Big Bucks, Bad Food Heinz/Kraft?

Matt Levine writes: To recap that math: Berkshire Hathaway and 3G Capital together invested $8.5 billion in the common stock of Heinz two years ago. (Berkshire also invested $8 billion in its preferred stock.) Yesterday, they announced that they were investing a total of an additional $10 billion in Heinz’s stock, in order to fund a cash payment to Kraft shareholders as part of Heinz’s merger with Kraft. I did some loose calculations and concluded that the market valued the combined company at about $83 billion, giving Heinz an equity value of about $42 billion. This math was fairly uncontroversial. I then said: Well, okay, Berkshire and 3G invested $10 billion in cash yesterday,  so that’s worth $10 billion. That means that their shares in Heinz — the ones they bought for $8.5 billion two years ago — are worth $32 billion, roughly quadrupling their money.

I got some resistance to that math. The theory behind the resistance was, more or less: No, the $10 billion in cash isn’t worth $10 billion, it’s worth more. The value accruing to Heinz isn’t just the value of the standalone company — it’s not like Heinz has, by itself, quadrupled in value in two years.  Instead, what makes Heinz’s share of the combined company worth $42 billion is the combination: Heinz has jumped in value in large part because of the Kraft deal, and to get the Kraft deal Berkshire and 3G had to kick in another $10 billion. So the real math is that they’ve put in $18.5 billion for a thing worth $42 billion — still a quite respectable 130 percent return on investment.

This is a pleasant philosophical debate — neither version is exactly “right” or “wrong” — but it also has practical implications for some people. For instance, if you are a manager of Heinz paid in stock options, you want that full $32 billion valuation attributed to your work, and none of it to the new money coming in: You want that new money to buy in at, effectively, a $42 billion post-money Heinz valuation.  And that’s a subject for negotiation in the merger agreement. The new money buys some number of shares. The more shares it buys, the better deal the new money is getting, and the lower the returns on the old money. (Since both new and old money come mostly from Berkshire and 3G, this may not matter too much.

 

heinz math 2

Roughly speaking, Berkshire and 3G are valuing their initial Heinz equity stakes — which they bought for $4.25 billion each two years ago — at about $12.8 billion each, more than tripling that money (on paper). They’re attributing $14.6-$17.9 billion of value to their new $10 billion equity investment — a 46 to 79 percent return in, um, no time at all. (Put another way, that new $10 billion came in at a valuation for standalone Heinz of about $26 to $29 billion.) But fair enough: That money is what allowed them to do this deal, and Heinz is worth more to Buffett and 3G with Kraft than without it.

Heinz:Kraft

Amazon Promotes Women


Holly Rosen writes:  According to the Geena Davis Institute on Gender In Media, only 31% of speaking roles are given to women.  The problem is even worse when you look beyond roles given to young, predominantly white, women in their twenties. It is hard for women to get meaningful roles and remain consistently working in the entertainment industry, and that goes for behind the scenes as well.

”Amazon

Image: Amazon StudiosHowever, Amazon Studios appears to be a solution for women in Hollywood. Its new platform for streaming video is bringing a slew of interesting female roles, as well as presenting new opportunities for artistic freedom and creativity to producers and creators. New shows are joining the successful Golden Globe winner, Transparent, which is written and created by Jill Soloway, on the Amazon platform.

Down Dog, produced by long-time producer and Are You There, Chelsea? writer Robin Schiff, is one of a new slate of 13 pilots with only one episode in the can, featuring a cast primarily made of women with a plot line that revolves around a yoga studio including Nikita alum Lyndsy Fonseca, Paget Brewster and Orange Is the New Black‘s Alysia Reiner.

Alpha House features a cast with solid female roles played by Julie White, Amy Sedaris, Yara Martinez, Brooke Bloom, Alicia Sable and Wanda Sykes.

Women are all over Amazon programming. There’s also the Leslie Bibb starring in Salem Rogers, directed by Mean Girls helmer Mark Waters, written by newcomer Lindsey Stoddart, with a cast that includes Rachel Dratch and Jane Kaczmarek, as well as Mozart in the City starring musical legend Bernadette Peters.

”Amazon

Image: Amazon StudiosAmazon is changing the ratio….quietly and skillfully in a few ways.

Actresses associated with Amazon’s programming are lauding Amazon for creating shows other networks aren’t daring to produce. They like the roles available when stories focus on edgy topics, and are gravitating toward the freedom of expression offered by the streaming video network.

”Amazon

Image: Amazon StudiosThe shows deal with real issues that are meaningful to women such as transgender equality, family, relationships, politics and life decisions.

The studio is also hoping that its philosophy on gender will take its programming to new heights, and it’s happening on both sides of the camera. With Transparent, 20 trans people have been hired in the cast and crew, and 60 have been employed as extras.

”Amazon

Image: Amazon Studios
Can Amazon Studios continue to pave new ground for women in television and film and change the ratio? Time will tell, but they clearly are off to a solid start.

 

Deutsche Bank to Become Goldman Sachs?

Deutsche Bank AG is weighing a sale of its consumer banking business in what would mark a reversal of its pledge to remain a universal bank, said two people with knowledge of the matter.

Selling the retail unit, or part of it, would free up capital and boost returns while also providing funds to absorb the cost of scaling back investment banking businesses that aren’t sufficiently profitable, said one person, who asked not to be identified because the deliberations are private.

Deutsche Bank has sought to keep a full-fledged investment bank and consumer-lending unit since Co-Chief Executive Officers Anshu Jain and Juergen Fitschen took over three years ago, even as rising capital requirements hurt profitability. The bank is completing a months-long strategic review to determine where it needs to trim operations to boost returns and capital levels.

A sale of the retail business will be positive for Deutsche Bank’s shares as the unit’s profitability has lagged behind peers, JPMorgan Chase & Co. analysts led by Kian Abouhossein wrote in a note to clients Monday.

The consumer unit, which includes small- and mid-sized business clients, had the lowest return on equity and the highest costs as a share of revenue of any of the company’s four units last year, its filings show.
The plan that would mark the biggest shift from the current model would see the Postbank unit and the other consumer operations bundled together and sold to the public in 2017, the person said. That option, which would also see the investment bank unit narrow its focus, is expected to provide the quickest increase in shareholder returns, the people said.

Deutsche Bank acquired Bonn-based Deutsche Postbank AG in 2010 to reduce its dependence on revenue from its trading and investment banking arm. The company also has a transaction banking as well as an asset and wealth management unit.

Another scenario would see the company’s Postbank unit merge with other consumer businesses and cuts made across Deutsche Bank, including the investment bank, said one person. The results would take as long as five years to take full effect, said the person.

A third option would be a sale of Postbank, which would free up capital by allowing the bank to shrink risk-weighted assets by about 45 billion euros, the person said.

Cuts at the investment bank would focus on the company’s business with hedge funds as well as parts of its derivatives and interest-rate trading desks that don’t serve corporate customers.

Deutsche Bank brand branches as clients increasingly use online banking, Die Welt reported on Monday, citing unidentified people familiar with the matter. Cuts to Postbank’s 1,100 branches are also possible, the newspaper said.

Deutsche Bank?

 

Russia & Algeria Wrapped in Arms

Paul J. Sauders writes:  Notwithstanding its extensive arms trade with Algeria, Russia’s political relations with President Abdelaziz Bouteflika and his government seem curiously constrained.  On one hand, Algeria is a top market for Russian weapons. For example, Russian media have only recently reported a massive 2014 deal under which Algeria will assemble 200 T-90 tanks using kits supplied by Russia’s state arms supplier Rosoboronexport — a contract one Russian military expert estimated at $1 billion and described as “possibly the largest export contract for main battle tanks in the world.”

According to the report in the business-oriented newspaper Vedomosti, the contract follows a 2010 sale of 185 T-90 tanks as well as a 2013 agreement to buy equipment to modernize 300 Soviet- supplied T-72 tanks. At the same time, Russia is reportedly building two Kilo-class submarines for Algeria. In 2006, Rosoboronexport announced a $7.5 billion sale of jet fighters, training aircraft, missile systems and tanks after a meeting between Russian President Vladimir Putin and Bouteflika that also yielded an agreement to write off $4.74 billion in Soviet-era debt held by Russia.

On the other hand, the Kremlin website does not report a Putin-Bouteflika meeting since the 2006 session, although then-President Dmitry Medvedev traveled to Algeria to meet his counterpart in 2010.

Russian and Algerian officials have interacted more frequently at lower levels, of course. Still, Foreign Minister Sergey Lavrov has apparently not met bilaterally with Algeria’s Foreign Minister Ramtan Lamamra since February 2014.

Kiriyenko signed a nuclear cooperation agreement that sounds analogous to America’s so-called 123 Agreements — a defining foundation for future talks rather than a commitment to any specific projects.

Russia’s relationship with Algeria looks like cautious and hyper-pragmatic interaction between two governments that may want a variety of things from one another but have trouble reaching a broader understanding on key issues. In some respects this would be an extension of their Cold War relationship, in which Algeria’s nationalists were more than willing to accept Soviet arms — and to define their independent country as a People’s Democratic Republic and to pursue socialist economic policies — but were not so interested in substituting one colonial master for another.

While Russia surely welcomes Algeria as an arms customer — especially while its economy is struggling under sanctions — Moscow seems unlikely to get what it may want most from Bouteflika and his government. Given Algeria’s role as a leading gas supplier to Europe, and therefore a leading alternative to Gazprom, energy cooperation may well be first on the Kremlin’s list. Despite this, Gazprom’s role in the country remains limited to some modest exploration activities. Perhaps more significant, Russia has been largely unable to co-opt Algeria to advance its energy geopolitics strategy toward influencing Europe.  Moscow has not permitted its inability to get everything it desires from Algeria to stand in the way of what it can accomplish. And selling 200 tanks for $1 billion is indeed an accomplishment.

by Polyp

by Polyp

Where is Home Grown in Iraq?

Wassim Bassem writes: You will not find any Iraqi grown vegetables and fruits in Iraq.  Instead you’ll find imported goods from Jordan, Turkey, Iran and the Gulf countries.

In fact, Iraqi agricultural products are not found in many local grocery stores, as if Iraq is no longer producing food products. The same applies to locally manufactured products, such as tissues, luxury items and drinks, which cannot be found in the markets. Yet, markets are overflowing with all sorts of imported goods.

Maytham Elaibi, an economist and academic researcher at the University of Baghdad, said that the major collapse in the domestic production of goods is attributed to “the economic policies that have failed to support factories and farm owners in making their products profitable.  The low salaries have prompted workers to move from the private to the public sector, which increased disguised unemployment, which is unproductive.”

Iraqis not only suffer from the absence of local goods, but also from widespread low-quality imports. They accuse traders of importing cheap commodities at the expense of quality, to realize the greatest possible profits. These practices were confirmed by China’s commercial attache in Iraq, Wang Xi Tong, who blamed the Iraqi traders of “importing poor-quality products.  The low-quality imports now also include medicines.

Protests took place in Basra, southeast of Baghdad, demanding that the market be revitalized with locally made products. Member of the Council of Representatives of Iraq Hamam Hamoudi called on March 18 for buttressing the local industry with locally made products to boost the country’s economy.

In this context, Salama al-Salhi, cultural consultant to the prime minister, said:  “Since 2003, the Iraqi market has been wide open to the entry of goods from various origins and of bad quality.” Salhi attributed the low-quality products to “the absence of quality control and consumer protection laws,” and the declining industrial and agricultural production to “the displacement of farmers to the cities because of desertification and their integration into the ranks of the armed forces.

Masoudi did not rule out the presence of “political goals behind the lack of advancement of the Iraqi production.” He added, “A war is being waged against Iraqi products, in favor of [products from] countries such as Iran, Turkey and Saudi Arabia, which benefit from Iraq as a market consuming their goods.”  Government statistics show that Iraq’s imported goods are worth $65 million per year.

Baghdad Bazaars

Iran Opening?

US officials said they can see a “path forward” to reaching a political agreement with Iran on the major elements of a final nuclear deal by the end of the month, in just six days’ time.

“We very much believe we can get this done by March 31,” a State Department official said.

“I don’t think we saw that before the last round,” the official added, referring to talks between Kerry and Iran Foreign Minister Mohammad Javad Zarif held in Lausanne March 15-20.

Kerry is due to resume talks with Zarif at a Swiss lakeside hotel here the morning of March 26. The schedule after that, including the possibility of other foreign ministers from the P5+1 (the five permanent members of the UN Security Council plus Germany) joining the talks remains for now very fluid, officials said. Kerry’s schedule after March 26 simply says “negotiations,” the US official said.

Ahead of Kerry’s arrival late March 25, lead US negotiator, Under Secretary of State Wendy Sherman, held talks with her Iranian counterpart, Deputy Foreign Minister Abbas Araghchi, to set up the Kerry-Zarif meeting. As in the last several meetings, US Energy Secretary Ernest Moniz and the head of the Atomic Energy Organization of Iran Ali Akbar Salehi are also due to attend the Lausanne talks. It is unclear if Iranian President Rouhani’s brother Hossein Fereydoun will attend, after the death of his mother last week.

“We are focused on getting a political framework that addresses all the major elements [of a comprehensive Iran nuclear deal],” the senior State Department official said.

If a political agreement is able to be reached, it is not yet clear exactly what form it might be released at least publicly, officials said.

“The goal is to have an agreement with Iran on as many specifics as possible,” the US official said.

Negotiators have given themselves an additional three months — til the end of June — to complete highly technical annexes that would accompany any comprehensive deal reached.

In the face of criticism from Israel and some members of Congress, the White House has fiercely defended the merits of a solid nuclear deal as the best way to ensure that Iran does not obtain a nuclear weapon.

“The bottom line is this — compared to the alternatives, diplomacy offers the best and most effective way to prevent Iran from obtaining a nuclear weapon, and this is our best shot at diplomacy,” White House chief of staff Denis McDonough told the J Street conference March 23.

Iran deal

Flexible Workforce the Answer to Technological Innovation?

Sami Mahroum and Elif Bascavusoglu Moreau write:  Ever since the industrial revolution, humans have been ambivalent about technological progress. While new technology has been a major source of liberation, progress, and prosperity, it has also fueled ear that it will render labor redundant.

So far, experience has seemed to discredit this fear. Indeed, by boosting productivity and underpinning the emergence of new industries, technological progress has historically fueled economic growth and net job creation. New innovations accelerated – rather than disrupted – this positive cycle.

But some are claiming that the cycle is now broken, especially in technologically savvy countries like the United States.

But are we really in the throes of a Frankenstein’s dilemma, in which our own creations come back to haunt us? Or can we beat the productivity paradox by harnessing the power of machines to support development in ways that benefit more than the bottom line?

There is good reason to be optimistic. Many countries – even technologically savvy ones – can still benefit from the self-reinforcing cycle of technological advancement, rising productivity, and employment growth. Luxembourg, Norway, and the Netherlands – three innovative and capital-intensive economies that regularly appear in the upper quartile of productivity per hour and employment, according to OECD data from 2001-2013 – are prime examples.

Cynics will suspect that Luxembourg and Norway have managed to sustain this dynamic only because of their peculiar economic structures in finance and natural  resroucces.

The Netherlands has been a champion of innovation, gaining a fifth-place ranking in the recent INSEAD Global Innovation Index. A striking 85% of large Dutch firms report innovative activities, while more than 50% of all firms are “innovation active.” Dutch firms are also world patent leaders; Eindhoven, the hometown of the electronics company Philips, is the world’s most patent-intensive city.

So what is the Dutch secret for ensuring that technological progress benefits all?

The Netherlands seems to be undergoing a sort of industrial revolution in reverse, with jobs moving from factories to homes. The Dutch labor market has the highest concentration of part-time and freelance workers in Europe, with nearly 50% of all Dutch workers, and 62% of young workers, engaged in part-time employment – a luxury afforded to them by the country’s relatively high hourly wages.

Many young Dutch work part-time as schoolteachers. But a more lucrative – and common – source of part-time employment in the Netherlands is the subcontracting of “white collar” services. Highly skilled or specialized workers sell their services to a wide range of businesses, supplementing the work of machines with human value-added activity.

Another key to the Netherlands’ success is entrepreneurship. In 1990-2010, self-employment rates fell across the OECD countries, with business ownership in the US, for example, having declined rapidly since 2002. In the Netherlands, however, business ownership has grown steadily since 1992, reaching 12% of the labor force in 2012. Almost 70% of Dutch business owners were exclusively self-employed in 2008.

Rates of business ownership and self-employment are also high in low-income countries like Mexico. But the Netherlands is much wealthier, and boasts high levels of per-hour productivity, employment, and participation – largely owing to its flexible and adaptive labor market.

In short, the Netherlands has restructured its economic value chain to accommodate a new division of labor between humans and machines.

Machines may be reaching new heights of intelligence, but they are no match for human resourcefulness, imagination, and interaction. This is a lesson that countries would do well to learn from the Dutch.

Flexible Workforce?

Trade and Currency Manipulation

Simon Johnson writes: Is it appropriate to use trade agreements to discourage countries from using large-scale intervention in the foreign-exchange market to hold down their currencies’ value? That is the question of the day in American economic-policy circles.

In recent years, Japan, South Korea, and China have manipulated their currencies to keep them undervalued. This boosted their exports, limited imports, and led to large current-account surpluses. But such intervention adversely affects trading partners and is barred under existing international rules. Unfortunately, those rules have proved completely ineffective.

Now a new opportunity to address the issue has emerged: The Trans-Pacific Partnership – the mega-regional free-trade agreement involving the United States, Japan, and ten other countries in Latin America and Asia. With the TPP close to being finalized, South Korea and China are watching intently, and other countries may want to join.

US President Barack Obama correctly argues that this is an occasion to set the rules for trade and investment in the twenty-first century. Yet the US Treasury Department and the US Trade Representative steadfastly refuse to include any language prohibiting currency manipulation in the TPP, for five main reasons – none of which fits the facts.

The first argument is that the International Monetary Fund can deal with instances of currency manipulation. The IMF does have up-to-date guidelines that define and seek to prevent currency manipulation.  The IMF cannot enforce its guidelines, because currency manipulators are able to stall action. This has been the entrenched and continuing pattern, including when I was the IMF’s chief economist (from early 2007 to August 2008).

The second argument made by the US Treasury and the Trade Representative is that no sufficiently precise currency rules can be negotiated. But there is nothing wrong with the IMF guidelines – both the 2007 and 2012 versions – negotiated by the Treasury itself.

Recognizing this, Congressman Sander Levin – the senior Democrat on the House Ways and Means Committee, which has jurisdiction over international trade – proposes that a TPP currency chapter be based on the IMF guidelines.

The third argument against putting anti-manipulation provisions in the TPP is that they would imperil America’s ability to implement monetary stimulus.

Conventional monetary policy operates by altering short-term interest rates, which includes the central bank buying and selling short-term government debt. No intervention in the foreign-exchange market – buying and selling foreign currency – is involved.

Similarly, the quantitative easing (QE) that has defined many major central banks’ monetary policy in recent years does not involve buying or selling foreign assets. Under QE, the Federal Reserve buys – and announces that it will buy – assets; the only difference is that these assets are longer-maturity US government debt instruments and mortgage-backed securities of various kinds, all denominated in US dollars.

The fourth argument is that no major country is currently manipulating its exchange rate.There is also nothing to stop China or any other country from resuming large-scale currency-market intervention if and when it chooses. And the lack of diplomatic tension around exchange rates today makes this a good moment to raise the topic.

The final reason cited in support of excluding a currency chapter from the TPP is that the countries negotiating the deal would never agree.

Canada, Australia, and New Zealand, developed economies with floating exchange rates, do not want to encourage currency manipulation. Chile, a middle-income country that has long had sound and responsible macroeconomic policies, does not favor currency manipulation. Mexico and Peru have much to fear from other countries becoming currency manipulators again.

Likewise, Japan, now running its own version of QE, worries about potential currency manipulation by other countries, such as South Korea and China. Malaysia and Singapore.

Currency manipulation is a real problem that causes significant damage. The TPP deal – if it establishes a dispute-resolution mechanism that can quickly dismiss frivolous claims and home in on genuine cases – may offer the best chance to fix it.

Currency Manipulation?

Separate US Fed from Wall Street?

Seth Mason writes  Recently, two prominent Republicans, Banking Chairman Richard Shelby of Alabama and House Financial Services Jeb Hensarling of Texas, stated that they plan to explore proposals that would roll back a long-standing provision that gives the president of the New York Federal Reserve an automatic position as vice chairman of a powerful committee that oversees Wall Street banks.

Not surprisingly, long-time New York Fed President vehemently opposes this.

Many high-ranking Fed officials, including former Chairman Ben Bernanke, current Chairwoman Janet Yellen, and the aforementioned William Dudley, purportedly oppose an audit of the Fed because doing so would undermine the “independence” of our nation’s central bank.

The most powerful Wall Street bankers of the early 20th century pressured the federal government to facilitate the creation of the Federal Reserve under the pretense that a central bank was necessary to ensure bank solvency during panics. Nevertheless, the Fed allowed hundreds of small and medium-sized banks to fail during the Great Recession while protecting its Wall Street brethren. Not only did the Fed selectively bail out the so-called “Too Big to Fail” banks to the tune of $14 trillion, but it allowed them to gobble up assets and competition from the faltering smaller banks and then pumped them more than $4 trillion in liquidity with which to stream into the Wall Street casino! The Fed has made this depression a gilded age on Wall Street.

For Main Street, however, the past seven years have been a dark period in American economic history. During a period in which the Fed has facilitated the doubling of the stock market and tremendous bubbles in other assets held in great quantities by the Wall Street elite, ordinary Americans of all education levels have been earning less, millions of them having undergone long periods of unemployment and/or underemployment as a result of the bursting of the Fed’s last asset bubble:

The Fed-Wall Street Revolving Door Must Be Shut - income by education level

The Fed looks out for its Wall Street buddies at the expense of everyone else. The Fed-Wall Street revolving door must be shut.

Women Alert: Nursing, Worthwhile and Lucrative

Bureau of Labor Statistics:  The occupations with the largest employment in May 2014 were retail salespersons and cashiers. These two occupations combined made up nearly 6 percent of total U.S. employment, with employment levels of 4.6 million and 3.4 million, respectively. Of the 10 largest occupations, only registered nurses with an annual mean wage of $69,790, had an average wage above the U.S. all-occupations mean of $47,230. The highest paying occupations overall included several physician and dentist occupations, chief executives, nurse anesthetists, and petroleum engineers. Jobs and Wages

Wiomen out number men 10 to 1 in the profession in the US, but still get paid less than male nurses.

Nurses