TheChek News Flow

Prostitution

A personal choice

The internet is making the buying and selling of sex easier and safer. Governments should stop trying to ban it

STREET-WALKERS; kerb-crawlers; phone booths plastered with pictures of breasts and buttocks: the sheer seediness of prostitution is just one reason governments have long sought to outlaw it, or corral it in licensed brothels or “tolerance zones”. NIMBYs make common cause with puritans, who think that women selling sex are sinners, and do-gooders, who think they are victims. The reality is more nuanced. Some prostitutes do indeed suffer from trafficking, exploitation or violence; their abusers ought to end up in jail for their crimes. But for many, both male and female, sex work is just that: work.

This newspaper has never found it plausible that all prostitutes are victims. That fiction is becoming harder to sustain as much of the buying and selling of sex moves online. Personal websites mean prostitutes can market themselves and build their brands. Review sites bring trustworthy customer feedback to the commercial-sex trade for the first time. The shift makes it look more and more like a normal service industry.

The invisible hand-job

Moralisers will lament the shift online because it will cause the sex trade to grow strongly. Buyers and sellers will find it easier to meet and make deals. New suppliers will enter a trade that is becoming safer and less tawdry. New customers will find their way to prostitutes, since they can more easily find exactly the services they desire and confirm their quality. Pimps and madams should shudder, too. The internet will undermine their market-making power.

But everyone else should cheer. Sex arranged online and sold from an apartment or hotel room is less bothersome for third parties than are brothels or red-light districts. Above all, the web will do more to make prostitution safer than any law has ever done. Pimps are less likely to be abusive if prostitutes have an alternative route to market. Specialist sites will enable buyers and sellers to assess risks more accurately. Apps and sites are springing up that will let them confirm each other’s identities and swap verified results from sexual-health tests. Schemes such as Britain’s Ugly Mugs allow prostitutes to circulate online details of clients to avoid.

Governments should seize the moment to rethink their policies. Prohibition, whether partial or total, has been a predictable dud. It has singularly failed to stamp out the sex trade. Although prostitution is illegal everywhere in America except Nevada, old figures put its value at $14 billion annually nationwide; surely an underestimate. More recent calculations in Britain, where prostitution is legal but pimping and brothels are not, suggest that including it would boost GDP figures by at least £5.3 billion ($8.9 billion). And prohibition has ugly results. Violence against prostitutes goes unpunished because victims who live on society’s margins are unlikely to seek justice, or to get it. The problem of sex tourism plagues countries, like the Netherlands and Germany, where the legal part of the industry is both tightly circumscribed and highly visible.

The failure of prohibition is pushing governments across the rich world to try a new tack: criminalising the purchase of sex instead of its sale. Sweden was first, in 1999, followed by Norway, Iceland and France; Canada is rewriting its laws along similar lines. The European Parliament wants the “Swedish model” to be adopted right across the EU. Campaigners in America are calling for the same approach.

Sex sells, and always will

This new consensus is misguided, as a matter of both principle and practice. Banning the purchase of sex is as illiberal as banning its sale. Criminalisation of clients perpetuates the idea of all prostitutes as victims forced into the trade. Some certainly are—by violent partners, people-traffickers or drug addiction. But there are already harsh laws against assault and trafficking. Addicts need treatment, not a jail sentence for their clients.

Sweden’s avowed aim is to wipe out prostitution by eliminating demand. But the sex trade will always exist—and the new approach has done nothing to cut the harms associated with it. Street prostitution declined after the law was introduced but soon increased again. Prostitutes’ understandable desire not to see clients arrested means they strike deals faster and do less risk assessment. Canada’s planned laws would make not only the purchase of sex illegal, but its advertisement, too. That will slow down the development of review sites and identity- and health-verification apps.

The prospect of being pressed to mend their ways makes prostitutes less willing to seek care from health or social services. Men who risk arrest will not tell the police about women they fear were coerced into prostitution. When Rhode Island unintentionally decriminalised indoor prostitution between 2003 and 2009 the state saw a steep decline in reported rapes and cases of gonorrhoea.

Prostitution is moving online whether governments like it or not. If they try to get in the way of the shift they will do harm. Indeed, the unrealistic goal of ending the sex trade distracts the authorities from the genuine horrors of modern-day slavery (which many activists conflate with illegal immigration for the aim of selling sex) and child prostitution (better described as money changing hands to facilitate the rape of a child). Governments should focus on deterring and punishing such crimes—and leave consenting adults who wish to buy and sell sex to do so safely and privately online.

Since it started flying commercially seven years ago, the A380 has caught the imagination of travelers. Its two full-length decks total 6,000 square feet, 50 percent more than the original jumbo jet, the Boeing 747. Its wingspan barely fits inside a football field. Its four engines take this 560-ton airplane to a cruising altitude of 39,000 feet in less than 15 minutes, a surprisingly smooth ascent for such a bulky plane. Passengers love it because it’s quiet and more reminiscent of a cruise ship than an airplane.

The A380 was also Airbus’s answer to a problematic trend: More and more passengers meant more flights and increasingly congested tarmacs. Airbus figured that the future of air travel belonged to big planes flying between major hubs. “More than simply a big airplane,” one industry analyst wrote when the first A380 was delivered to Singapore Airlines in 2007, “the newest industry flagship will change forever the way the industry operates.”

The prediction hasn’t exactly come true.

Airbus has struggled to sell the planes. Orders have been slow, and not a single buyer has been found in the United States, South America, Africa or India. Only one airline in China has ordered it, and its only customer in Japan has canceled. Even existing customers are paring down orders.

The A380 has a list price of $400 million, but the pressure has forced Airbus to cut prices as much as 50 percent, according to industry analysts. So far, Airbus has received 318 orders and delivered 138 planes to just 11 airlines — a disappointing tally given forecasts that the plane would be a flagship aircraft for carriers worldwide.

Only one airline — Emirates — has made the A380 a central element of its global strategy, ordering 140 as it built a major travel hub in Dubai. But Emirates is unique. No one else has bet on the plane with quite the same confidence.

The A380 hasn’t done so well for a number of reasons, some merely cyclical. The plane was introduced amid a deep downturn in the airline business. Airline executives were wary of expanding their fleets aggressively, especially for a costly, four-engine fuel hog.

But critics like Richard Aboulafia, an aerospace analyst at the Teal Group, an aviation consulting firm in Fairfax, Va., say the main problem is more fundamental: Airbus made the wrong prediction about travel preferences. People would rather take direct flights on smaller airplanes, he said, than get on big airplanes — no matter their feats of engineering — that make connections through huge hubs.

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“It’s a commercial disaster,” Mr. Aboulafia says. “Every conceivably bad idea that anyone’s ever had about the aviation industry is embodied in this airplane.”

Airbus spent roughly $25 billion to develop the aircraft. The plane was delayed for years because of manufacturing problems while Airbus struggled to keep the plane’s weight down and coordinate its complex design among dozens of suppliers across Europe. In 2012, Airbus discovered small cracks in supporting ribs inside the A380’s wings, an embarrassing and costly design error that the manufacturer is now correcting.

While the A380 program has been a boon for the European aerospace industry, Airbus is unlikely to recover its research and development costs. The best it can now expect is to break even on production costs, according to analysts, provided that it can keep orders going.

Steven F. Udvar-Házy, an industry veteran who is chief executive of the Air Lease Corporation, which leases aircraft, calls the lack of interest in the planes “a very unusual situation,” especially among United States airlines. “I’ve never seen this before in a big program,” he says.

Competing Conclusions

A little more than a decade ago, the two dominant airplane makers, Boeing and Airbus, looked at where their businesses were headed and saw similar facts: air traffic doubling every 15 years, estimates that the number of travelers would hit four billion by 2030 — and came to radically different conclusions about what those numbers meant for their future.

Boeing figured that traffic would move away from big hubs and toward secondary airports. So it started to build a smaller, more fuel-efficient long-range aircraft, which became known as the 787 Dreamliner.

Airbus, on the other hand, saw the rise of international traffic through major hubs and decided to bet on a big plane to connect those big airports.

“The A380 is not made for every route, but it is ideal for high-traffic routes, high-volume routes that are congested, or where there are flying constraints,” says Antonio Da Costa, the head of A380 marketing for Airbus.

And there are a fair number of those routes. Around 15 of the 20 largest long-haul routes by passenger volume in the world today are slot-constrained, meaning that they face some restrictions on the number of daily takeoff or landings, says John E. Thomas, managing director at L.E.K. Consulting, a transportation advisory firm.

Here is one example of how the Airbus theory works in practice: This summer, British Airways plans to replace three Boeing 747s flying each day between London and Los Angeles with two A380s, freeing one slot at Heathrow Airport for another flight.

Yet despite the congestion at hubs like Heathrow and the growth of megacities like New York, New Delhi and Beijing, the market for large planes remains small. Airbus predicts that in the next 20 years, airlines will order more than 29,000 new planes from Airbus, Boeing and other plane makers. But the bulk of those, or roughly 20,000, will be smaller, single-aisle planes that fly routes like New York to Chicago, or London to Frankfurt. Airbus estimates that the market for the biggest — and most expensive — long-range airplanes will be about 1,700.

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Boeing, too, is facing lukewarm demand for its latest jumbo jet upgrade, known as the 747-8. The company has received just 51 orders for this big plane, which can seat about 460 passengers and lists at $357 million. By contrast, it has sold more than 1,200 twin-engine 777s, which sell for as much as $320 million. (Airlines typically get discounts on the listed prices.)

The Airbus A380 is the world’s largest passenger jet, with a wingspan much wider than that of Boeing’s 747-400. The biggest customer for the A380 is Emirates, based in Dubai. As yet, though, there have been no orders for the plane from North or South America.

More worrisome for Airbus is that it has struggled to find new customers for the A380 after a flurry of initial orders. Just three new carriers — Etihad Airways, Qatar Airways and Asiana Airlines — are getting A380 planes this year. And last month, Airbus canceled an order for six A380s destined for Skymark Airlines, a low-cost carrier in Japan that has been losing money.

Garuda of Indonesia recently dropped plans to buy the A380, deciding that the plane was too big for its markets. And Virgin Atlantic, which has options for six A380s, remains undecided about whether to proceed. The airline was partly acquired by Delta Air Lines in 2012; Richard H. Anderson, Delta’s chief executive, has said the A380 is “by definition an uneconomic airplane unless you’re a state-owned enterprise with subsidies.”

Current customers, too, are cutting back their orders, including the major carriers in France and Germany, where the plane is assembled. Air France postponed the last two of 12 planes it had ordered. Lufthansa has scaled back its order to 14 from 17.

Bruno Delile, Air France’s senior vice president for fleet management, says that there are a limited number of routes in its network with enough daily traffic to justify the expense of such a big plane.

“The forecasts about traffic growth and market saturation haven’t exactly panned out,” he says.

Not only do airlines take a big risk on the size and cost of the A380, but they also have to gain the cooperation of airports to modify gates and widen taxiways to make room for the plane. Apart from the main global hubs, few airports have made these investments. No airport in Brazil, for instance, can handle an A380. The plane was only recently allowed in Mumbai.

“Airports haven’t really been rushing to welcome the A380,” Mr. Delile says.

Airbus may have mistimed the market in a more fundamental way. While European engineers were developing the plane, their counterparts at Boeing were working on alternative designs. Out of this effort came the 787 Dreamliner, with a carbon-composite fuselage, a host of electronic systems and more efficient engines that could fly longer distances while consuming less jet fuel.

That plane, which entered service in late 2011, had its share of high-profile problems; the entire fleet was grounded for three months in 2013 because of battery fires. Boeing says the problem has been resolved, and the company has orders for more than 1,000 of the planes. With versions that seat 210 to 330 passengers, and with a range of about 9,000 miles, the 787 allows airlines to fly pretty much anywhere in the world and connect smaller airports without going through a hub.

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Japanese carriers are flying these planes from Tokyo to Düsseldorf, Germany, and to San Diego and Boston. This reduces the need for bigger planes to feed big hubs. And passengers are willing to pay more to avoid a connection, says Will Horton, an aviation analyst at CAPA — Centre for Aviation.

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Economy class on an Emirates A380 looks similar to that of other planes. Credit Michael Nagle for The New York Times

Recognizing the success of the 787, Airbus started developing its own version of a long-range, fuel-efficient airplane, called the A350-XWB. The first should be delivered to Qatar Airways before year-end. Airlines have ordered 742 of the A350s since the program was announced in 2006.

“No doubt some airlines, given the opportunity to rewrite history, would not order the A380,” Mr. Horton says.

A Bar in the Sky

The view from Tim Clark’s office on the top floor of the Emirates headquarters in Dubai offers a stunning panorama of the city’s airport, including a new $4.5 billion terminal. Emirates currently operates 50 A380s, with more on the way, and has built its business model around the plane. Traffic here never stops. Even at midnight, when flights from the east land and connect passengers who are headed west, the airport is alive and bustling.

If most airlines appear skeptical of the A380, Emirates is a true believer. It stunned the industry in December when it ordered 50 more of the planes, beyond the 90 it already had on order, throwing Airbus a much needed lifeline. (Emirates also ordered 150 new Boeing 777Xs, a more efficient variation on the best-selling jet, helping to initiate the program for this new airplane, due in 2020.)

Mr. Clark, the president of the airline, has turned it into one of the world’s largest carriers by seat capacity. And he is the A380’s most enthusiastic supporter.

“People get on the A380 and they absolutely love it,” he says. The upper deck on the Emirates version, he adds, is “just one big party.”

(Other carriers configure their A380s differently, with some including economy seating in the upper deck.)

The son of a tanker ship captain and an economist, Mr. Clark joined Emirates in the mid-1980s. His basic insight about the A380 is simple: It can be a canvas for a new kind of luxury flight experience. It was Mr. Clark who came up with the idea to install two showers for first-class passengers. Airbus engineers thought the idea was crazy because it would require more fuel to fly the water for the showers. But he dismissed their objections. The showers would immediately distinguish the plane from anything else in the air.

He also put a large bar on board, along with a pair of semicircular couches, equipped with seatbelts in case of turbulence.

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The bar at the back of business class on the upper deck offers premium spirits — and room to relax. Credit Michael Nagle for The New York Times

“This thing is so popular and during the course of a 14-hour flight it becomes even more popular,” he says. “They all want to have their picture taken behind the bar with their arms around the girls,” he says, referring to passengers posing with the flight attendants.

That was certainly the atmosphere on a 13-hour flight between New York and Dubai earlier this year. While about 400 weary coach passengers on the lower deck tried to catch a few hours of fitful sleep, the upper-deck mood was more festive.

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Rudolph V. Pino Jr., an insurance lawyer from New York, enjoyed a glass of chardonnay and traded pleasantries and business cards with other passengers. The bar was staffed by cheerful flight attendants amid an endless supply of Champagne and canapés.

“It’s a special airplane,” he said. “It brings some glamour back to air travel, just like in the days of TWA and the old Boeing 747s.”

Unlike airlines in the United States, Emirates, which is a product of Dubai’s aviation-friendly policies, operates from a single hub. The airport handled 66 million passengers last year, rivaling Heathrow as the busiest international hub. Emirates serves more than 140 destinations, essentially connecting flows of passengers with a single stop in Dubai.

But for Emirates, the biggest selling point of the A380 is its ability to pack in more business-class seats and create an environment that appeals to big-spending passengers. “The upper deck of the A380 is an absolute gold mine for us,” Mr. Clark says. “We elected to make it all premium. We elected to put in all the gadgets and gizmos. We were laughed at, at first.”

There are more first- and business-class seats on the Emirates A380 than on the 777, and they are usually 75 to 80 percent full, Mr. Clark says. On some routes, like those to Heathrow, where Emirates has five daily flights, that figure can reach 90 percent. Once the whole plane is 85 percent full, its operating costs fall below those of a 777, he says.

It’s a simple-enough recipe. But for the plane to be successful for Airbus, Emirates can’t be the only airline to make it work.

“United would be a great operator from San Francisco to Asia,” says Mark Lapidus, chief executive of Amedeo, an aircraft leasing company. Last year, Mr. Lapidus announced that his company would buy 20 new A380s, in a deal valued at $8.3 billion, and then lease them to airlines. It was an expensive gamble, and Amedeo doesn’t have any commitments yet.

The problem is that American carriers, including United, aren’t interested. Wall Street analysts aren’t convinced, either. Shares of United would plunge at least 10 percent if it bought A380s, according to one analyst, because of concerns that they would bring too much capacity into the market.

In recent years, United States airlines have found the way back to profitability by cutting capacity and retiring airplanes, effectively taking seats out of the market. A bigger plane, in the view of some analysts, would undo everything they’ve done.

Some analysts are also worried about the resale value of an A380, once the planes come off their lease and enter the secondary market. With weak sales and limited interest today, aviation experts say the plane’s resale value could potentially depress new A380 prices even further.

In his aerie in Dubai, Mr. Clark appears untroubled by these considerations. He has repeatedly said he would buy more planes if Airbus could deliver them fast enough.

“My view is that we’ve all got to tough this out,” he says. “As I say to my friends at Airbus: Don’t bottle this. The day will come again. The global economy will take care of you.”

He has encouraged Airbus to build an even bigger version of the A380. That, even Airbus would concede, seems unlikely.

--> Terex could reach $46, up from a recent $35.48, as crane demand rises and the company gains operational efficiencies. Port automation could also hoist the shares.

As big construction projects get underway, prospects for the crane maker are growing. Investors have four ways to win.

Terex, a maker of cranes and other large machines operated by hardhats, offers stock investors four ways to win. Look for 30% upside over the next year.

The first opportunity is a pickup in big construction jobs—office buildings, hospitals, schools, and so on—which tends to lag behind a home-building recovery by about two years, and now seems afoot. That should be good news for Terex (ticker: TEX) and other heavy-metal specialists, including Caterpillar (CAT) for earthmovers, Manitowoc (MTW) for cranes, and Oshkosh (OSK) for aerial work platforms

After two decades of nearly 13% average annual stock gains, the crane maker has a strong foundation to build on. Photo: Courtesy of Terex

The second way for Terex to drive better results is to make some grown-up efficiency moves. Terex is a relative pipsqueak, with a market value less than $4 billion—even after two decades of 12.7% average annual stock gains, five points better than the Standard & Poor's 500. Caterpillar, by contrast, is valued at $65 billion. But years of acquisitions have left Terex with, for example, more than 70 accounting departments worldwide, a number management says it can reduce to eight. There are also opportunities to lower taxes, streamline manufacturing, and improve the supply chain. "Big companies did these things a decade ago," Chief Executive Ron DeFeo told Barron's this past week. "We're still working through them, and we haven't yet harvested the rewards.

The third opportunity is in ports, where Terex has amassed a full suite of automated products for stacking and unloading cargo on giant ships. That's a good business to be in, because the Panama Canal, a key shipping gateway between the Atlantic and Pacific, is getting a major capacity increase over the next two years. That will spur shipbuilders to shift from "Panamax" vessels to "New Panamax" ones, which can carry more than twice as many of those 20-foot metal containers. To stay competitive, many ports will have to turn to robots and software to handle the increased workload. Terex predicts the number of automated ports will grow to 50 in a decade from about 10 today.

PUT THESE THREE TOGETHER, and Terex could have significant room for earnings growth. This year, Wall Street predicts a 15% rise, or $2.57 a share, on 6% sales growth, to $7.5 billion. Terex hopes to hit $5 a share in earnings power by 2016, with half of the upside coming from increased orders and the other half from efficiency gains.

That's a goal, not formal guidance, management notes, and Wall Street isn't quite buying it. The 2016 consensus stands at $4.37. But even a rise to that level could generate handsome returns for shares.

That's because of the fourth way Terex can win for shareholders: Its shares are cheap. At a recent $35.48, they trade at 13.8 times this year's earnings forecast. Compare that with Caterpillar, another "late-cycle" industrial—a company whose sales are tied to slow-moving projects, and whose profits tend to balloon once billings for those projects roll around, and factories are put to fuller use. Caterpillar trades at 16.4 times this year's earnings forecast. Factor in expected growth over the next two years, and the discount is even bigger. Terex sells for eight times the 2016 consensus, versus 12.5 times for Caterpillar.

One reason for Terex's humble valuation is the stock's 16% decline so far this year, versus a 3% rise for the Standard & Poor's 500. That's attributable to earnings misses in the first and second quarters. Management has cited a slower-than-expected recovery in developed markets and weakness in emerging markets, combined with short-term costs to, for example, revamp an Oklahoma factory. On July 23, when it reported second-quarter numbers, Terex also lowered the top end of its revenue guidance for the year. It now expects revenue of $7.3 billion to $7.5 billion. The previous top of the range was $7.7 billion. But the company held its earnings guidance steady at $2.50 to $2.80 a share. Reaching that range implies a sharp rise in second-half orders versus the first half, which is what Terex saw last year.

TEREX'S AERIAL WORK PLATFORMS, 35% of revenue during the first half, have done much of the heavy lifting when it comes to profits, bringing in 83% of first-half income from operations. A bigger contribution from other divisions would give profits a boost. Cranes, 24% of revenue during the first half, look like a likely contributor. Sales of cranes declined in the first and second quarters, but the book-to-bill ratio has been above 1.0 for three quarters, suggesting a pipeline of orders that will soon flow through as revenue. Wall Street predicts 10% growth in crane revenue this quarter and next. That could be the start of a longer growth spurt.

The Architectural Billings Index, an early indicator of building activity, hit 53.5 in June, its highest monthly reading since September 2013. The American Institute of Architects predicts a 4.9% rise in nonresidential building this year—and 8% growth next year. Last quarter, Terex's cranes division produced only a small profit, up from about break-even in the first quarter, leaving plenty of room for fast profit growth as revenue increases.

Terex's Materials Handling and Port Solutions unit, 22% of revenue, also looks ripe for more profit growth. Revenue increased 13% during the first half, and returned to profitability after a first-quarter loss. And while only half of revenue comes from port products, that half is growing by an estimated 33% a year. Port-automation equipment and software—which management thinks will total one-quarter of port revenue this year versus a much smaller portion last year—carries higher profit margins than traditional port machines.

IF TEREX CAN MERELY meet earnings forecasts from here, shares could rise 30% over the next year as investors gain confidence. That would put them at $46, or 10.6 times the 2016 earnings forecast, still a 16% discount to Caterpillar. The clearest risk for Terex in hitting its numbers is a sudden slowdown in economic growth. That's certainly possible. But then, the economy has been showing signs of strength, which helps explain why stock prices have turned volatile in recent weeks.

A healthy economy makes the Federal Reserve more likely to increase interest rates sooner rather than later, which could help bonds compete better with stocks for investor affection. In other words, while the removal of Fed support is worrisome in the short term for stocks, it's also a sign that markets like those Terex sells to are healthy enough to do without Fed support.

All told, Terex's late-cycle profit exposure and modest valuation make it a likely outperformer in an aging bull market.

A threat to inversions and a junk-bond rout worsen the odds of a victory for Valeant in its months' long pursuit of Allergan.

Sometimes unrelated events intersect in unexpected ways.

For example, Sprint (ticker: S) and 21st Century Fox (FOXA) each captured headlines last week by walking away from possible acquisitions when the targets proved unreceptive. Separately, President Obama announced that his administration aimed to curb moves by U.S. firms to incorporate overseas to avoid U.S. taxes. Meanwhile, the selloff in junk bonds continued, with investors pulling money from high-yield bond funds and ETFs for the fourth week in a row.

These developments, disparate as could be, nonetheless represented a trifecta of bad news for Valeant Pharmaceuticals International (VRX), a seller of drugs, eye-care treatments, and over-the-counter products.

Valeant was a U.S. company until 2010, when it purchased a Canadian company and moved its headquarters north of the border, allowing it to enjoy a 3% tax rate. If the U.S. manages to prevent American companies from lowering their tax rates through foreign acquisitions, Valeant's appeal as a potential takeover target for a U.S. buyer would dim considerably. And, if it were to be bought, the price paid likely would be lower than expected because the tax benefit no longer would be available to a stateside acquirer.

Separately, the break-up of pending acquisitions -- such as Sprint's proposed takeover of T-Mobile US (TMUS) -- hurt investors who were betting the deals would occur. It also increased concerns about whether other pending deals would close. Valeant has been rebuffed in its effort to buy Botox maker Allergan (AGN), but the offer, made in April, is pending.

Valeant has offered to exchange each Allergan share for $72 in cash and 0.83 of a Valeant share. As Valeant shares fall -- the stock is down 29% from a February peak of $153 to a recent $109 -- the purchase price offered also declines, as do the odds the deal gets done.

Valeant has fallen 12% in the past two weeks. Two weeks ago, its offer for Allergan was worth $174 a share. Today it is worth $162.

Valeant's declining stock price gets bond investors nervous because it means the company might up the cash component of its bid or boost the offering price. Doing so could increase Valeant's leverage and hurt its bondholders. Junk-bond investors are already nervous, as noted, and the yield on Valeant's intermediate debt has risen to roughly 6.5% from 6.2%. The higher the yield goes, the more it will cost Valeant in interest expenses to fund the Allergan deal.

The bad-news triple play marked the second week in a row that Valeant faced head winds. Two weeks ago, the company reduced its 2014 earnings targets: Revenue guidance for 2014 is now $8 billion to $8.3 billion, down 4% from previous guidance, and non-GAAP, or cash, earnings per share are projected to be $7.90 to $8.10, an 8% decline from the previous target. Last year the company reported cash earnings of $6.24.

"Valeant's revised financial outlook validates Allergan's belief that growth is declining at Valeant and that its business model is unsustainable," Allergan said last week in a news release that questioned a number of the items in Valeant's quarterly report.

VALEANT'S SECOND-QUARTER earnings raised fresh doubts about the company's ability to grow its business organically -- that is, without acquisitions. The company's organic-growth potential has been questioned, given that it spends only 3% of revenue on research and development, while other drug companies spend closer to 16%. Valeant says it slashes wasteful research spending, providing a new model for the industry.

When Valeant reported second-quarter results, it said organic sales rose 10% in the period. But that increase excludes drugs that face generic competition, and its injectable business, which was sold in July.

Many of Valeant's largest drugs face generic competition, including its second-largest product, the antidepressant Wellbutrin, and its sixth-largest product, Solodyn, an antibiotic used to treat acne. When a drug faces generic competition, its sales often decline quickly as other drug manufacturers enter the market offering the same drug at a lower price. The impact is significant, as organic sales rose only 4% in the quarter when Valeant included generic drug sales but excluded injectable sales.

There is no increase in organic sales if you count both generic-drug sales and the injectables business, calculates Thomas Tobin, an analyst with Hedgeye Risk Management. The injectables business was purchased as part of the $1.8 billion acquisition of drug company Medicis almost two years ago, and Valeant says it is selling the business to avoid regulatory objections as it pursues Allergan.

If Valeant clinches the deal for Allergan, its shares could rally to $200 based on the potential to cut costs dodge U.S. taxes, Tobin says. If it doesn't go through -- and the odds are rising that it won't -- he sees the stock falling to $70.

Shares could rally 60% in the next two years as the U.K. company focuses on new products.

With packaging company DS Smith, it's what's inside that matters most.

On the outside, the Maidenhead, U.K.-based company might look like a staid paper supplier, but strip away the packaging, and what's left is a high-value consumer-products concern. Its shares could command a positive re-rating as a transformation becomes more apparent and investors catch on.

DS Smith's stock (ticker: SMDS.UK), which closed in London on Friday at £2.67 ($4.48), could rise sharply when that happens. Shares trade at about 11 times projected earnings for the year ending April 2015, and a ratio of about seven times enterprise value to earnings before interest, taxes, depreciation, and amortization.

Applying the same multiples used to value consumer-products companies, DS Smith could trade for as much as 18 times earnings and 12 times EV/Ebitda, or about £4.32 a share. That reflects upside of more than 60%, although it could take more than a year or two to realize such gains.

Analysts like the stock, however. A consensus price target of £3.36 suggests upside of 25%.

DS Smith, which has a market value of £2.5 billion, manufactures corrugated packaging, but buys paper to protect itself against price volatility. It produces cardboard boxes, other packaging, and product displays for everything from candy bars to toothpaste.

Customers include a variety of consumer-goods producers such as Nestlé (NESN.Switzerland), Procter & Gamble (PG), and Unilever (ULVR.UK), which means that DS Smith is heavily dependent on the consumer-goods environment in Europe, where it earns 65% of its profit.

"It is closer to a consumer-products company than a paper company," says Brian Hennessey, a portfolio manager at the Alpine Dynamic Dividend fund (ADVDX).

DS SMITH'S SHARES HAVE come undone in 2014, losing almost 20% in value. Most of the downside has come since late June, when the company reported solid earnings but spooked the market with a warning that the weakness of the euro would weigh on results in fiscal 2015.

The selloff looks overdone and distracts from an impressive operating performance. Earnings per share increased 25% last year, to 21 pence, on a 10% rise in revenue to £4.04 billion. The company is forecast to earn 24 pence a share in the current fiscal year on revenue of £4.12 billion.

Aided by 2.2% growth in organic corrugated packaging volume, DS Smith saw its return on sales increase last year to 7.6% from 6.8% a year earlier, and its return on average capital employed rise to 13% from 12.2%.

It is also reaping synergies from the 1.58 billion-euro ($2.12 billion) acquisition of the packaging division of Svenska Cellulosa Aktiebolaget (SCA-B.Sweden) in 2012. Profits this year will benefit from €40 million in synergies, just as they have in the past two years.

SCA is a model for DS Smith to follow. The Stockholm-based enterprise has remade itself from a paper company to a specialist in forestry and hygiene products such as sanitary tissue, cleansing wipes, and baby diapers. Based on Friday's close of 164.70 Swedish kronor ($23.92), the stock trades at about 14 times projected 2015 earnings, well above the multiples of the paper industry.

Hennessey, of Alpine Dynamic Dividend fund, sees upside for DS Smith based on its good growth prospects, strong free cash flows, and a willingness to return cash to shareholders. DS Smith boosted its dividend last year by 25%, and the stock currently yields a generous 4%.

"We think the best is yet to come," Hennessey says.

BANCO ESPIRITO SANTO'S shareholders saw their equity wiped out last week when the Portuguese government stepped in with a rescue plan that separates the bank's healthy assets from the toxic ones.

It is a painful blow for shareholders and subordinated bondholders, but simply fast-tracked what was becoming increasingly inevitable.

The healthy assets, including deposits, were placed in a vehicle called Novo Banco, which translates as "new bank." It will be recapitalized with €4.9 billion provided by a euro-zone-mandated bailout fund and the Portuguese government.

Novo Banco likely will be sold as soon as possible so that the state, which is providing the bulk of the money, is repaid quickly and taxpayers aren't out of pocket. The bad bank will be wound down.

Among the losers is Crédit Agricole (ACA.France), which owned a stake of almost 15% in Banco Espirito Santo. The French bank wrote down €708 million in its second-quarter earnings to account for its losses, tarnishing an otherwise good set of numbers.

Bank stocks did poorly last week, but Banco Espirito Santo's trouble appears isolated, and there is no hint of a systemic problem.

US groups ponder the great tax escape

U.S. Sen. Dick Durbin, D-Ill., talks to Walgreens clerk Estella Washington as he shops after a news conference Wednesday, Aug. 6, 2014, in Chicago. Durbin praised Walgreen, the nation's largest drugstore chain, for declining to pursue an overseas reorganization to trim its U.S. taxes. (AP Photo/M. Spencer Green)©AP

Walgreen’s decision to keep its domicile in the US will not deter other US healthcare companies from striking transatlantic deals to cut their American tax bills, according to corporate advisers.

The US pharmacy chain had come under pressure from investors to shift its tax domicile to Switzerland or Britain as part of the £6bn takeover of Alliance Boots, but this week concluded such a move was not in the best long-term interest of its shareholders.

Walgreens said it was mindful of the public reaction to a potential inversion deal and its role as an “iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs”. But advisers said that lesser-known companies contemplating so-called inversion deals would ride out the storm.

Billy Tauzin, a former congressman and ex-head of a pharmaceuticals lobby group who now advises companies, said it would make sense for businesses to delay their inversion plans until after November elections, but that few would scrap them.

“They’re all public companies and investors expect them to make economic decisions, not necessarily just politically smart decisions,” said Mr Tauzin. “They might want to time it differently, but I don’t think they’re going to change what is the right economic decision for their companies.”

The two biggest inversion deals agreed so far have involved relatively low-profile US healthcare companies. Medtronic, the medical devices maker, agreed to buy Dublin-based Covidien for $42.9bn in June, followed a month later by the £32bn takeover of UK-listed Shire by AbbVie.

People close to those deals said they were confident they would go ahead – but declines in the share prices of Shire and Covidien this week reflected investor fears.

Political attacks on inversions have been building for weeks. President Barack Obama and some Democrats are seeking to make such deals a campaign issue ahead of midterm elections on November 4, and have criticised the “corporate deserters” who had “renounced their US citizenship” by moving offshore.

Republicans have been equally critical of the deals, but they want any legislative solution to be part of broader tax reform, which is unlikely to pass the US Congress. The Obama administration this week said it was exploring ways to use the president’s executive powers to limit inversions, but lawyers say it is not clear it has sufficient authority.

Before its announcement, Walgreens had been braced for anti-inversion protests and boycotts from union groups such as Change To Win, a labour federation.

We had a lot of perspectives from the political side, the White House, consumers, and we looked at all the issues . . . We did not think the structure had a high enough confidence level to withstand that

- Greg Wasson, Walgreens’ chief executive

“We had a lot of perspectives from the political side, the White House, consumers, and we looked at all the issues,” said Greg Wasson, Walgreens’ chief executive. “We did not think the structure had a high enough confidence level to withstand that.”

On the day Walgreens announced its decision, a Change To Win official said the group received a new consignment of now redundant signs and banners with slogans such as “Walgreens – Don’t Short Change America”.

But Mr Tauzin said it would be harder to stir public opposition to healthcare groups. “I’m a cancer survivor and a company in California made the product that saved my life. I don’t think it would have mattered to me if I was upset with that company politically,” he said.

“On the other hand, if I can buy the same over-the-counter product at Walmart or CVS and I’m upset with Walgreens, I might make a different choice.”

It is a big dilemma for Pfizer, the largest US drugmaker by sales, which in May attempted what would have been the biggest inversion so far with a £69.4bn bid for the UK’s AstraZeneca. While it is a less visible brand than Walgreens, it is still a household name associated with well-known drugs such as Viagra and Lipitor.

Underlining the sensitivity for high-profile consumer brands in particular, Bob Iger, the chief executive of Walt Disney, this week ruled out relocating overseas.

An adviser to Walgreens said the pharmacy chain was also concerned that its rival CVS Caremark would exploit an inversion by painting Walgreens as unpatriotic.

“There was some growing concern among Republican political operatives and trade associations like the Chamber of Commerce that the inversion issue could get traction in key election races,” he said. “This reduces that as an issue.”

Nell Geiser, an associate director at Change To Win, the labour group, disagreed. She vowed to keep up the pressure on companies considering inversions – including those with little name recognition – and said activists would shine a harsh spotlight on businesses that depended on federal healthcare spending and other US government funds.

Shire drops on doubt over AbbVie takeover

All may not be lost for Shire shareholders.

The drugmaker dropped 5.1 per cent this week on worries that US moves to curb tax inversions would derail its takeover bid from AbbVie. A key attraction of the deal is that AbbVie could redomicile to avoid US repatriation taxes on its global cash flows.

A meeting with AbbVie’s chief financial officer Bill Chase provided reassurance that the takeover will complete, Credit Suisse told clients. “While he cannot break down the value that AbbVie would obtain from an inversion specifically, the strategic importance of integrating Shire into a more diversified, speciality care NewCo holds more importance than some on the Street currently appreciate,” it said.

Buying Shire will give AbbVie greater flexibility to deploy cash trapped outside the US, which is more important to management than using controversial tax-lowering methods such as intercompany debt and interest expense deductions, said Credit Suisse.

Currently, AbbVie has a 13 per cent pro forma tax rate and pays 35 per cent to repatriate international cash. So even without redomiciling, AbbVie could still make savings worth about £9 per Shire share just by getting access to the UK group’s cash flow, 70 per cent of which comes from the US, Barclays estimated. “Put another way, for every dollar of expenditure that AbbVie can avoid paying with repatriated cash by utilising Shire’s US cash flows it saves 54 cents,” the broker told clients.

Merger cost savings can deliver a further £3.70 per Shire share so even if inversion is impossible, Abbvie’s offer, worth £52.42 on Friday’s prices, looked only marginally too high, Barclays said. Shire ended flat at £46.19, rallying from a session low of £45.00.

Better pick your airline carefully, or you’ll be at a higher risk of getting bumped off flights, losing your luggage or having your flights delayed or canceled, a new survey reveals.

According to a report released Thursday by AirfareWatchdog.com, some domestic airlines perform better than others when it comes to canceled flights, on-time arrivals, mishandled bags, denied boardings, and customer satisfaction. This year Delta, which typically ends up toward the bottom of the performance list, ranked No. 1 in overall performance, thanks to more on-time arrivals, fewer canceled flights and mishandled bags and better customer service. “Delta is this year’s unsung hero,” the report revealed. It was followed by Virgin America, Alaska Airlines, JetBlue and Frontier, in that order.

On the not-so-good side of this list are Southwest, Airtran (now part of Southwest), American, US Airways (now part of American Airlines) and United, which ranked dead last. United’s abysmal ranking may be due to the fact that it had the highest number of boarding denials (nearly 246 per one million passengers, compared with just 3.58 per one million for JetBlue, which ranked highest in this category) of all the airlines examined as well as the lowest overall customer satisfaction score (it ranked 60 out of 100, compared with 79 out of 100 for JetBlue, which had the best customer satisfaction score).

American and US Airways have the second-lowest customer satisfaction scores and have a high number of mishandled bags. AirTran has the highest number of denied boardings and mishandled bags, and Southwest gets low marks in terms of mishandled bags and on-time arrivals.

Of course, these overall rankings are more nuanced than they seem. While Delta ranked first in overall performance, its boarding denials are fairly high (more than 74 per one million passengers, compared with just 3.58 per one million for JetBlue).

George Hobica, the founder of AirfareWatchdog.com, says JetBlue’s boarding denials are low because it is one of the only airlines that doesn’t routinely overbook flights. And though JetBlue only ranked third in overall performance, it has the highest scores in terms of both customer satisfaction and the fewest denied boardings. Indeed, Hobica notes that JetBlue also has more legroom and “a better economy-class experience” so it’s often a great bet for flyers, even though it didn’t get the top spot this year. And Virgin America (No. 2) has the fewest mishandled bags and Alaska Airlines (No. 3) has the highest percentage of on-time arrivals.

While some airlines score better than others, the industry as a whole is still hated by consumers. According to a 2014 survey by the American Customer Satisfaction Index, out of the 43 industries measured, airlines ranked 40th in terms of customer satisfaction (only Internet service providers, social media companies and cable and subscription TV providers got worse scores).

Newmont Mining (NYSE:NEM) CEO Gary Goldberg’s comments on Thursday that he was still open to merger talks with Barrick Gold (TSX:ABX) are unlikely to get Barrick back to the negotiating table at this time, a source familiar with the matter said.

Barrick's thought process had not changed since talks between the gold miners fell apart in April, the source said, adding that the company has “moved on.” This was also in line with Barrick Executive Chairman John Thornton’s comments in July that rekindling merger talks was not something on the Toronto, Ontario-based supermajor's mind.

At the time, Barrick said that a key reason behind the talks breaking down was Newmont’s reneging on three key elements of the term sheet signed by both companies on 8 April. The crucial points were identification of the assets that would be included in a spin-off company; "carefully constructed governance agreements," describing the role and authority of the chairman, lead director and CEO of the combined companies; and the location of a joint head office in Toronto.

The source brushed off speculation that Thornton could offer Goldberg a co-president role in the event a merger between the companies materialized. Barrick announced in July that COO Jim Gowans and African Barrick Chairman Kelvin Dushnisky would be named co-presidents and current CEO Jamie Sokalsy would be stepping down on 15 September.

An industry banker noted that after the talks collapsed in April, it appeared unlikely that they would restart anytime soon. In this pricing environment, a bigger precious metals company is almost always worse than a smaller one, this banker pointed out.

An industry executive agreed with these comments, saying it was unclear whether the management teams of Barrick and Newmont could constructively work together and referenced the "messy" way the most recent round of merger talks had ended between the two companies.

Leading up to the late-April announcement, Barrick and Newmont traded volleys of press releases and public statements that included negative characterizations of Barrick’s co-chairman by Newmont and reported assertions by Barrick founder Peter Munk that Newmont was extremely bureaucratic and "not shareholder-friendly."

A second banker, however, noted one can never say never in terms of a merger being scuppered.

Prior to the talks falling apart, a separate source familiar with the situation said that Barrick had retained RBC Capital Markets and Michael Klein & Co as financial advisors for the transaction, along with Davies and Cravath, Swain & Moore as legal advisors.

A Newmont spokesperson said Goldberg's comments were consistent with what the company has stated previously. Barrick declined comment.

Alibaba [A Li Ba Ba], the Chinese e-commerce company, has ended funding round talks with SnapChat Inc., the Pacific Palisades, California-based mobile application company, Sina.com reported, citing an unidentified source.

The source added that the talks were terminated last month prior to a Bloomberg report dated 30 July. He went on to say that Alibaba abandoned the talks possibly to avoid potential noises which may affect its IPO process, but Snapchat is in the process of a funding round and its market value is estimated to be USD 10bn.

Source Sina.com