Transcript: Tuesday, February 18, 2014

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib, brought to you in part by —

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SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Joining forces. Drugmaker Actavis is buying Forest Laboratories (NYSE:FRX) for $25 billion. Is this just a beginning of a wave of healthcare mergers as the industry undergoes historic change?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Losing its fizz. Shares of Coca-Cola (NYSE:KO) have their worst day in more than two years. Profits are down, so is demand for sugary beverages. What the company must do now to juice sales and the stock?

GHARIB: Home sweet home? Not this month. Home builder sentiment plunges, just as the unofficial start to the spring selling season gets underway. Is it a bad time for the housing market?

We have all that and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, February 18th.

MATHISEN: Good evening, everyone, and welcome.

Two big stories leading our broadcast tonight. One, disappointing earnings from Coca-Cola (NYSE:KO) after sales in North America lost some of their fizz last quarter. That sent the stock sharply lower. More on the troubles at Coke in just a moment.

But the other big story tonight, a megamerger in pharmaceuticals. Ireland-based generic drugmaker Actavis agreed to by U.S. drugmaker Forest Labs for $25 billion in cash and stock, combining two of the world`s fastest-growing specialty drugmakers and a possible harbinger of more mergers in the health care industry.

Actavis CEO Paul Bisaro spoke today about the changing environment in the industry and the need to control costs.

(BEGIN VIDEO CLIP)

PAUL BISARO, ACTAVIS CEO: As our environment changes, the pharmaceutical space changes, one of the things we know we have to do is provide a broad range of product offerings to our customers, including branded products and high quality generic products. That`s going to be key. Cost containment is key. Hospitals are looking for cost containment, physicians are looking for cost-containment, and the government is looking for cost containment. And I think we`re well-positioned now to be the leader in that space.

(END VIDEO CLIP)

MATHISEN: Shares of Forest Labs, best known for its anti-anxiety pill Lexapro and Alzheimer`s medication Namenda, shot up nearly 28 percent while Actavis shares which trade on the New York Stock Exchange rose 5 percent.

GHARIB: Our guest tonight says today`s big pharma deal could be a sign of what`s to come in the health care sector. He`s Rich Peterson, director of S&P Capital IQ.

Rich, nice to see you.

You heard our coverage of the Actavis deal. With the CEO there saying that pharma space is changing. They have to be cost conscious when it comes to hospitals and insurers and all of that. As you look at this whole healthcare space, who are going to be the buyers and who are going to be the sellers?

RICHARD PETERSON, S&P CAPITAL IQ DIRECTOR: Well, first, Susie, you look at the landscape for health care M&A in 2013, there were less than $100 billion in announced transactions in the United States. It`s the lowest number since 2004, according to our numbers from S&P Capital IQ. One part of the downturn of activity last year was concern about what the impact was from the Affordable Care Act. Now it`s basically a pent up of activity from deals that were deferred from last year.

Obviously the transaction today being the largest health care deal this year and the largest since Express (NYSE:EXPR) Scripts acquired Medco for over $30 billion in July 2011. You know, overall is well for the sector. I think the sector seeing steady revenue growth in the fourth quarter. Their expectations are for double the S&P 500 more for revenue growth and earnings have been steadily rising. Plus, they have a lot of cash on the balance sheet.

In terms of the companies that are expected to make deals, you know, Merck (NYSE:MRK) and Pfizer (NYSE:PFE) have talked about shedding off some units that they feel are not growing as fast as they like. But in terms of companies, you have companies like Med Assets or Alliance Express (NYSE:EXPR) areas that can provide investor opportunities. But I think as a sector, you know, as I said, we had slow growth in 2013 in terms of deal activity. That should rise going into 2014.

MATHISEN: You know, Rich, Forest recently bought a company. I guess it`s not just the drugmakers, specialty, generic, whatever, that are going to be the buyers and sellers in the healthcare area. It`s going to be the device makers, the healthcare management companies. It`s broader than just drug companies, right?

PETERSON: Correct. Now, you`re talking about corporate sponsors. You always talk about private equity. In fact, earlier this year the Caldwell Group purchased a unit from Johnson & Johnson (NYSE:JNJ) for over $4 billion.

And given the fact that the private equity firms have over $700 billion of dry powder that is unused capital, the health care sector could be one that is increasingly looking as targets.

GHARIB: Are these going to be big deals? This was a big deal, $25 billion is a lot of money. Are we going to see smaller strategic deals, or are they going for big deals where in this new landscape, bigger is better? Is that the case?

PETERSON: Well, I think you can look over the numbers of transactions that occurred over the past six months, the average deal size was about $2.9 billion. So, we`re talking about the middle market of deal size. So, $25 billion was the biggest over 2 1/2 years.

Today`s deal is really the exception rather than the rule. In some cases, you know, companies look to acquire assets, divisions, units that are underperforming or just trying to grow their footprint by buying companies that are privately held and not in the public marketplace.

MATHISEN: Thirty seconds, Rich. In the drug spaces being driven by pipeline concerns on these companies` parts?

PETERSON: Oh, very much. So the fact you have concerns, expirations of patents and pressure to grow opportunities. They have to look for new ventures. And the fact as I said with the new regulatory environment, where companies are — consumers are forced to look for cost savings, your companies are going to try to provide that.

GHARIB: All right. Rich, thanks so much.

PETERSON: You`re welcome.

GHARIB: Rich Peterson with S&P Capital IQ.

MATHISEN: Well, the Actavis acquisition of Forest Labs is giving a boost to some other drug manufacturers` today. Teva Pharmaceuticals, Mylan (NASDAQ:MYL), Allergan (NYSE:AGN), all seeing gains today.

GHARIB: Well, as Tyler mentioned just a moment ago, it was a different story for Coca-Cola (NYSE:KO) stock today. Coke was the biggest loser in the Dow. Shares fell near 4 percent and are down almost 10 percent so far this year.

Investors were disappointed with Coke`s quarterly results out this morning. Earnings were in line with estimates, and global sales rose last quarter but soda sales in North America tumbled.

The news reinforced a nasty truth for Coke: fewer Americans are drinking sugary sodas, opting instead for healthier drink. Now yes, Coke does make some of those, too. Dasani purified Water, Vitaminwater, Powerade drinks, Minute Maid and Odwalla juices and Honest Teas.

But the sweet, bubbly stuff is still the company`s bread and butter. And that`s a big problem for Coke and the company knows it.

MATHISEN: Well, joining us now to talk more about Coca-Cola (NYSE:KO), a key Dow component, is Dan Veru. He`s chief investment officer at Palisade Capital Management.

Dan, welcome. Good to have you in the studio with us evening.

Are you — would you be a buyer of Coca-Cola (NYSE:KO) at this price? If not, why not?

DAN VERU, PALISADE CAPITAL MANAGEMENT CIO: Not yet. Because I think the challenges are not going to go away. If you look at the way the company is set up for 2014, it looks like it`s going to be much or of a backend-loaded year for them financially speaking. So, I really think there`s no hurry.

And they`re doing everything that they can do in the context of macro forces that are just too big for any company to outweigh, even a brand icon like Coca-Cola (NYSE:KO).

GHARIB: Well, you know, the Coca-Cola (NYSE:KO) CEO Mukhtar Kent said today, he was quoted as saying it was macroeconomic global challenges. But, I mean, how much is it really these cyclical economic issues, and is it more that people are drinking healthier drinks and Coke has a structural problem to deal with?

VERU: The way I see it, in the U.S. Diet Coke was actually problematic for them, because people as you say are opting for more healthier choices, even though, you know, there`s no calories in Diet Coke, they don`t perhaps like the contents of Diet Coke. So they`re looking for organic alternatives on the low calorie side, perhaps some reformulation or some enhancement to formulation for Diet Coke as well to spur growth within the U.S.

MATHISEN: But the trend for healthy beverages is most notable in North America and the United States and the developed world. But a lot of Coke`s growth has come, hasn`t it, and won`t it, from the developing world?

VERU: There`s no doubt about it. It wasn`t enough to counteract the forces in the developed market this year. Plus, currency is playing some havoc with the results as well.

MATHISEN: Stronger dollar hurts them.

VERU: In those emerging market, currencies are difficult to hedge against, because those markets are not liquid enough. You can certainly hedge against euro exposure given the size of the euro but you can`t in some of these emerging markets.

GHARIB: So, let me go back to what I asked you in the first part, is that — does Coke really have to change its business model? You look at a company`s competitor, Pepsi, besides sugary drinks, it also has food and snacks and all that.

VERU: Yes.

GHARIB: I don`t know if that`s the solution for Coke. But do they have to change their business model?

VERU: I don`t know but they definitely have to think out of the box or out of the can, if you will.

You know, their partnership with Green Mountain looks quite interesting. I don`t know how that`s going to evolve. But that`s yet another non-soda pop product in the arsenal of their product line. So we could perhaps see them get more active in coffee or other products like that, away from the traditional —

GHARIB: Would that be enough? Would that be enough of a change?

VERU: It seems to me, like given the size of Coke, they`d have to do a series of acquisitions. Certainly with their cash flow generation and their enormous ability to market, they could certainly go on a string of acquisitions that would give balance and offset.

MATHISEN: They`ve done some acquisitions. Vitaminwater, they did Minute Maid some years ago.

What would it take for you to turn positive on the stock?

VERU: Tyler, we`re in an environment right now where the market is paying for growth stories. I mean, look at some of the great growth companies this year, how well they`ve done. You know, you`re just showing organic top line growth is very difficult at this time for me and for my colleagues at Palisade to be excited about low single digit, zero to low single digit top line growth and bottom line growth.

MATHISEN: All right. Dan, thank you very much. Great to see you again. Dan Veru of Palisade Capital Management.

GHARIB: On Wall Street today, that big drop in Coke stock held back blue chip Dow. But the NASDAQ managed to hit a 13 1/2-year high, notching its best eight-day winning streak since 2011.

Here`s a rundown of today`s split session for stocks. The Dow lost 24 points, the NASDAQ was up 28, and the S&P added 2 points.

MATHISEN: Shares of the nation`s biggest home builders all ending a bit lower today after a report showed that home builder sentiment is pretty gloomy. The closely watched index posted its largest monthly decline ever in February, and builders say snow and frigid temperatures in many parts of the U.S. mean buyers are in hibernation. That in term means fewer houses get bought or built. Shares of D.R. Horton (NYSE:DHI), Hovnanian, Lennar (NYSE:LEN), Pulte Homes and others were down today.

GHARIB: Now, that record drop in home builder confidence in February has put bad weather in the crosshairs again. But some builders themselves say that`s not the only reason for this winter`s housing slow down.

Diana Olick has our story.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Sure, the weather in much of the nation has been truly awful this winter, but not exactly historic. The drop in home builder confidence, however, is. A monthly index gauging sentiment fell 10 points from 56 to 46 in February, 50 is the line between positive and negative.

This is the first time builders have felt negative since May of last year, and it`s the largest monthly drop since the survey began in 1985. Some blame this on too high expectations going into winter.

DAVID GOLDBERG, UBS HOME BUILDING ANALYST: We had a huge 2013 first half of the year. A lot of builders were hoping for a big volume push. It`s very tough to get that volume right now given some constraints in the labor market, given constraints in the land side, given the economy is not picking up that fast.

OLICK: Builders had the least confidence in current sales conditions and buyer traffic. Future sales expectations were down the least, but that one is based on visions of pent-up demand and the fact that we are headed into the spring season.

GARY CHANDLER: This is typically the heart of the selling season now. And this is really when buyers are out, when this weather clears I think it`s going to allow people to get out to the sales offices and our traffic should pick up again.

UNIDENTIFIED FEMALE: We just love going to open houses.

OLICK: Brian and Allie Cunningham braved the snow in northern Virginia to visit a Hovnanian Presidents` Day open house. The holiday is the unofficial start of the spring housing season, but many visitors were just kicking the tires.

BRIAN CUNNINGHAM, POTENTIAL HOME BUYER: We bought at a very good time the first time we bought. So, now, we`re just kind of looking around.

OLICK: As home prices rise, confidence is coming back to the housing market. But affordability is also weakening. That has some buyers caught in the middle.

AMANDA SCHNEIDER, POTENTIAL HOME BUYER: I feel like there`s more movement in the market buying and selling. So in terms of timelines, how long it would take to sell your home.

I think there`s a small possibility we`d buy within the next year. Yes. I mean, it does feel like everything is falling a little bit right now.

OLICK (on camera): All real estate is local. And while you can blame the weather for slow sales in much of the nation, home builder confidence actually fell the most in the West. That`s the one region where weather wasn`t a factor at all. But it is the area where home prices have shot up the most and where affordability is the worst.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Silver Spring, Maryland.

(END VIDEOTAPE)

GHARIB: Still ahead on NIGHTLY BUSINESS REPORT, outside the box. Can small tech start ups compete with the likes of Microsoft (NASDAQ:MSFT), IBM and Google (NASDAQ:GOOG)? And transform the way companies manage their data? That`s coming up.

(MUSIC)

GHARIB: Iran is playing hardball as multinational talks resumed in Vienna, aimed at curbing Tehran`s nuclear ambitions. When talks opened today, Iran said it would not buckle under pressure from the U.S. and other Western nations by scrapping its nuclear power plants. This has been a key demand by the six nations hosting the talks.

MATHISEN: Another global hot spot erupted today and markets are sure to keep an eye on developments overnight and into tomorrow. Anti-government protests in Kiev, Ukraine, turned violent tonight when riot police tried to drive two armored personnel carriers through an encampment in the city`s Independent Square. Protesters have been holding of there living in tents for about three months. Tonight, some of those tents were set ablaze. There have been reports of gun fire, and late this evening local time, of more than a dozen deaths.

GHARIB: Japan`s stock market soared higher today, gaining more than 3 percent. The rally came after the Bank of Japan announced new measures aimed at sparking economic growth in Japan, doubling the size of the central bank`s lending fund. That move comes on news that Japan`s economy grew at a much slower pace than expected at the end of last year, despite massive stimulus policies.

MATHISEN: That money won`t help Japanese automakers which are getting slammed by snow storms just like we`re having here in much of the U.S. manufacturing was suspended at some of Japan`s biggest auto plants after heavy weekend snow closed roads and shut down deliveries of parts. All the big carmakers including Toyota (NYSE:TM), Nissan, Honda, Mazda, Subaru, temporarily halted operations after the weekend storms, but they have now resumed production.

GHARIB: An update now on a story that we brought you last week. The vote was close but workers at a Volkswagen plant in Tennessee rejected a proposal to unionize under the United Auto Workers banner. It`s a big defeat for the union`s long-term plans to organize auto plants in the South.

Now, the UAW may be looking to organize workers at a Mercedes plant in Alabama and a Nissan factory in Mississippi.

Well, BlackBerry gets a big powerful shareholder and that`s where we begin tonight`s market focus. Dan Loeb`s Third Point revealed it has a 10 million share stake in BlackBerry. The hedge fund now has a 1.9 percent position in the company, making it the fifth largest shareholder. The troubled smartphone maker also scored an upgrade from SVR Capital because of recent changes at the company and positive momentum. That helped lift shares more than 5 percent to $9.46.

Passengers flying on United Airlines suffered widespread delays this morning because of problems with the company`s computer reservation system. The flight tracking site, Flight Aware (NASDAQ:AWRE), reported that 16 percent of the airline`s flights were delayed as of midday but that was also caused by weather issues in parts of the country. Shares of United Continental fell nearly 2 percent to $43.66.

Norwegian Cruise Line posted better than expected earnings. The results beat estimates by a penny but revenue came in shy of analysts` forecasts. The company said it was pleased with a solid performance during a challenging year for the industry. But investors weren`t impressed. Shares fell 4 1/2 percent to $43.56.

MATHISEN: Shares of Waste Management (NYSE:WM) took a hit after the company posted an earnings miss. The nation`s largest garbage hauler and recycler swung to a fourth quarter loss because of high asset impairment charges and higher accruals from incentive compensation. The company`s outlook also missed the street`s estimate. Now, shares plunged 4.5 percent today to $41.72.

And Boeing (NYSE:BA) selected Everett, Washington, as the site to build wings for its new 777X aircraft. The company currently builds 777 jetliners in that same location. This is a shift in strategy from the large-scale outsourcing to overseas suppliers that cause big delays on the 787 jet. Shares of Boeing (NYSE:BA) up a fraction today to $130.63.

GHARIB: And there may be a new stock you can trade soon as the London-based video game maker behind Candy Crush saga — an addictive game made popular on Facebook (NASDAQ:FB) — has filed paperwork for an initial public stock offering. King Digital hopes to raise half a billion dollars and trade shares here in the U.S.

MATHISEN: Starwood Capital is considering to begin selling stock to the public. Starwood is the company behind the upscale W Hotel chain. It also owns stakes in office buildings, apartment complexes, shopping malls and other real estate concerns.

GHARIB: And the next big IPO in the tech sector could be a company called Box. It`s become a market leader in the fast-growing world of Cloud storage. It`s just one of several start ups taking on the biggest names in Silicon Valley, disrupting the tech sector`s status quo.

Julia Boorstin has more.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Start up Box has reportedly filed confidentially to go public. CEO Aaron Levie won`t comment on IPO plans, but it`s clear he wants Box, which serves more than 25 million individuals and 225,000 businesses helping to manage and share information. He wants to steal market share from giants like Microsoft (NASDAQ:MSFT).

AARON LEVIE, BOX CEO: We`re investing very aggressively for growth right now. So, that`s something that we`re very happy about and excited about as we see a window of opportunity with this market where the leaders of the next generation of software are going to be created right now. So, we`re investing to ensure that Box is one of those leaders.

BOORSTIN: The market Box is tackling, Cloud tool for businesses, grew $20 billion or $30 billion and growing more than 25 percent annually in a market where IT spending is growing at single digits, says FBR analyst Dan Ives.

(on camera): The big question now is which of the tech giants which sells software to businesses are looking over their shoulder, fearing disruption by Box and other startups which take software services to the Cloud.

DAN IVES, FBR ANALYST: It`s the EMCs, the Oracles, potentially the Citrixs, or even like an SAP. It`s really any of the traditional vendors that, you know, where Cloud mobile is a potential opportunity. It also is a threat.

That`s where guys like Box, you know, go after, especially even a name like Microsoft (NASDAQ:MSFT) has to look out where Box is. And I think it speaks to just the massive market opportunity where a young company like this is really making waves in the enterprise sector.

BOORSTIN (voice-over): Box isn`t the only start-up looking to gain market share. Dropbox which started focusing on individual consumers and has pivoted to serve more businesses has a market cap of $10 billion as of its last fundraising round, while Box is valued at about $2 billion.

Levie is trying to distinguish Box from Dropbox with its focus on companies, and to distinguish itself from the giants with its start-up approach.

LEVIE: We`re a 1,000-person company but we still act and operate and can move at the speed of a very smart start-up. That lets us be very disruptive. As soon as new platforms emerge we tend to focus on whatever the new ways that people want to work are. That lets us make decisions much faster and lets us innovate much more quickly.

BOORSTIN: We`ll see whether Box and Dropbox manage to steal share from their bigger rivals and as they head towards IPOs, whether they`re snapped up by larger competitors.

For NIGHTLY BUSINESS REPORT, I`m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

MATHISEN: Coming up, technology is changing the way kids play and what parents buy in the toy aisles. Leaving big questions about the future of the multibillion business. The toy story next.

(MUSIC)

MATHISEN: A new hurdle for President Obama`s initiative to raise the nation`s minimum wage to $10.10 hour. The nonpartisan Congressional Budget Office says that raising the federal minimum wage would increase earnings for more than 16 million Americans by the year 2016 and pull an estimated 900,000 of them out of poverty. But it would also eliminate a half million mostly low-wage jobs. GOP has assailed the plan as a jobs killer.

GHARIB: Americans went on a borrowing binge at the end of 2013. And so, household deficits are on the high side. U.S. households that surged by more than 2 percent in the final quarter of last year.

Now, that doesn`t sound like a lot. But it is the biggest jump in about six years. Most of that new debt was from mortgage loans, but there were increases in student debt, auto loans and credit card spending.

One bright spot, home equity lines of credit declined.

MATHISEN: And finally tonight, the calendar says February, but toymakers and retailers are already working on this year`s holiday shopping season. And they`re doing it at the annual toy fair across the river in New York City.

Jon Fortt now with a look at some of this year`s high tech and surprisingly low tech offerings.

(BEGIN VIDEOTAPE)

JON FORTT, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): There`s no business like the toy business.

(on camera): From wooden blocks to solar-powered vehicles here at the annual toy fair in New York, some things are changing but some things are staying the same.

(voice-over): What`s changing? Tablets and smart phones are having a big impact on what we do for fun. We spend about $22 billion a year on toys in the U.S., not including video game systems and apps.

BRIAN GOLDNER, HASBRO CEO: We believe in giving people the opportunity to play our toys and games at any format they want anytime and anywhere. We set out a blueprint about five years ago to do this, between the studios and digital gaming. We have great digital games coming out around a lot of our brands.

FORTT: And the kinds of crafts and building toys that are especially popular this year, they offer the kind of three dimensional experiences that you can`t easily match on a touch-screen.

ADRIENNE APPELL, TOY INDUSTRY ASSOCIATION: Ten years ago, people were afraid that kids would stop playing because of technology. What we`ve seen evolve in the last ten years is probably the way that the toymakers are making with seamless integration of technology and to be able to recognize that kids aren`t turning away from toys.

FORTT: Crayola`s $40 My Virtual Design Pro is a great example. Color a dress in the coloring book, snap a picture with your phone and then watch a video of a model wearing your design.

Lego has big presence here. With the success of “Lego Movie”, big ticket items like Benny`s $100 spaceship due this summer are likely to be popular. Lite-Brite, the viewfinder, lots of old toys have been updated for a new generation. So, maybe the most remarkable thing, for every (INAUDIBLE) $30 to $60 toy that nestles a phone or tablet, there`s also a set of Melissa & Doug blocks with that retro flair, which goes to show tech hasn`t taken over everything. After all, 30,000 toy industry folks will walk seven football fields, the space here, this week, to actually talk to each other in person.

For NIGHTLY BUSINESS REPORT, I`m Jon Fortt.

(END VIDEOTAPE)

GHARIB: Legos and blocks.

MATHISEN: Legos and real old wooden blocks. How do you like that?

GHARIB: That`s NIGHTLY BUSINESS REPORT for tonight. I`m Susie Gharib. Thanks for joining us.

MATHISEN: And welcome back from your vacation.

GHARIB: Thanks a lot.

MATHISEN: I`m Tyler Mathisen. Have a great evening, everybody. We`ll see you back here tomorrow night.

END

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) 2014 CNBC, Inc.

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