(ZH) Goldman: "Some European Economies Already Qualify As A Japanese-Style Stagn



Goldman: "Some European Economies Already Qualify As A Japanese-Style Stagnation"

For the longest time anyone suggesting that Europe's economic collapse was nothing short of a deflationary collapse (which would only be remedied with the kind of a money paradopping response that Japan is currently experiment with and where, for example, prices of TVs are rising at a 10% clip courtesy of the BOJ before prices rise even more) aka a "Japan 2.0" event, was widely mocked by the very serious economist establishment, and every uptick in the EuroSTOXX was heralded by the drama majors posing as financial analysts as the incontrovertible sign the European recovery has finally arrived. Well, they were wrong, and Europe is now facing if not already deep in a triple-dip recession. Which also explains why now it is up to the ECB to do all those failed things that the BOJ did before the Fed convinced it it needs to do even more of those things that failed the first time around, just so the super rich can get even richer in the shortest time possible.
So we were a little surprised when none other than Goldman Sachs today diverged with the ranks of the very serious economists and the drama major pundits, and declared that "recent trends in some European economies already qualify as a Japanese-style stagnation."
Oops.
Full note from Goldman:
The Costs of Euro area Stagnation

 

Over the course of 2014, there have been important changes in the global growth outlook. The most noticeable of these have been mark-downs in GDP growth forecasts for some of the largest economies, including the US, Euro area, Japan and China. Within that set, the persistent sluggishness of growth in the Euro area has become an increasing source of concern in market discussions, as it appears to be tracking unpleasant patterns associated with the Japanese experience of the 1990s---leading commentators to hypothesize about a so-called ‘Japanization’ of the Euro area.

 

But the phenomenon of stagnation belongs to some continental European economies as much as it belongs to Japan. Recent trends in France, Italy, Spain and other countries in the region already qualify as stagnation experiences. Moreover, our historical analyses show that Western Europe has featured prominently in the list of the most serious stagnations.

 

In this Daily, we discuss three of the main costs associated with these experiences: (1) Growth wedges with respect to peers; (2) market underperformance; and (3) shortfalls in competitiveness. Our focus is on the most recent stagnation experiences looming over the Euro area, in an attempt to contribute to the debate with a more concrete assessment of how costly these experiences can be. This also has global ramifications: Consider that Japan’s weight in global output was around 9% when its stagnation started, compared with roughly 15% for the Euro area in the aftermath of the financial crisis. Thus, continued stagnation in the Euro area would be potentially more damaging for the global economy than Japan’s experience was back in the 1990s---because of its larger economic weight and the stronger financial linkages with the rest of the world. 

 

More Continental European Countries in ‘Stagnation’

 

Three years ago we argued that the risks that some of the largest economies would fall into a long period of stagnant growth had increased following the macro contractions and stock-market crashes we had just seen (GEW, ‘From the ‘Great Recession’ to the ‘Great Stagnation’?’, September 2011). Back then, we identified five countries in stagnation (Canada, France, Italy, New Zealand and Portugal) and noted that several more were at risk (including Austria, Australia, Belgium, Japan and even the US).

 

Fast-forward to today, and our most recent analysis finds three new cases of actual stagnation: Belgium, Spain and Norway (for the latter, the distinction between a non-stagnant mainland and a stagnant offshore economy are, however, relevant). On the brighter side, New Zealand is no longer in stagnation, while the US, the UK and Japan (for a change) appear to have come out of stagnation (GEW, ‘Still wading through ‘Great Stagnations’’, September 2014).

 

From that perspective, concerns around the stagnation of the Euro area are not entirely unwarranted: Average GDP growth in the Euro area over the 10 years leading to 2014 will likely print below 0.8% (or below 0.7% if we only take the last 5 years), which is similar to Japan’s 0.9% average growth during its stagnation experience (1992-2003). A large economy like Italy has experienced very little growth in GDP per capita even in the decade preceding the great financial recession.

 

Historical analysis shows that around two-thirds of stagnation experiences have occurred in developed economies, with a large fraction of these occurring in Western Europe. Moreover, among the most recent experiences, the most notable are precisely those of European economies (ordered by growth shortfall with respect to peer group): Spain (2008-13), Italy (2002-13), Portugal (2002-13), Belgium (2008-13) and France (2002-13).

 

The growth discontent: Wedges in GDP per capita between 10-30%

 

Recently stagnating economies in the Euro area have been growing at rates that are not only lower than their post-WWII average, but also substantially lower than their peers (economies of similar level of development judged by income quartiles). Over time, these differences in growth rates have opened sizeable wedges in levels of GDP per capita with respect to what they would have attained if they had grown at the average rate of their peers.

 

As of 2013, our calculations show that those wedges in GDP per capita are substantial: Spain (18%), Italy (27%), Portugal (21%), Belgium (13%) and France (18%). Among these, Italy is noteworthy. IMF data show that Italy’s GDP per capita as a share of Germany’s GDP per capita went from 96% in 2002 to 76% in 2013; the same share with respect to the US went from 69% to 57%; and even with respect to Spain it went from 109% to 102%. As a reflection of this stagnation, combined with the ascent of emerging economies to the global stage, Italy’s share of the world’s output has declined from 3.2% to 2.1% over the same period.
So with that in mind are you going to buy European stocks? Think again suggests Goldman:
The market's discontent: Lower stock returns, higher bond returns
Our historical analyses show that stagnations tend to be characterized by lower stock returns and higher bond returns than normal (GEW, ‘A Market View of Stagnations’, October 2011). Recently stagnating economies fit those patterns. Total returns on stocks for these economies average -1.4% per year in real terms, considerably below the historical average of around 8%. In turn, total bond returns for these economies average 3.7%, above the historical average of around 3%. Finally, total bill returns have been slightly negative, at -0.2%, compared with a historical average of around 1%.
So the overall picture of financial returns in recently stagnating economies has been unfavorable for risky assets, with relatively low valuations (average Price/Earnings ratio at 13.9) and inflation lower than nominal yields (particularly once the zero bound has been reached), resulting in real rates above those in some countries’ trading partners. While global events over the past few years have affected the performance of the broadest asset classes across these and other developed economies, the underperformance of stocks in stagnant economies is a sign that market pricing reflects shortfalls in growth.
Wait, Goldman not pitching a buy? That can only mean one thing: the Goldman prop desk is buying European equities hand over fist ahead of the ECB's QE, even as Goldman has been selling US equities with both hands over the past few months.

>>> Russia Discovers Massive Arctic Oil Field Which May Be Larger Than Gulf Of M



Russia Discovers Massive Arctic Oil Field Which May Be Larger Than Gulf Of Mexico

In a dramatic stroke of luck for the Kremlin, this morning there is hardly a person in the world who is happier than Russian president Vladimir Putin because overnight state-run run OAO Rosneft announced it has discovered what may be a treasure trove of black oil, one which could boost Russia's coffers by hundreds of billions if not more, when a vast pool of crude was discovered in the Kara Sea region of the Arctic Ocean, showing the region has the potential to become one of the world’s most important crude-producing areas, arguably bigger than the Gulf Of Mexico. The announcement was made by Igor Sechin, Rosneft’s chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today.
The oil production platform at the Sakhalin-I field in Russia, 
partly owned by ONGC Videsh Ltd., Rosneft Oil Co., Exxon Mobil 
Corp. and Japan's Sakhalin Oil and Gas Development Co. on June 9, 2009.
Well, one person who may have been as happy as Putin is the CEO of Exxon Mobil, since the well was discovered with the help of America's biggest energy company (and second largest by market cap after AAPL). Then again, maybe not: as Bloomberg explains "the well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia’s Arctic offshore. Rosneft and Exxon won’t be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today."
Which means instead of generating billions in E&P revenue, XOM could end up with, well, nothing. And that would be quite a shock to the US company because the unveiled Arctic field may hold about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said.
For a sense of how big the spoils are we go to another piece by Bloomberg, which tells us that "Universitetskaya, the geological structure being drilled, is the size of the city of Moscow and large enough to contain more than 9 billion barrels, a trove worth more than $900 billion at today’s prices."
The only way to reach the prospect is a four-day voyage from Murmansk, the largest city north of the Arctic circle. Everything will have to shipped in — workers, supplies, equipment — for a few months of drilling, then evacuated before winter renders the sea icebound. Even in the short Arctic summer, a flotilla is needed to keep drifting ice from the rig.
Sadly, said bonanza may be non-recourse to Exxon after Obama made it quite clear that all western companies will have to wind down operations in Russia or else feel the wrath of the DOJ against sanctions breakers. Which leaves XOM two options: ignore Obama's orders (something which many have been doing of late), or throw in the towel on what may be the largest oil discovery in years. 
And while the Exxon C-suite contemplates its choices, here is some more on today's finding from Bloomberg:
“It exceeded our expectations,” Sechin said in an interview. This discovery is of “exceptional significance in showing the presence of hydrocarbons in the Arctic.”

 

The development of Arctic oil reserves, an undertaking that will cost hundreds of billions of dollars and take decades, is one of Putin’s grandest ambitions. As Russia’s existing fields in Siberia run dry, the country needs to develop new reserves as it vies with the U.S. to be the world’s largest oil and gas producer.

 

Output from the Kara Sea field could begin within five to seven years, Sechin said, adding the field discovered today would be named “Victory.”
Duh.
The Kara Sea well -- the most expensive in Russian history -- targeted a subsea structure named Universitetskaya and its success has been seen as pivotal to that strategy. The start of drilling, which reached a depth of more than 2,000 meters (6,500 feet), was marked with a ceremony involving Putin and Sechin.

 

The importance of Arctic drilling was one reason that offshore oil exploration was included in the most recent round of U.S. sanctions. Exxon and Rosneft have a venture to explore millions of acres of the Arctic Ocean.
But what's worse for Exxon is that now that the hard work is done, Rosneft may not need its Western partner much longer:
“Once the well is plugged, there will be a lot of work to do in interpreting the results and this is probably something that Rosneft can do,” Julian Lee, an oil strategist at Bloomberg First Word in London, said before today’s announcement. “Both parties are probably hoping that by the time they are ready to start the next well the sanctions will have been lifted.”
And here is why there is nothing Exxon would like more than to put all the western sanctions against Moscow in the rearview mirror: "The stakes are high for Exxon, whose $408 billion market valuation makes it the world’s largest energy producer. Russia represents the second-biggest exploration prospect worldwide. The Irving, Texas-based company holds drilling rights across 11.4 million acres in Russia, only eclipsed by its 15.1 million U.S. acres."
Proving just how major this finding is, and how it may have tipped the balance of power that much more in Russia's favor is the emergence of paid experts, desperate to talk down the relevance of the Russian discovery:
More drilling and geological analysis will be needed before a reliable estimate can be tallied for the size of the oil resources in the Universitetskaya area and the Russian Arctic as a whole, said Frances Hudson, a global thematic strategist who helps manage $305 billion at Standard Life Investments Ltd. in Edinburgh. Sanctions forbidding U.S. and European cooperation with Russian entities mean that country’s nascent Arctic exploration will be stillborn because Rosneft and its state-controlled sister companies don’t know how to drill in cold offshore conditions alone, she said.

 

“Extrapolating from a small data sample is perhaps not going to give you the best information,” Hudson said in a telephone interview. “And because of sanctions, it looks like there’s going to be less exploration rather than more.” In addition, the expense and difficulty of operating in such a remote part of the world, where hazards include icebergs and sub-zero temperatures, mean that the developing discoveries may not be economic at today’s oil prices.
Maybe. Then again perhaps the experts' time is better suited to estimating just how much longer the US shale miracle has left before the US is once again at the mercy of offshore sellers of crude.
In any event one country is sure to have a big smile on its face: China, since today's finding simply means that as Russia has to ultimately sell the final product to someone, that someone will almost certainly be the Middle Kingdom, which if the "Holy Gas Grail" deal is any indication, will be done at whatever terms Beijing chooses.

(MergerMarket) Roundup of US private equity-related deals in the consumer sector

Roundup of US private equity-related deals in the consumer sector

In 3Q14 there were 37 consumer sector deals in the US involving private equity firms, valued at a total of USD 4.7bn, according to Mergermarket data. Those figures represent a decline from 47 deals with an aggregate value of USD 10.1bn in 3Q13.

Below is a roundup of consumer-sector situations in the US involving private equity investors that are ongoing as of the end of 3Q14. The date shows the last update published by this news service. The list does not take into account deals that may have been completed but have not yet been made public.


It’s a good time to head for the exit…

Jimmy John’s (25/09/2014)

The sale process of sandwich chain Jimmy John’s, in which Weston Presidio holds a 33% stake, has stalled after founder and majority owner John Liautaud decided not to go through with the sale, this news service reported. Reuters reported early in the month that the company was in the early stage of a sale process with North Point Advisors.


Performance Health and Wellness (23/09/2014)

Private equity sponsor Gridiron Capital mandated Credit Suisse to explore strategic alternatives for Performance Health and Wellness, a maker of products used for physical therapy and athletic training, this newswire reported.

The Habit (22/09/2014)

The Habit, a hamburger chain backed by KarpReilly, confidentially filed for an initial public offering on 22 September. It plans to raise between USD 75m and USD 100m. This news service reported in July that The Habit was receiving pitches from underwriters about a potential public listing.

Bumble Bee Foods (10/09/2014)

Bumble Bee Foods, the San Diego, California-based canned fish company, is likely to appoint Morgan Stanley and Rothschild for its sale process, Mergermarket reported. Reuters previously reported that private equity sponsor Lion Capital was looking to sell the company for around USD 1.5bn. It also reported that Thai Union Frozen Products and Post Holdings (NYSE:POST) had shown early interest in Bumble Bee.

Performance Food Group (09/09/2014)

Performance Food Group, a foodservice distributor counting Blackstone and Wellspring as backers, filed an S-1 for an initial public offering in which it could raise USD 100m. The company generated USD 13.7bn in net sales for the fiscal year ending 28 June 2014. Credit Suisse Securities and Barclays Capital are acting as book-runners for the offering. Simpson Thacher & Bartlett LLP is providing legal counsel in connection with the offering.


Still time to join the party…

Fogo de Chão (19/09/2014)

Fogo de Chão, the Dallas-based Brazilian steakhouse chain, is expected to invite investment banks to a bake off to be underwriters for an IPO, Mergermarket reported. Financial backer Thomas H. Lee Partners acquired the company in 2012 for USD 400m.

Atkins Nutraceuticals (17/09/2014)

Roark Group-backed Atkins Nutraceuticals has not yet mandated a bank to handle a sale, but bankers told this newswire that a sale could happen in 1Q15. A source familiar with the company told Mergermarket that the company’s EBITDA is materially higher than USD 70m. Roark acquired Atkins in December 2010 for an undisclosed amount.


We haven’t heard of these in a while, have you?

Stuart Weitzman (15/08/2014)

Stuart Weitzman, the women’s shoe retailer whose parent Jones Group is backed by Sycamore Partners, hired Goldman Sachs and Citi to advise on a sale, Reuters reported. The news service also reported the retailer could sell for around USD 800m to USD 1bn.

Rue La La (28/07/2014)

Online flash sale site Rue La La hired J.P. Morgan to explore a potential sale, according to Reuters. The newswire also cited sources who said Gilt Group was weighing a potential bid for Rue La La that would value the company at around USD 400m.


J. Jill (22/7/2014)

Women’s apparel retailer J. Jill, backed by Golden Gate Capital and Arcapita, was expecting first round bids in July, this newswire reported, adding that Bain Capital and Onex Partners were among the private equity firms vying for the company. The company appointed Morgan Stanley and Houlihan Lokey in April to run the sale process.

REuters - Deutsche Telekom warms to idea of longer stay in U.S.: sources

Deutsche Telekom warms to idea of longer stay in U.S.: sources

(Reuters) - Deutsche Telekom (DTEGn.DE) is preparing for the possibility of keeping its investment in T-Mobile US (TMUS.N) for at least another year as it fears the sole current suitor for the U.S. firm will fail to come through with a sufficiently attractive offer, three people familiar with the matter said.

Iliad (ILD.PA), the maverick French tycoon Xavier Niel's low-cost telecoms operator, has set a mid-October deadline to decide whether to improve its bid of $33 a share for 56.6 percent of T-Mobile US, the fourth-biggest cellphone network operator in the United States. And Deutsche Telekom could still be swayed if Iliad can find partners to substantially improve its offer, the sources said.

The decision is a crucial one for Europe's third-largest telecoms firm by market value, because the U.S. business, which accounts for about a third of its sales and a fifth of its core profits, has long been a drag on cash flows.

An exit would dramatically alter its size and profile at a time of consolidation across the industry as companies seek to bring together fixed and mobile services.But some executives at Deutsche Telekom have begun to warm to the idea in recent weeks of now keeping T-Mobile US until after a major auction of U.S. radio spectrum is completed late next year, the sources said.

Under local rules, companies cannot hold deal talks ahead of spectrum sales, so a delay would allow other possible suitors such as satellite TV group Dish (DISH.O) or cable companies now busy with their own mergers to make bids.

Given time there might also be a change in the regulatory climate which frustrated T-Mobile US's erstwhile suitor Sprint (S.N), owned by Japan's Softbank (9984.T), in its attempt earlier this year to merge the two to better compete with the giants of the U.S. market, AT&T (T.N) and Verizon (VZ.N).

That left only Iliad, backed by its billionaire founder, in the running.

But Deutsche Telekom doubts Iliad's pledge to deliver annual savings of $2 billion, or 7 percent of T-Mobile's estimated cost base, since the French start-up has no track record in the country, sources earlier told Reuters.

T-Mobile US is also finally posting rising sales after years of losses, so there is an argument that Deutsche Telekom should keep the business at a time of growth when its European operations are shrinking under regulatory pressure and still fierce competition, the sources said.

Last month T-Mobile US added 552,000 post-paid subscribers, marking its biggest monthly addition ever, albeit amid aggressive promotions that allow customers to add four lines for $100 a month.

"Basically Deutsche Telekom thinks that if there is not going to be an in-market consolidation deal in the U.S., which would generate huge synergies and change the structure of the market, then perhaps they are better off keeping the business and trying to realize themselves the upside potential that Niel thinks is there," said one person close to the German company.

"This is why things have gotten bogged down."

CHOICES

Whatever Iliad's final bid, Deutsche Telekom has a tough decision to make between making a quick exit from the United States to concentrate its resources on Europe and confronting the big investment challenges in the United States if it stays, said Hannes Wittig, an analyst at JP Morgan.

"A well-negotiated Sprint deal would have been a no-brainer, but now some harder strategic choices might have to be made," said Wittig, who has a 'neutral' rating on Deutsche Telekom's shares.

If it were to sell now, Deutsche Telekomn would have to decide how much of the proceeds it could return to shareholders and how much would have to be ploughed into fiber broadband in Germany to compete with Liberty Global (LBTYA.O) and Vodafone (VOD.L).

Shorn of T-Mobile, Deutsche Telekom would also be much smaller, a potential handicap as European telecom consolidation picks up pace.

Bigger rival Vodafone exited the United States earlier this year, halving its market value, but at $89 billion, it is still substantially larger than Deutsche Telekom's $69 billion.

Nevertheless there are some within the company that believe that Deutsche Telekom should pursue Iliad's interest since the French bid would not face the competition objections that stymied its two sale attempts since 2011 -- to Sprint and before that to AT&T.

But the German side wants Iliad to substantially improve its bid to at least $40 per share for a higher proportion of T-Mobile's share capital, according to two of the sources.

While one person close to the Iliad side said a deal would only be viable at a lower level, somewhere between $35 to $40 per share.

"We got a sense that Deutsche Telekom is genuinely convinced that Iliad will not manage to put together an improved offer matching their price and synergies expectations so they are basically leaking to prepare the market if Iliad walks away in the end," said a fourth person close to the situation.

T-Mobile US's share price has fallen almost 18 percent since Sprint walked away in early August and is down more than 20 percent from a high of $35.50 in late May.

Deutsche Telekom had hoped to reduce its exposure to the U.S. business before next year's costly frequency auction. But as T-Mobile's turn-around progresses, Deutsche Telekom's management is becoming more confident that a longer stay could make sense despite the U.S. firm's need for further major investment, said two of the sources.

Analysts estimate that T-Mobile US will need anywhere from $5 to $10 billion to bid for the best frequencies in the auction next year as well as billions more to improve its network to keep up with consumer demand for quality and speed.

However, Deutsche Telekom is confident the U.S. company can raise the money to fund those investments via issuing new shares or bonds, said a person close to the German operator's management.

With T-Mobile US shares were trading up 2.7 percent at $29.255 on Friday, valuing the company at over $23.6 billion.

>>> Starboard acquires "significant stake" in Yahoo, suggests AOL would be a goo

Starboard acquires "significant stake" in Yahoo, suggests AOL would be a good merger partner for Yahoo 

Starboard Value LP announced it has acquired a significant ownership stake in Yahoo and that it has delivered a letter to Marissa Mayer, President and CEO of Yahoo, and to Yahoo's Board of Directors.

Starboard believes that unlocking the substantial value from Yahoo's non-core minority equity stakes in Alibaba Group and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner. Even after the previous ill-timed and tax-inefficient sales of Alibaba stock, Yahoo's remaining stake in Alibaba is currently worth more than the entire enterprise value of Yahoo. When adding Yahoo Japan, these two minority equity interests are worth approximately $11 billion, or $11 per share more than the current enterprise value of the Company. This is before ascribing any value to Yahoo's core business, intellectual property, or real estate holdings, and clearly shows the dramatic valuation discrepancy that currently exists at Yahoo. 

Starboard would like to see management realize substantial cost efficiencies by reducing expenses throughout the Company, specifically with a goal of reducing losses in the Display business by $250-500 million. Would like to see an end to Yahoo's aggressive acquisition strategy which has resulted in $1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased. 

Clearly Yahoo is deeply undervalued relative to the sum of its parts. Starboard believes this value gap can be closed with minimal tax leakage and without delay based on actions within the control of management and the Board. We believe it is incumbent upon management and the Board to take immediate steps in committing to remedy this valuation discrepancy. Comparable advertising companies currently trade in a range of between 6x and 11x next twelve months EBITDA. Assuming a very conservative multiple of 5.5x EBITDA, which represents approximately a 10% free cash flow yield, this implies a value gap of almost $18 billion or $18 per share from the current share price.

Starboard believes management should pursue a strategic combination with AOL to improve Yahoo's competitive position, deliver cost synergies of up to $1 billion, and potentially facilitate the realization of value from Yahoo's non-core equity stakes with minimal tax leakage. While a cost reduction program could lead to significant value creation, this opportunity pales in comparison to the synergies that we believe Yahoo could unlock in a combination with AOL. In fact, like Yahoo, we believe AOL's Display business also continues to lose a substantial amount of money. The combined entity would be able to more successfully navigate the ongoing industry changes, such as the growth of programmatic advertising and migration to mobile. A combination could also lead to revenue growth opportunities given the broader user base, higher quality content, better technology assets, and enhanced relationships with advertising agencies.

Yahoo's recent strategy of focusing on acquisitions has not worked. Yahoo's stock price has merely been buoyed by the strong growth in value of Alibaba. We understand that the likely result of monetizing Yahoo's non-core minority investments in the most tax efficient manner likely means that the Company will not have access to those proceeds to be used towards acquisitions. However, even if the Company were to deliver all of the value from its non-core minority investments directly to shareholders without receiving any additional cash proceeds, it is important to note that Yahoo would still have $7 billion in cash and cash equivalents (after returning to shareholders approximately 50% of the Alibaba IPO proceeds) and significant debt capacity which would be more than sufficient for any future capital needs for investments or acquisitions. To be clear, while Yahoo is trading at such a deep discount to the sum-of-its-parts, we do not believe the Company should be pursuing acquisitions of companies at high multiples of revenue as it has done repeatedly in the past.

>>> Starboard acquires "significant stake" in Yahoo, suggests AOL would be a goo

Starboard acquires "significant stake" in Yahoo, suggests AOL would be a good merger partner for Yahoo 

Starboard Value LP announced it has acquired a significant ownership stake in Yahoo and that it has delivered a letter to Marissa Mayer, President and CEO of Yahoo, and to Yahoo's Board of Directors.

Starboard believes that unlocking the substantial value from Yahoo's non-core minority equity stakes in Alibaba Group and Yahoo Japan in a structure that delivers value directly to Yahoo shareholders in a tax-efficient manner. Even after the previous ill-timed and tax-inefficient sales of Alibaba stock, Yahoo's remaining stake in Alibaba is currently worth more than the entire enterprise value of Yahoo. When adding Yahoo Japan, these two minority equity interests are worth approximately $11 billion, or $11 per share more than the current enterprise value of the Company. This is before ascribing any value to Yahoo's core business, intellectual property, or real estate holdings, and clearly shows the dramatic valuation discrepancy that currently exists at Yahoo. 

Starboard would like to see management realize substantial cost efficiencies by reducing expenses throughout the Company, specifically with a goal of reducing losses in the Display business by $250-500 million. Would like to see an end to Yahoo's aggressive acquisition strategy which has resulted in $1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased. 

Clearly Yahoo is deeply undervalued relative to the sum of its parts. Starboard believes this value gap can be closed with minimal tax leakage and without delay based on actions within the control of management and the Board. We believe it is incumbent upon management and the Board to take immediate steps in committing to remedy this valuation discrepancy. Comparable advertising companies currently trade in a range of between 6x and 11x next twelve months EBITDA. Assuming a very conservative multiple of 5.5x EBITDA, which represents approximately a 10% free cash flow yield, this implies a value gap of almost $18 billion or $18 per share from the current share price.

Starboard believes management should pursue a strategic combination with AOL to improve Yahoo's competitive position, deliver cost synergies of up to $1 billion, and potentially facilitate the realization of value from Yahoo's non-core equity stakes with minimal tax leakage. While a cost reduction program could lead to significant value creation, this opportunity pales in comparison to the synergies that we believe Yahoo could unlock in a combination with AOL. In fact, like Yahoo, we believe AOL's Display business also continues to lose a substantial amount of money. The combined entity would be able to more successfully navigate the ongoing industry changes, such as the growth of programmatic advertising and migration to mobile. A combination could also lead to revenue growth opportunities given the broader user base, higher quality content, better technology assets, and enhanced relationships with advertising agencies.

Yahoo's recent strategy of focusing on acquisitions has not worked. Yahoo's stock price has merely been buoyed by the strong growth in value of Alibaba. We understand that the likely result of monetizing Yahoo's non-core minority investments in the most tax efficient manner likely means that the Company will not have access to those proceeds to be used towards acquisitions. However, even if the Company were to deliver all of the value from its non-core minority investments directly to shareholders without receiving any additional cash proceeds, it is important to note that Yahoo would still have $7 billion in cash and cash equivalents (after returning to shareholders approximately 50% of the Alibaba IPO proceeds) and significant debt capacity which would be more than sufficient for any future capital needs for investments or acquisitions. To be clear, while Yahoo is trading at such a deep discount to the sum-of-its-parts, we do not believe the Company should be pursuing acquisitions of companies at high multiples of revenue as it has done repeatedly in the past.

>>>> Weekly UpdatE

Weekly Market Update: September Volatility Strikes

September has once again proved its reputation for volatility, as global equity indices swung sharply from big gains to big losses this week. After pushing out to new all-time highs last Friday, the S&P500 was unable to hold above 2000 and sharp and punishing declines slammed the index below its 50-day moving average. Besides technical levels, there was no obvious catalyst for the move lower. Rumors circulated about the liquidation of a big institutional position or a hedge fund blowing up, but there was never any reporting to confirm such events. Others attributed the moves to anticipation of the Fed's rate lift off next year and to Russia threatening more counter-sanctions that might tip Europe into recession. Then on Friday, the S&P500 rapidly gained in the final hours of trade, again on no identifiable catalyst. US data out this week was very good, while Europe looked weaker than ever. For the week the DJIA lost 1%, the S&P500 dropped 1.4% and the Nasdaq dipped 1.5%.

The final revisions to second quarter US GDP were in line with expectations, at +4.6% versus the +4.2% preliminary reading, matching the fourth quarter of 2011 as the fastest quarterly growth rate since 2006. Analysts caution the data needs to be viewed in the context of the -2.1% first quarter GDP, which would put the average growth rate for the first half of the year at an unimpressive +1.2%. Early indications are that the third quarter growth estimate will be 3% or more. One point is clear, businesses are starting to invest for growth: in the final revision, business investment rose 9.7%, up from the +8.4% preliminary figure.

August new home sales (504K v 430Ke) rose to a six-year high, while existing home sales (5.05M v 5.20Me) fell for the first time in four months. Analysts noted the strong regional variations in the new home sales data, with sales up big in the south and west but down slightly in the northeast. Sales were flat in the Midwest. Regarding the existing homes sales data, the NAR noted that there was a marked decline in all-cash sales to investors.

The continuing rise of the dollar despite the equity selloff was a central theme this week. EUR/USD pushed out to 22-month lows on of Friday, around 1.2680. Good US economic data, highlighted by the second quarter GDP, contrasted sharply with another round of dismal European numbers, including the September German IFO survey at 18-month lows and September PMI manufacturing right at the flat-line. USD/JPY was at a six-year high, around 109.50. The dollar Index made its 11th-consecutive weekly gain, just shy of 86. Note that WTI crude move up off lows in the $91 handle on Monday, to close out the week around $93.50.

Apple said that its first weekend of iPhone 6/6+ sales were above 10M units, compared to estimates ranging from 6.5 million to 10.0 million units (first weekend iPhone 5 sales topped 9.0 million devices, including China). The iPhone 6/6+ numbers did not include China, where the model was still waiting for approvals from regulators. There were reports that China sales would begin around October 10th; analysts expect about 2.75 million units in initial sales in China.

BlackBerry launched its new PassPort smartphone, perhaps its final chance to regain a foothold in the mobile device market. The aggressively square touchscreen device features a physical QWERTY "touch-enabled" keyboard, comprising its main selling point over Android and iOS devices. In second quarter results out this week, BlackBerry managed to get very close to non-gaap profitability even as revenue missed expectations. Unit sales are also picking up: in the second quarter, BlackBerry recognized hardware revenue on 2.1M smartphone units versus 1.3M in the prior quarter.

Just a week after the Alibaba IPO, activist investors have begun their attack on Yahoo's board to "unlock value." Yahoo sold $6 billion worth of Alibaba shares in the IPO and its remaining 15% stake is valued around $36 billion. Starboard Value announced that it had bought a "substantial" stake in Yahoo and wrote an open letter to CEO Marissa Mayer saying she should buy AOL and unlock the value in its Alibaba and Yahoo stakes.

With Congress unlikely to act on tax reform anytime soon, the Treasury has changed the way it interprets tax law in an attempt to unilaterally make inversion deals "substantially less appealing." The package includes small steps, including moves to change the way foreign ownership is gauged (companies can invert if foreign stockholders own more than 20%) and to make it harder for parents to extract profits from subsidiaries.

In the latest pharma consolidation deal, Germany-based Merck KGaA agreed to acquire US firm Sigma-Aldrich for $17 billion in cash to boost its lab supplies business. Two global fertilizer giants, CF Industries and Yara International of Norway, are discussing a 50/50 merger deal. The combined market value of the companies would be about $27.4 billion, making it worth about as much as Canada's Potash Corp, the world's largest fertilizer producer.

The surprise announcement on Friday that bond king Bill Gross would take his talents to Janus Capital sent a ripple through asset management industry as speculation circulated about Pimco clients leaving with Mr. Gross or moving their holdings to other firms. Janus shares rocketed up 40%, and Pimco parent Allianz lost 5%. Gross reportedly jumped ship after it became apparent he would be fired imminently because of frequent confrontations with co-workers who described his behavior as "increasingly erratic."

The Shanghai Composite gained 0.8% this week, supported by slightly improved economic data and more relief for the property sector. The September HSBC flash manufacturing PMI dodged speculation of a slide into a contractionary territory, turning in a 50.5 print, its fourth consecutive month of expansion. In housing, several top tier cities eased their criteria for "first mortgage" home purchase classification to attract more buyers into the market. The decision follows a particularly soft set of housing price numbers in August and a warning by Moody's that China's nationwide residential property market will decline 5-10% this year. China will release its Industrial Profits data over the weekend, while investors will also watch for any evidence supporting press speculation that PBoC Governor Zhou may be replaced.

In Japan, core CPI measures released late in the week revealed another downtick in inflation, potentially paving the way for more Bank of Japan easing if Q3 data points disappoint. National core CPI of 3.1% was a 5-month low, while ex-sales tax estimated 1.1% price gauge is still well below the 2% BOJ target. USD/JPY hit new 6-year highs above ¥109.50 on Friday after Japan's health minister downplayed earlier expectations that pension fund reform - a boon to riskier assets and a negative for the Yen - would be delayed.

>>> US Close Dow+0,99% S&P+0,86% Nasdaq+1,09%

Closing Market Summary: Stocks End Down Week on Upbeat Note

Equity indices finished a cautious week on an upbeat note. The S&P 500 (+0.9%) and Nasdaq (+1.0%) reclaimed their 50-day moving averages, while the Dow Jones Industrial Average (+1.0%) was able to turn positive for the month (+0.1%). However, today's rally did not feature the same conviction as yesterday with just fewer than 620 million shares changing hands at the NYSE floor versus Thursday's above-average total of 720 million.

The stock market received an early boost from heavily-weighted consumer discretionary (+1.1%) and technology (+1.2%) sectors. Both groups were underpinned by better than expected earnings with discretionary shares rallying behind Nike (NKE 89.50, +9.75), which surged 12.2%.

Elsewhere, the technology sector drew strength from chipmakers following an earnings beat from Micron (MU 33.84, +2.14). The stock jumped 6.8%, while the broader PHLX Semiconductor Index rose 1.3% to narrow its September loss to 0.3%. To be sure, large cap components also displayed strength with Apple (AAPL 100.75, +2.88) spiking nearly 3.0%.

Stocks were briefly pressured from their morning highs by the underperforming health care sector (+0.3%). The group could not catch up to the broader market amid weakness in hospital names like Tenet Healthcare (THC 60.75, -1.09), but biotechnology rallied with the iShares Nasdaq Biotechnology ETF (IBB 276.41, +2.44) advancing 0.9%.

The relative weakness in the health care space did not stand in the market's way during afternoon action as other influential groups like financials (+0.9%), industrials (+0.9%), and energy (+1.3%) picked up the slack. In the financial sector, Janus Capital (JNS 15.89, +4.78) soared 43.0% after it was announced Bill Gross will be joining the company following his departure from PIMCO.

For its part, the energy sector rebounded from its recent underperformance amid a 1.1% rise in crude oil. The energy component ended the pit session at $93.55/bbl to register a 2.2% gain for the week.

Treasuries slumped in the morning, but the rest of the session saw a divergence among different maturities. The 10-yr note settled near its low with its yield up three basis points at 2.53%, while the long bond returned to its flat line with its yield at 3.22%.

Also of note, the Dollar Index (85.63, +0.43) continued charging higher to extend this week's gain to 1.1%. The index will enter the final two sessions of the month after surging 3.6% so far in September.

WSJ : Pimco's Gross Split Isn't End of Allianz

Pimco's Gross Split Isn't End of Allianz

Bill Gross may have just opened the floodgates. Still, Allianz, ALV.XE -6.18% the German insurer that owns fund house Pimco, isn't likely to be swamped by his departure.

Mr. Gross, the mercurial founder and star fund manager at Pacific Investment Management Co., is off to join rival Janus in a huff. So the outlook for assets in the $222 billion Pimco Total Return fund he has managed for decades is in doubt.

That, along with new questions this will raise about Pimco's business at a time when a long bull run for bonds looks to be coming to an end, means Allianz is in for some short-term pain. Indeed, the insurer's stock slumped Friday.

However, management infighting at Pimco—which broke into the open when Mohamed El-Erian's quit as chief executive earlier this year—and this week's news of a regulatory inquiry into an exchange-traded fund managed by Mr. Gross show his departure isn't all bad news if it ends dysfunction within the business. And there remain good reasons for owning Allianz stock in the medium term.

There is no denying Pimco is big for bond markets and Allianz. It has nearly $2 trillion in assets under management. Pimco delivered about 28% of Allianz group operating profits in the past two years. Any big cut to that would be worrisome.

There is also no denying Mr. Gross was important to Pimco. The Total Return fund is the world's biggest bond mutual fund. He also ran other, smaller funds, taking his total direct influence to perhaps one-quarter of Pimco's third-party assets.

If all those went out the door, Allianz could lose a profit contribution equaling 4% of 2013 operating profits.

But that is likely too pessimistic. Heightened outflows wouldn't happen instantly and Mr. Gross's star had already dimmed. Net outflows from his funds over the past 16 months have amounted to about $60 billion.

Meanwhile, recent asset flows show that other funds, such as the Pimco Income Fund run by Dan Ivascyn —now a favorite to succeed Mr. Gross—have been seeing strong inflows, even if they haven't offset Mr. Gross's outflows.

Part of this has been due to less-than-stellar performance by Mr. Gross. But it also reflects that investors are growing more wary of the outlook for bonds as the U.S. Federal Reserve approaches a potential turning point for interest rates.

This will be an issue to some degree at all bond-fund managers, not just Pimco. Eventually, too, higher interest rates should benefit Allianz as it will generate more income from its investments.

And other parts of Allianz's business have been performing about as well as they could in current markets. Low interest rates are putting pressure on its businesses in continental Europe, which accounts for about half its earnings. But Allianz has been managing the investment side well, partly by increasing its risk profile.

The group has also done a good job managing costs and pricing in its nonlife insurance business, protecting and even improving margins in Germany and Italy. That is helping to offset weakness in its nonlife businesses in Russia and the U.S. On the life side, the U.S. has been the brighter spot, with growth returning in annuity and savings products.

Overall, full-year operating profits are expected to hit €10.5 billion ($13.39 billion)—about half a billion ahead of 2013. And analysts expect the group to increase its dividend payout ratio to 45% of earnings or higher from 40%.

What's more, Allianz isn't expensive. The shares trade at just 9.2 times forward earnings—down from 9.8 times before Mr. Gross's departure.

The lower multiple is in line with Axa, another European insurer that has struggled with owning U.S. asset managers. But it is a good way behind Aviva, AV.LN +1.43% where a turnaround has investors more excited, or Zurich Insurance Group.

For some time, the cloud of Pimco's troubles has made it hard to see how Allianz's valuation was going to catch up. Now, it won't have to deal with a difficult relationship with Mr. Gross.

In that sense, his abrupt departure, while crystallizing worries of investors in Pimco funds and Allianz stock, may also allow both to get over this breakup.