps contracts. The downgrade adds to the financial pressure on Chicago, which was already the lowest-rated of any big U.S. city except Detroit.

The Department of Agriculture has released its annual honeybee survey and it shows that beekeepers are starting to lose large numbers of bees during both the summer and winter. More than 40% of US honeybee colonies died in a 12 month period ending in April.

Responding to shareholder pressure to improve transparency, Wal-Mart said it will start directly disclosing to investors what it spends on lobbying on a state-by-state basis. The step would make Wal-Mart the first company in the Dow to itemize state expenditures on lobbying.

Toyota, Nissan, and Honda are expanding a huge global recall triggered by potentially fatal air bags made by Takata Corp.  They are recalling more than 6.5 million vehicles. Today’s announcements raise to roughly 31 million the number of vehicles recalled worldwide since 2008 over Takata air bag inflators, which can erupt with too much force, spraying shrapnel inside the car.

Seven deaths confirmed in the derailment of an Amtrak train near Philadelphia, hundreds more injured.  Investigators believe the train was traveling at 100 mph, or twice the speed limit when it derailed. The commuter rail route where the Amtrak train left the track was not governed by an advanced safety technology meant to prevent high-speed derailments. Positive train control, or PTC, automatically slows or even halts trains that are moving too fast or heading into a danger zone. Under current law, the rail industry must adopt the technology by year end. The NTSB is also looking into the condition of the tracks and equipment, as well as crew training. Coincidentally, the House Appropriations Committee voted today to approve a measure that cuts $260 million from Amtrak’s budget.

Danaher Corp. agreed to buy  Pall Corp. for $13.8 billion, and following the acquisition it will split itself into two independent, publicly traded companies. The new entities will be a “science and technology growth company” retaining the Danaher name and an industrial company.  Danaher’s business lines span water filters to dental equipment to medical-testing devices; Pall makes water-filtration and purification systems.

Five big banks are expected to reach settlements with US regulators over allegations that they manipulated currency markets; the deals could be announced next week.   Four of the banks – Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland – will likely enter pleas related to antitrust violations. The fifth bank, UBS, cooperated with the Department of Justice on antitrust violations – so they have immunity there – but the bank is still facing fraud charges in that case for failing to make disclosures to clients and counterparties. If this all sounds familiar, it is because the banks are repeat offenders. And now the DOJ might be ready to say enough is enough – at least in the case of UBS.

Back in 2012, UBS signed a non-prosecution agreement with the US to resolve a worldwide investigation into the manipulation of the London interbank offered rate, or Libor. UBS promised not to commit crimes for two years. That agreement was set to expire last year, but it was extended through December as the Justice Department investigated currency rigging. As part of the currency settlements, UBS is expected to plead guilty to a charge stemming from the Libor agreement.

The move by the DOJ would be a first for the industry; in other words, they have never done anything to a bank that signed a Non-Prosecution Agreement. The idea of an NPA is like putting a convict on parole; go on with your life but if you break the law again, you go to jail. But the banks that signed Non-Prosecution Agreements have repeatedly violated the law, and it is like the NPA was completely toothless. Leslie Caldwell, the head of the Justice Department’s criminal division, said in March she wouldn’t hesitate to tear up non- or deferred-prosecution agreements in exchange for banks’ cooperation in other probes.

So, even though UBS is a repeat offender, the most likely result is a fine, a slap on the wrist. The prosecutors could invoke the nuclear option, and pull the bank’s charter but nobody expects that. The fear is that pulling a charter could result in collateral damage; innocent people could lose their jobs; it could hurt the broader economy. So, even if the Department of Justice compels a guilty plea to criminal charges, the punishment will still be a fine. Because the law is different for the banksters than for regular people.

The New York Times will begin publishing articles directly to Facebook’s platform today. The project is called “Instant Articles” and it involves a partnership with 9 news organizations, including BuzzFeed, NBC News, The Guardian, and National Geographic. Under the terms of the deal, entire news stories from those partners will appear inside Facebook’s mobile app and be able to be read there, as opposed to the traditional practice of news publishers posting an excerpt and a link to their website.

On the surface, this sounds like a pretty straightforward exchange of value. Facebook gets content for its 1.4 billion or so users, and publishers get the reach that the social network provides, plus they get to keep any revenue from advertising that they sell around that content (if Facebook sells the ads, then publishers reportedly get to keep 70%.) But this is hardly a deal among equals. Facebook holds the advantage.  For Facebook, this is a way to engage their customers. If the NYTimes is not engaging, then Facebook will move on to the next thing. For the publishers, there aren’t many places to go.

Once upon a time, if you wanted news, you subscribed to the paper and maybe a few magazines. Times changed but the publishers did not. As a result of their own incompetence and/or inflexibility, combined with the shifting sands of the digital-media market, they have lost their grip on the audience that both they and advertisers are trying to reach.

Case in point: Cablevision will drop its $1 bid for the New York Daily News when second-round bid deadlines arrive next week. Cablevision couldn’t justify even the one dollar considering the paper’s poor financial condition. It’s reportedly losing $30 million each year with a heavy dependence on newsstand sales.

And so the face of journalism is now Facebook, or at least Facebook will now control much of the access to news; and that is no small thing.