ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you by —
TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Grounded. The Department of Justice wants to stop the mega merger between U.S. Airways and American Airlines. Does this mark the end of consolidation in the industry? And what does it mean for you, the traveler?
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Following the money.
Carl Icahn tweets about a reported $1 billion stake in Apple (NASDAQ:AAPL) and the stock takes off.
Bill Ackman leaves J.C. Penney`s board. His shares worth $350 million less than he paid. Can you make money investing in the split screen (ph) of the accident?
MATHISEN: And supersized hospitals. They are getting better, changing the economics of healthcare. But will the trend mean higher bills for you?
All that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, August 13th.
And good evening, everyone.
Buckle (NYSE:BKE) your seat belts and make sure your trey tables are upright and locked. That planned $11 billion merger between American Airlines and U.S. Air hit an air pocket today courtesy of the U.S. Justice Department.
Attorney General Eric Holder, along with six state attorneys general, sued to block the merger, saying the deal would stifle competition after a wave of airline combinations in recent years. That, says the government, could lead to higher prices, bigger prices, fewer choices. Shares of U.S.
Airways are falling 13 percent today. Shares of American`s parent, AMR
(NYSE:AMR) Corp, which is currently in bankruptcy but still trading, nosedived a staggering 45 percent.
Hampton Pearson has more now on the DOJ suit and what it might mean for the future of the merger and for consumers.
HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
At Reagan National Airport, just across the river from the Justice Department, antitrust lawyers says a merge of American Airlines and U.S.
Air would control 69 percent of the take off and landing slots, and control
63 percent of all the non-stop routes. That says the Justice Department is an air travel snap soft of the harm to competition and consumers if American Airlines and U.S. Air are allowed to create the largest airline with 6,700 daily flights serving 56 countries and annual revenues of $40 billion.
Assistant attorney general for antitrust, William Baer, says, “We simply cannot approve a merger that would result in U.S. consumers paying higher fares, higher fees and receiving less service.”
Consumer advocates are cheering the government lawsuit.
CHARLES LEOCHA, CONSUMER TRAVEL ALLIANCE: There were no benefits for consumers in this merger. There were only benefits for the airlines. On a net basis, consumers got no new destinations and we lost competition across the country.
UNIDENTIFIED FEMALE: The crackers? OK.
PEARSON: The two airlines will fight the Justice Department, a joint statement from U.S. Air and American Airlines parent company AMR (NYSE:AMR) reads in part, “We will mount a vigorous defense and pursue all legal options in order to achieve the merger and deliver the benefits of the new American to our customers and communities as soon as possible.”
The stocks of both airlines were hit hard on news of the government lawsuit. Analysts say it`s a shock to an industry that has profited from the previous mega-mergers involving Delta, United and Southwest Air.
JOHN BRIGGS, AXINN VELTROP HARKRIDER PARTNER: The market seems to think it`s not going to happen, if you look at the share prices. So, it does not look good. They`re going to have to litigate it all the way to the death and maybe experience the death of the deal that way.
PEARSON: Barring a settlement, the looming court battle could determine if the wave of airline mega-mergers that began in 2008 is over.
For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson at Reagan National Airport.
GHARIB: Our guest today says this could be the end of the era of airline mergers in the U.S. He`s Craig Jenks, airline consultant of his own firm, Airline Aircraft Projects.
What puzzled a lot of people today, Craig, was United and Continental, Delta and Northwest, Southwest and AirTran. What changed here? You know, what is your thinking on this?
CRAIG JENKS, AIRLINE AIRCRAFT PROJECTS PRESIDENT: Well, I think what really changed is that if you go back a few years ago, airlines were going into Chapter 11 bankruptcy and the interest of the consumer in a stable, viable airline industry were having the interest of investors and shareholders, and what has happened in the past — in really the recent past — is that the airlines are doing much better.
And so to answer the question, what has changed, what has changed is there is maybe a somewhat of a divergence where the consumer is now interested in not seeing higher fares, whereas airline investors want to see higher fares.
MATHISEN: Mr. Jenks, what does your instinct tell you? Do you think that ultimately, the Justice Department and these two companies will reach some sort of settlement and the deal will go through or not?
JENKS: I think it`s 50/50. The Justice Department is playing hardball here. It`s a very strong case that doesn`t — on the face of it show a way out, but it may be that the — that they will agree to some kind of a deal down stream.
MATHISEN: And here is another question along those lines, does American Airlines survive? A big part of its restructuring plan and to get out of bankruptcy was this deal with U.S. Airways. Can American stand on its own?
JENKS: American very likely can stand on it own, but it would be somewhat less viable and profitable.
MATHISEN: What do you think happens to airfares if anything in light of this lawsuit? Do they not rise as quickly as they otherwise might? Do they decline a little bit? What happens?
JENKS: The situation over the merger will not in itself impact fares short term. But if this merger is prevented, then there is probably some truth in the view that fares would be more checked than if the merger goes through.
GHARIB: All right. Craig, thank you so much. Craig Jenks, airline consultant.
JENKS: My pleasure.
GHARIB: On Wall Street today, more green than red in the stock market, all the major averages posted modest gains, reversing earlier losses on worries about higher interest rates from the Federal Reserve.
The Fed official du jure speaking up about policy moves, this time, Atlanta Fed President Dennis Lockhart, saying it was too early to say when the central bank would ease back on its stimulus plan, but said it would likely happen before the end of this year.
Investors were encouraged to buy stocks on a healthy reading on retail sales, up 2/10 of a percent, and that despite a slight decline in auto sales. The Dow rose 31 points, the NASDAQ up 14, and the S&P 500 adding four points.
MATHISEN: But what a day it was for activist investors. Several of them making news today and impacting the markets big time.
Carl Icahn tweeting that he now has a large stake in Apple (NASDAQ:AAPL), reportedly $1 billion and says the stock is extremely undervalued. He also says he spoke with Apple`s CEO Tim Cook today, discussing a larger stock buy back program. For, its part, Apple
(NASDAQ:AAPL) says it appreciates the interest and the investment of all its shareholders and described Cook`s conversation with Icahn as very positive.
Now, the market reaction to Icahn was very strong. Shares spiking around the time of the tweet, you can see it on the chart there 2:21 Eastern Time, adding $10 billion worth of market value from that point until the close of trading at 4:00 p.m. Shares ultimately ending up about
5 percent, one of Apple`s best days in months. But look here at the spike in volume, with just about 10 million shares trading in the final hour alone.
GHARIB: Now, a letter from another activist investor group had a bigger impact on shares of men`s clothing retailer, Joseph A. Bank. Beacon Light Capital, which owns more than 1 percent of the chain, wrote the retailer says shares are undervalued and it`s calling for a stock buyback.
It also wants changes to the board of directors.
Investors like what they heard. Shares of Joseph A. Bank surged 12.5 percent.
MATHISEN: And Bill Ackman is out at J.C. Penney. Ackman, who`s been pushing for a new CEO, says that although he`s leaving the board, it is a win for the struggling retailer because he was able to raise concerns about troubles at the chain.
So, what does it all mean for Penney`s future?
Courtney Reagan has more now.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
It`s been a tumultuous 18 months for J.C. Penney and the drama is far from over. Pershing Square`s Bill Ackman has resigned from his position on J.C.
Penney`s board, a move surprising many on Wall Street, after the vocal activist hedge fund manager sent two letters to the J.C. Penney board, advocating for a number of executive changes, including the replacement of the board chairman Thomas Engibous and a speedy search process for a permanent CEO to succeed interim chief Mike Ullman.
As Ackman resigns, J.C. Penney reaffirms its support for Ullman and Engibous, also announcing former Federated Department Store vice chairman Ron Tysoe will replace Ackman on the J.C. Penney board, along with another yet to be named board member.
Ackman may no longer hold a board seat but with a nearly 18 percent stake, his fund remains the retailer`s largest investor. While the position was once worth roughly a billion dollars, it`s now worth about half that, and because Ackman is privy to inside information, he isn`t able to sell shares at this time.
(on camera): Many analysts do believe Ackman`s resignation removes some leadership uncertainty, but it doesn`t solve the issues of poor sales and low traffic in stores. Those continue to be J.C. Penney`s biggest problems.
JAN KNIFFEN, RETAIL ANALYST: I don`t think many consumers that shop at J.C. Penney are really paying much attention to the paid in place or the
— as the world turns aspect of this story. I do think they are paying a lot of attention to what products in the store, what pricing looks like, what the feel of the store is like, and what the competition is doing.
REAGAN (voice-over): Interim CEO Mike Ullman has stabilized J.C.
Penney`s financial situation, keeping the ship afloat. Moving that vessel forward is another issue. So when J.C. Penney reports earnings a week from today, how the retailer plans to reinvigorate shoppers is still the burning question. Even more so, the closer the calendar moves to the all-important holiday season.
For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan.
GHARIB: So, are activist investors good for companies and for shareholders?
Kate Kelly joins us now with a look at the impact on big name activist investors had had on companies.
You know, Kate, they make a lot of noise and a lot of headlines. But what`s the scorecard on this? I mean, who has a good track record? Who doesn`t?
KATE KELLY, NIGHTLY BUSINESS REPORT CORRESPONDENT: You know, it`s very much of a mixed bag.
So, take for example David Einhorn. He had a successful battle earlier this year with Apple (NASDAQ:AAPL), which we mentioned earlier in context with Carl Icahn who has now taken a large stake. He essentially wanted them to do more with her balance sheet to benefit shareholders. He actually won that battle which went from the courtroom at one point, to the annual meeting and he actually got what he wanted. However, the stock is not doing that well this year, so his investment is not up year-to-date.
So, that`s an example where you have a short-term victory but it`s a longer term investment play.
Take another example, like Herbalife (NYSE:HLF). That`s one where Bill Ackman said he was going very short. He had about a billion dollar short position announced last December. And since then, the stock has actually gone up and it`s benefited Carl Icahn and other people that had been on the long side.
So, it`s often a mixed bag. Even if you get what you wanted to do in the first place, you may or may not see results.
One final example would be Dan Loeb with Sony (NYSE:SNE). So far, they`ve refused to spin out their entertainment business, but the stock has actually on a tear this year.
MATHISEN: But a lot of stocks that Icahn holds or had bought recently, they are up this year.
KELLY: That`s right, Tyler. Icahn had had a heck —
MATHISEN: Including Herbalife (NYSE:HLF).
KELLY: Absolutely. We`ve seen triple digit upside for some of his holdings.
MATHISEN: Netflix (NASDAQ:NFLX).
KELLY: Netflix (NASDAQ:NFLX), Web MD is another one. Herbalife
(NYSE:HLF) has done very well. Chesapeake has done very well. So, he`s had a great Midas (NYSE:MDS) touch lately.
MATHISEN: But one of the things that worries me, forgive me, for — if you try to come behind these guys, is that you never really know when they are selling. They don`t tell you.
KELLY: That`s definitely an issue but maybe —
MATHISEN: Unless Icahn decides he`s going to tweet again.
KELLY: Yes, he`s definitely embracing new technology.
Well, here`s the big picture. So, Harvard Law School, among others, just put together a study where they looked at about a 15-year period with a number of stocks with activists positioned in them and they looked at these stocks right before the activist announcement during and then for five years.
What they found is when activist come in, stocks rise an average of 6 percent and that rise continues. It is not diminished in the following year.
GHARIB: So, should investors follow along of these headlines?
KELLY: The track record shows, Susie, that activist investments do have a positive impact. There`s about 6 percent pop and also from a performance level, companies that has been underperforming before the activism began, which is probably why you have activist in the first place actually improved their businesses and especially compared to peers and you do see a long-term gain.
So, there is some veracity to the idea that activists are picking good stories that are undervalued.
GHARIB: Fascinating stuff. Thanks a lot, Kate Kelly.
MATHISEN: All righty.
Still ahead, supersized hospitals, the sector is being hit by a wave of mergers, but will the recent trend drive up the cost of care for you?
But, first, some of the most widely held stocks closed today.
GHARIB: Picture this, a 100-foot sinkhole swallows up a building at a resort just outside of Disneyworld. And a day after the earth opened up, there are new questions about the safety of homes across the state, and how it will affect the housing recovery.
Diana Olick has more from Clermont, Florida.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
Engineers towing enormous drills rolled into Summer Bay this morning as developers here assess the damage and try to make sure the other 52 buildings in this resort are safe.
PAUL CALDWELL, SUMMER BAY RESORTS PRESIDENT AND CEO: We expect insurance people and our own adjustors to be here today to start work.
It`s too early to say what will happen.
OLICK: The building is a total loss but Caldwell says they will continue to develop this area, even though it`s prone to such sinkholes.
Across central and western Florida, there are more than 19,000 known sinkholes and likely more unknown.
FRANK VITALE, L.R.E. GROUND SERVICES: Basically, your Tampa Bay area or your Central Florida area is really — they call it sinkhole alley, just about. And if you`re a homebuyer, a new homebuyer, looking to relocate, you definitely got to think about that.
OLICK: Florida law requires insurers to cover what`s known as catastrophic ground cover collapse. But that`s not all sinkhole damage.
To get the catastrophic, the building has to be condemned. For minor damage, you have to add that to the policy. Sinkhole insurance claims submitted in Florida alone between 2006 and 2010 totaled $1.4 billion, according to a Florida Senate report.
Vitale`s company has been fixing sinkholes for 25 years and done over
4,500 jobs. Business has picked up lately he says.
VITALE: There is over 100 contractors in the state of Florida that do the same type of work. So, it is — it`s a big industry in Florida.
OLICK: You would think images like this would drive homeowners and investors away, but one who escaped this disaster Sunday says he`s keeping other timeshares in Florida.
HERBERT UNDERWOOD, TIMESHARE INVESTOR: That`s nature. You can`t kick nature to the curb. It could happen in your backyard at home. But you never know.
OLICK (on camera): Sinkhole activity in Florida has been picking up in just the past three years, according to several studies. Some blame over developments, as builders continue to drag their backhoes across the state, digging into ground that has been unstable for thousands of years.
For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Clermont, Florida.
MATHISEN: And now to “Market Focus” where SeaWorld has taken a late day dive. The theme park operator out with weaker than expected profits, revenues also soft and the outlook not much better. The company sees full year revenue coming in now below Wall Street expectations. Stock finished the day fractionally lower at $36.31, but then it dropped even more after hours — as you see there.
A former employee of Herbalife (NYSE:HLF) subpoenaed. It`s part of an investigation by the New York state attorney general into a 2011 safety issue. According to “The New York Times (NYSE:NYT)”, the nutritional supplement company found tiny pieces of metal in some diet shakes at a California plant.
The problem was resolved but the former employee remained concerned.
None of the tainted shakes, it appears, ever reached consumers. Herbalife
(NYSE:HLF) has no comment. The stock fell 2.5 percent today to $64.62.
A shot in the arm for GlaxoSmithKline. Regulators approve its new treatment for HIV, that`s the virus that causes AIDS. Its once daily drug which analysts predict could see sales of nearly $1 billion by the year 2017. Shares of Glaxo rose more than 1 percent to $52.
A possible new drug driving shares at Eli Lilly (NYSE:LLY). The company said its experimental lung cancer drug improved overall survival rates in a late stage clinical trial. Lily expects to submit a marketing application to regulators before the end of 2014. Shares jumped almost 3 percent, closing at $54.96.
Hospitals and hospital chains are getting bigger, and they are merging at a rate not seen since the late 1990s. A hundred and five deals last year alone doubled the rate of just three years prior, according to sources cited in “The New York Times (NYSE:NYT)” today. So why the wave of deals? And what does the surge in super hospitals mean for consumers like you?
Here to give us answers is Frank Morgan. He`s a healthcare analyst at RBC Capital Markets.
Mr. Morgan, welcome. Good to have you with us.
Why are hospitals merging at the pace they are?
FRANK MORGAN, RBC CAPITAL MARKETS HEALTHCARE ANALYST: Well, I think in one word, you can say it`s uncertainty. The current operating environment is very difficult. You`re seeing weak utilization trends.
You`re seeing rate pressure.
And when you`re in a high fixed cost business, like the hospital business, that can have a significant effect on your profitability. Longer term, the other uncertainty that we see out there is for a lot of these hospitals that are merging is the uncertainties related to healthcare reform, new payment models, new delivery models, all those uncertainties bring risk and if you`re a not-for-profit hospital with thin margins and thin capitalization, then that could forge the consolidation activity.
GHARIB: You`d think that with health care changes coming, that you would see hospitals not wanting to get bigger but to be smaller and nimbler so that they can react and do more for consumers. Why are we seeing the opposite? Is bigger better in this particular case?
MORGAN: Well, I would say there is divergence here. Not-for-profit hospitals are generally more fearful, more skeptical of health care reform than, say, the for-profit hospitals. But in general, the argument for being larger would certainly scale, the opportunity to lower cost because we have a lot of reimbursement pressure out there today. So, being part of a more efficient organization, having access to resources to deal with all these changes, be it reimbursement changes, delivery model changes — those are why the not-for-profit would probably want to merge.
MATHISEN: So, bigger hospitals, I take it then, have a kind of pricing power from scale, pricing power with the device makers, with drug companies and so on and so forth. Are bigger hospitals, and man, I was in a big one a few weeks ago, are they necessarily more, quote, “efficient”?
MORGAN: Certainly, I think for certain clinical procedures, absolutely, there are advantages that come with size. Over time, payers, be it Medicare, Medicaid payers are going to want to negotiate and contract with those most efficient providers. So, certainly, if you`re larger, you have more scale, you`re more efficient, then you would certainly be more in a better competitive position than negotiate with manage care and to win business.
GHARIB: You heard our story at the top of the program where we`re talking about a big airline merger that`s been blocked on the grounds that`s anti-competitive. It doesn`t give consumers as many choices.
Can`t the same be said for these hospital mergers that it`s going to raise possible fees and hospital bills for the consumer?
MORGAN: Well, you know, natural, we talk about healthcare that`s being a very local business. So, yes, when you hear those issues about anti-competitive pressures, FTC issues, it is very, very market specific.
I don`t think it would be accurate to kind of overlay the example of the airline industry there because market dynamics are so unique to those individual markets.
But, you know, when you think about consolidation today, a lot of it is defensive. It`s trying to lower cost because there are rate pressures out there that all providers are seeing and in the future with the focus of healthcare reform being accessed but also reducing cost of the system, there will be a lot of the behavioral changes, a lot of systemic changes in delivery models out there, and that will require lower cost structure.
MATHISEN: Frank, a lot of changes happening in the medical business, and you helped us through them. Thank you very much.
MORGAN: Thank you.
MATHISEN: Frank Morgan with RBC Capital Markets.
MORGAN: And coming up on the program, the house that feels nice.
We`ll take you inside the University of Oregon`s state of the art football center funded by Nike`s chairman, to look at the big money behind college football.
But, first, here`s a check on how commodities, treasuries, and currencies performed today.
GHARIB: It takes a lot of money to attend college and even more to support a division 1 college football team and nothing illustrates the big money involved in the collegiate football business than the brand-new state of the art $68 million facility at the University of Oregon and the billionaire alumnus who paid for it.
Jane Wells has the story.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): From the outside, it looks like a mysterious black spaceship. Inside, it is no less imposing, television screens everywhere, along with Italian leather, marble line showers, hand-woven rugs from Nepal, writable black walls, endless tables made in Germany. Some call it the Death Star, but maybe it should be called the duck star, the house that Phil built — Phil Knight, Nike`s cofounder and loving son of his alma mater, the University of Oregon.
MARK HELFRICH, UNIVERSITY OF OREGON HEAD FOOTBALL COACH: It`s a super hero. It`s unbelievable.
MARCUS MARIOTA, UNIVERSITY OF OREGAN QUARTERBACK: You first walk in and there`s 65, 55-inch TVs or something like that in the lobby and it just kind of takes your breath away.
WELLS: There`s the space agent locker room with bacteria resistant surfaces, lockers which spring out the helmets and shoulder pads within reach. A special hot tub for coaches, special foosball tables for players, special food for all athletes, not just football. Three practice fields, a 170-seat auditorium with Ferrari leather seats and a 25,000-square-foot weight room with wood floors so hard they can bend nails.
(on camera): You really want to put sweaty men on Italian furniture and hand-women Nepal rugs, I don`t know.
ROB MULLENS, UNIVERSITY OF OREGON ATHLETIC DIRECTOR: They treat it very well. They are very appreciative and they know how to take care of it.
WELLS: It is by all accounts over the top. But is it enough to put Oregon over the top and finally allow the school to win a BCS championship?
(voice-over): Oregon is a perennial runner up. And now, as some had nicknamed this the University of Nike (NYSE:NKE), if money can buy the best, the Duck haves no excuses. The pressure is on the new head coach, Mark Helfrich, and star quarterback Marcus (NYSE:MCS) Mariota.
HELFRICH: We don`t talk about the national championship except for one time a year and we`ve already done that and now, it`s about going to work.
WELLS: But the ducks are also being penalized for recruiting violations, and college sports is in the middle of a battle over how to manage a lucrative enterprise while trying to educate and graduate armature athletes. Rob Mullins supports some kind of change.
MULLENS: We are very much proponents of a stipend that goes above and beyond the tuition fees with book and board, because we think they do need a little extra money, and that`s something that`s on the table at the NCA (ph).
WELLS: In the meantime, the Duck`s star may not help Oregon win it all now but maybe in the future. Because if colleague recruiting at an arm`s race, this is a nuclear weapon.
For NIGHTLY BUSINESS REPORT, Jane Wells, Eugene, Oregon.
MATHISEN: And that`s just the practice facility and the team accommodations. It`s not even the stadium.
GHARIB: What part did you like the best?
MATHISEN: Oh, I like the Ferrari leather seats in the theater, I suppose, and 55-inch screens, you know. But that`s a lot of money — a lot of money.
GHARIB: Let`s hope they win.
GHARIB: They better win.
MATHISEN: They got a new coach and Jane Wells, of course, is a big USC alum. So, she doesn`t — she doesn`t really want them to win.
All right. We want to hear from you folks. Send us the one-stop you`d like our market monitor to discuss this coming Friday. Log on to our Web site, NBR.com. Click on the link to submit your questions and don`t forget to include where you`re from.
GHARIB: And that`s NIGHTLY BUSINESS REPORT for tonight, I`m Susie Gharib. Thanks so much for joining us.
MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. We`ll see you back here tomorrow night, Wednesday.
Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2013 CNBC, Inc.