TheChek News Flow

Verizon and Yahoo are set to announce an exclusive $5 billion deal

Verizon and Yahoo are set to announce that they are striking an acquisition deal, according to sources close to the situation. The news is expected by Monday, although it could come earlier or later.

But Yahoo told other bidders this afternoon — those interested in buying Yahoo have included private equity firm TPG and a group led by Quicken Loans’ Dan Gilbert — that the telco giant was the winner of the four-month process, said sources.

The transaction of about $5 billion still has to pass regulatory muster and also faces difficult integration issues. Also, the reception of the deal from Verizon shareholders will be an issue.

As per usual, there is always a chance it will not work out and one of the other bidders — most likely Gilbert — might lob in another offer once the terms are revealed.

Those terms are still unclear, including whether Verizon’s deal includes some or all of Yahoo’s patent and real estate assets, which have some (though diminishing) value.

Verizon is set to report its quarterly results on Tuesday, and sources said the pair hope to be able to announce details of the deal before then, if possible.

In any case, the move is not a surprise, given Verizon has been public in its interest in buying Yahoo and it has always been the front-runner.

Recode and others reported Friday that the Yahoo board had settled on Verizon, but the other bidders had still not been officially informed. Verizon was considered the safest bid among those made and most attractive, especially after Verizon upped its initial bid substantially. In addition, said sources, the willingness of Verizon to accept some "hairy" issues at Yahoo — including a less-than-ideal search deal with Mozilla and also large stock compensation costs.

The deal, which has been shepherded by Verizon’s EVP of Product Innovation and New Businesses Marni Walden and AOL head Tim Armstrong, will be a big leap for the company, which has been seeking to add to its ad tech and digital content offerings. Verizon bought AOL a year ago for $4.4 billion to start that process.

But that effort has been mixed so far. For example, its Go90 mobile video service, aimed at teens, has gotten a lot of criticism from investors. There are also worries about how well Verizon will fare going up against digital ad powerhouses like Facebook and Google.

Adding Yahoo’s assets to its weaponry could help — its BrightRoll programmatic video ad service is considered a plus — but a lot of its display tools are aimed at solving yesterday’s problems.

Verizon will also be getting a mass of media assets, some of which are still powerful, such as Yahoo Finance and Yahoo Sports, and others not so much. Under CEO Marissa Mayer, Yahoo spent large sums on content — such as its $1 billion acquisition of Tumblr and a deal to bring TV news star Katie Couric to the network — that have not paid off.

The same is true with Mayer’s intense — and many say misguided — plunge into mobile search technology, in an effort to make an end run around Google. Very little of her massive investment there has seen the light of day, and it is not clear if Verizon will continue it.

Also no surprise: Mayer is not expected to stay on after the deal is wrapped up in the fall, said sources, and it is unclear how many of Yahoo’s current execs will remain. Many have had their options accelerated, but someone has to keep the lights on until Verizon gets to fully claim its prize.

It seems likely that effort will be run by Armstrong, who had once tried to get Mayer to consider merging the companies. He was pretty much rebuffed by her, but the idea of an AOL-Yahoo merger has been around for a long time and almost happened a few of those times.

Here’s me writing about possible mergers of the pair in 2006. Then in 2008! Also 2010! And 2011! By the way, when AOL was really powerful in the mid-1990s, Yahoo was also given an offer by then-exec Ted Leonsis, as I reported in my book on AOL from then. (Conclusion: I have been covering Yahoo and AOL for too long.)

Mayer and Armstrong were also top execs at Google in its early days and have tangled since over talent raids while at Yahoo and AOL. (Remember the Ned controversy? Me either, but I did seem to write about it a lot!)

Well, finally it looks like it’s going to happen. And it will be really hard.

"This is going to be a very tough integration," said one source, who noted that Yahoo and Verizon have spent very little time on the specifics of how the companies will coordinate pretty much everything. "The unknowns are as big as the knowns."

Translation: It’s Yahoo, Jake.

Actually, maybe not anymore — it’s not clear if Verizon will keep the well-known brand. Whatever the case, the sale marks a definitive end to one of the internet’s most iconic and pioneering companies as an independent entity.

I tried everyone for a comment and no one seems to be home today. I wonder what they’re up to?

Cover story: There are a number of reasons for investors to be concerned about the prospects of pharmacy-benefit managers, which haven't been effective in keeping rising drug costs contained, a task some top corporations are taking on themselves (Cautious on ESRX, CVS, UNH). 

(Reuters) - Tesla Motors Inc TESLA.O and SolarCity Corp SCTO.O have made progress in putting together a deal that will merge the electric car maker and the solar panel installer, people familiar with the matter said.

The two companies, which count billionaire Elon Musk as a major shareholder, are in the final stages of carrying out due diligence on each other, and could agree on the terms of a deal in the coming days, though it is still possible that their negotiations end unsuccessfully, the people said on Saturday.

It could not be learned whether SolarCity would be successful in including a go-shop provision in a merger agreement with Tesla that would allow it to continue to solicit bids from other potential buyers for a short period of time.

The sources asked not to be identified because the negotiations are confidential. Representatives for SolarCity and Tesla did not immediately respond to requests for comment.

Tesla announced last month that it had made an all-stock offer for SolarCity worth $2.8 billion. It argued that by acquiring SolarCity, the two companies would form a one-stop clean energy shop, offering consumers solar panels, home battery storage and electric cars under a single trusted brand.

SolarCity has not publicly revealed its views on Tesla's offer since it announced on June 27 that it had formed a special committee consisting of two board members to evaluate the offer. The committee said it had retained legal and financial advisers and would review the proposal against SolarCity's standalone prospects and a broad range of strategic alternatives.

As chief executive of Tesla, chairman of SolarCity and the biggest shareholder in both companies, Musk has recused himself from voting on the deal at both companies. Several Tesla and SolarCity executives, including Musk's cousins SolarCity CEO Lyndon Rive and SolarCity board member Peter Rive, have also recused themselves from voting.

Elon Musk said on July 20 when he revealed his master plan "part deux" for Tesla that he is looking to create a "smoothly integrated and beautiful solar-roof-with-battery product."

"We can't do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies," Musk said.

Apple's rumored electric car won't hit the roads until 2021, owing to various obstacles encountered in "Project Titan," a report claimed on Thursday.

In profiling three brothers who once worked on Apple's Siri team, but now work on Titan, The Information quoted sources as saying that while the company was aiming for a 2020 rollout, problems have forced a delay. Among these is the departure of one-time Titan leader Steve Zadesky in January.

The brothers at the center of the story — Brian, Kevin, and Michael Sumner — have reportedly been developing software to capture the tremendous amounts of data Apple cars will generate, and may also be involved in buying and configuring servers for that purpose.

It's speculated that data will be uploaded to Apple servers, allowing the company to evolve autonomous driving technology and boost its accuracy.

The report suggests that Apple will have to dramatically improve its cloud infrastructure if it wants to handle all of the demands of a self-driving car in-house, unlike Tesla, which offloads some data tasks to Amazon Web Services. A single self-driving vehicle can generate anywhere between 2 and 10 gigabytes of data per mile, according to the CEO of DeepMap, a company specializing in mapping technology for self-driving systems.

It's not yet clear, though, if the first-generation "Apple Car" will actually be self-driving. Past reports have indicated that the first model might be semi-autonomous at best, though the company is at least believed to be developing self-driving systems.

Is the U.S. economy headed for another recession? Of course it is. As soon as one recession ends, the economy is always headed for another. Especially in this cycle, the ultralow interest rates maintained by the Federal Reserve have virtually ensured the buildup of financial excesses that, once corrected, will likely cause a contraction in overall output.

Those were my introductory remarks (repeating my lead in a May 28 Barron’s cover story about the inevitability of market crashes), as part of a panel on the economic outlook at a conference held each July in Las Vegas called “Freedom Fest.” While there is always plenty to be festive about at this four-day event, prognostication sessions are often punctuated with talk of “economic Armageddon”—the very words of one my colleagues on the panel.

Free-market economists who are sensitive to the heavy hand of government tend to err on the side of pessimism. So I began by speaking of the inevitability of recession in order to establish my bona fides in this company. I share the view that the government does far more to destabilize the economy than to stabilize it.

With all that said, however, I outlined my reasons for believing that Armageddon is not about to happen. In fact, economic growth in 2016 could even show a pickup from 2015’s dismal rate.

IRONICALLY, IT MAY BE that the very sluggishness of this expansion—the slowest on record—has been a key reason why excesses have not yet become apparent. In the housing market, for example, it was reported last week that the slow and steady rise in the purchase of existing homes continues, at an annualized rate in June of 5.6 million units—a nine-year high, although way down from the 7.1 million average of 2005, or the 6.5 million average of 2006. And back then, there were fewer households headed by someone 25 and older that might be in the market for a home.

Back then, however, there was also a housing bubble that was about to burst. But while the median price of an existing home rose to $247,700 in June, it was still lower, in today’s dollars, than the July 2006 peak of $275,000.

The stock market has also been remarkably free of irrational exuberance, based on a fairly solid indicator, the dividend yield. The yield on the WisdomTree Dividend Index, which covers the nearly 1,400 companies that pay cash dividends, is at 3%, even though the yield on the 30-year Treasury bond has plunged to 2.3%. Back in July 2007, the yield on the dividend index was 2.9%, against a 30-year T-bond yield of 5.1%. Based on any adjustment in the interest rate, then, stock prices today are at much more conservative levels.

Speaking of interest rates, one fairly reliable indicator of imminent recession is a flat or inverted yield curve. Normally, long-term rates are higher than short-term rates. But when the yield curve goes flat or inverts, short-term rates are equal to or greater than long-term, and a recession generally results. Right now, the difference between the 10-year Treasury note and the three-month Treasury bill is 125 basis points, or 1.25 percentage points, indicating a relatively normal yield curve.

Finally, there is the remarkable performance of new unemployment insurance claims (see chart). Virtually every recession is preceded by an increase in claims from the same month a year earlier. But not only have claims been running at historic lows, they keep falling to ever-lower lows, most recently at 7% below that of the same month a year ago.

On Friday, the Bureau of Economic Analysis will report the first estimate for gross-domestic-product growth in the second quarter. Look for growth at an annualized rate of 3% or greater.

If a game of chicken sounds like your idea of a good time, then utility stocks might be your sector of choice.

Utilities, typically bought by income- seeking investors for their hefty dividends, have been racing ahead this year. The Utilities Select Sector SPDR exchange-traded fund (ticker: XLU) has gained 20% during the first 145 trading days of 2016, the type of performance you have to go back to 2009 to find. They’ve been driven higher by tumbling bond yields, which make their payouts look more attractive by comparison, and a demand for safety in a world that feels like it’s careening out of control. Safety-seeking investors appear to have found it.

That rally, however, has watered down the very characteristics that have made it the sector of choice for risk-averse investors—the Utilities Select Sector SPDR now yields just 3.1%, the lowest level since the middle of 2008—while valuations look extended. Utilities might not be heading off a cliff just yet, but they’re certainly getting closer to the edge.

On most valuation metrics, utilities look pricier than they’ve been in years. The S&P 500 Utilities Sector has been trading near 19 times 12-month forward operating earnings forecasts, its highest since the early years of the millennium. You have to go back even further, to the mid-1990s, to find a time when the sector traded higher than its current two times price/sales ratio. Of course, those valuation metrics don’t take into account ultralow Treasury yields that have helped buoy utilities—but even accounting for low interest rates, utilities look pricey. Citigroup analyst Praful Mehta looked at the correlation between the utility sector’s valuation and expectations for where the 10-year yield would be in one year, and found that utilities should be trading closer to 18 times 2017 earnings.

But no one’s buying utilities because they’re good value. With interest rates so low around the world—even negative in some cases—utilities have looked like an attractive place to stash cash thanks to their 3%-plus dividend yields. At the same time, concerns about the strength of the global economy, the impact of Brexit, and other macro factors have made utilities—the most defensive of the defensive sectors—a haven in a frightening world.

For that reason, Mehta isn’t ready to urge his clients to sell utilities just yet. While utilities probably won’t continue their strong performance, it would take something like a Federal Reserve rate hike or a stronger global economy to really force investors out of the sector. That “would suggest holding on if you think macro risks are here for a while,” Mehta says, noting that utilities could hang on until December and provide a nice yield in the meantime.

Cumberland Advisors’ chief investment officer, David Kotok, isn’t waiting around for such a clear signal. His firm started buying utilities for his clients starting in 2014—when the Utilities Select Sector SPDR ETF, recently $52, was trading below $40 a share. Last week he exited the position. With the difference between short-term interest rates now near its lowest level since the financial crisis in 2008, Kotok says, the fuel for the utilities rally is running out. “We’ve had a marvelous run,” he says. “It’s time to take profits.”

We couldn’t agree more.

WHEN WE RAN THE Barron’s Energy Roundtable in April, Harlan Cherniak, co-head of Americas special situations at KKR’s credit division, touted the prospects of U.S. Silica Holdings (SLCA), which produces the sand used in hydraulic fracturing, or fracking. A central part of his thesis was consolidation in that part of the industry. It now appears that his prediction has come to pass.

Last week, U.S. Silica announced that it would buy NBR Sand from privately held New Birmingham for $210 million in cash and restricted stock. The acquisition wasn’t necessarily cheap, but should still pay dividends for U.S. Silica. These days, oil companies are using more sand to get the same amount of crude out of the ground. That means sand producers don’t need the number of oil rigs in operation to return to their peak levels—some 2,000 at the top of the market—but can still turn a hefty profit at 900 rigs in use, a level Halliburton (HAL), in its earnings call, suggested was a reasonable level in a recovery. U.S. Silica, for its part, expects the acquisition to add 20 cents to 30 cents to earnings per share in 2017.

Don’t expect the industry consolidation to end any time soon. U.S. Silica still has more than $500 million in cash remaining after the deal. At the same ratio of cash to stock it used in the NBR Sand deal, it has about $1 billion in purchasing power remaining. “Those that have a war chest of capital have a number of very attractive acquisitions in their crosshairs,” Cherniak says. U.S. Silica, recently at $36, could continue to rise.

First the massacre by truck in Nice, France, then an ax attack on a German train and now a shooting spree in Munich: Over the past 10 days, Western Europe has seen the calm of everyday life shattered by high-profile acts of violence.

The motives and circumstances of each attack were different but the string of violence has officials in the region asking if terrorism is becoming a fact of life that Europe must learn to accept.

The initial assessment by authorities is that Friday’s German attack was committed by Ali David Sonbody, a teenager who was believed to have been in psychiatric care and taken an interest in mass killers including Anders Behring Breivik, the right-wing terrorist who killed 77 people in Norway exactly five years before.

If the assessment holds, the Munich attack would be an exception in a year when Islamic State has either directed or inspired most of the terror attacks in Europe.

U.S. and European officials said they were proceeding cautiously because the assessment could change in the days to come. But security officials said the recent string of attacks in both Europe and America show the importance of improving intelligence collection, and improving services and monitoring of people with mental-health issues.

“We are living in fear whether it is from terrorists or [mentally ill] people,” said a U.S. official in Europe. “Whether they are self-radicalized or mentally ill they can terrorize and change peoples lives. We have two problems here, we have to focus on both.”

European security officials say that better intelligence is far more effective at finding a terror network than lone wolf attackers. There is no way, officials say, to foresee and prevent an attack on undefended targets by someone who isn't known to police or intelligence services.

Hardening the kinds of soft targets struck this month in Europe would require a far greater presence of armed guards, security checks and barriers—steps European officials have so far been reluctant to take.

There is little doubt that the ever-expanding number of threats, not just from jihadist groups but also right wing extremists, have stretched European intelligence agencies and police departments.

Europol, the law enforcement agency of the European Union, this week released a report that noted that last year saw not just a sharp spike in arrests of Islamist radicals, but also an increase in arrests of terrorism suspects tied to ethno-nationalist groups in Europe.

“The general trend is the radicalization of everybody,” said a European security official. “I don’t know how we’re going to stop this.”

U.S. officials say the one thing European intelligence and law-enforcement officials could do quickly is find a mechanism with which to share more intelligence and law enforcement information, and share it more widely.

American officials have been pushing Europe for more intelligence sharing with the U.S.—not simply providing information on terrorists or potential terrorists who are intent on attacking the U.S. but a far broader swath of information.

U.S. officials believe if European officials would share a much greater percentage of information on people they are tracking would allow them to find connections between potentially radicalized individuals or others that pose a threat of conducting mass casualty attacks.

Even attackers who act alone often rely on outside help or contact people about their planned attack.

Some European officials are concerned about depending on American intelligence that many officials believe is overly intrusive.

Jerry Hendrix, a Washington-based security analyst at the Center for a New American Security, said the terror threat in Europe has laid out a stark choice for the European Union and the North Atlantic Treaty Organization “if Europe is to avoid this being the new normal.”

“Europe, the EU, or NATO, either have to grow up, and grow together with more investment in intelligence and intelligence sharing amongst the member nations, or they are going to have to go back to an era of hard borders and low immigration,” Mr. Hendrix said.

Hershey Trust controls billions of dollars for a nonprofit school and holds a 30% stake in HSY with 81% of the voting rights.