BAT fuels talks of Reynolds deal with appointment of Centerview
British American Tobacco (BAT) has appointed advisers from Centerview, The Sunday Telegraph reported. Centerview bankers worked on UK-headquartered BAT’s acquisition of a stake in the North Carolina-based tobacco group Reynolds American last year and the advisory appointment has fuelled speculation BAT might be planning to take over the remaining 58% stake in its US rival with a bid of more than USD 50bn, the unsourced report said.
BAT was advised on the Reynolds transaction last year by UBS, the item said, reporting that several bankers from UBS involved in that transaction are now working for Centerview.
A BAT spokesperson said the company is content with its current Reynolds shareholding but otherwise declined to make any comment, the item reported.
BAT’s current advisers already include Deutsche Bank and UBS, the report noted.
Sunday Telegraph
Busch prepares for merger with Pfeiffer Vacuum by changing legal form
The fact that Busch, a German vacuum pump and compressor group, has changed its legal form could be a preparation for a merger with local rival Pfeiffer Vacuum, Euro am Sonntag suggested without naming sources. The newspaper pointed out that Busch only recently changed its legal form to Societas Europaea [SE], which gives it more room for maneuvering.
The report repeated that Busch has accumulated a 27% stake in Pfeiffer Vacuum and it is widely believed that it is more than a mere financial investment. One of the more likely scenarios is that Busch will push for a merger. The newspaper suggested that Busch would, however, have to table an offer that is significantly higher than the current Pfeiffer Vacuum share price.
Pfeiffer Vacuum has a market cap of EUR 874m.
Euro am Sonntag
Tele Columbus shareholder United Internet could push for full control or sale
United Internet, a German telecommunication group, could try to secure full control of Tele Columbus, a local cable network operator, after becoming the latter’s largest shareholder, Euro am Sonntag suggested. Without naming sources, the newspaper pointed out that United Internet, which recently boosted its stake in Tele Columbus to 25.1%, will need to make a move to unlock value from its investment in the cable network operator. The report suggested that the second scenario alongside the aforementioned takeover is to groom Tele Columbus for a sale to a rival or mobile carrier.
The newspaper pointed out that United Internet’s stake in Drillisch, a German provider of mobile telecommunication services, means that there are existing ties with O2 [Telefonica Deutschland], a German mobile carrier of Spanish telecommunications group Telefonica. It speculated that Tele Columbus could expand its product portfolio by teaming up with O2. The report also pointed out that United Internet is a major client of Vodafone, a UK telco for which Tele Columbus could also prove useful.
Tele Columbus has a market cap of EUR 1.001bn.
Euro am Sonntag
Staples Prepares Plan B as Merger Stalls, Sales Sink
Retailer is planning specific changes to improve its stand-alone performance
Staples Inc.’s chief executive said the retailer still hopes to overcome a government lawsuit blocking its takeover of rival Office Depot Inc., even as the company prepares contingency plans to go it alone.
“We’ve been working on Plan B for several months at this point,” CEO Ron Sargent said in a conference call with analysts Friday, though he didn’t say how it might differ from Staples’ existing plan to close stores and expand its customer base. He said the office-supplies retailer is planning specific changes to improve its stand-alone performance “despite the fact that we’re focusing all our energies and efforts on getting this acquisition behind us.”
The assessment came after Staples reported fourth-quarter results that Mr. Sargent said fell short of management’s expectations. The company’s retail sales in North America dropped 5%, excluding newly opened and closed stores, as fewer shoppers visited its big-box stores. The chain has more than 1,900 locations around the world.
Mr. Sargent said the company has a plan to resume earnings growth this year after core earnings declined in 2015, though executives warned that sales will likely decline again in the current quarter.
Shares of Staples, which slid 2.7% to $9.60 on Friday, have fallen more than 40% over 12 months.
Staples has struggled with years of declining revenue as demand wanes for traditional office basics like folders and filing cabinets and as shoppers seek cheaper deals online. Managers last year pinned their hopes for a turnaround on a $6.3 billion combination with Office Depot designed to save on the operating costs from stores, distribution centers and executive offices. The cash-and-stock deal would be valued at about $5.2 billion at current prices.
The Federal Trade Commission in December sued to block the tie-up, saying it would result in higher prices and fewer options for big companies that buy office supplies in bulk. European officials signed off on the deal last month on the condition that Office Depot sheds its contract supply business and all its Swedish operations.
Staples in February also agreed to sell certain wholesale contracts, representing more than $550 million of annual sales, to Essendant Inc. for about $22.5 million if its Office Depot deal closes. The FTC has rejected Staples’ divestiture proposals.
The FTC in 1997 rejected Staples’ first attempt to buy Office Depot. But in 2013, the agency unconditionally approved Office Depot’s merger with OfficeMax, a move Mr. Sargent said should bolster the case for its new deal.
“Since 2013, competition has materially intensified, not lessened,” he said.
Even as it tries to add about 1,700 stores with the merger, Staples has been closing locations. In North America, the company closed 12 stores in the latest quarter, among 73 total closures last year. Staples said it expects to close about 50 North American stores in 2016.
Staples earned $86 million in the holiday quarter compared with a year-earlier loss of $260 million triggered by a write-down of the value of some of its international businesses. Overall revenue slipped 6.9% to $5.27 billion.
Corrections & Amplifications:
Staples’ tie-up with Office Depot Inc. was approved by European Regulators last month. An earlier version of this article incorrectly had the approval coming last week. (March 4)
The marijuana industry has a dirty little secret
Moving the black market in marijuana into the light has been a boon for state tax coffers, entrepreneurs and cannabis users, but an inconvenient fact went unaddressed in the process: Potentially dangerous chemicals are used to grow it.
That changed last fall, when a Colorado newspaper’s investigation found shelves stocked with products grown using pesticides that hadn’t been approved for cannabis farming, spurring a rush of legal, regulatory and business activity.
Since then, states have quickly drawn up regulations, companies have seen their products and methods put under the microscope — sometimes taking big hits to their businesses — and cannabis product and pesticide buyers have filed lawsuits against their manufacturers.
There is even concern that the federal government could intervene out of concern for public health, stalling the spread of cannabis legalization and the growth it has fostered.
“If the feds wanted to crack down, we’ve given them all the reasons to,” said Nic Easley, Comprehensive Cannabis Consulting founder and chief executive, who has helped more than 60 cultivators develop their growing practices.
Little long-term research on cannabis-related pesticide risks
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Photo: Getty Images
The use of pesticides in marijuana cultivation attracted widespread attention in September, when the first of 25 recalls of cannabis products over five months in Colorado was announced. The recalls followed a September Denver Post investigation that found pesticides the state hadn’t approved for marijuana farming on products sold at dispensaries.
Little long-term testing has been performed on the dangers of eating or smoking products made with cannabis and grown using pesticides, so the extent of the hazard they pose is mostly unknown. Still, legalization experts worry that those unknowns could endanger the burgeoning legal marijuana industry in the US.
Experts say the risk is partly a byproduct of the haste to create growing capacity after legalization, which has attracted growers inexperienced with large-scale and indoor farming and led to cultivation environments that require pesticide use to sustain yields and keep plants alive. Many states also lacked pesticide regulations at the time of legalization, leaving growers without guidance.
While the Justice Department has essentially left states to manage their own marijuana enforcement, it also threatened intervention if states fail to prevent “the exacerbation of other adverse public health consequences associated with marijuana use,” according to a 2013 memo. The Justice Department did not reply to multiple requests for comment.
California was first to legalize medical marijuana in 1996; it is now legal in 23 states. After Colorado and Washington passed the first recreational marijuana legalization laws in 2012 — it’s also legal in Oregon, Alaska and the District of Columbia — a “green rush” to enter the industry began.
Some climates in states where marijuana is legal — including Oregon, Washington and Colorado — require it to be cultivated indoors, said Rodger Voelker, lab director at cannabis testing service Oregon Growers Analytical. The combination of an indoor climate and overplanting can lead to “stressed” plants more likely to develop fungus and mites, Voelker said.
Growers have turned to pesticides — such as myclobutanil, which breaks down into an asphyxiant that can cause various forms of sickness when burned, and the insecticide imidacloprid — that have been used on such ornamental crops as roses and Kentucky bluegrass, as well as edible crops in regulated amounts, according to Easley.
But no long-term studies of the effects of inhaling those chemicals by smoking them have been conducted, according to experts. Pesticide use on marijuana crops, meanwhile, has been “rampant,” according to Brian Smith, communications director for the Washington State Liquor and Cannabis Board, even as the health implications remain unclear.
“There’s no research on what any of this means,” said Smith.
The EPA worries about ‘unknown health consequences’
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The Environmental Protection Agency ultimately approves the use of pesticides on crops, but states can do their own testing, draft guidelines for growers within their borders, and propose pesticides for federal testing and approval. As of February, no state had submitted a complete application for pesticides to be used to grow marijuana, according to the EPA.
“The use of unregistered pesticides on marijuana may have unknown health consequences, as no pesticides have undergone complete risk assessments for use on marijuana at this time,” the agency said in a statement. The EPA has not demanded proposals from states that have legalized marijuana use.
Some states, meanwhile, have published pesticide rules — well after they’d legalized cannabis use. Colorado, Washington and Oregon have issued lists of pesticides they say are safe to use; others are still being tested.
In mid-February, Colorado piggybacked on its recalls — which were initiated by the city of Denver, rather than the state — by placing a hold on the sale of products made by two marijuana cultivation sites in Colorado Springs it said used pesticides containing myclobutanil pending an investigation. The companies, Dr. Releaf Inc. and High Mountain Medz, did not respond to requests for comment.
The holds were the first actions taken under a November order issued by Gov. John Hickenlooper that declared it a public health risk to use pesticides not approved by the state.
Oregon, meanwhile, stopped the sale of the previously approved pesticide Guardian in February after Voelker discovered that the label did not disclose the active ingredient, abamectin — which wasn’t approved for cannabis use — in lab testing and alerted state officials. Guardian manufacturer All In Enterprises declined to comment.
Oregon has approved about 250 pesticides for use on cannabis: It allows pesticides that can safely be used in unlimited amounts on edible products and adopted its tobacco-growing rules for smokable marijuana. The state is working with the EPA, Washington and Colorado to refine regulations and develop a testing program, according to Sunny Jones, the Oregon Agriculture Department’s cannabis policy director.
Washington issued pesticide guidelines for recreational marijuana as part of its July 2014 adult-use legalization rollout. It currently has no separate pesticide guidance for medical marijuana, which was legalized in 1998, but the recreational guidelines will extend to medical cannabis in July.
The state in December issued its first and only administrative holds on New Leaf Enterprises and BMF Washington, which both grow marijuana and make products from it, saying pesticides not approved for recreational production were in their plants. The hold on New Leaf ended in January, according to a state spokesman, while BMF’s continues.
New Leaf founder Boris Gorodnitsky said the pesticides were traces from a previous medical grow. Once discovered, the company conducted an internal investigation and stopped using plants that contained the chemicals.
The hold was a “nightmare” for New Leaf, according to Gorodnitsky, who said lost business required the company to lay off most of its staff. BMF, which is still under the hold, said it is working with the state “to better understand the levels of pesticides on the products.”
The combination of marijuana’s federal illegal status and varied state pesticide regulations creates complications for companies like New Leaf, according to Gorodnitsky. The goal for regulators, he said, should be to reduce harm for consumers, rather than prohibiting pesticide use.
“The reason it’s such a mess is not because it’s unsafe. It’s because [cultivation] is not federally regulated,” he said.
Nevada waited 15 years after legalizing medical marijuana use to allow sales in dispensaries — which began in July — while it addressed questions about pesticides and other concerns. The state allows cultivators to use 22 pesticides on medical marijuana crops in low levels. Crops are tested by independent labs before they are approved for sale; they are destroyed if unapproved pesticides are found.
While the delays have slowed the growth of businesses hoping for quick profits, some say they’ve put companies in the state on a firmer footing.
“Cultivators want to know what the rules are and want to play by the rules,” said Todd Denkin, chief executive at Las Vegas-based cannabis testing service Digipath Labs. “If you can’t grow a clean product, you’re going to be out of business.”
‘Everyone is willing to do what it takes’
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As state governments wrestle with pesticide regulation, some people have taken matters into their own hands.
In October, a recreational cannabis customer joined a medical cannabis customer to file a class-action suit against Denver-based marijuana edible manufacturer LivWell, claiming financial damage because the company didn’t disclose that it used myclobutanil.
The suit was dismissed in February after the Denver District Court ruled that the suit failed to prove injury or damage. Corry & Associates attorney Rob Corry, one of the lawyers who brought the suit, said he is still considering whether to appeal or amend the complaint.
LivWell said it stopped using myclobutanil in early 2015, before regulatory issues arose. “None of our products have ever been recalled, and we have never received a health-related complaint regarding our products,” said LivWell chief legal strategist Dean Heizer. “The lawsuit has not impacted our business.”
And after Oregon stopped the sale of Guardian, a customer sued its manufacturer, All In Enterprises, in February, alleging deceptive practices in marketing the product as “100% natural” and failing to disclose its active chemical ingredient. The class-action suit wants financial relief for people who wouldn’t have bought it if they’d known what was in it.
While lawsuits like these can hurt companies’ brands and sales, some experts view them as bumps in the road to productive long-term regulation. The industry hasn’t experienced “dramatic, law-changing events” yet, according to Hilary Bricken, an attorney at Seattle-based marijuana industry law firm Canna Law Group, “but it’s brewing.”
More broadly, some see complications related to pesticides as normal for a young industry. “This is nothing new,” says Trek Hollnagel, a member of cannabis industry and lifestyle news publication DOPE Magazine’s board of directors. “The willingness of the cannabis community to put reforms in place is beyond compare. Everyone is willing to do what it takes to make this industry succeed.”
Still, a concern that pesticides could upset the detente between the industry and the federal government lingers.
“We have an incubated environment we’re allowed to operate in right now,” said Derek Peterson, chief executive of cannabis-focused agriculture company Terra Tech. “If we keep opening up opportunities for people to use dangerous things on plants, it becomes an embarrassment and we invite more scrutiny from the federal government. It would be a huge step backward.”
China Lowers Growth Target to 6.5%-7% Range This Year
Goal acknowledges slowing momentum in world’s second-largest economy but still could be difficult to reach
BEIJING—China gave itself wiggle room in lowering its economic growth target this year, though it still set the pace at a relatively high 6.5% to 7%, suggesting the government prefers buoying the slowing economy to more painful retrenchment.
In opening the National People’s Congress on Saturday, Premier Li Keqiang laid out policies and goals for the year that aim to stimulate growth and encourage restructuring of industries afflicted with overcapacity.
This year’s policy plan, however, left unclear how Beijing would balance its growth objectives and its reform goals. Economists said it would be hard to achieve both.
“We believe the top priority of the policy makers has turned to growth,” wrote Mizuho Securities Asia Ltd. economist Jianguang Shen in a research note. “It is intrinsically difficult to consolidate production capacity while carrying out stimulus.”
Mr. Li acknowledged the dilemma. “Pursuing development is like sailing against the current: You either forge ahead or drift downstream,” he said in one of the notes of urgency in his nearly two-hour speech.
He told the roughly 3,000 delegates at this year’s annual legislative sessions: “This is the crucial period in which China currently finds itself and during which we must build up powerful new drivers in order to accelerate the development of the new economy.”
For the first time in two decades, Beijing adopted a range for its growth target rather than a specific number, giving itself more flexibility in a system where hitting stated goals remains politically important. Mr. Li said growth over the next five years should average at least 6.5%.
The growth goal posts, above expectations for Chinese expansion from Western economists and the International Monetary Fund, send a signal to ordinary Chinese that raising their living standards remains a priority and to the world that China will continue to be a global economic engine.
But it also could exacerbate imbalances in an economy with too much debt, industrial capacity and housing.
Money is already flowing into property in major cities such as Beijing and Shanghai, while most other urban areas have a glut of apartments. “The divergence between housing markets…is getting more and more severe,” Cheng Zhenggao, the housing minister, told reporters Saturday.
Mr. Li said: “We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructuring and bankruptcy liquidations.” Zombie enterprises, a term that Chinese officials have embraced recently, are unproductive businesses kept alive by debt and subsidies.
He said 10 million jobs would be generated in urban areas and unemployment would be kept below 4.5% in cities. Among the job-creation initiatives were an 800 billion yuan ($122.9 billion) investment for railway construction and 1.65 trillion yuan to build roads.
To leave room for more spending, the targeted budget deficit will be 3% of gross domestic product this year, up from 2.3% in 2015, according to Mr. Li’s report.
The report didn’t give a specific target for China’s foreign trade, a departure from past years, reflecting both weaker global demand and the diminishing importance of exports as a growth driver. Last year, Beijing set a goal for a 6% increase in trade; instead both exports and imports fell.
A five-year economic blueprint also released Saturday set plans to ease controls on overseas investment and access for foreigners to China’s capital markets and pledged that its currency, the yuan, would become fully convertible by 2020. Confidence in China’s markets among global investors was rattled last year by a poorly signaled yuan devaluation and by botched efforts to salvage a cratering stock market.
Private-sector delegates at the meeting were heartened by Mr. Li’s pledge to reduce corporate taxes and fees this year. “We just want to be treated equally, alongside state-owned enterprises,” said Chen Zhilie, executive chairman of EVOC Intelligent Technology Co.
Beijing also said it plans to raise military spending in 2016 by 7.6%. This would be the slowest pace in six years but still larger in percentage terms than the 7% increase for the overall budget, suggesting the military still gets an outsize share of government resources.
The lowered targets for overall growth released Saturday weren’t a surprise given that senior officials from President Xi Jinping on down had flagged them in recent months.
Last year, China grew 6.9%, its slowest pace in 25 years, compared with a 2015 target of about 7%. This year’s target sets the stage for a new quarter-century low.
The government pledged to continue retooling the economy toward consumption and services as it tries to wean itself from its decadeslong dependence on investment and manufacturing.
China has outlined plans to pare jobs and cut excess production by about 10% over the next several years in the steel industry. But economists question whether this goes far enough given that excess capacity in the steel industry is currently around 30%, according to industry figures.
“The critical issue for me is how deep and aggressive this restructuring process will be and how quickly it will be implemented,” said Adam Slater, economist with Oxford Economics.
China’s leaders have said that part of the difficulty in letting zombie factories fail is resistance from local governments.
After a three-year campaign against corruption, Mr. Xi has recently stepped up efforts to get officials to fall in line with party directives. Mr. Li also appeared to take a stab at bureaucratic foot dragging, saying Beijing will punish “all types of behavior that constitute flagrant violations of discipline.”
China is banking on new sources of growth, including deregulation, innovation and larger city groupings, to pick up the slack left by falling productivity, weak property investment and a maturing economy.
However, some of the newer plans to promote services and higher-tech industries also came with echoes of big state planning: The government says it will establish demonstration centers for startups and provide support for projects in high-performance microchips, biomedicine and advanced displays.
Mr. Li, who has championed urbanization as a way to build a consumer society, said building up cities is “the most powerful force for sustaining economic development.”
So far, these new drivers haven’t kicked in enough to counter the economy’s many downdrafts. That has added to concerns that China will put reform on the back burner in favor of excessive fiscal and monetary stimulus to reach its targets through 2020.
CHINA PREMIER LI KEQIANG: SETS 2016 GDP TARGET AT 6.5-7.0% (AS EXPECTED) vs "around 7%" 2015 target and 6.9% actual 2015 GDP
- Sets 2016-20 annual GDP of at least 6.5%
- Maintains 2016 CPI target around 3%.
- Maintains 2016 budget deficit target of 3% of GDP with fiscal deficit seenat CNY2.18T.
- M2 money supply target set at 13% v 12% target in 2015.
- Retail Sales target set at 11% v 13% target in 2015.
- Fixed Asset Investment to rise 10.5% v 15% target in 2015.
- Fiscal spending to rise 6.7%
- Maintains target to create 10M new jobs this year and keep urban unemployment rate below 4.5%.
- Defense budget to grow 7.6%
- Aims for 2016 local govt budget deficit of CNY780B.
- Downward pressure on economy is increasing.
- Aim to expand domestic consumption.
- Plan to deepen reform of financial sector; to continue reform of state owned commercial banks.
- Monetary policy is prudent with flexibility; To continue proactive fiscal policy.
- Plan to further liberalize interest rates.
- To use various policy tools to maintain liquidity.
- To resolve overcapacity in industry, with focus on steel and coal.
- To begin Shenzhen-Hong Kong stock connect at "appropriate time".
- To keep CNY exchange rate "basically stable"; To encourage Yuan investment overseas.
- Expect to achieve its economic and social development targets despite facing greater difficulties and challenges this year.
- To invest over CNY800B in railway construction.
- Plan to gradually reduce residential housing inventory.
- To expand trials of free trade zones.