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G.E. Weighs Changes, but Investors Hear ‘Breakup’: DealBook Briefing

Credit...Brendan Mcdermid/Reuters

Good Tuesday, and welcome back. Here’s what we’re watching:

• Will G.E. be broken up? Maybe not in the way people think.

• Nestlé signs a deal to sell its U.S. confectionary business to Ferrero.

• Why Elliott is agitating at Bezeq.

• The one interesting number from Silver Lake’s $3.5 billion bid for Blackhawk Network.

• Qualcomm’s busy M.&A. day.

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John Flannery, G.E.’s chief executive, is considering changes in the way that the company operates, he said today. Though the news accompanied the announcement that G.E. would take a $6.2 billion charge related to its legacy insurance portfolio, the statements are unrelated.

The problem: Many on Wall Street think that Mr. Flannery was talking about the once-unfathomable idea that G.E. could be broken apart into separate businesses.

On a conference call with analysts, Mr. Flannery said:

“We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses. Our results, over the past several years, including 2017 and the insurance charge, only further my belief that we need to continue to move with purpose to reshape GE.”

Late last year, Mr. Flannery, who succeeded Jeff Immelt as C.E.O. in August, said he will make the company smaller by reducing the number of businesses it is in. He said that G.E. would focus on jet engines, power-generation equipment and health-care machines.

The context: It’s unlikely that G.E. will make an announcement in the spring that it will only fiddle around the edges, like more fully spinning off its Baker Hughes oil-field services unit. But it’s also unlikely that Mr. Flannery will be the one to break up the 125-year-old conglomerate.

It’s more likely that Mr. Flannery and his team will consider unique ways of separating G.E.’s core business units without actually splitting them completely apart. But it’s all somewhat speculative at the moment.

Critic’s corner, from Brook Sutherland of Gadfly:

It is now abundantly apparent that the previous management team led by Jeff Immelt had little handle on the comings and goings of all the pieces of this sprawling conglomerate. The reasons for keeping GE together — shared resources and technology — look increasingly tenuous. If you ask employees, they don’t really see the benefit of having both a power and an aviation business, for example.

— Stephen Grocer and Michael J. de la Merced

The attorneys general of 22 states filed a lawsuit to block the Federal Communications Commission’s repeal of regulations that ensure an equal and open internet, reports the NYT’s Cecilia Kang.

The attorneys general said the rollback of so-called net neutrality rules were “arbitrary and capricious” and a reversal of a longstanding policy to prevent internet service providers from blocking or charging websites for faster delivery of content to consumers.

The petition to begin the lawsuit, filed in the United States District Court of Appeals in Washington, is the first legal challenge against the F.C.C.’s order in December. Several others are expected, including by public interest groups such as Public Knowledge and Free Press, which argue that the F.C.C.’s order was harmful to consumers and was done hastily and without proper public input.

The business that makes Butterfingers and Gobstoppers will find a new home — at Ferrero, the producer of Rocher chocolate — for $2.8 billion in cash.

The numbers

• The U.S. candy business, which doesn’t include KitKats, generated $900 million in sales in 2016. (That’s roughly 1 percent of Nestlé’s overall revenue that year.)

• The deal is expected to close by March 31

The context: Nestlé said last year that it would explore a sale of the business amid a waning appetite among Americans for candy. The move had been lauded by Dan Loeb’s Third Point, which has put pressure on the food titan to sell off nonessential businesses.

The pullquote, from Mark Schneider, Nestlé’s C.E.O.:

“With Ferrero we have found an exceptional home for our U.S. confectionery business where it will thrive. At the same time, this move allows Nestlé to invest and innovate across a range of categories where we see strong future growth and hold leadership positions, such as pet care, bottled water, coffee, frozen meals and infant nutrition.”

The advisers

For Ferrero: Credit Suisse, Lazard and the law firm Davis Polk & Wardwell

— Michael J. de la Merced

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Paul Singer of Elliott Management.Credit...Steve Marcus/Reuters

One of Elliott’s first campaigns of 2018 sees the activist hedge fund going even further abroad: Its latest target is Bezeq, the once-government-owned Israeli telecom company. The phone service provider is up 5 percent as of this morning on the news of Elliott’s investment and public letter to the telecom’s interim chairman, David Granot.

The context

Bezeq has been under pressure on multiple fronts:

• The company has been under pressure from regulators amid an investigation into potential securities violations, including an inquiry into the mogul Shaul Elovitch, who owns 26 percent of the company.

• The company’s ownership structure is complicated. Technically, Mr. Elovitch controls Eurocom, which in turn controls Internet Gold, which in tern controls BCom, which in turn controls Bezeq. (Got that?) But Mr. Elovitch has been grappling with debt at Eurocom and is in talks to sell control of that vehicle to another businessman, Naty Saidoff.

What Elliott wants

• Replacing all directors under scrutiny by Israeli securities regulators, in consultation with shareholders

• Simplifying the ownership structure of the company

From the hedge fund’s letter to Mr. Granot:

As you well know, Bezeq faces compelling business opportunities and significant challenges. The time that passes without stable, impartial ownership and governance is to the detriment of all stakeholders.

What could lie ahead

Beyond the public pressure that the letter by Paul Singer’s hedge fund will bring, Elliott could also call a special meeting of shareholders to vote on matters like choosing new directors, if it can muster up the support of at least 5 percent of shares. (Elliott said that it currently owns a 4.8 percent economic interest in the company. )

— Michael J. de la Merced

• It isn’t necessarily the $3.5 billion purchase price that Silver Lake and P2 Capital Partners agreed to pay for the operator of gift card stores.

• It isn’t necessarily the 24 percent premium over Blackhawk’s Friday closing price that the $45.25-per-share bid represents.

• It isn’t even necessarily the nine advisers listed in the press release. (More on that below.)

• It’s the $1.7 billion equity check that Silver Lake is writing to support the deal. That’s one of the biggest-ever equity commitments that the $39 billion investment firm has ever made.

The backstory

Dan Primack has more on the five-year saga over at Axios.

The advisers

For Blackhawk: Sandler O’Neill & Partners, Citigroup and the law firm Wachtell, Lipton, Rosen & Katz

For Silver Lake: Barclays, Bank of America Merrill Lynch, Goldman Sachs, JPMorgan Chase and the law firm Simpson Thacher & Bartlett

For P2 Capital: The law firm Debevoise & Plimpton

— Michael J. de la Merced

The first

Qualcomm unveiled its first official “fight letter” in its campaign to beat back Broadcom’s $105 billion bid for the chip maker.

Among the highlights of the letter:

• Qualcomm says that it will deliver between $6.75 and $7.50 in pro forma earnings per share for its 2019 fiscal year.

• A pledge to continue the company’s its cost-savings program.

• A reiteration that Broadcom’s offer ignores the upswing that the emerging 5G wireless standard will bring for Qualcomm’s stock.

From the letter:

Broadcom is asking Qualcomm stockholders to voluntarily transfer to a hostile acquirer the considerable near- and long-term value creation Qualcomm has in front of it. It is attempting to acquire Qualcomm at an opportunistic, inferior price by installing a slate of conflicted Broadcom/Silver Lake nominees with minimal relevant experience.

The second

Ramius, a money manager that owns stakes in both Qualcomm and NXP Semiconductors, said that it plans to reject Qualcomm’s $110-a-share bid for the smaller chip maker. The firm wants a deal done — but at a higher price.

That follows the declaration of Elliott that NXP was worth $135 a share on a standalone basis.

From Ramius’s news release:

Should Qualcomm fail to complete its acquisition of NXP, Ramius believes that Qualcomm shareholders will seriously question the ability of Qualcomm to execute its strategy as an independent entity.

— Michael J. de la Merced

Citigroup said that it earned $3.7 billion in its fourth quarter — if one excludes a $22 billion charge related to the tax overhaul.

Here’s a look at its results by the numbers:

• $18.3 billion, or $7.15 per share. Citi’s loss in the fourth quarter, including the tax charge. It is the bank’s largest quarterly loss. The new tax law is causing large banks to report big one-time charges to their fourth-quarter results, but the legislation should benefit the banks over time.

• $1.28. Its earnings per share excluding the tax hit. That beat the $1.19 expected by Wall Street analysts, according to Thomson Reuters and topped the $1.14 per share earned a year ago.

• $17.26 billion. Citi’s revenue for the quarter, which exceeded the $17.01 it generated a year ago.

• $19 billion. The amount of the $22 billion tax charge that came from writing down deferred-tax assets, which companies use to offset future tax bills.

• $3 billion. The amount of the tax hit that came from a one-time charge on overseas earnings because of the new tax law.

• $2.9 billion. The amount Citi generated in trading revenue, down 19 percent. JPMorgan reported a 17 percent drop on Friday.

— Stephen Grocer

Goldman’s commodity trading revenue fell 75 percent last year, its worst annual performance, Bloomberg reports, citing people familiar with the matter.

Goldman’s commodities unit has been under scrutiny both within the bank and among investors since it revealed its second-quarter performance was the worst in its post-IPO history. That triggered an informal review of the unit and several high-profile departures, including global commodities head Gregory Agran.

The bank’s commodities earnings in the final three months of 2017 were better than the previous two quarters as losing natural gas trades were closed. Nonetheless, performance at the unit remained lackluster as it cut back risk-taking.

Goldman reports earnings tomorrow before the bell.

— Stephen Grocer

The Dow Jones industrial average is trading above 26,000 for the first time.

It took just seven days for the blue-chip index to go from 25,000 to 26,000. If it closes above that level, it will mark the quickest move from one millennial marker to the next.

The previous record was set on Jan. 4 when the Dow finished above 25,000 just 23 trading sessions after surpassing 24,000.

Of course, 1,000 point moves aren’t what they used to be. Going from 25,000 to 26,000 is a move of just 4 percent. By comparison, when the index went from 10,000 to 11,000 in 24 days in 1999, it was a rise of 10 percent, points out the WSJ’s Erik Holm.

And it’s not just the Dow that is surging this month. The more widely followed Standard & Poor’s 500 index crossed 2,800 this morning and is up more than 4 percent this month. That puts it on pace for its best monthly performance since March 2016, when it was rebounding from the steep sell-off during the first six weeks of that year.

In fact, the S.&P. 500 hasn’t experienced a monthly decline since March of last year.

— Stephen Grocer

In a letter to investors, the hedge fund manager wrote that his firm had bought shares of Twitter in the fourth-quarter at an average price of $21.59.

Via ValueWalk:

Despite a massive user base and broad reach, TWTR has an enterprise value of about 2% of Facebook, the largest social media platform. New management improved the TWTR user experience, which led to rapid growth in number of users and time spent on TWTR in 2017. As a result, we believe TWTR will have a pitch to advertisers in 2018, which should lead to revenue growth. Restructuring actions taken over the past year will allow much of the revenue to fall to the bottom line, and we expect TWTR to begin to close some of the 25% margin gap vs. its social media peers. TWTR shares ended the year at $24.01.

Shares of Twitter are down about 1 percent to $25.13.

— Stephen Grocer

What’s happening: Larry Fink of BlackRock is sending a letter to C.E.O.s of public companies today saying that they must show how they contribute to society, or risk losing the money-management firm’s support.

More from the letter:

The public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.

The leverage: BlackRock has $6 trillion under management, making it the biggest investor in public companies in the world.

The context, from Andrew’s latest DealBook column: Mr. Fink’s letter pits the investment mogul “against many of the companies that he’s invested in, which hold the view that their only duty is to produce profits for their shareholders, an argument long espoused by economists like Milton Friedman.”

The assessment: Jeff Sonnenfeld of the Yale School of Management told Andrew, “It is huge for an institutional investor to take this position across its portfolio.” Mr. Sonnenfeld added that he’s seen “nothing like it.”

More in corporate social activism

• Citi said it would measure, publish and address gaps in the pay between male and female employees in the U.S., Britain and Germany, after pressure from an investor. (Bloomberg)

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From left, Jessica Alba, Gary Vaynerchuk, will.i.am, Gwyneth Paltrow, and Zane Lowe, stars of “Planet of the Apps.”Credit...Charley Gallay/Getty Images for Apple Music

Raine — the merchant bank that invested early in Vice and counts Masa Son and Steve Ballmer as clients — has invested in Propagate Content, the studio that produced the first original series for Apple and Twitter. (Propagate’s co-founders are Ben Silverman, once co-chairman of NBC Entertainment, and Howard T. Owens, who was president of National Geographic Channels.)

The thesis: That content is more important than ever in an era of online streaming. Raine’s betting that Propagate, which is also turning popular podcasts like “Lore” into streaming series and working on content for Netflix and CBS, can produce hits from a variety of sources and replicate them around the world.

The pullquote, from Raine co-founder Joe Ravitch:

“These guys think global from the very beginning, and the formats and shows that Ben and Howard have developed are some of the best examples of customizing content to different markets and cultures.”

In other media deals:

• Saudi Arabia’s Public Investment Fund is in talks to invest more than $500 million in Endeavor, the parent company of WME, as part of its push to diversify the kingdom’s economy, according to unidentified sources. (TheWrap, Bloomberg)

• Graydon Carter’s first project after Vanity Fair is an investment in Zig, a start-up described as Instagram for news.

From the venture capitalist’s blog post from this weekend, which has been making the rounds in Silicon Valley:

A few years ago I met with a very successful entrepreneur who built his company outside of the tech sector. When I asked him about equity compensation he said to me “You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.”

Mr. Wilson’s bottom line: Stock awards have a real cost — annual dilution of companies’ equity can be as high as 5 percent a year.

He adds:

We should be confronting the true cost of this practice and asking ourselves if it is best for our employees, and if so, which ones, and if it is best for our companies and our shareholders.

The tech and telecom flyaround

• By potentially spinning out its Japanese cellphone business, SoftBank could raise as much as $18 billion for deals. (FT)

• Kuaishou, a video site backed by Tencent, is seeking a valuation of about $17 billion in its new round of financing. (Bloomberg)

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A Ram 1500 truck at an assembly plant in Warren, Mich., in 2014.Credit...Bill Pugliano/Getty Images

Sergio Marchionne, the automaker’s outspoken C.E.O., made it clear that the company won’t sell its Jeep or Ram divisions or otherwise break itself up. But if that idea is “three years ago,” as he said at the Detroit Auto Show, what is his plan to compete with rivals who are diving headlong into autonomous vehicles?

From his interview with Bloomberg:

“We talk to everybody, and we are continuously learning and making selections on the basis of the best available technology.”

Mr. Marchionne also confirmed that this will be his last year leading Fiat Chrysler, with a successor to be named in March.

The Detroit Auto Show flyaround

• Automakers are celebrating their best ever three-year stretch, but they could be headed for choppier waters. (NYT)

• BlackBerry continued its push into the auto industry with a product to help carmakers detect software security flaws. (Bloomberg)

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That’s an actual question posed in a private forum that was sent to us by a reader this weekend.

Your daily reminder of virtual currency prices, courtesy of CoinMarketCap:

• Bitcoin is at $12,288, down 11 percent over the past day.

• Ethereum is at $1,137, down nearly 15 percent.

• Ripple is at $1.45, down 22 percent.

And your daily dose of virtual currency skepticism, courtesy of Bloomberg:

Investors “should be prepared to lose all their money” in Bitcoin, said Steven Maijoor, chairman of the European Securities and Markets Authority, in a Bloomberg TV interview in Hong Kong.

The digital money flyaround

• The head of Singapore’s central bank said he hoped the technology underpinning Bitcoin and other digital currencies would outlast the current “fever.” (Axios)

• Nine hedge funds who had bet on Bitcoin made a 1,167 percent return last year — less than the virtual currency’s return but far more than the 8 percent that the hedge fund industry as a whole generated. (Bloomberg)

• China is escalating its cryptocurrency crackdown, and has blocked websites and apps that offer exchange-like services, according to unidentified sources. (Bloomberg)

• IBM has teamed up with Moller-Maersk to create a blockchain-based platform for the shipping industry. (Reuters)

• TechCrunch got hold of Telegram’s initial coin offering prospectus and learned that the messaging service wants to challenge Ethereum as a platform for services. (TechCrunch)

damage

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