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Commodities, Instacart, 3M, and Hawaiian Electric (Podcast) · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller.
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Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
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Speaker 2: and Bloomberg experts, along with essential market moven news.
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Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
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Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast.
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Speaker 1: All right, I'm reading speaking of Bloomberg Intelligence, I'm reading
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Speaker 1: some research here. It says most commodities are melting except
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Speaker 1: for gold. What stops it? Let's go right to the
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Speaker 1: person who wrote this stuff. Mike mcclooney covers all the
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Speaker 1: commodity stuff. He's a senior macro strategist for Bloomberg Intelligence. Mike,
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Speaker 1: what are you thinking about these days in terms of
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Speaker 1: the commodity space? What are you telling your clients? What
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Speaker 1: are the conversations you're having with your clients about commodities?
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Speaker 3: Well, hello, Paul, I appreciate you reading that headline because
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Speaker 3: it's something I like to re iterate periodically, particularly when
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Speaker 3: it's relevant. Is typically historically over time, gold is the
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Speaker 3: best performing commodity now, basically because it's not really a commodity.
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Speaker 3: It's it's a store of value. It's a metal. I mean,
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Speaker 3: you can store it on your body in terms of jewelry.
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Speaker 3: But certainly lately it's been the key case. It's the
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Speaker 3: best performing command this year. It's up ten percent, and
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Speaker 3: the average, the Bloomberg Commodi Index this year is down
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Speaker 3: sixteen percent. And the key thing I like to ask
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Speaker 3: myself is those are bodies in motion. And as a strategist,
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Speaker 3: I say, okay, is it going to stay the same
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Speaker 3: reverse or accelerate. I think it's more likely accelerate, particularly
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Speaker 3: at some point if we get to a point where
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Speaker 3: the FED pivots, it's going to happen. But that's the
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Speaker 3: bottom line is we had this massive pump and commandis
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Speaker 3: last year and they're proving what they always do. Elastic
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Speaker 3: supply demand makes commandies their worst enemy. It's the higher
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Speaker 3: priced cure. As a farmers say, well, that's.
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Speaker 4: Interesting, though, I feel like we're a far bit away
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Speaker 4: at least if you listen to J Powell on Friday
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Speaker 4: from when we see the FED reverse course, I mean,
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Speaker 4: talk me through the timeline there. When would you expect
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Speaker 4: goal to start showing some outporfore? I mean, I guess
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Speaker 4: it is showing out performance.
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Speaker 3: Right, that's the point. Goal's looking ahead, and that's a
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Speaker 3: key point. They will probably not be cutting rates anytime soon,
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Speaker 3: particularly in my view, until the stock market tells them to.
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Speaker 3: And that's part of the lose lose for risk ads.
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Speaker 3: There's then a high high connection and correlation between stock
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Speaker 3: market bouncing this year, all this massive fiscal stimus and
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Speaker 3: the FED hiking another one hundred basis points. They are
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Speaker 3: still on that hiking trajectory. Despite then you look over
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Speaker 3: a commodities, what's the number one source of demand historically
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Speaker 3: at least the last twenty years or so, is China
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Speaker 3: demand estimate revisions heading lower in China are just getting started,
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Speaker 3: so their key customers, their key export customers Europe, US
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Speaker 3: and Europe are in these early days of just getting
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Speaker 3: showing signs of what you expect from high interest rates jumping.
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Speaker 3: And then of course the leader of China, President z
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Speaker 3: cozing up with Putin right before the war, so we
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Speaker 3: see that tilt just get us out, and so that
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Speaker 3: to me is this is early days. So I look
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Speaker 3: at this is what's normally is potentially a very bear
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Speaker 3: scenario for commodities, and you look at yourself so what's
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Speaker 3: going to change is typically also you need a week dollar,
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Speaker 3: and for the dollar to get week, we have a
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Speaker 3: major issue there. It's the hardest, you know, most expensive
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Speaker 3: to short commodity currency in the planet, particularly if you
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Speaker 3: look very compared versus the top top top commodities and
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Speaker 3: I'm sorry economies in the planet China, Japan, and Germany,
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Speaker 3: US is just a much higher rate. So that to
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Speaker 3: me is basically a train wreck heading for commodities and
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Speaker 3: for deflation.
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Speaker 1: So, Mike, I know you come from the land of
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Speaker 1: the great American farmer. I wonder how the American farmers
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Speaker 1: doing here. I'm looking at corn down thirty percent year
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Speaker 1: to date, soybeans down eight percent year to date, wheat
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Speaker 1: down twenty six percent year to date. How is the
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Speaker 1: farmer doing these days?
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Speaker 3: They are crushing it, so it will price us down
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Speaker 3: so much, oh well down from where they were. So
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Speaker 3: corn right now the number one, as I'm going back
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Speaker 3: next to next week and lesson I learned going and
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Speaker 3: raised and having owned the farm in the corn belt,
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Speaker 3: we plant soybe so we can plant corn. We plant
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Speaker 3: corn because that's what we do and that's where we
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Speaker 3: make our Money's world's most significant commoditybeans the plant corn
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Speaker 3: that fit. It's a rotation because soybeans add nitrogen and
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Speaker 3: fertilizer to the soil and they're a legome. Corn takes
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Speaker 3: it away. It's very nitro and expensive. It's a grass.
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Speaker 3: It's just that rotation that the corn belt has crushed.
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Speaker 3: But the bottom line is, partly because of this war
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Speaker 3: in Europe, you've had prices well above their cost of
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Speaker 3: productions and the cost of costs of production. For instance,
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Speaker 3: anhydrous ammonia is collapsing, and so we're making a lot
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Speaker 3: of money. It's just called profits. What a profits mean
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Speaker 3: for farmers production. So this year is probably gonna be
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Speaker 3: close to the biggest production year ever for corn, just
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Speaker 3: in the weather is not so great. And also what
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Speaker 3: did they do with corn and soybeans in Argentina and
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Speaker 3: I'm sorry in South America, but most noted in Brazil
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Speaker 3: record production I mean off the charts. So this is
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Speaker 3: just a normal lasticity of supplying demand in the area
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Speaker 3: of the commodites. We can bring on that supplying one
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Speaker 3: year and the bottom line is are making a lot
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Speaker 3: of money, and that means more supply, more production, and
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Speaker 3: it means typically lower prices. But I'll just end with this.
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Speaker 3: September is the worst monthly year for grains, typically buys
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Speaker 3: a harvest, and that's how futures came about because it
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Speaker 3: needed to start hedging, most knownly when they all try
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Speaker 3: to sell at the same time.
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Speaker 4: And I've been looking at it. I've been I've been
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Speaker 4: pulling out, pulling back a little bit our our commodity
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Speaker 4: price for corn, and we're levels where we were in
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Speaker 4: late twenty twenty, but those are substantially higher than where
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Speaker 4: we were in previous to that. Talk me through, Mike's
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Speaker 4: what's happening in wheat, because you know we have all
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Speaker 4: this stuff with a grain deal in Turkey. Very interesting
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Speaker 4: to see where you think this is going.
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Speaker 3: Also, so the significance of wheat is that was at
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Speaker 3: the epicenter of what happened with Russia's I'm sorry, President
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Speaker 3: Putin's invasion of Ukraine. But it's been in a straight
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Speaker 3: downward trajectory since reaching that high last year, right around
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Speaker 3: thirteen dollars a bushel. But typically what we does now
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Speaker 3: it's back to a level that was kind of en
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Speaker 3: during before. Because what happens is you can bring on
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Speaker 3: rate supply rapidly, and it's the most widely grown agricultural
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Speaker 3: crop on almost every country will can grow wheat. Now,
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Speaker 3: Ukraine was a big exporter US we explored over fifty
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Speaker 3: five percent of our week. We grow less of it
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Speaker 3: every day because it's so much easier to produce. It's
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Speaker 3: basically considered a weed, and it's one commodity you never
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Speaker 3: want to be long after it goes up. It's just
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Speaker 3: the way it works because you're bringing on so we
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Speaker 3: it's been a good indicator. Right now it's around six
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Speaker 3: dollars a bushel, and I view it's all going to
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Speaker 3: continue to trend lower unless we get some kind of
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Speaker 3: surprise out of that war, which means hopefully not but
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Speaker 3: something nuclear could do. But there's this is a situation
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Speaker 3: similar to World War two for the grain, for the
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Speaker 3: grain belt, corn belt which where I'm from, and that
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Speaker 3: is prices and the war in Europe kept prices rather high,
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Speaker 3: which meant US did very well, created more and more
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Speaker 3: production and profited, and then it all collapsed when the
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Speaker 3: war ended and we had way too much supply. That
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Speaker 3: is the risk, and that's markets are looking ahead to.
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Speaker 5: That so real quick.
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Speaker 1: WTI crude oil going to switch gears here eighty dollars
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Speaker 1: or barrel seems to found a little bit of a
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Speaker 1: home here for a while.
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Speaker 3: Yes, it's happy, it's consolidating. Well, it's the same prices.
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Speaker 3: I'll put this back into history. This price here was
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Speaker 3: first traded in two thousand and seven. Imagine we said
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Speaker 3: that about the stock market. Yet over that time period
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Speaker 3: the PPIs of fifty percent. In terms of gold, here's
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Speaker 3: one for you. It takes point zero four to two
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Speaker 3: ounces of gold to buy one barrel of cruel. That's
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Speaker 3: the same price as nineteen thirty one. Cruel is the
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Speaker 3: world's most auto correlated acid and has a lot of
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Speaker 3: reason to continue trade lower after that big pump last year.
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Speaker 3: Fifteen percent of all sales of evs and the world
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Speaker 3: our automobiles are evs. And then course that supply out
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Speaker 3: of the US. The biggest thing that's pressured crude all
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Speaker 3: the last at least almost fifteen years is the US.
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Speaker 3: We just create much more than we need, and with
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Speaker 3: Canada are surplus every day. It's about four million barrels
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Speaker 3: a day of lick with fuels. So we can spell
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Speaker 3: up the spr that's cheating Pasolium reserve in just a
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Speaker 3: few months.
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Speaker 1: Interesting, all right, Mike always learned something with you. You put
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Speaker 1: in soybeans the ducorn I learned that at That's new
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Speaker 1: Mike mcglohone's senior macro strategist and Bloomberg's resident a farmer
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Speaker 1: for Bloomberg Intelligence.
8:17
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8:31
Speaker 1: The I field market looks like it might be heating
8:33
Speaker 1: up a little bit. Had a couple of filings late
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Speaker 1: last week arm Holdings, the chip maker, and then the
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Speaker 1: grocery delivery company Instacart.
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Speaker 5: So we want to talk about that deal.
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Speaker 1: Brian Lynch joints as she's head of market insight at
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Speaker 1: Equity Zen. She joins us here, so brand talked to
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Speaker 1: us about Instacart here. What do we learn from their
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Speaker 1: IPO filing last week?
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Speaker 7: Yeah, thanks for having me. I think Instacart really painted
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Speaker 7: a picture in that file of what companies are going
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Speaker 7: to need to show if they want to have potentially
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Speaker 7: a successful IPO. So this is a company that is growing.
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Speaker 7: They grew transaction revenue thirty nine percent year over year.
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Speaker 7: They're profitable with fifteen percent operating margins, which a lot
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Speaker 7: of other players in the gig economy space that are public,
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Speaker 7: like uber lyft Dash, you know, they all are not
9:23
Speaker 7: presenting profitability yet. And this is both a brand that
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Speaker 7: people recognize and a business model that people know, so
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Speaker 7: definitely a strong one that could potentially open up the
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Speaker 7: IPO market for others.
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Speaker 8: Well.
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Speaker 4: The interesting bit as well to me, and we were
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Speaker 4: talking with this about this with our equity reporter Bailey
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Speaker 4: Lipshits earlier, is that this company had been valued much
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Speaker 4: much higher as of twenty twenty one, I believe thirty
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Speaker 4: nine billion dollars according to pitchbook, And now you know
9:55
Speaker 4: the valuation here is going to be maybe seventy percent less.
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Speaker 4: Talk to me about how investors can I get comfortable
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Speaker 4: allowing this company or going along with the company's plans
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Speaker 4: to ibo here. How does this change the dialogue between
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Speaker 4: the company and its existing investors.
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Speaker 7: Sure so, Instacart has already been priming its investors about this.
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Speaker 7: So while they did raise that thirty nine billion dollar
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Speaker 7: round in twenty twenty one, their internal valuations have gone
10:28
Speaker 7: as low as ten billion dollars now closer to thirteen billion.
10:31
Speaker 7: So this is for the equity that they're issuing to
10:34
Speaker 7: new employees or you know, new stock grants. That's the
10:37
Speaker 7: valuation that they've given themselves. So internally at least they've
10:42
Speaker 7: accepted that haircut, and I think that's ultimately the tough
10:46
Speaker 7: pill that a lot of these venture backed companies are
10:49
Speaker 7: going to have to swallow. As we raised money at
10:52
Speaker 7: a crazy valuation in twenty twenty one, it's not where
10:55
Speaker 7: the market is anymore. And if we're going to raise
10:58
Speaker 7: capital and either the private or public markets, it's most
11:01
Speaker 7: likely going to be at a discount. And I think
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Speaker 7: investors understand that as well, just given where multiples are.
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Speaker 7: With a case of instacart, you have Dash as a
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Speaker 7: public market competitor. That's a pretty good comp that helps
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Speaker 7: from a valuation perspective.
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Speaker 1: So speaking of DoorDash brand, I mean this has become
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Speaker 1: a crowded space really since the pandemic, as this market's
11:23
Speaker 1: really developed and evolved. Where does instacart kind of position
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Speaker 1: itself in terms of its competition, whether it is DoorDash
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Speaker 1: or Uber Eats or Amazon and all the type of thing.
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Speaker 7: Yeah, so they're by far the market leader. Both uber
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Speaker 7: and DoorDash have less than one percent of the grocery market,
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Speaker 7: and it's a market that they're aggressively pursuing, but they
11:47
Speaker 7: still are not big players in it. When you look
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Speaker 7: at all of the grocery players, instackcart has partnerships with
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Speaker 7: over eighty five percent of them, and this is a
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Speaker 7: one point one trillion dollar market. Largest retail market is grocery,
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Speaker 7: so it's a huge market where they are already the leaders.
12:05
Speaker 7: So there is a lot of competition, but they are
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Speaker 7: one foot ahead. But to your point, it's not just
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Speaker 7: these other kind of gig economy players they're up against.
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Speaker 7: They're up against Amazon Fresh, They're up against Walmart, Grocery
12:21
Speaker 7: and other players that you have a lot more resources
12:24
Speaker 7: just from being bigger companies. So there is a lot
12:26
Speaker 7: of competition.
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Speaker 4: Yeah, does that competition scare would be investors in this
12:34
Speaker 4: space at all? Because you know, you think of Amazon
12:36
Speaker 4: coming into any space and it's just sort of you know,
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Speaker 4: that has the potential to be transformative, even if they've
12:42
Speaker 4: struggled a little bit with their with expanding their grocery footprint.
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Speaker 7: Yeah, so they got a strong vote of confidence by Pepsi,
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Speaker 7: who's investing one hundred and seventy five million in this
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Speaker 7: IPO and a lot of the thesis or you know,
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Speaker 7: the bulk that they see is around the advertising piece
13:02
Speaker 7: of instacarts business. So about thirty percent of their revenue
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Speaker 7: comes from advertising. So when they highlight different products you know,
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Speaker 7: on their marketplace to users, and this actually helps diversify
13:15
Speaker 7: their revenue stream in ways that you know, some of
13:18
Speaker 7: these other players haven't done yet. And it's also the
13:21
Speaker 7: piece of their business that is driving their profitability. So
13:25
Speaker 7: that's kind of a unique or you know, a strong
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Speaker 7: point that they have now that investors have found compelling.
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Speaker 1: Growth has slowed a little bit for this company. Is
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Speaker 1: that just a post pandemic kind of evening out of
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Speaker 1: this marketplace in terms of number of subscribers in terms
13:42
Speaker 1: of that metric.
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Speaker 7: Yeah, in terms of I would say they haven't saturated
13:48
Speaker 7: the market fully, but you know, they did see such
13:52
Speaker 7: growth during the pandemic that it's probably more about activation.
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Speaker 7: So of these customers you have who have used instacart,
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Speaker 7: how do you get people, you know, more captive on
14:04
Speaker 7: the platform. They haven't admitted and understand that it's not
14:09
Speaker 7: going to be onlinely for every customer. People will still
14:13
Speaker 7: be going to stores. So it's more about you know,
14:15
Speaker 7: activating those customers and then just improving their margins. You know,
14:19
Speaker 7: amongst those who are transacting, so they have grown revenue,
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Speaker 7: They've grown grown average cart size over the same period,
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Speaker 7: So even if their customer base isn't growing, you know,
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Speaker 7: their revenue is growing.
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Speaker 4: We saw as well, filing by ARM for its megalistic
14:41
Speaker 4: I believe it was a filing, but we uh, what
14:46
Speaker 4: threads are there here for you that you're starting to
14:48
Speaker 4: see evolve in the the IPO space, because I think
14:51
Speaker 4: there was a bit, a fair bit of hesitancy for
14:53
Speaker 4: a while, just given what had happened to IPOs in
14:57
Speaker 4: twenty twenty one, and now maybe we were turning around.
15:02
Speaker 7: It looks like we're starting to turn around. This year
15:05
Speaker 7: has been the worst year for IPOs since two thousand
15:09
Speaker 7: and nine. We really haven't seen that many blockbuster names
15:12
Speaker 7: hit the market, and Instacart and ARM those will be
15:16
Speaker 7: the largest IPOs in the US since Rivian in twenty
15:19
Speaker 7: twenty one, So definitely starting to signify this turning tide,
15:26
Speaker 7: and ultimately you have over fourteen hundred unicorn tech companies
15:31
Speaker 7: sitting in the private markets, many of who have been
15:34
Speaker 7: waiting for the right opportunity to have an exit. Their
15:38
Speaker 7: investors are ready for an exit. Their employees who maybe
15:42
Speaker 7: have got in some liquidity but are looking for you know,
15:45
Speaker 7: broader liquidity, are looking for an exit. And I think
15:48
Speaker 7: the fact that you know, while there's been some recent
15:51
Speaker 7: market volatility, you have the nastac up thirty percent, You've
15:56
Speaker 7: seen a few successful IPOs though not tech ipo is
16:00
Speaker 7: like Kava oddity and can you hit the market. People
16:04
Speaker 7: are feeling a little bit more comfortable, like this may
16:07
Speaker 7: be the time if they're looking to exit this year.
16:09
Speaker 1: I think for a lot of investers, I think for me,
16:12
Speaker 1: the thing that jumped out of me is, as Simone
16:14
Speaker 1: was mentioning earlier, the dramatic reduction in valuation. I think
16:18
Speaker 1: that's kind of been kind of a gating issue for
16:21
Speaker 1: a lot of these companies not tapping the public markets
16:23
Speaker 1: because they didn't want to take that big write down
16:27
Speaker 1: on valuation. Is the expectation that maybe Instacartal maybe opened
16:30
Speaker 1: the way for more companies to kind of bite the
16:33
Speaker 1: bullet if you will.
16:35
Speaker 7: Absolutely, I think Instacart doing this and kind of taking
16:40
Speaker 7: it on the chin is going to open the door
16:43
Speaker 7: for others who realize it will become less taboo. Essentially, as
16:49
Speaker 7: more companies accept these valuation right downs, it becomes less
16:54
Speaker 7: of you know, a negative and just more reflection of
16:58
Speaker 7: how multiples have cracked. So I do think that they
17:01
Speaker 7: will make it easier for other companies doing this as well.
17:04
Speaker 7: You know, Klavio is another company, a marketing automation platform
17:08
Speaker 7: that also filed their S one on Friday. Got a
17:11
Speaker 7: little lost in the Instacart news, but this is a
17:13
Speaker 7: company that raised at a nine and a half billion
17:16
Speaker 7: dollar valuation twenty twenty one, so they are likely to
17:19
Speaker 7: be one that is you know, trading down from those
17:21
Speaker 7: levels as well. So it's just kind of a reality
17:24
Speaker 7: for where we are in the market.
17:25
Speaker 1: All right, Brian, thanks so much for joining us. I
17:27
Speaker 1: really appreciate getting your thoughts there. We're getting some IPO
17:30
Speaker 1: filing starting to hit the tape. Maybe get a little
17:32
Speaker 1: bit of a action in the fall here with the
17:35
Speaker 1: IPO market Brand Lynch, head of market insight at Equity
17:39
Speaker 1: Zen and again, you like to think maybe we're going
17:41
Speaker 1: get a little bit of deal activity once everybody comes
17:43
Speaker 1: back from the summer.
17:45
Speaker 4: Yeah, i mean busy Friday, even though even though Klavio
17:50
Speaker 4: is not quite as large a company and likely will
17:52
Speaker 4: not be quite as large a company when Instacart.
17:54
Speaker 1: Yeah, Instacart, you know, it's going to be a pretty
17:57
Speaker 1: big transaction. We're going to have all the big investment banks.
18:00
Speaker 1: So this deal is being led by Goldman Sachs, so
18:03
Speaker 1: it'll be certainly a deal that people will pay attention to.
18:05
Speaker 1: And there are some comps out there, as brand was mentioning,
18:07
Speaker 1: so see how that plays out.
18:09
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18:27
Speaker 5: I'm looking.
18:28
Speaker 1: I mean, we're talking about Vinfest. You know what a
18:30
Speaker 1: crazy name that is. Story that is the exact opposite,
18:34
Speaker 1: might be Minnesota mining and manufacturing three m. You're talking
18:39
Speaker 1: industrial heartland, been around forever. I'm looking at this stock
18:42
Speaker 1: over the last five years, it's down ten percent on
18:46
Speaker 1: a compounded annual basis, where the S and P's up
18:48
Speaker 1: a little more than ten percent, so really underperformed the market.
18:52
Speaker 1: But they're in the news today and we want to
18:53
Speaker 1: talk about three M. We want to talk about industrial America.
18:57
Speaker 1: What's happening out there? Brooks Southerland. She covers all that
19:00
Speaker 1: so well for us. She's a columns covering.
19:02
Speaker 5: Industrials and deals for Bloomberg Opinion.
19:04
Speaker 1: She joins us live here in our Bloomberg Interactive Brooker Studio.
19:07
Speaker 1: So three M, I guess the story today Brooke agrees
19:10
Speaker 1: to pay more than five point five billion dollars over
19:13
Speaker 1: combat earplugs.
19:14
Speaker 5: Can you give us the background of this story? Sure?
19:17
Speaker 10: So threems sold. They were dual ended earplugs to the
19:20
Speaker 10: US military through its Arrow Technology subsidiary which it acquired,
19:24
Speaker 10: and the idea was that on one side it was
19:27
Speaker 10: sort of block out everything, and the other would block
19:30
Speaker 10: out sort of immediate near term gunfire sounds that you
19:33
Speaker 10: could still hear the person sitting next to you, which
19:35
Speaker 10: obviously has a lot of appeal for the US military.
19:39
Speaker 10: But the veterans have claimed that these airplugs did not
19:42
Speaker 10: in fact work and left them instead with hearing loss
19:45
Speaker 10: and tonightis and so this has been sort of a
19:47
Speaker 10: mushrooming legal challenge for three M. Veterans were increasingly winning
19:51
Speaker 10: bell weather trials at THREEM then made the move last
19:54
Speaker 10: summer to put the aerotechnology sublicidiary into bankruptcy as a
19:58
Speaker 10: means of sort of speeding up the resolution of those claims. Now,
20:01
Speaker 10: a judge earlier in June said you can't do that.
20:05
Speaker 10: This is not a valid reorganization purpose, and you know,
20:09
Speaker 10: the company was appealing that, but it looked like a
20:11
Speaker 10: rocky road. We've seen J and J run into legal
20:14
Speaker 10: challenges with a similar ploy involving some of those talk
20:17
Speaker 10: claims for that company, and so it looks like the
20:20
Speaker 10: company three M is instead moving toward a settlement, which
20:23
Speaker 10: makes sense. I mean, this was really the only way
20:24
Speaker 10: that this probably was going to end for the company.
20:27
Speaker 4: Now I understand that there are more issues the three
20:29
Speaker 4: AM space, But first, is this it for this specific issue?
20:34
Speaker 4: Is this likely to kind of settle all the claims
20:36
Speaker 4: around the ear plug issue?
20:38
Speaker 10: So we don't know a lot of the details, and
20:40
Speaker 10: so Bloomberg News has reported on this Sunday that this
20:43
Speaker 10: was in the works. It's a tentative deal at this point.
20:45
Speaker 10: I think it'll be interesting to see what the actual
20:47
Speaker 10: details look like once we get the final paperwork. One
20:51
Speaker 10: of the things that's been reported is that this settlement
20:52
Speaker 10: would be paid out over five years, which is not
20:55
Speaker 10: what Wall Street was expecting. If you think about the
20:58
Speaker 10: type of hearing loss we're talking talking about. If you,
21:01
Speaker 10: you know, lost your hearing because you were exposed to
21:03
Speaker 10: very loud gunfire, this is not something that plays out
21:06
Speaker 10: over time that we were sort of waiting to see happen,
21:09
Speaker 10: like you would with cancer coins. Okay, so I think
21:11
Speaker 10: analysts had been bracing for more sort of an upfront payment,
21:15
Speaker 10: So it wo'd be interesting to see what that actually
21:16
Speaker 10: looks like. But you know, theoretically, I don't think they
21:20
Speaker 10: would be moving forward with something like this unless they
21:22
Speaker 10: thought it was really going to put this issue behind them.
21:24
Speaker 10: Now there will be sort of ramification down the road.
21:26
Speaker 10: I do think you have to worry about a dividend
21:28
Speaker 10: cut at three M just given the fact that they've
21:30
Speaker 10: also separately agreed to a twelve point five up to
21:33
Speaker 10: twelve point five billion dollar settlement. Regarding p Fast and
21:36
Speaker 10: drinking water, but that is not the end of their
21:39
Speaker 10: p Fast liabilities by any stretch. And I think that
21:42
Speaker 10: dividend is just going to be under pressure.
21:43
Speaker 1: He Yeah, the dividend you'll looking just about five point
21:45
Speaker 1: eight percent, So that might be that's some risk there.
21:49
Speaker 5: For three M.
21:50
Speaker 1: I mean, was this hearing were these hearing aid issues
21:54
Speaker 1: just from the left since f Afghanistan in Iraq from
21:57
Speaker 1: that time period or is it even before that.
22:00
Speaker 10: I'm not sure exactly on the dates of the claims,
22:03
Speaker 10: but like I said, this has been sort of a
22:04
Speaker 10: mushrooming issue that has you.
22:06
Speaker 1: Know, certain of stocks stocks up about three or four percent,
22:08
Speaker 1: So I guess the Marco's thinking maybe it would have
22:10
Speaker 1: been a bigger number.
22:11
Speaker 10: Maybe sure, And so you know a lot of analysts
22:13
Speaker 10: have been bracing for something in the ten billion dollar range,
22:16
Speaker 10: and you know, I think the stock is up because
22:18
Speaker 10: quite frankly, any progress is good progress for three M
22:21
Speaker 10: on its legal issues. You know, the stock has lost
22:24
Speaker 10: more than fifty billion dollars in market values since CEO
22:27
Speaker 10: mic Roman took over in twenty eighteen. Like you said,
22:30
Speaker 10: it's been a serious underperformer, and some of that has
22:33
Speaker 10: to do with execution issues, operational hiccups within the company,
22:37
Speaker 10: tougher industrial markets, but a lot of it has to
22:39
Speaker 10: do with these legal liabilities that have just been hanging
22:41
Speaker 10: over the company's head. And they're very open ended and
22:43
Speaker 10: nobody could really put a number on it. So the
22:46
Speaker 10: fact that we now have a number that we're talking about,
22:48
Speaker 10: I think is a relief to shareholders.
22:50
Speaker 4: Yeah, can you talk to us a little bit about
22:52
Speaker 4: these PFEST obligations. There's one twelve plus billion dollars, but
22:58
Speaker 4: there may be more than that.
23:00
Speaker 10: Sure, So the settlement that they've agreed to covers claims
23:03
Speaker 10: that Pfast polluted drinking water supplies, and that's with US
23:07
Speaker 10: public water systems.
23:08
Speaker 4: But these are forever chemicals. They exist forever. You ingest
23:12
Speaker 4: them somehow and then they're bad.
23:14
Speaker 10: So three M manufactured them for a range of products
23:17
Speaker 10: for years. They stopped making some of the most problematic
23:20
Speaker 10: compounds several decades ago, and then more recently have come
23:23
Speaker 10: out and said we're getting out of past altogether. But
23:25
Speaker 10: so we're talking about legacy manufacturing from years and years back.
23:29
Speaker 10: So the settlement involves drinking water claims, but then there
23:31
Speaker 10: are also potentially liabilities involving state attorney generals, potentially the EPA,
23:37
Speaker 10: the military. Then there are also foreign governments to consider
23:40
Speaker 10: because three M has factories all over the world. So
23:42
Speaker 10: Barclay's analyst, Julian Mitchell has put some of these outstanding
23:46
Speaker 10: liabilities at about sixteen billion addition to the twelve point
23:49
Speaker 10: five billion that we've been talking about, and that does
23:51
Speaker 10: not include any sort of deals with the foreign government.
23:54
Speaker 8: That's just us.
23:55
Speaker 10: One of the biggest budgets is personal injury claims, property
23:58
Speaker 10: damage claims. They just brought in a very big lawyer
24:02
Speaker 10: or trying to bring in a big lawyer to help
24:04
Speaker 10: with some of those claims. He was the one who
24:06
Speaker 10: got the big tobacco settlement, and so I think we
24:09
Speaker 10: could still see some big, multi billion dollar settlements.
24:12
Speaker 1: Brooke, you cover a lot of the big industrial companies.
24:14
Speaker 1: A lot of those companies are conglomerates and conglomerates. It
24:18
Speaker 1: seems like in time and time are in favor, some
24:20
Speaker 1: of the times are out of favor. I've pitched it
24:22
Speaker 1: both ways. As a banker, you know which way the
24:25
Speaker 1: winds are blowing. You have a fascinating column out on that.
24:27
Speaker 1: Where are we now with just conglomerates to investors like them,
24:31
Speaker 1: did they not like them? What's going on?
24:33
Speaker 10: So it's interesting because we went through a moment during
24:35
Speaker 10: the pandemic where all of a sudden, diversity was an
24:37
Speaker 10: asset again because it was very helpful to not just
24:40
Speaker 10: be an aerospace company, for example, but even beyond that,
24:43
Speaker 10: you sort of had different markets were covering at different
24:45
Speaker 10: rates as we came out of the pandemic, and you
24:47
Speaker 10: actually heard a lot more companies talking about diversity as
24:50
Speaker 10: an asset, and that message is not resonating in the
24:53
Speaker 10: same way now that we're sort of on the other
24:55
Speaker 10: side of that initial robust COVID comeback, and we're sort
24:59
Speaker 10: of seeing some market slow down, other markets being more robust,
25:02
Speaker 10: and diversity is becoming a liability again. Now there's not
25:05
Speaker 10: that many big diversified industrial conglomerates left just because so
25:09
Speaker 10: many have done breakups, spinoffs, what have you. Even three
25:13
Speaker 10: MS you know is planning to spin off its healthcare
25:16
Speaker 10: unit at the end of this year. But there are
25:17
Speaker 10: a couple and I think, you know, we may see
25:19
Speaker 10: them under more scrutiny.
25:21
Speaker 4: Is this a cyclical sort of thing, because are there
25:26
Speaker 4: various times, you know, over when you look over periods
25:30
Speaker 4: of decades where it helps to be diversified because it
25:32
Speaker 4: helps insulate you from some risk, and then all of
25:35
Speaker 4: a sudden, you know, the market recovers and activists say
25:38
Speaker 4: get rid of your XYZ division.
25:40
Speaker 10: It definitely is cyclical, and to your point, you know,
25:43
Speaker 10: it's one thing to argue that diversity is a liability,
25:45
Speaker 10: and then when times get tough and you're just an
25:47
Speaker 10: aerospace company, then the numbers don't look so great. But
25:50
Speaker 10: you know, I do think it goes in waves. And
25:53
Speaker 10: one of the comments that the industrials always make is
25:55
Speaker 10: if you look outside of manufacturing, look at finance, for example,
25:59
Speaker 10: some of the big banks are in a wide variety
26:01
Speaker 10: of businesses. Look at the tech companies. Amazon will deliver
26:04
Speaker 10: goods to your front door, but then they also sell
26:06
Speaker 10: cloud computing services, and they own whole foods, and so
26:09
Speaker 10: there is you know a number of examples of conglomerate
26:12
Speaker 10: out there in the markets. And I think one of
26:14
Speaker 10: the ironic things is for all the times that this
26:17
Speaker 10: business structure has been pronounced dead, it actually has quite
26:20
Speaker 10: a lot of staying power and just reincarnates itself into
26:23
Speaker 10: sort of different visions.
26:24
Speaker 5: What are you working on these days. What's the next
26:26
Speaker 5: cool thing coming out of your Bloomberg terminal?
26:30
Speaker 10: Oh, well, I mean all kinds of things. But certainly,
26:33
Speaker 10: watching this diversity issue and how it plays out, I
26:35
Speaker 10: think will be really interesting. And we haven't really seen
26:37
Speaker 10: a lot of activists investors in the industrial sector for
26:40
Speaker 10: a while. The last big time I can remember somebody
26:43
Speaker 10: pushing for changes at an industrial conglomerate was in twenty
26:46
Speaker 10: nineteen with D. E. Shaw and Emerson Electrics, So it's really.
26:49
Speaker 5: While and Emerson did do something.
26:51
Speaker 10: They did break up, although that was not so much
26:55
Speaker 10: I don't know how much that was connected to the activist.
26:57
Speaker 10: They got a new CEO who had a lot of
26:59
Speaker 10: energy and a lot of vision for what he wanted
27:01
Speaker 10: this company to look like, and I think that was
27:03
Speaker 10: sort of more the driving force in that case. But
27:06
Speaker 10: we really haven't seen that many activists in industrials, which
27:08
Speaker 10: is fascinating, And so I wonder if you know now
27:10
Speaker 10: that sort of the pendulum is swinging the other way
27:12
Speaker 10: on diversity, if we might diversity of businesses, if we
27:14
Speaker 10: might see, you know, some activists come out of the
27:17
Speaker 10: woodwork and take a look at these companies. Honeywell, stock
27:19
Speaker 10: in particular has been under pressure since they announced a
27:22
Speaker 10: CEO change, and I think investors are just sort of
27:24
Speaker 10: waiting and watching to see what that new CEO of
27:27
Speaker 10: vim Wi Kapor might do with that mix of businesses.
27:29
Speaker 10: They're sort of the last remaining really big industrial conglomerate
27:33
Speaker 10: that has not done a massive spin off. They spent
27:35
Speaker 10: off two smaller businesses in twenty eighteen, but we haven't
27:38
Speaker 10: seen the kind of full scale breakup we've seen elsewhere.
27:41
Speaker 1: All Right, brook thanks so much for joining us. As always,
27:43
Speaker 1: Brooks Subland and Calumnists. She covers industrials and deals for
27:46
Speaker 1: Bloomberg Opinion. Joining us here on all things industrial, including
27:50
Speaker 1: Minnesota mining and manufacturing.
27:53
Speaker 6: You're listening to the Team Cancer Live program, Bloomberg Markets
27:57
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28:01
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28:04
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28:08
Speaker 1: Our next guest, I would say it just feels like
28:10
Speaker 1: consistently bullish on the state of California. Several weeks ago,
28:14
Speaker 1: we discussed San Francisco, and the numbers bear out a
28:17
Speaker 1: bullish outlook there. Today it's the city of Angels, Los Angeles.
28:21
Speaker 1: Matt Winker joins us. He is the founder of Bloomberg News.
28:25
Speaker 1: He is the editor emeritus right now of Bloomberg News,
28:29
Speaker 1: joining us via zoom Matt. When I think LA, I
28:32
Speaker 1: think Hollywood, because I'm a former media analyst, and Hollywood's
28:36
Speaker 1: kind of on its backside these days with the actors
28:38
Speaker 1: on strike, the writers on strike. Tell us about what
28:41
Speaker 1: the numbers show you about the health of the LA economy.
28:45
Speaker 11: Always great to be with you, and truth be told,
28:48
Speaker 11: it's not just Hollywood actors and screenwriters. At some point
28:53
Speaker 11: this year, you've had airports, shuttle drivers, boat captains, crane operators,
28:58
Speaker 11: sanitation workers, duty mechanics, custodians, longshoremen which handled, by the way,
29:03
Speaker 11: forty percent of US imports from Asia, and nurses and
29:07
Speaker 11: school teachers all on strike. However, that pervasive perception of paralysis,
29:14
Speaker 11: if you like, is really belied by the reality that
29:19
Speaker 11: not only does Los Angeles still work, its ten largest
29:23
Speaker 11: publicly traded companies are number one in sales and employee
29:27
Speaker 11: growth among the same group of firms based in each
29:30
Speaker 11: of the ten most populated US cities now and for
29:33
Speaker 11: the foreseeable future. And what are we talking about The
29:36
Speaker 11: ten run the gamut from banks, financial services, insurance to
29:40
Speaker 11: consumer discretionary staples and industrials healthcare. They're doing better as
29:48
Speaker 11: a group than any top ten companies in any of
29:52
Speaker 11: the top ten US cities.
29:54
Speaker 4: Now, does this analysis that you've done here apply to
30:00
Speaker 4: having more people work from these firms in LA itself
30:04
Speaker 4: or is it just simply that these firms are based
30:07
Speaker 4: in LA they're successful. I guess I'm trying to connect
30:11
Speaker 4: to the home base of these companies and actually bringing
30:16
Speaker 4: benefits back for the city itself.
30:19
Speaker 11: Okay, so that's a great question, And of course, none
30:23
Speaker 11: of this would be meaningful unless, as you query, all
30:28
Speaker 11: the people we're talking about are in LA proper and
30:31
Speaker 11: we are talking about employee growth within Los Angeles, not
30:36
Speaker 11: outside Los Angeles, inside Los Angeles. And there really is
30:41
Speaker 11: no city that comes close to this double digit sales
30:46
Speaker 11: gain from its top ten firms. San Jose, by the way,
30:51
Speaker 11: is the closest firm at ten percent, and LA is
30:54
Speaker 11: way above that, and way above Chicago, Phoenix, Philadelphia, and Diego.
31:00
Speaker 11: They're all distant. Also, rans San Antonio and Dallas are
31:04
Speaker 11: going to have average revenue decline. So LA really is
31:10
Speaker 11: out front here and employee growth. It's the same story
31:14
Speaker 11: all over again. So and you can see that, by
31:17
Speaker 11: the way, on the Bloomberg terminal, if you were to
31:19
Speaker 11: graph Los Angeles, for example, against the Russell three thousand,
31:24
Speaker 11: which is big and small companies alike publicly traded, the
31:28
Speaker 11: gap between the two has widened, maybe close to a
31:32
Speaker 11: record actually.
31:33
Speaker 1: Right now, Hey, Matt, if I were to listen to
31:35
Speaker 1: the leaders of states like Florida and Texas, I would
31:38
Speaker 1: get a different narrative. It seems like that, Oh, everybody's
31:41
Speaker 1: leaving California the high taxes. That's not pro business. They're
31:44
Speaker 1: coming down here to lower no tax states. What's what
31:50
Speaker 1: is the data show you?
31:52
Speaker 11: You could fit Florida, maybe a couple of them inside California.
31:56
Speaker 5: Yep, without missing a being exactly you could fit you.
31:59
Speaker 11: Could probably all of corporate Florida, all of corporate Florida
32:04
Speaker 11: inside of LA and not miss abeat. The point is
32:07
Speaker 11: that California is huge, all right, Let's be clear about this.
32:12
Speaker 11: So there's been a according to the Census, you know,
32:15
Speaker 11: three percent decline in population since twenty twenty in Los Angeles.
32:18
Speaker 11: Having said that California is thirty nine million people, Okay,
32:22
Speaker 11: that's at least ten million more than any other state.
32:25
Speaker 11: Texas is number two, and then corporate California dwarfs corporate anywhere,
32:32
Speaker 11: Corporate Texas, Corporate New York, corporate Florida. You could fit
32:36
Speaker 11: any of those economies comfortably into California without so much
32:43
Speaker 11: as a bulge. That's the reality. And you know, look,
32:49
Speaker 11: George Orwell said this best. He said, you know, to
32:52
Speaker 11: see what is in front of one's nose needs a
32:54
Speaker 11: constant struggle. And that's really the reality for California, particularly
32:59
Speaker 11: Los Angele is that it's a very diverse city. By
33:02
Speaker 11: the way, it's still got the largest manufacturing base that's
33:06
Speaker 11: five hundred thousand plus people of any city in the
33:09
Speaker 11: United States. So it's not only you know, a place
33:13
Speaker 11: where you have if you like Hollywood screenwriters, but you
33:17
Speaker 11: also have aerospace going back decades, and that's just a
33:22
Speaker 11: bigger footprint than anywhere else.
33:24
Speaker 8: You know.
33:24
Speaker 4: Interestingly, Los Angeles is one of those places that's struggling
33:27
Speaker 4: with these these empty office or not empty, but much
33:33
Speaker 4: more much high office buildings with very high vacancy rates,
33:37
Speaker 4: to the point that their owners are sometimes giving the
33:42
Speaker 4: keys back to the banks. Do you get any sense
33:46
Speaker 4: of how Los Angeles is going to tackle that problem.
33:49
Speaker 4: Is it any different than somewhere like San Francisco might
33:53
Speaker 4: be trying to tackle that problem.
33:57
Speaker 11: Well, look, it's early days. We're talking about a peer
34:00
Speaker 11: really since the pandemic, which was unprecedented in our lifetime,
34:04
Speaker 11: So who's to say, you know, what kind of calamity
34:08
Speaker 11: this really is. Certainly in the short term it seems so.
34:12
Speaker 11: But look, one of the people that we have followed
34:17
Speaker 11: closely is a thirty three year old co founder and
34:21
Speaker 11: chief executive officer of a company called Relativity Space. It's
34:24
Speaker 11: an eight year old startup. Made the first three D
34:28
Speaker 11: printed rocket to enter space. That's the one hundred and
34:32
Speaker 11: ten foot Tehran. One is the largest metal object three
34:36
Speaker 11: D printed. Okay, it's right in the backyard of Los Angeles.
34:39
Speaker 11: It's actually in Long Beach, but it's close enough, and
34:42
Speaker 11: their offices are in Los Angeles. And he'll tell you,
34:47
Speaker 11: speaking about downtown and everything else, that most of his
34:50
Speaker 11: friends are engineered, but he's friends with artists, people in fashion,
34:55
Speaker 11: people in other industries. And that's the kind of innovation
34:58
Speaker 11: and mentality says that with take to do something as
35:01
Speaker 11: crazy as put a million people on Mars and I
35:05
Speaker 11: forgot to mention he's from Plano, Texas, right, Okay, he
35:10
Speaker 11: loves California. So be careful. You know what the prevailing
35:15
Speaker 11: narrative is, because this being Bloomberg, you look at the data, and,
35:19
Speaker 11: as our owner likes to say, you know, in God
35:22
Speaker 11: we trust, but everybody else bring data.
35:25
Speaker 5: Hey, Matt, thanks so much for joining us.
35:27
Speaker 1: Matt Winkler, he is the founder of Bloomberg News fascinating
35:30
Speaker 1: column on the great city of Los Angeles and how
35:33
Speaker 1: well it is doing economically.
35:35
Speaker 5: At this point, you're listening to the tape.
35:37
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35:41
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35:45
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35:46
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35:55
Speaker 1: Goldman is offloading a wealth unit to two hundred and
35:58
Speaker 1: forty billion dollar money manager. Shrinana Rojen reported that story.
36:02
Speaker 1: He joins us here in our Bloomberg Interactive Broker studio,
36:04
Speaker 1: shre what is Goldman doing here?
36:06
Speaker 5: I thought they liked the wealth management business.
36:08
Speaker 12: Well, they still like the wealth management business. But what
36:10
Speaker 12: they're doing here is another strategic flip flop, and we've
36:13
Speaker 12: seen a little bit of that over the course of
36:15
Speaker 12: the last twelve months. This is an ria investment advisory
36:18
Speaker 12: business that purchased in twenty nineteen for seven hundred and
36:22
Speaker 12: fifty million dollars. Goldman has a dominant presence when catering
36:26
Speaker 12: to the ultra rich, the ultra high net worth individuals.
36:30
Speaker 12: No one does it better than Goldman. You know, people
36:32
Speaker 12: who have twenty five thirty fifty million dollars per account.
36:36
Speaker 12: The most affluent market is one where people could have
36:40
Speaker 12: a million dollar account on average. One point to one
36:43
Speaker 12: point three million dollar account is what they got when
36:45
Speaker 12: they purchased United Capital with about twenty two thousand clients.
36:49
Speaker 12: Four years in, they've realized that really is not where
36:52
Speaker 12: they want to be. It has been a little bit
36:54
Speaker 12: of a drag on their profit pre tax margins as well,
36:57
Speaker 12: so they've decided to shed that. They're selling it to
37:00
Speaker 12: this two hundred and forty billion dollar wealth manager called
37:03
Speaker 12: Creative Planning, which is run by a very interesting gentleman
37:06
Speaker 12: by the name of Peter Muluk. But for Goldman What
37:09
Speaker 12: that means is you refocus your attention on the part
37:13
Speaker 12: of the business that you're really good at, which is
37:15
Speaker 12: serving the ultra rich. It mirrors some of their stumbles
37:20
Speaker 12: with consumer banking, which is something we've spoken about a
37:22
Speaker 12: lot over the course of the last year. Again another
37:25
Speaker 12: way to expand beyond their core roots and go into
37:29
Speaker 12: the retail banking markets. And in many ways, I think
37:31
Speaker 12: it's fair to call it an attempt that flopped, and
37:34
Speaker 12: they're getting out of much of that through trying to
37:38
Speaker 12: sell off its credit cards businesses, trying to sell off
37:40
Speaker 12: the installment lender, shutting off its lending platform for consumers.
37:45
Speaker 12: All that they've left is that Marcus Savings business, which
37:48
Speaker 12: by the way, is very successful, is a big benefit
37:51
Speaker 12: to Goldman because it doesn't mind accumulating deposits that way
37:56
Speaker 12: because what it has to pay out on that is
37:57
Speaker 12: less than what it has to pay out when it
37:59
Speaker 12: has to raise my from the market, so that they
38:02
Speaker 12: will stick with. But pretty much every other vestige of
38:05
Speaker 12: their consumer banking for a is either being you know,
38:09
Speaker 12: chucked overboard or in the process of being chucked overboard.
38:13
Speaker 4: Well, yeah, so this was purchased United Capital. This RII
38:16
Speaker 4: was purchased for seven hundred and fifty million dollars back
38:20
Speaker 4: in twenty nineteen. Is that where does that seven hundred
38:23
Speaker 4: fifty million dollars go.
38:25
Speaker 12: That's a good question because when Goldman announced the deal,
38:28
Speaker 12: which came a little bit after our story a few
38:31
Speaker 12: minutes back, they did confirm the sale of this business,
38:34
Speaker 12: they didn't give us a price, so we don't know
38:36
Speaker 12: what price this platform fetched. But they do have an
38:39
Speaker 12: important line in their press release that says when this
38:41
Speaker 12: deal closes, which they expect by the end of the
38:43
Speaker 12: fourth quarter, there will be a gain. There will be
38:45
Speaker 12: an accounting gain. That doesn't necessarily mean that the buyer
38:48
Speaker 12: is paying more than seven hundred and fifty million dollars,
38:51
Speaker 12: But the way with most of these transactions is you
38:53
Speaker 12: buy something, you have some goodwill. That goodwill gets amortized,
38:57
Speaker 12: appreciates over the years. Relative to that, I think you
39:01
Speaker 12: will see an accounting gain. And I think that's what
39:03
Speaker 12: they're signating at rather than necessarily telling us that this
39:06
Speaker 12: is something where they will get in excess of seven
39:08
Speaker 12: to fifty million.
39:08
Speaker 1: Sure, the beginning of this discussion, you characterize this deals
39:11
Speaker 1: perhaps a flip flop. Investors don't like flip flops. What's
39:16
Speaker 1: going on at the senior ranks of Goldman sacks here
39:18
Speaker 1: a lot of flip flopping in terms of what they own,
39:20
Speaker 1: what they don't own, strategies.
39:21
Speaker 12: Two ways to look at it. Right, When David Solomon
39:24
Speaker 12: took over in October twenty eighteen, there were two key pillars,
39:27
Speaker 12: which is, expand the businesses you're really good at, grow earnings.
39:31
Speaker 12: There they benefited hugely benefited from that boom in trading
39:35
Speaker 12: and deal making set off by the pandemic and every
39:38
Speaker 12: other dynamic that continued after that. But the other important
39:41
Speaker 12: pillar for David Solomon and his management team was to
39:43
Speaker 12: try and improve the stock multiple, try and convince investors
39:48
Speaker 12: the stock is worth a lot more that their price
39:50
Speaker 12: to book creature, price earnings, whatever fancy technical metric you
39:54
Speaker 12: want to throw out there, deserves more. They haven't really
39:57
Speaker 12: succeeded in doing that. A lot of book value growth
40:01
Speaker 12: because of earning's growth, but not any success in convincing
40:05
Speaker 12: investors that you can do the multiple growth. Maybe now
40:09
Speaker 12: that they've done a strategy pivot or have done the
40:11
Speaker 12: slip flop, there perhaps in the place where they want
40:14
Speaker 12: to be, and maybe investors come on board.
40:16
Speaker 1: All right, Sre, thanks so much for joining us. Glad
40:17
Speaker 1: you could join us here in studio. Shri Nana Rogen
40:20
Speaker 1: from Bloomberg News. He covers Goldman Sacks. He covers a
40:22
Speaker 1: big investment banks. He is all over Goldman Sachson, including
40:25
Speaker 1: some of the recent changes in strategy.
40:28
Speaker 6: You're listening to the tape cats are live program Bloomberg
40:31
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40:35
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40:36
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40:38
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40:46
Speaker 1: Whyant Electric Industries? It stocks up forty three percent? Looks
40:50
Speaker 1: like the company saying, hey, wait a minute, maybe we're
40:53
Speaker 1: not so much to blame. Maybe the there's a they're
40:55
Speaker 1: putting out a statement on. Maybe there's some other causes
40:58
Speaker 1: as and.
40:59
Speaker 4: As Billy talking about it still down sixty seven percent
41:02
Speaker 4: this year.
41:02
Speaker 5: Yep.
41:03
Speaker 1: So it's interesting. So I have to get the latest here.
41:05
Speaker 1: But let's do that with an analyst who covers the bonds.
41:07
Speaker 1: Here covers the credit side of the utilities. Jamon Patel.
41:10
Speaker 1: He's a senior Fixed and Come strategist for Bloomberg Intelligence,
41:14
Speaker 1: joining us via zoom. Jamie, what do you know about
41:17
Speaker 1: what's happening here with Hawaiian Electric? Quite the turnaround here.
41:21
Speaker 8: Well, you know.
41:23
Speaker 13: What, we're we're really very much in the early days here, right,
41:27
Speaker 13: So you're gonna you've had allegations being filed, you've had
41:30
Speaker 13: some responses, you've had some findings. But over the next
41:33
Speaker 13: you know, weeks, months, as as a pg and Ek
41:35
Speaker 13: showed us, this sort of thing can take a really
41:37
Speaker 13: long time. There'll be more findings, there'll be more allegations
41:40
Speaker 13: and so on. But this latest one seeds to be
41:42
Speaker 13: very interesting. Up until we you know this, this particular
41:46
Speaker 13: statement that came out from the company, Hawaiian Electric had
41:49
Speaker 13: really not mentioned anything about de energizing its lines. In fact,
41:52
Speaker 13: it said that it didn't de energize its lines simply
41:55
Speaker 13: because they were concerned about emergency usage hospitals, et cetera
42:01
Speaker 13: that would you know, be damaged obviously if if the
42:04
Speaker 13: if the powers turned off. But today they came out
42:07
Speaker 13: with a statement saying that the first fire, the one
42:09
Speaker 13: that occurred in the morning, had been contained and then
42:12
Speaker 13: according to the Maui Department of Fire, it had been extinguished.
42:17
Speaker 13: Then the second fire, which was the one that I
42:19
Speaker 13: believe created most of the damage, didn't really start to
42:21
Speaker 13: about six hours later, and they apparently, or a little
42:25
Speaker 13: bit more than six hours they had de energized their lines,
42:27
Speaker 13: presumably because of the first fire. So at the end
42:31
Speaker 13: of the day, it really depends upon the findings that
42:34
Speaker 13: come out of the next few weeks and months, what
42:36
Speaker 13: the courts decide, uh, and then how that liability is
42:39
Speaker 13: is apportioned.
42:40
Speaker 1: All right, So just the Bloomberg reporting here, Hawaii utility source,
42:44
Speaker 1: after pointing blame for the fire at the county Hawaiian
42:47
Speaker 1: Electric says power lines de energized before the fire.
42:52
Speaker 4: Yeah, And I guess the the interesting bit is there
42:55
Speaker 4: there is that they're sort of drawing this line this
42:57
Speaker 4: was not a continuation of the first fire, but rather
43:00
Speaker 4: a second fire.
43:01
Speaker 8: And of course, yeah, exactly exactly.
43:05
Speaker 13: I think I think what they you know, what, what
43:07
Speaker 13: the litigants, maybe not the county so much, but certainly
43:11
Speaker 13: the litigants will will try to claim and try.
43:13
Speaker 8: To prove is that the first the first fire.
43:16
Speaker 13: Had not been extinguished and and had eventually led to
43:19
Speaker 13: the second fire. If that's the case, then the question becomes, well,
43:22
Speaker 13: is is Maui County, through the Department of Fire liable
43:26
Speaker 13: at the end of the day, I you know, and
43:29
Speaker 13: and in addition to all this, I think you sort
43:31
Speaker 13: of have to kind of take a step back, you
43:34
Speaker 13: so you know, what's going to affect the bonds uh,
43:36
Speaker 13: and and the equity, which is you know, where where
43:38
Speaker 13: we'd started this. The whole question depends upon how much
43:43
Speaker 13: the liability is, how much h E is is determined
43:47
Speaker 13: to be responsible for, how much of it will they share?
43:51
Speaker 9: Uh?
43:51
Speaker 13: And then once that's determined, will that be tax deductible
43:54
Speaker 13: for the company, because that obviously reduces the overall.
43:57
Speaker 8: Liability, And then where.
43:59
Speaker 13: The the regulators will allow them to recover that liability
44:03
Speaker 13: as well as the obviously the restoration costs that they
44:07
Speaker 13: have to go through through rates. If they don't, that's
44:10
Speaker 13: you know, obviously not good for the bonds and and
44:13
Speaker 13: certainly not good for the equity.
44:15
Speaker 1: So, Jamie, what has the company done to date to
44:18
Speaker 1: maybe from a balance sheet perspective, to prepare for, you know,
44:21
Speaker 1: maybe some some downside scenarios.
44:24
Speaker 13: Well, so far they've they've you know, there's not much
44:26
Speaker 13: they can do on the balance sheet side, but they.
44:28
Speaker 8: Have tried to shore up their liquidity.
44:29
Speaker 13: They drew down the two revolvers that they have, one
44:33
Speaker 13: for one hundred and seventy million up at the parent
44:35
Speaker 13: and then two hundred million down at the intermediate parent
44:37
Speaker 13: Hawaiian Electric Company. So that plus any dividends that may
44:42
Speaker 13: come up from American Savings Bank and any cash that
44:45
Speaker 13: they have on hand, will hopefully take them through the
44:49
Speaker 13: restoration period through to the end of the year so
44:51
Speaker 13: that they can they can get their power up and
44:55
Speaker 13: running to all the all the customers that don't have it.
44:58
Speaker 4: At this point, I'm looking at bonds of Hawaiian Electric
45:03
Speaker 4: Do in December twenty twenty eight. It looks like they're
45:06
Speaker 4: training around eighty six cents on the dollar. How should
45:10
Speaker 4: we interpret that, jaymen? How dire are things for the
45:16
Speaker 4: company with respect to its credit worthiness?
45:20
Speaker 13: So you have to sort of differentiate between the bonds
45:22
Speaker 13: up at the parent level and then the intermediate holding
45:25
Speaker 13: company and down at the utilities the parent level bonds have,
45:28
Speaker 13: you know, and this is sort of what differentiates Hawaiian
45:31
Speaker 13: Electric from PG and E pgn E had just the
45:33
Speaker 13: electric utility as its only subsidiary. Hawaiian Electric has American
45:38
Speaker 13: Savings Bank as a separate subsidiary through which they can
45:42
Speaker 13: upstream dividends in the normal course of business to continue
45:46
Speaker 13: to service their debt. Down at the utility level, you
45:50
Speaker 13: don't have that. Everything is purely dependent upon the earnings
45:53
Speaker 13: at the utility in terms of the ability to service debt.
45:56
Speaker 13: But I think you know, we haven't seen the bonds
45:58
Speaker 13: move as much today as certainly not as much as
46:01
Speaker 13: the share prices. I think you know two reasons for that.
46:04
Speaker 13: One is the liquidity most of these bonds are privately placed,
46:08
Speaker 13: don't trade as much as you would expect. But two
46:11
Speaker 13: also the junk ratings on the bonds, right, and the
46:13
Speaker 13: bonds are going to trade in line with their ratings
46:16
Speaker 13: until there is a change those ratings.
46:18
Speaker 5: So Jim.
46:18
Speaker 1: And for these utilities, whether it's you know, you know
46:21
Speaker 1: the at in California that we saw several years ago
46:24
Speaker 1: or here in Hawaii, there's just a ton of risk
46:26
Speaker 1: that these utilities have in a world of climate change
46:29
Speaker 1: and more and more fires, some of which are caused
46:33
Speaker 1: by utility lines. Is there any way for them to
46:36
Speaker 1: ensure against that? Or if you're a creditor or you're
46:39
Speaker 1: a shareholder. You just have to assume this growing risk
46:43
Speaker 1: going forward.
46:45
Speaker 8: Yeah.
46:45
Speaker 13: So, I you know, most of the transmission assets that
46:48
Speaker 13: are owned by utilities, and those are the ones that
46:50
Speaker 13: are you know, generally the most susceptible, whether it's to
46:52
Speaker 13: hurricanes or to wildfires, are generally not in short, and
46:57
Speaker 13: the understanding there is that if they are damaged, regulators
47:01
Speaker 13: will allow the utility to recover through increased rates, recovery
47:06
Speaker 13: of those assets, and to rebuild those assets. Certainly, that's
47:09
Speaker 13: what we saw with Entergen New Orleans when when Katrina hit.
47:12
Speaker 13: That's what we saw with CNP and and FP and
47:15
Speaker 13: L when when both those were hit by hurricanes. You know,
47:21
Speaker 13: it remains to be seen what's gonna happen over here.
47:23
Speaker 8: At PG and E there wasn't the full recovery.
47:26
Speaker 13: Because PGNU was found to be liable to to the
47:29
Speaker 13: significant extent. So I think I think utilities are not
47:33
Speaker 13: those boring UH investments that that they have traditionally been,
47:39
Speaker 13: you know, sort of buying and and put away. I
47:43
Speaker 13: think you've got more risk perhaps at at at individual
47:47
Speaker 13: utilities then at the holding company to the extent that
47:49
Speaker 13: the holding company owns more than one utility. Diversification is
47:53
Speaker 13: probably the way to go. You have a utility that's
47:55
Speaker 13: operating in one jurisdiction, uh and in in different geographic
48:01
Speaker 13: localities as opposed to another. So when you've got multiple utilities,
48:05
Speaker 13: you've got a little bit of diversification that helps to
48:08
Speaker 13: prevent a hit up at the parent level and for
48:12
Speaker 13: the equity.
48:13
Speaker 4: Yeah, that's interesting. And is PG and E is that
48:16
Speaker 4: the sort of situation that we really should see as
48:20
Speaker 4: indicative of how this might play out? Or do you
48:23
Speaker 4: think we could see some sort of answer as to
48:25
Speaker 4: who's liable, et cetera more quickly. And I'm sorry we
48:29
Speaker 4: have only about twenty seconds here.
48:32
Speaker 13: So in terms of your question, is are we wondering
48:37
Speaker 13: how this is going to play out in relative to
48:40
Speaker 13: PG and E. So PG and E's you know, obviously
48:43
Speaker 13: you had a much bigger utility. The advantage that PG
48:48
Speaker 13: and E had as it came out of bankruptcy was
48:51
Speaker 13: it shared California primarily with two other solid utilities, investment
48:56
Speaker 13: grade utilities. So California was able to set up this
48:59
Speaker 13: wildfire farm twenty billion dollars plus, which all of the
49:02
Speaker 13: utilities have had to contribute into, and will continue to
49:05
Speaker 13: contribute into, and will be at least partially be able
49:08
Speaker 13: to recover through rates. That's sort of I don't want
49:12
Speaker 13: to use the word subsidizes, but maybe that is the
49:14
Speaker 13: one that comes first to mind, subsidized PG and e's
49:18
Speaker 13: liabilities with the other two.
49:21
Speaker 8: But of course it works all ways.
49:22
Speaker 5: Right yep, all right, Jamie, thanks so much for joining us.
49:25
Speaker 1: We really appreciate you getting some of your analysis here today,
49:27
Speaker 1: big news for Hawaiian Electric jam and Pateel, senior fixed
49:31
Speaker 1: income strategists for Bloomberg Intelligence, joining us from Bloomberg Princeton Campus.
49:38
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49:41
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49:45
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49:51
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49:54
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49:56
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