Weekly Business Roundup
Publication 10- JetBlue Agrees to Buy Spirit Airlines, Federal Reserve Enact 0.75-Point Rate Increase, and Russia Cut Gas Flow to Europe via Nord Stream to 20% Capacity
Published Sunday, July 31st 2022
This week, Chinese mega-entrepreneur Jack Ma announced plans to cede control of Ant Group, inflation hit a new four-decade high, and the U.S economy contracted for the second quarter in a row.
Business
JetBlue Agrees to Buy Spirit Airlines for $3.8 Billion After Frontier Deal Dies
JetBlue Airways Corp. agreed to buy Spirit Airlines Inc. for $3.8 billion, a combination that would create the fifth-largest U.S. carrier.
The deal announced Thursday comes after reports revealed that the two sides were close to sealing an agreement after a monthslong bidding war between JetBlue and Frontier Group Holdings Inc.
JetBlue will pay $33.50 in cash for each share of Spirit, including a prepayment of $2.50 a share payable once the deal has been approved by Spirit shareholders. The deal also includes a so-called ticking fee of 10 cents a month starting in January until the deal closes.
The new deal culminates JetBlue’s efforts to wrest Spirit away from Frontier—a rival budget carrier that had struck a deal to buy Spirit when JetBlue swooped in with a competing offer. Spirit and Frontier called their merger off Wednesday, clearing the way for the airline to come to terms with JetBlue.
JetBlue has said that buying Spirit would make it a more formidable competitor to the four carriers that dominate U.S. air travel: American Airlines Group Inc., Delta Air Lines Inc., United Airlines Holdings Inc. and Southwest Airlines Co.
Getting to an agreement was a rocky process. JetBlue and Spirit had been locked in an unusually bitter and public battle since April, with Spirit staunchly defending its previous plans to merge with Frontier in what became the industry’s most heated contest in years. JetBlue had accused Spirit’s board of not looking out for shareholders’ best interests in spurning JetBlue’s offer, while Spirit and Frontier suggested that JetBlue was merely trying to spoil their deal and fend off a potential new rival.
“Where we are today is we’ve got an exciting merger agreement with JetBlue. It’s going to create a very large, national low-cost carrier,” Spirit Chief Executive Ted Christie said in an interview. “Many things were said, but business is business.”
Spirit CEO, Ted Christie
Initially it seemed unlikely that JetBlue would be able to break Spirit and Frontier apart—the two companies are closely linked and had been discussing a combination for years. Spirit initially turned JetBlue down, arguing that the Frontier deal had a better chance of passing muster with regulators and would be better for investors in the long run. But JetBlue continued to press the issue, sweetening its offer several times. Spirit and Frontier struggled to persuade Spirit’s shareholders to back Frontier’s cash-and-stock bid, which was worth about $1 billion less than JetBlue’s offer as of earlier this week.
“Where we are today is we’ve got an exciting merger agreement with JetBlue. It’s going to create a very large, national low-cost carrier”
Twitter & Elon Musk 5-Day Trial Is Set for Week of October 17 in Delaware
The judge overseeing Twitter Inc.’s lawsuit against Elon Musk over their stalled $44 billion merger set the week of October 17 for a trial in Delaware Chancery Court.
Last week, Chancellor Kathaleen St. Jude McCormick, Chancery’s chief judge, granted Twitter’s request to fast-track the lawsuit and ordered a five-day trial in October, over Mr. Musk’s objections. Chancellor McCormick said the case should be resolved quickly, agreeing with Twitter’s claim that it could be harmed by uncertainty about its future as a public company.
The court’s clerk later told the parties that the trial would be held the week of October 10th or October 17th, court filings show, based on available dates during those weeks.
Twitter sued Mr. Musk on July 12th to try to force him to go through with his takeover bid after the Tesla CEO said in a July 8th securities filing that he wanted out of the deal.
Tesla CEO, Elon Musk
Mr. Musk said he was terminating the agreement because Twitter hadn’t provided the necessary data and information he needed to assess the prevalence of fake or spam accounts on its platform. The social-media company has said for years that it estimates such accounts represent less than 5% of its monetizable daily users, a figure Mr. Musk has disputed.
Despite the month for the trial being settled and the weeks narrowed down, Mr. Musk and Twitter traded barbs this week about their efforts to agree on a schedule.
On Tuesday, Mr. Musk’s lawyers filed a proposed schedule setting the trial for the week of October 17th, saying clarity was needed immediately “to break the impasse” with Twitter, “who at every turn has sought to delay” efforts to abide by the judge’s order to expedite. According to the filing, Twitter insisted on scheduling the trial for the week of October 10th.
The next day, Twitter filed a response to that motion, accusing Mr. Musk of misstating the facts and Twitter’s positions. Twitter said while it told Mr. Musk that it preferred an October 10th start date, it thought they should wait for guidance from the court before requesting a specific date. The company also said it told Mr. Musk that it wouldn’t oppose an October 17th start date if the court determined that week would work.
Mr. Musk still hasn’t formally responded to the lawsuit, which was filed in Delaware Chancery Court, though he opposed Twitter’s motion to expedite a trial, arguing his team needs more time to complete the discovery process.
Also this week, Twitter said in a regulatory filing that it would ask shareholders to vote on the merger at a meeting on Sepember 13th. The company reiterated its commitment to completing the merger at the agreed-upon price of $54.20 a share and that its board of directors has unanimously recommended that shareholders vote in favor of it.
Jack Ma Plans to Give Up Control of Ant Group
Billionaire Jack Ma plans to relinquish control of Ant Group Co., people familiar with the matter said, part of the fintech giant’s effort to move away from affiliate Alibaba Group Holding Ltd. after more than a year of extraordinary pressure from Chinese regulators.
The authorities halted Ant’s $34 billion-plus IPO in 2020 at the 11th hour and are forcing the technology firm to reorganize as a financial holding company regulated by China’s central bank. As the overhaul progresses, Ant is taking the opportunity to reduce the company’s reliance on Mr. Ma, who founded Alibaba.
Mr. Ma, a 57-year-old former English teacher and one of China’s most prominent entrepreneurs, has been the target of government action that appears designed to reduce his influence and the power of his companies. He has controlled Ant since he carved its precursor assets out of Alibaba more than a decade ago. Over time he built it into a company that owns the Alipay payments network with more than one billion users, an investing platform that houses what was once the world’s largest money-market fund, and a large microlending business. Ant was expected to be valued at more than $300 billion had it gone public.
Alibaba Founder, Jack Ma
Diminishing his ownership could put back a potential revival of Ant’s IPO for a year or more. Chinese securities regulations require a timeout on public listings for companies that have gone through a recent change in control.
Mr. Ma doesn’t hold an executive role at Ant or sit on its board, but is a larger-than-life figure at the company and currently controls 50.52% of its shares via an entity in which he holds the dominant position. He could relinquish his control by transferring some of his voting power to other Ant officials including Chief Executive Eric Jing, after which they would collectively control the company, some of the people said.
Ant told regulators of Mr. Ma’s intention to cede control as the company prepared to convert into a financial holding company, the people familiar with the matter said. Regulators didn’t demand the change but have given their blessing, the people said. Ant is required to map out its ownership structure when it applies to become a financial holding company.
The People’s Bank of China has yet to officially accept Ant’s application to become a financial holding company. Any change of control isn’t likely to materialize until Ant’s restructuring is complete.
Economics
Fed Execute Three-Quarter Point Increase Again
The Federal Reserve continued a sprint to reverse its easy-money policies by approving another unusually large interest rate increase and signaling more rises were likely coming to combat inflation that is running at a 40-year high.
Officials agreed unanimously Wednesday to lift their benchmark federal-funds rate to a range between 2.25% and 2.5%. But markets rallied after the meeting because Fed Chairman Jerome Powell offered fewer specifics about the magnitude of upcoming rate rises and hinted at an eventual slowdown.
Federal Reserve Chairman, Jerome Powell
Mr. Powell said Wednesday it was too soon to say whether the Fed would dial down the size of its rate increases to a half-percentage point or a quarter-percentage point at its next meeting in September. But he said that at some stage, it would be appropriate to slow the pace of rate increases to assess their cumulative impact on the economy.
“These rate hikes have been large, and they’ve come quickly,” Mr. Powell said, referring to the Fed’s four consecutive rate increases since March. “And it’s likely that their full effect has not been felt by the economy, so there’s probably some significant additional tightening in the pipeline.”
The Fed chairman said the slowdown in economic growth during the second quarter had been notable, citing signs of cooling consumer spending, hiring and housing activity. “Are we seeing the slowdown in economic activity that we think we need?” Mr. Powell said. “There is some evidence we are, at this time.”
Mr. Powell suggested the central bank wasn’t likely to slow down rate increases simply because growth slows. That is because with inflation running well above the Fed’s 2% target, it wants to see economic growth slow below its estimated long-term trend of around 1.8%.
“Are we seeing the slowdown in economic activity that we think we need? There is some evidence we are, at this time”
Inflation Hits Fresh Four-Decade High, According to Fed’s Preferred Measure
Inflation accelerated in June, measured by the Federal Reserve’s preferred gauge, driven by a jump in energy prices as well as broader-based increases.
Consumer prices rose 6.8% in June from a year earlier, up from 6.3% in May and April, as measured by the Commerce Department’s personal-consumption expenditures price index. The gain in June marked the sharpest rise since January 1982.
The so-called core PCE index, which excludes volatile food and energy prices, increased 4.8% in June from a year ago, up from 4.7% in May. On a monthly basis, core prices rose a seasonally adjusted 0.6% in June from a month earlier, a sharp pickup from the 0.3% increase in each of the prior four months.
Energy prices surged 43.5% from a year earlier, while food prices gained 11.2%. Prices for durable goods—big-ticket long-lasting goods like factory equipment, appliances and motor vehicles—decelerated for the fifth straight month, rising 6.1% from a year ago, a signal that supply-chain pressures that have driven inflation over the past year and a half are easing. However, prices for services increased 4.9%, the sharpest gain since 1990.
The central bank is watching for signs that inflation is on a glide path toward its 2% inflation target, measured by the PCE price index. The Labor Department’s measure of consumer prices rose 9.1% in June from a year earlier.
The consumer-price index usually runs somewhat higher than the PCE index due to differences in how they are constructed. For instance, the two measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is broader, including spending on behalf of households—for example, employer-sponsored healthcare plans, Medicare and Medicaid. The PCE price index as a result has a heavier weight for healthcare prices. Meanwhile, housing costs account for a much bigger share of the CPI than the PCE price index.
The Fed has traditionally tended to focus on the PCE price index because it gives a more complete picture of consumer prices, while the public and many investors tend to be more aware of the Labor Department’s CPI figure.
U.S Economy Contraced 0.9% During Q2
The U.S. economy shrank for a second quarter in a row—a common definition of recession—as the housing market buckled under rising interest rates and high inflation took steam out of business and consumer spending.
Gross domestic product, a broad measure of the goods and services produced across the economy, fell at an inflation and seasonally adjusted annual rate of 0.9% in the second quarter, the Commerce Department said Thursday. That followed a 1.6% pace of contraction in the first three months of 2022.
The report indicated the economy met a commonly used definition of recession—two straight quarters of declining economic output.
The official arbiter of recessions in the U.S. is the National Bureau of Economic Research, which defines one as a significant decline in economic activity, spread across the economy for more than a few months. Its Business Cycle Dating Committee considers factors including employment, output and household income—and it usually doesn’t make a recession determination until long after the fact.
Whether or not the U.S. is in a recession now, ING economist James Knightley said that a downturn is “really only a matter of time,” given pressure on American households from inflation, equity markets and “the housing downturn really gathering pace now,” which he said “reinforces the feeling that it’s only a matter of time before we’re in a proper recession.”
Analysts noted that much of the decline in the second quarter was due to a slower pace of inventory restocking.
“We’re seeing a sharp and necessary deceleration rather than a recession,” said David Mericle, chief U.S. economist at Goldman Sachs, adding that slower growth is needed to rebalance the economy’s supply and demand for goods and services, and cool wage growth and inflation. “I wouldn’t say we seem to be in contractionary territory on a go-forward basis,” he added.
“It’s only a matter of time before we’re in a proper recession.”
U.S. Jobless Claims Hold Near Highest Level of the Year
New applications for unemployment benefits held near the highest level of the year last week, a sign that the tight labor market is loosening.
Initial jobless claims, a proxy for layoffs, fell 5,000 to a seasonally adjusted 256,000 in the week ended July 23 from the prior week’s upwardly revised level, the Labor Department said Thursday. The prior week’s reading was revised up by 10,000 and was the highest level of claims since November.
Last week’s claims stood above the 2019 prepandemic weekly average of 218,000, but remained at a level generally consistent with a solid labor market. The four-week moving average for claims, which smooths weekly volatility, inched up to 249,250 last week, an increase of 6,250 from the previous week’s revised average.
The labor market has been a source of strength this year for the economy, with the unemployment rate in June holding near a half-century low. That stands in contrast to slowing pace of economic output and inflation trending at four-decade high.
Still, recent indicators show conflicting views of the labor market, said Nela Richardson, chief economist at payroll-processing firm ADP. Historically high job postings and solid hiring in recent months indicate a tight labor market, but the share of adults working or looking for work remains below its prepandemic level and the supply of workers shrunk slightly this spring.
ADP Chief Executive, Nela Richardson
“It’s not yet finding a balanced position post-pandemic,” said Dr. Richardson, who holds a Ph.D. in economics. The labor market is still evolving in the wake of the pandemic recession, she said.
Federal Reserve Chairman Jerome Powell said he expects the tight labor market to cool.
“We actually think we need a period of growth below potential in order to create some slack,” he said. “We also think that there will be, in all likelihood, some softening in labor-market conditions.”
Thursday’s report showed continuing claims, a proxy for the total number of people receiving payments from state unemployment programs, fell 25,000 to 1.36 million in the week ended July 16th from the previous week’s level. Continuing claims are reported with a one-week lag.
“[The labor market] is not yet finding a balanced position post-pandemic,”
World
Russia to Cut Europe’s Gas Flow via Nord Stream to 20%
Russia said it would further reduce natural-gas supplies to Europe this week, lobbing another volley in its economic war with the West and raising new questions about Europe’s ability to avoid shutting down factories and leaving homes cold this winter.
Russian state-owned energy producer Gazprom PJSC said gas exports through the vital Nord Stream pipeline to Germany would drop to about a fifth of the pipe’s capacity, blaming sanctions-related problems with turbines that have already reduced flows. The fresh reduction in the pipeline’s capacity—from 40% currently to 20%—is expected to take effect Wednesday, Gazprom said.
Wholesale European gas prices jumped 12% Monday to €179, or about $183, a megawatt-hour. They have more than doubled so far this year and are expected by analysts to keep rising as winter approaches, adding to inflation that is straining economies, governments and financial markets in the region.
European officials and analysts say Russia President Vladimir Putin is weaponizing gas deliveries, aiming to retaliate for economic sanctions imposed on Russia and weaken the West’s resolve to give military and financial assistance to Ukraine. By keeping some gas flowing, they say, Moscow is keeping Europe guessing and maximizing the leverage it has over Europe’s energy security to sow political fissures.
Russian President, Vladimir Putin
“Russia is playing a strategic game here,” said Simone Tagliapietra, a senior fellow at Brussels-based economic think tank Bruegel. “Fluctuating already low flows is better than a full cutoff as it manipulates the market and optimizes geopolitical impact.”
European government officials and companies say Moscow is using the turbine holdups as a diversion in what Berlin has called an economic attack. Nord Stream has an elaborate contingency system with at least one spare turbine available at all times. The German Economy Ministry on Monday said there was no technical reason for the reduction in deliveries.
Dmitry Peskov, the Kremlin’s press secretary, dismissed accusations that Gazprom has meddled with gas supplies to gain political leverage. “Russia is a responsible gas supplier,” he told reporters Monday, before the Gazprom announcement, according to Russia’s Interfax news agency.
The planned reduction complicates Europe’s efforts to fill up its gas storage ahead of winter. Without enough gas in the higher-demand months, governments say they are likely to ration energy and the continent’s fragile economy could sink into recession. Germany’s federal energy regulator has said that the country would struggle to reach its storage goals with Nord Stream flows capped at 40%. Reaching them at 20% is an even taller order.
“Russia is playing a strategic game here”
Two HIV Patients Appear to Have Beaten Virus, Offering Hope for Cure
A 66-year-old man in Southern California and a woman in her 70s in Spain are the latest in a small group of people who appear to have beaten their HIV infections, providing researchers new clues to a possible cure at a time when Covid-19 and other crises are slowing progress against the spreading virus.
Doctors caring for the man said they haven’t found any human immunodeficiency virus that can replicate in his body since he stopped antiretroviral drug therapy in March 2021 after a transplant of stem cells containing a rare genetic mutation that blocks HIV infection. He was given the transplant for leukemia, for which people with HIV are at increased risk. Details of his case were made public Wednesday and will be presented at a large international AIDS conference in Montreal that opens Friday.
He is the oldest of five patients thus far who appear to have rid their bodies of HIV after the risky procedure and had been infected the longest, since 1988, offering hope for a growing cohort of aging HIV patients, said Jana Dickter, an infectious disease doctor who cares for the man at City of Hope, a cancer research and treatment center in Duarte, Calif., in the Los Angeles area.
“He saw many of his friends and loved ones become ill and ultimately succumb to the disease and had experienced some stigma associated with having HIV,” she said. His success “opens up the opportunity potentially for older patients to undergo this procedure and go into remission from both their blood cancer and HIV.”
The woman in Spain still has HIV lying dormant in some cells in her body. But the amount is declining, and the virus isn’t replicating even though she stopped antiretroviral therapy more than 15 years ago, said Juan Ambrosioni, one of the doctors caring for her at the Hospital Clinic of the August Pi i Sunyer Biomedical Research Institute in Barcelona.
She was diagnosed with HIV at age 59 shortly after becoming infected and entered a clinical trial in which she received antiretroviral drugs as well as therapies to boost her immune system. After nine months, the antiretrovirals were stopped, Dr. Ambrosioni said.
This deal in my eyes will seriously benefit jetblue. Could help them be more profitable in the long run!