TheChek News Flow

Slowdown shows drag from real estate and consumer spending as party leaders gather in Beijing to discuss economic reform

SINGAPORE—China’s economy slowed sharply in the second quarter, piling pressure on the country’s leaders to act more aggressively to rev up growth as they gather in Beijing to chart the course of the economy over the next half-decade.

Gross domestic product expanded 4.7% in the second quarter compared with the same quarter a year earlier, China’s National Bureau of Statistics said Monday. The result was weaker than the 5.3% growth rate recorded in the first quarter and lower than the 5.0% figure expected by economists polled by The Wall Street Journal.

On a quarter-to-quarter basis, growth more than halved, sliding to just 0.7% versus a revised 1.5% previously.

The world’s second-largest economy is losing momentum thanks to a festering property slump, tepid consumer spending and rising trade tensions with the rest of the world.

Leader Xi Jinping and the Communist Party’s top brass are gathering in Beijing this week to discuss long-range economic reforms.

But many economists say China’s economy needs more help right now.

“These data will heighten the clamor for stimulus measures as well as broader reforms, with both short-term and longer-term policy measures likely to be needed to overcome China’s economic malaise,” said Eswar Prasad, professor of trade policy at Cornell University and a former head of the International Monetary Fund’s China division.

Monday’s data showed manufacturing investment and exports powered growth in the second quarter, offsetting weaker consumer spending and strains in the property sector.

Xi’s ambition is for China to develop into a technological powerhouse, secure from U.S. threats to cut it off from key technologies. To that end, the government has been steering money into China’s factories, boosting industrial production and exports but inflaming trade tensions with the rest of the world, with some governments seeing a rising tide of cheap Chinese imports as a threat to domestic jobs and industries.

Industrial production in the first six months of the year was 6% higher than the same period a year earlier, data showed. But retail sales rose just 3.7% over the same period and real-estate investment was down 10.1%. New home sales were 26.9% lower.

The lopsided recovery has intensified calls for the government to take bolder steps to fix the property sector and offer tax breaks and other financial help to hard-pressed consumers.

Chinese leaders have taken a series of small steps to juice growth, including cutting interest rates and doling out cheap loans to banks to spur lending to households and businesses.

But their appetite for major stimulus is limited. Officials are wary of reinflating an epic property bubble and are concerned that a weak yuan could worsen capital flight. On Monday, the People’s Bank of China said it would keep the interest rate on a key lending facility for banks steady, suggesting that benchmark borrowing rates for households and businesses will stay where they are for now, too.

Chinese Premier Li Qiang said last month that the government has no intention of using “strong medicine” to boost an economy still bruised after being battered by the Covid-19 pandemic. Instead, “we should precisely adjust and slowly nurture [the economy] to allow it to gradually recover,” Li said at the World Economic Forum in the Chinese port city of Dalian.

This week’s meeting in Beijing of top Communist Party officials, known as the Third Plenum, has in the past been the venue for major changes that have heralded but shifts in China’s economic direction. Economists are hopeful that officials might consider some changes to the tax system to support consumption and repair local governments’ strained finances.

But any such reforms could take time to have an effect. China’s top policymaking body, the Politburo, is also due to meet later this month. Economists say that meeting might signal more short-term aid is coming, such as further cuts to borrowing costs, which they say will probably be needed to ensure the government can meet its 5% growth goal for the year.

Deal would be tech giant’s largest acquisition ever

Google parent Alphabet GOOGL -0.27%decrease; red down pointing triangle is in advanced talks to acquire cybersecurity startup Wiz for roughly $23 billion, according to people familiar with the matter, in what would be its largest acquisition ever.

A deal could come together soon, assuming the talks don’t fall apart, the people said.

Alphabet is eyeing the deal at a time of intense antitrust scrutiny of the search company and other tech giants. The acquisition could also help boost Alphabet’s efforts in cloud computing, an important and growing business but one where it has lagged behind peers.

Wiz’s valuation has soared since it was founded in 2020 by Chief Executive Assaf Rappaport and several colleagues. The company, which offers cybersecurity software for cloud computing, raised $1 billion earlier this year at a valuation of $12 billion. It is one of only a few startups outside the artificial-intelligence industry to raise money at a higher valuation in 2024.

Most startups are still suffering the hangover effects of the tech boom that peaked earlier this decade, during which a low interest-rate environment fueled ballooning valuations that far surpassed business growth.

Wiz said it hit $100 million in annual recurring revenue after 18 months, and achieved $350 million in annual recurring revenue in 2023. The company is backed by prominent Silicon Valley venture capitalists including Sequoia Capital, Andreessen Horowitz, Index Ventures, and Lightspeed Venture Partners.

If completed, the Google deal would mark a rare exit for these investors at a time when the initial public offering market has stalled and the antitrust environment has made startups reluctant to pursue M&A.

Wiz’s founders started the company after selling their first startup, Adallom, to Microsoft in 2015 for $320 million. They worked at the tech giant for several years before leaving to launch Wiz.

Wiz is based in New York with additional offices in the U.S. and Israel. The startup partners with a number of the biggest cloud companies, including Amazon and Microsoft as well as Google, according to its website.

Despite its more than $2 trillion market value, Google has been a more conservative acquirer than some of its big-tech peers in recent years. It has shied away from big splashes like Microsoft’s $26 billion purchase of LinkedIn or $75 billion deal for ActivisionBlizzard.

A Wiz acquisition would dwarf the size of Google’s largest deal to date, its $12.5 billion purchase of Motorola Mobility that closed in 2012. Google also spent $2.1 billion on Fitbit in 2021—a deal that hit regulatory hurdles after it was announced—and $3.2 billion on Nest Labs in 2014. Other acquisitions over the years have included YouTube, DoubleClick, Looker and Waze.

Google has been working to bulk up its cybersecurity business, focused on the cloud. Its biggest recent acquisition—and second largest ever—is the nearly $5.4 billion purchase two years ago of another security company, Mandiant.

Google is currently awaiting a verdict in a Justice Department antitrust lawsuit over claims that it used illegal means to bolster its dominance in internet search. The agency last year filed a second antitrust suit, which has yet to go to trial, that alleges unfair practices in Google’s ad-tech business.

Google isn’t nearly as strong in the cloud-computing market as it is in search and online advertising, however. The company is a distant third after Amazon and Microsoft, but it is investing heavily in the business, which is growing quickly. Last year Google’s cloud revenue grew 26% and it reported an operating profit for the first time.

Should a deal for Wiz come together, it would be one of the largest technology deals of late as antitrust scrutiny and high interest rates keep would-be buyers on the sidelines. Where there have been deals, cybersecurity has been an area of focus. Cisco closed a $28 billion takeover of cybersecurity and analytics company Splunk earlier this year.

Plan for tech regulation will be one of 35 bills to be set out by Keir Starmer’s new government

Sir Keir Starmer is expected to introduce a long-awaited artificial intelligence bill this week as he seeks to follow through on Labour’s manifesto pledge to create binding rules to govern development of the most advanced machine-learning models.

The AI bill, one of 35 bills currently set to be included in the King’s Speech on Wednesday, will seek to enhance the legal safeguards surrounding the most cutting-edge AI technologies, according to people briefed on the plans.

The legislation is likely to focus on the production of large language models, the general-purpose technology that underlies AI products such as OpenAI’s ChatGPT.

Other legislation to be set out in the speech will allow Starmer’s new government to axe hereditary peers from the House of Lords, empower the Office for Budget Responsibility to independently publish forecasts of big fiscal events, and implement worker protection reforms, including a crackdown on zero-hours contracts and “fire and rehire” practices.

The Labour administration will also resuscitate the previous Conservative government’s ambition to create a register of children missing from schools, as well as a cyber security bill to protect critical infrastructure from nefarious foreign actors.  

Starmer’s legislative proposals will be monitored closely for signs of the scale of his ambition for the first few months of his premiership — a time many argue will represent the apex of his power.

His AI bill marks a departure from the strategy employed by former prime minister Rishi Sunak, who was reluctant to push for legal interventions in the development and rollout of AI models for fear tough regulation might stymie industry growth. 

Sunak instead set out voluntary agreements between the government and companies, ruling out legislation in the short term.

The EU has taken a tougher approach. In March, the European parliament approved some of the first and strictest rules for regulating the technology through its Artificial Intelligence Act.

Last week, the Tony Blair Institute held a conference on AI’s potential to revolutionise government and public services, with guest speakers from Labour’s cabinet.

The former Labour prime minister noted the importance of Sunak’s AI Safety Summit held at Bletchley Park last year but said “we need to build on this fast”, adding that government needs to learn an entirely “new language” to fully harness the technology’s potential.

Labour’s manifesto outlined plans to “ensure the safe development and use of AI models by introducing binding regulation on the handful of companies developing the most powerful AI models”.

Peter Kyle, the new technology and science secretary, said earlier this year that he was hoping to introduce a “statutory code” that would compel companies to release “all of their test data” and “tell us what they are testing for”.

Regulators, including the UK competition watchdog, have become increasingly concerned about the potential harms of AI technologies. These range from the possibility that algorithms could bake in biases that affect marginalised demographics, to the potential use of general-purpose models to create harmful materials.

Speaking about the King’s Speech on Sunday, leader of the House of Commons Lucy Powell told the BBC the 35 bills were “not just a shopping list of things we’d quite like to do, these are fully considered, worked up bills that we know we can get through in this parliamentary session”.

This week Labour will also outline legislation to set up the centrepiece of its green energy plans — GB Energy, a new state-owned energy investor that will be based in Scotland and will take stakes in renewable energy and nuclear projects.  

Energy secretary Ed Miliband on Sunday vowed to take “immediate action” to boost the role of solar power, as part of several steps aimed at meeting the government’s goal of cutting carbon emissions from electricity generation to net zero by 2030.

“We will encourage builders and homeowners in whatever way we can to deliver this win-win technology to millions of addresses in the UK so people can provide their own electricity, cut their bills and at the same time help fight climate change,” Miliband said.

On Friday, he approved three large solar projects in England that had been blocked by Sunak’s government, saying they would power the equivalent of up to 400,000 homes per year. One of the projects, Sunnica, would create 1,500 construction jobs, the Department for Energy Security and Net Zero said.

PUCK News

Mario Gabelli, the long-suffering investor who has long been the largest of the non-Redstone Class A shareholders in Paramount Global, has just filed suit in Delaware, seeking access to Paramount’s books and records. According to Gabelli, who called me on Friday afternoon to share the news, he isn’t opposed to Shari’s deal to sell the company to the Ellisons and RedBird Capital. He’s also perfectly fine, in principle, with Shari getting a premium for her Class A shares. But he’s concerned about the allocation, noting that Shari has both A shares and B shares, and wants to make sure she’s not getting more for her B shares than others. “I got to represent all investors here,” he told me. Stay tuned…

TKO –

Courthouse News:

Judge in UFC case weighs settlement

Judge Boulware said he would take the arguments under consideration and that he plans to issue a ruling on the settlement sometime next week

https://www.courthousenews.com/judge-weighs-settlement-in-pair-of-ufc-monopoly-lawsuits/#:~:text=A%20Las%20Vegas%20judge%20is,arbitration%20clauses%20in%20their%20contracts.

FTC v KR USDC OR

ORDER: Defendant Albertsons Companies, Inc.'s Motion to Compel, ECF 177 , is GRANTED. Nonparty Target Corporation, Inc., must produce a witness for a deposition on topics three, four, and five of defendant Albertsons Companies, Inc.'s subpoena no later than fourteen days after this order. Ordered by Judge Adrienne Nelson. (joha) (Entered: 07/12/2024)

Politico -

The Federal Trade Commission investigation of DaVita and Fresenius Medical Care follows years of consolidation in the dialysis industry.

Feds tackle dialysis giant with antitrust probe

The Federal Trade Commission is investigating the nation’s two largest dialysis providers over allegations they illegally thwart smaller competitors, according to three people with knowledge of the probe.

The investigation focuses in part on how the companies make it difficult for the physicians who work in their clinics to leave for rivals and start new businesses, said the three people, who were granted anonymity to speak about a confidential matter. The agency is investigating whether noncompete agreements the companies require doctors to sign snarl efforts by rivals that want to make it easier for dialysis patients to be treated at home.

HZO Issues Statement

MarineMax, Inc. (NYSE: HZO), the world’s largest recreational boat, yacht and superyacht services company, today issued the following statement in response to recent letters issued by Island Capital Group LLC:

The MarineMax Board of Directors is open-minded and regularly evaluates bone fide opportunities to enhance shareholder value. The Board is always open and responsive to input from key stakeholders and we have spoken with Island Capital on several occasions. The Company will continue to make decisions and take actions that we believe are in the best interest of the Company and our shareholders.

Proposed Spin of Smithfield

PROPOSED SPIN-OFF The board (the ‘‘Board’’) of directors (the ‘‘Director(s)’’) of the Company announces that it has submitted a proposed spin-off application to the Stock Exchange on July 12, 2024 (after trading hours) pursuant to Practice Note 15 of the Listing Rules regarding the proposed spin-off of the businesses of Smithfield Foods, Inc. operated in the United States and Mexico (‘‘Smithfield U.S. and Mexico’’) for separate listing on either the New York Stock Exchange or Nasdaq Stock Market in the United States (the ‘‘Proposed Spin-off’’).

As at the date of this announcement, Smithfield Foods, Inc. is a global food company and a wholly-owned subsidiary of the Company. It is currently expected that Smithfield U.S. and Mexico, after the completion of the Proposed Spin-off, will remain as a subsidiary of the Company and its financial results will continue to be consolidated into the Company’s financial results.

The details of the Proposed Spin-off, including but not limited to the terms of the Proposed Spin-off and assured entitlement for shareholders of the Company (the ‘‘Shareholders’’) required under Practice Note 15 of the Listing Rules, if applicable, have not yet been finalized. The Proposed Spin-off may or may not proceed. The Company will make further announcement(s) in this regard pursuant to the requirements under the Listing Rules and the applicable laws and regulations as and when appropriate.

BB:

Franchise Group Inc. investors sued ex-CEO Brian Kahn and investment partner B. Riley Financial Inc., claiming shareholders were shortchanged in a $2.6 billion take-private buyout of the operator of franchised-retail brands.

Kahn and his allies are accused in the suit of using their control of the company to wrongfully push through a $30-per-share buyout in 2023. The firm’s brands include Vitamin Shoppe and Sylvan Learning.

Investors say in the Delaware Chancery Court suit – unsealed late Friday — that the deal undervalued their shares and Franchise Group’s proxy disclosures about who was behind the leveraged buyout were flawed. They allege that B. Riley aided Kahn in cheating them.

The former chief executive officer publicly acknowledged in a B. Riley analyst call in December that the deal amounted to “an opportunistic acquisition at a bargain-basement price,” according to the 81-page complaint.

Signs LOI for merger with Invest Inc.

The chill that has suddenly fallen over Europe’s battery industry captures the essential shortcoming of EU green industrial policy. Even as leaders are clear-eyed about the central importance of domestic economic strength to their geostrategic independence, they still do not seem to will the means to their stated ends.

In the tangle of policies making up the EU’s industrial strategy, batteries actually stand out as a relative success. The European Commission includes them in “important projects of common European interest”, making it easier to kick-start manufacturing with public subsidies. A flurry of factories, both indigenous and offshoots of Chinese and Korean battery makers, have opened across the region. Capacity was until recently forecast to grow robustly.

So news that European battery projects are being scrapped or seriously scaled down is an important sign of things going wrong, especially as the disappointments do not appear to be due to Europe’s well-known but slow-to-fix handicaps on technology, raw materials and energy costs. The issue is, rather, that slowing electric vehicle sales have undermined expectations of market demand for the battery capacity that was to come on stream. 

This exemplifies a broader problem: a private sector deeply lacking in faith that its political leaders can move from words to action.

Those leaders have committed to phasing out new internal combustion engines over the next decade, while vowing not to let Chinese imports wipe out domestic carmakers. If both were credible, EU car manufacturers would be investing hand over fist to meet imminent EU demand for some 10mn EVs a year. That they are not — with the fallout for batteries and other parts of the supply chain — proves they do not believe the political goals will be met.

None of the many things Europe does get right is enough to turn this around. Setting targets (even legally binding ones), regulating away polluting activities or subsidising production: these are necessary, but evidently do not produce confidence that the market for green tech will be there. Nor, much, do protectionist tariffs in isolation. 

This lack of faith holds back everything from renewable generation (will the grids be there to offload peak power?) to electrolysers (will there be enough buyers of green hydrogen?). Fundamentally, policy needs to make the private sector trust demand at scale will be there. That is what China has long been adept at ensuring, and is the true cause of the US Inflation Reduction Act’s huge effect on factory building.

The EU needs to do the same, in its own way. This is not primarily about joining a subsidy race. But it does require enlisting fiscal policy, tax design and credit policy so as to forge new or fledgling markets into solid existence.

On fiscal policy, at least do no harm. A return to the demand-sapping budget consolidation of the last decade is sure to damp private investment plans. Why expand if no one will buy your extra production? The quid pro quo for any budget cuts prompted by the new fiscal rules, then, must be more EU-level funding to sustain long-term demand for green tech: EV leasing schemes, green infrastructure, grid construction, household electricity storage and so on.

Then twist taxes more to favour the new markets you aim to create, and commit to keeping them that way. Norway’s extraordinary adoption of EVs was achieved by granting them exemptions from onerous taxes on conventional cars, plus traffic privileges (access to bus lanes and cheap parking). The EU can follow suit in areas such as the tax treatment for corporate cars.

Renewable energy projects are being cancelled because once-attractive financing profiles look unviable with today’s interest rates. But central bankers have the tools to prevent inflation-fighting from setting back the transition. The European Central Bank could surgically loosen financial conditions for green investment by adapting its “targeted long-term repurchasing operations”. These offered banks loans at terms below the policy rate to the extent they expanded lending to the economy. A green TLTRO could reward banks for lending growth to projects within the EU’s green taxonomy.

This would fulfil, not violate, the ECB’s mandate, which requires it to support the EU’s general economic policies so long as it safeguards price stability — it would do this by keeping its main policy rate where it needs to be. There is no reason for green investments to fall victim to the economic cycle.

There is no reason, in truth, why Europe shouldn’t see a green investment boom. But the private sector needs to know that governments, too, mean business.

QuantumScape’s deal with VW is a rare bright spot in a tough market for electric transportation

The slowdown in demand for electric vehicles is temporary, US battery executives insist, as strong clean car sales in the second quarter in North America suggest drivers remain eager to go green.

This week, battery maker QuantumScape’s shares surged 52 per cent following its disclosure of a $130mn payment from Volkswagen for technology royalties.

Shares in QuantumScape, which makes solid-state batteries rather than conventional EV lithium-ion batteries, had fallen since going public in 2020 via a blank-cheque company.

The announcement was a rare bright spot this year for US battery makers, whose lofty valuations have crumbled amid slowing EV sales and increasing competition for Chinese suppliers such as BYD and CATL.

“I would be foolish to say that I am not worried about the Chinese competitors,” Siva Sivaram, QuantumScape’s chief executive, said in an interview.

The company’s development of solid-state batteries will give EV cars longer range and faster charging times versus the lithium batteries made by Chinese or other competitors, Sivaram argued. But Wall Street analysts have said solid-state batteries have an uncertain path to commercialisation.

The deal with Volkswagen gives QuantumScape about one to two months of free cash flow, Morgan Stanley said in a July 11 report. Volkswagen previously invested $300mn in QuantumScape and controls about 25 per cent of the voting power at the company, Morgan Stanley said, adding that there is no specific timeline for the potential mass production of its battery cells.

“The automotive business has these big ups and downs,” Sivaram said about the sluggish EV sales. “Yes, there is surely a blip. We just have to ride out these blips.”

Tesla, the world’s largest EV company, this month reported a second consecutive decline in quarterly vehicle sales.

But after “a shaky start” to the year, North American EV sales increased 10 per cent in the first six months of 2024 versus last year, according to Rho Motion. Ford said this month its EV sales were up 72 per cent in the first half of the year, making it the second-largest EV seller after Tesla.

Still, battery business valuations have fallen from the market’s 2021 heyday. Silicon-based battery developer Sila Nanotechnologies, which was valued at $3.3bn in a 2021 funding round, raised $375mn in a June fundraising that Joe Fath, a portfolio manager at repeat investor TRowePrice, said was “clearly a down round”.

“The folks who are participating, there is conviction and belief that all ground transportation is going to go electric,” Gene Berdichevsky, co-founder and CEO of Sila, told the Financial Times. Another of Sila’s repeat investors, Sutter Hill Ventures, made some of the first investments in chipmaker Nvidia and remains on its board, Berdichevsky said.

In EV sales, “we are in an air pocket right now,” said Fath, but he added that the lower valuation for Sila “is not a knock on their progress. It is a knock on the world we were in versus the world we are in today. When you go through environments like this, you have to have a stronger stomach.”