TheChek News Flow

Merkel Says There Is A "Problem" With The Euro, Blames Mario Draghi

France’s Bonds Take a Beating

Investors move money into German debt, pushing the yield on its 10-year government bond as low as 0.3%

Government bonds in France and southern Europe tumbled again Friday, with fresh data showing that foreign investors continue to dump French debt ahead of the country’s presidential election.

The spread between French and German 10-year government-bond yields widened to 0.74 percentage point on Friday from 0.66 percentage point Thursday. French bonds are now trading in the same direction as those of the southern European countries, whose debt was hit hardest by the euro sovereign-debt crisis.

Bonds slid in Italy, Spain, Portugal and Greece on Thursday and Friday. Investors moved money into German debt, with the yield on its 10-year government bond falling as low as 0.3% during Friday’s trading, down from 0.35% at Thursday’s close.

During the sovereign-debt crisis in 2010 to 2012, investors were concerned that some countries could leave the eurozone, questioning the single currency’s existence.

Concerns for the currency bloc are increasing once again as betting odds rise for an election victory for Marine Le Pen, leader of the far-right National Front who has promised to take France out of the eurozone. Betfair now gives Mrs. Le Pen a 28.6% chance of becoming the president of France, up from 20.3% at the beginning of February.

While former economy minister Emanuel Macron remains the favorite in the presidential race, foreign investors aren’t taking the risk even as local-fund investors remain more sanguine.

Foreign-based investors sold €30 billion ($32 billion) in French bonds during the last three months of 2016, the most in two years, according to European Central Bank data released Friday.

Survey data suggest that international money managers who are invested in other French markets are also getting nervous. Bank of America Merrill Lynch’s regular survey of fund managers showed global investors’ sentiment toward French stocks was at its lowest level in two years. That shift comes even as investors generally warm toward eurozone equities.

“The two-round French [election] system means anti-Le Pen voters can rally around a single alternative in the final round and, therefore, she needs more than a lead in the polls, she needs a majority, to win the presidency,” said Tomas Hirst, analyst at CreditSights. The election rounds are in March and May.

But “markets are understandably wary of being caught out as they were with the Brexit and Trump votes last year,” he added.

Investors are also currently grappling with a more familiar problem for the eurozone, as Greek bonds sank Friday. Athens is again embroiled in a tussle with international creditors over the terms of its bailout. Yields on 10-year Greek bonds rose as high as 8.1% Friday from a close of 7.9% Thursday. Yields rise as bond prices fall.

Kraft’s $143 Billion Bid for Unilever Highlights Squeeze in Consumer Goods

U.S. food and beverage maker says U.K. company declined proposal, but ‘we look forward to working to reach agreement on the terms of a transaction’

Kraft Heinz Co. made a $143 billion unsolicited bid for Anglo-Dutch rival Unilever PLC, seeking to marry two of the world’s biggest packaged food makers and accelerate an industrywide drive to cut costs amid slowing sales.

Any deal faces significant hurdles, even if Unilever management—which quickly rejected the offer Friday—ultimately comes around. The companies are big players in many of the same markets, so a combination would draw scrutiny by antitrust regulators around the world. It also could face political hurdles in the U.K. and the Netherlands, where Unilever has dual headquarters.

Unilever said the cash and stock offer undervalues the company. Kraft responded that it was committed “to working to reach agreement on the terms of a transaction,” though it said another offer isn’t certain.

If Kraft were to overcome these obstacles, the deal would rank as the second-largest cross-border transaction on record, behind Vodafone Group PLC’s $172 billion acquisition of Mannesmann in 1999, according to Dealogic. It would combine the No. 4 and No. 5 players in the global, packaged-food industry, bringing under one roof grocery-store staples like Heinz ketchup and Ben & Jerry’s ice cream.

A deal with Unilever also would accelerate Kraft Heinz’s effort to expand in emerging markets, where Unilever generates about 60% of its sales. About 70% of Kraft Heinz’s sales come from the U.S.

Shares of Unilever rose more than 13% in London trading. Shares of Kraft Heinz were up more than 7% in New York.

The offer is also the latest, sweeping foray into the global consumer-goods industry by Brazilian private-equity firm 3G Capital Partners L.P. The group, along with Warren Buffett, orchestrated the 2015 merger of Kraft and Heinz, and remains Kraft’s biggest shareholder.

3G also calls the shots at Anheuser-Busch InBev SA, the global beer colossus that last year swallowed SAB Miller for more than $100 billion. 3G has targeted consumer companies it considers bloated and aggressively slashes costs.

Kraft is making its move at a time when global consumer-goods giants from Procter & Gamble Co. to Nestlé SA are struggling to boost sales. Many of their biggest markets are saturated and highly competitive. That, and stubbornly low inflation, have made it hard to raise prices to make up for sluggish sales growth.

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Five Things to Know About Potential Deal

Offer Comes Amid Headwinds for Unilever

Heard: Can Kraft Afford Unilever?

Analysts: Temper Your Enthusiasm

Big Food Looks to Startups for Ideas, Innovation

For food companies, consumer habits have changed radically—away from the packaged foods that made sense across the developed world for more than a generation and toward fresh and healthier offerings from an array of big and small players.

For decades, the rise of baby boomers, more women working and a trend toward low-fat foods “created a perfect environment for packaged food growth that came at the expense of fresh foods,” said RBC analyst David Palmer. But over the past several years, much of that dynamic has changed.

One reason, according to Mr. Palmer: Millennials have begun having babies. “This has brought a new set of eating values...today’s consumer is avoiding food with sugar and artificial ingredients,” he said.

The industry has tried to pivot. Kraft, for instance, has removed artificial colors from foods like its famous orange mac-and-cheese, and it created a new brand of frozen meals aimed at using trendier ingredients to attract younger consumers.

But the biggest players, including Nestle, Unilever and Kraft, also have scrambled to cut costs to preserve margins. 3G has a reputation for swift layoffs and scrutiny of even the most minor costs using “zero-base budgeting.” The process calls for departments to justify every expense anew each year. This week, Kraft announced plans to squeeze out $200 million more in savings than it initially targeted in the Heinz combination. But its momentum in improving profitability is slowing.

Unilever Chief Executive Paul Polman rolled out his own version of zero-base budgeting last year, though margins there are still significantly lower than they are at Kraft. Unilever’s earnings before interest and taxes are only 15.3% of sales, while Kraft Heinz’s are 30%, said RBC’s Mr. Palmer.

A union would bring together brands like Kraft Heinz’s namesakes, Oscar Mayer hot dogs, Planters peanuts, Philadelphia cream cheese and Maxwell House coffee with Unilever’s Hellmann’s mayonnaise, Lipton teas and Ben & Jerry’s ice cream.

But Kraft Heinz also would be pushing into uncharted territory, acquiring Unilever’s long list of personal-care and home-care brands like Dove soaps, Axe deodorant and Surf laundry detergent. Unilever’s Mr. Polman has steered the company away from food and toward these higher-margin goods, which now make up the bulk of the company’s portfolio.

In a statement Friday, Unilever said Kraft’s offer was $50 a share, in a mix of $30.23 in cash payable in U.S. dollars and 0.222 share of the combined new company.

Unilever said Kraft Heinz’s proposal represents a premium of 18% to its Thursday closing price. Under U.K. takeover rules, Kraft has until March 17 to make a formal offer sweetening the deal, or it must walk away.

The deal comes after a steep drop in the value of the pound against the dollar. Unilever shares, meanwhile, have fallen 7% since September amid its recently sluggish sales

A person familiar with the matter said Unilever was “surprised” by the offer. Unilever management views it as an opportunistic play on the currency and Unilever’s share weakness, this person said.

Should Kraft ultimately convince Unilever on the merits of a deal, it has other hurdles. Antitrust issues aside, Unilever’s unusual corporate structure and deep roots in Europe could force a close look by politicians. Unite, Britain’s biggest union, on Friday said it would urge Unilever to reject any offer from Kraft, which has already courted controversy in the U.K. Critics accuse it of backtracking on a promise to keep a factory open in the U.K. after it bought Cadbury in 2010. Mondelez International Inc. kept the Cadbury business when it split with Kraft in 2012.

Kraft has said it tried to keep the factory open, but later found that plans to move production abroad were too far along to change.

Unilever is considered one of the Netherlands’ corporate jewels. The company employs around 3,000 people there and operates several plants and a research lab. Dutch Prime Minister Mark Rutte, who faces elections next month, is a former human-resources director at the company. On Friday, he called Unilever “an important company, a proud company” and said his government will monitor developments.

But he also said it was “primarily Unilever’s business and not the government’s.”

Mike Pence Says U.S. Backs NATO but Urges Europe to Boost Military Spending

Comments aim to reassure Europe on U.S. commitment to NATO

MUNICH—Vice President Mike Pence said the U.S. would be unwavering in its commitment to the North Atlantic Treaty Organization, but demanded that Europe step up its military spending, marking one of the Trump administration’s most full-throated efforts yet to reassure nervous partners.

Mr. Pence, speaking at the Munich Security Conference to German Chancellor Angela Merkel and scores of other leaders and senior officials from around the world, said he was bringing to Europe a message from President Donald Trump about the importance of the trans-Atlantic bond. He promised Europe that the U.S. would be “your greatest ally.”

“We will stand with Europe,” Mr. Pence said.

It was the broadest speech on foreign policy that a member of the Trump administration has delivered abroad, and part of a barrage of speeches by top officials aimed at reassuring allies that have been rattled by Mr. Trump’s comments that NATO was obsolete.

But though Mr. Pence promised the U.S. would continue to “hold Russia accountable” for its military intervention in Ukraine, he didn’t address many of European allies’ broader concerns, particularly on how the new administration views the European Union.

Ms. Merkel, speaking before him, refrained from criticizing Mr. Trump directly but delivered a defense of multilateral institutions, including NATO, the United Nations and the EU. She said Germany would continue increasing its military spending until it reaches 2% of gross domestic product, the NATO standard. But she cautioned against believing that “security is only ensured by raising one’s defense spending.”

Speaking later, Russian Foreign Minister Sergei Lavrov said the West and Moscow needed to abandon confrontation and turn to dialogue. By working together, Moscow and the West can “overcome the post-truth period and abandon the hysteric information wars...Let it be a post-fake era.” But he criticized NATO’s expansion and military buildup in Eastern Europe, as well as Western support for Ukraine.

He added that Moscow is looking for a new kind of world order, one where Russia has a loud voice. “If you want you can call it a post-West world order,” he said.

Mr. Lavrov also said the U.S. has produced few hard facts backing up its accusation of Russian interference in the American presidential election, which Moscow denies. He said people complained that Mr. Trump provided no evidence when he said there was voter fraud in U.S. election but didn’t demand evidence in this case.

European officials were muted in their criticism of Mr. Trump in Munich. Many appeared to be looking for common ground or gentle comparisons between European and U.S. foreign policy.

Some officials pushed back against isolation.

“We are linked across the Atlantic with our friends in the United States,” said Federica Mogherini, the EU’s foreign-policy chief. “When we see that it is Europe that needs America, it is also America that needs Europe.”

Others called for security spending in Europe to be viewed through a bigger lens. German Foreign Minister Sigmar Gabriel pushed back on demands for additional military spending, arguing that nations should also evaluate how much is spent on development aid and other issues, including support for migrants.

German, French and European officials all argued that Europe should increase its spending through the EU to get more capability for every euro spent.

NATO Secretary-General Jens Stoltenberg has taken up Mr. Trump’s call for allies to spend more on defense and has been pressing allies to develop spending plans ahead of the president’s visit to Europe in May. On Thursday, Mr. Stoltenberg evoked Mr. Trump’s inauguration day slogan while trying to make the point that it is in the U.S. interest to continue to work with Europe. “I don’t believe ‘America First’ means ‘America Alone,’” Mr. Stoltenberg said.

Since Defense Secretary Jim Mattis’s visit to Brussels last week, European leaders have been wondering what the U.S. might do to reduce its commitment to Europe should allies not spend more on defense.

On Saturday, Mr. Pence took one option off the table. He promised the U.S. would continue to support its contribution to the NATO deterrent force in Poland and the Baltic states. And he said the Trump administration would boost its military spending to strengthen its forces and better protect NATO allies.

“Peace only comes through strength,” Mr. Pence said. “President Trump believes we must be strong in our military might.”

But he was careful to add that Mr. Trump was clear that the alliance would be weakened if European allies didn’t do their part by increasing spending.

Without mentioning Mr. Trump, Ms. Merkel pushed back against the notion that the West is at war with Islam. German officials worry that Mr. Trump’s emphasis on bringing NATO more directly into waging the war on terrorism—rather than doing so in a broader coalition with Arab countries, as the Obama administration did—could feed anti-Western attitudes in the Middle East.

“The Europeans alone cannot finish the fight against terrorism—we need the military power of the United States of America,” Ms. Merkel said. “But it is just as important to me that we have pulled Islamic, Muslim states into this coalition, since I believe that it is these very states that must contribute to making it clear that a misguided Islam, rather than Islam itself, is the cause of terrorism.”

Reckitt Bags a Reviving Mead Johnson on the Mend

Proposed $17 billion acquisition gives Britain’s consumer-goods company access to China health-care markets.

In an otherwise lackluster period for consumer-goods businesses, Reckitt Benckiser Group ’s proposed purchase of U.S. infant and baby-food maker Mead Johnson Nutrition looks timely.

Britain-based Reckitt Benckiser (ticker: RB.UK), whose brands include Scholl and Air Wick, said it will pay $16.6 billion for Mead Johnson (MJN), boosting its exposure to Asian and U.S. consumer-health markets. The tie-up comes weeks after Mead, known for its Enfamil infant formula, reported fourth-quarter sales fell 7% from a year earlier. A 15% rise in earnings before interest and taxes was attributable to Latin America and narrower losses in its “corporate and other” division. Ebit from its key Asian business fell 15%, while North America and Europe slipped 5%.

Mead expects net sales this year to be between flat and down 3%, or from minus 1% to plus 2% on a constant-dollar basis. Reckitt’s earnings also missed forecasts, with full-year like-for-like sales up 3% against an expected 4%.

Tim Gregory, a fund manager with Vermeer Investment Management, says Mead’s recent weakness capped its share price, helping Reckitt snag a bargain just as its fortune may be turning. “Investment in the company at this time, when China has been weak and about to improve, could be extremely good,” he says. Reckitt is paying $90 a share for Mead, roughly where the company’s stock was eight months ago.

Reckitt says the deal will lift earnings per share by a double-digit percentage within three years, while generating annual cost savings of 200 million pounds ($250 million). It pushes the company deeper into China, which will be its second-biggest market. Gregory says that although market conditions in China have been tricky lately, gaining access to the infant-nutrition market there is wise in light of the country’s decision to phase out the one-child policy.

RECKITT IS PRACTICED in mergers and acquisitions. The company increased its profile in the personal-care market in 2010 with its acquisition of SSL International, adding brands such as Durex condoms and Scholl foot care. In 2012, it moved into the $30 billion vitamins, minerals, and supplements market with its $1.4 billion purchase of Schiff Nutrition International, outbidding German pharmaceutical and chemical company Bayer (BAYN.Germany). “Reckitt Benckiser has a very good long-term track record of revenue growth, strong margins, and high cash generation, and we were very sure of the fact that the balance sheet allowed them the possibility of doing a meaningful deal,” Gregory says.

Like sector heavyweights Unilever (UL) and Procter & Gamble (PG), Reckitt has struggled to bolster sales in an economy with weak growth and low inflation. U.S.-based food and beverage maker Kraft Heinz said Friday that Unilever rebuffed a $143 billion takeover bid but that it was hopeful of thrashing out a deal. Some of its recent problems have been temporary, including fallout from a Korea scandal related to disinfectant used in humidifiers. Its stock, which closed on Friday at £71, trades at a price/earnings ratio of 26, broadly in line with P&G but above Unilever’s 22.

Berenberg analyst Rosie Edwards has Reckitt as a Buy with an £85 target, an upside of more than 23%. “We believe combining Mead Johnson’s expertise in science, R&D, and innovation with Reckitt’s superior distribution reach, in-store execution, and advertising capabilities will create value,” she says.

Exclusive: SoftBank willing to cede control of Sprint to entice T-Mobile - sources

Japan's SoftBank Group Corp (9984.T) is prepared to give up control of Sprint Corp (S.N) to Deutsche Telekom AG's (DTEGn.DE) T-Mobile US Inc (TMUS.O) to clinch a merger of the two U.S. wireless carriers, according to people familiar with the matter.

SoftBank has not yet approached Deutsche Telekom to discuss any deal because the U.S. Federal Communications Commission has imposed strict anti-collusion rules that ban discussions between rivals during an ongoing auction of airwaves.

After the auction ends in April, the two parties are expected to begin negotiations, the sources told Reuters this week.

Two and a half years ago, SoftBank abandoned talks to acquire T-Mobile for Sprint amid opposition from U.S. antitrust regulators. That deal would have put SoftBank in control of the merged company, with Deutsche Telekom becoming a minority shareholder.

T-Mobile was worth around $30 billion at the time, but its market value has since risen to more than $50 billion as it overtook Sprint as the No. 3 wireless carrier by subscribers. Sprint's market value is around $36 billion, roughly the same as in 2014.

Deutsche Telekom Chief Executive Tim Hoettges has said in recent months that the German company is no longer willing to part with T-Mobile, prompting SoftBank to explore a new strategy towards a potential combination, the people said. Deutsche Telekom owns about 65 percent of T-Mobile.

SoftBank, which owns about 83 percent of Sprint, has been frustrated with its inability to grow significantly on its own in the U.S market, which is dominated by Verizon Communications Inc (VZ.N) and AT&T Inc (T.N), the two largest U.S. carriers.

While SoftBank is still open to discussing other options, it is now willing to surrender control of Sprint and retain a minority stake in a merger with T-Mobile, the sources said. They asked not to be identified because the deliberations are confidential.

The Reuters report sent shares of T-Mobile surging as much as 7.9 percent before they eased back to close up 5.5 percent at $63.92. Shares of Sprint ended 3.3 percent higher at $9.30.

Investors have said a merger between T-Mobile and Sprint, ranked third and fourth respectively, would still face antitrust challenges, but made strategic sense as the industry moves to fifth-generation wireless technology.

Carriers will need to spend billions of dollars to upgrade to 5G networks that promise to be 10 times to 100 times faster than current speeds.

SoftBank, Sprint, Deutsche Telekom and T-Mobile all declined to comment.

"We may buy, we may sell. Maybe a simple merger, we may be dealing with T-Mobile, we may be dealing with totally different people, different company," SoftBank Chief Executive Masayoshi Son told analysts on the company's latest quarterly earnings call earlier this month.

With the advent of 5G, Deutsche Telekom may receive offers for T-Mobile from other U.S. companies, such as DISH Network Corp (DISH.O) and Comcast Corp (CMCSA.O). Sprint could also be an acquisition target for other companies, the sources said.

Dish declined to comment and Comcast did not immediately respond to a request for comment.

DISCOUNTING PLANS

Under CEO John Legere, T-Mobile has rolled out unlimited data plans and international roaming packages. Combined with aggressive marketing, this has boosted T-Mobile customer base at the expense of its rivals.

T-Mobile said it had 71.5 million total customers while Sprint had 59.5 million at the end of 2016.

T-Mobile is now almost as big as Deutsche Telekom's German business. "We are not in the mood of selling the business," Hoettges told investors last November.

While Sprint's customer base has also grown under CEO Marcelo Claure and financials have improved, the growth was primarily driven by heavy price discounts. Despite new investment, the company's network is still viewed by many consumers as weaker than its rivals.

Reuters could not determine how much of a premium SoftBank may want Deutsche Telekom to pay for control of Sprint.

Barclays analysts wrote in a note in December that a merger of T-Mobile and Sprint could result in $25 billion to $30 billion in synergies but said, "it is not imminently clear to us that the various regulatory agencies would reverse course having already blessed the outcome of a four-player market."

The FCC and the U.S. Department of Justice sent strong messages in 2014 that they did not want Verizon, AT&T, Sprint and T-Mobile to merge among themselves.

Since then, AT&T acquired satellite television provider DirecTV and signed an agreement to buy media giant Time Warner Inc (TWX.N), though that deal is still under regulatory review and has attracted criticism from U.S. President Donald Trump. Verizon has also been exploring other acquisitions.

Antitrust experts said it was difficult to predict how the Trump administration would view a T-Mobile-Sprint merger since key antitrust appointments at the Justice Department have not been made. It is also not clear how such a combination would be viewed by the FCC, whose new chairman Ajit Pai is viewed as more business-friendly than his predecessor.

"I am of the camp that that will not happen even in a Trump administration," Christopher Marangi, co-chief investment officer at GAMCO Investors Inc, said on the prospects of a T-Mobile-Sprint combination. "That kind of merger means lots of job cuts in the U.S."

Craig Moffett, an analyst at MoffettNathanson, said price wars between Sprint and T-Mobile have driven down overall wireless prices for consumers.

"Antitrust regulators could well argue that this is precisely the dynamic they would want to preserve," Moffett added.

Son has said he expects his company to benefit from Trump's promised deregulation of the U.S. economy. After meeting Trump in early December, Son pledged to invest $50 billion and create 50,000 jobs in the United States.