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How Trump's Proposed Travel Ban Hurts Tourism · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
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• 0:32
  Speaker 1: Following the Supreme Court decision giving the President Trump's administration
• 0:37
  Speaker 1: leeway to enforce certain parts of their travel ban, we
• 0:42
  Speaker 1: are going to see some of that implemented starting an
• 0:44
  Speaker 1: a pm tonight Eastern time, UH, and we're getting a
• 0:48
  Speaker 1: little bit more of a sense of what the guidelines
• 0:50
  Speaker 1: are for, what the close relationships are for people who
• 0:54
  Speaker 1: will be allowed into the country for more and some
• 0:56
  Speaker 1: of the ramifications of this travel ban. I want to
• 0:59
  Speaker 1: bring in Brian and Egger. He's senior Gaming and Lodging
• 1:02
  Speaker 1: analyst for Bloombrick Intelligence and he joins us here in
• 1:04
  Speaker 1: the Bloombrig eleven three oh studios. Brian, I wanted to
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  Speaker 1: start first with a sense of how much, if at all,
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  Speaker 1: UH tourism, people just visiting the country or people UH
• 1:16
  Speaker 1: moving here has been affected by the proposition of the
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  Speaker 1: travel ban and some of the rhetoric that we've heard
• 1:23
  Speaker 1: out of the administration. So I think you want to
• 1:25
  Speaker 1: parse between the direct effects and the indirect effects. Directly,
• 1:28
  Speaker 1: the impact has been to date pretty limited. Remember, the
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  Speaker 1: top source markets from the Middle East coming to the
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  Speaker 1: US are Israel, Turkey, Saudi Arabia clearly not affected by
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  Speaker 1: this the Middle East. Even if you throw in Mexico,
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  Speaker 1: where there's been travel concerns, uh, those source markets are
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  Speaker 1: less than one percent of the hotel stays for companies
• 1:49
  Speaker 1: like Hilton, so it's it's com comparatively speaking, a small portion.
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  Speaker 1: The bigger concerned is the indirect effects, you know, whether
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  Speaker 1: it's the stronger U S dours or broader travel policy concerns.
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  Speaker 1: Mary for example, has seen inbound arrivals from markets like
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  Speaker 1: Mexico in the Middle East down that's in a in
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  Speaker 1: a market where inbound international travel overall is flat, those
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  Speaker 1: source markets have seen declines in inbound travel. Hard to
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  Speaker 1: tell whether that's from currency. I think that's rough more
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  Speaker 1: or less this year compared to last year exactly, And
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  Speaker 1: they made that comment recently in an industry conference, So
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  Speaker 1: hard to tell whether that's coming from a stronger dour
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  Speaker 1: or the general broader concern that the US is somehow
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  Speaker 1: riskier or less hospitable to travelers. But it does raise concerns,
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  Speaker 1: and those concerns have have been articulated by hotel executives.
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  Speaker 1: Is there any evidence to suggest, Brian, that maybe there
• 2:44
  Speaker 1: is a positive effect that people will feel that being
• 2:46
  Speaker 1: in the United States as a tourist destination is a safer,
• 2:50
  Speaker 1: more secure environment. UM, there is that possibility. The offset
• 2:54
  Speaker 1: is if you are a group travel plan or overseas
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  Speaker 1: and you're trying to locate people at the future events
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  Speaker 1: UH in the United States and your alternative choices having
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  Speaker 1: an event on Canada or elsewhere, that the US might
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  Speaker 1: be perceived to be somewhat riskier if there's a possibility
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  Speaker 1: some of your perspective group visitors might not be able
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  Speaker 1: to enter the country. What have some of the hotel
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  Speaker 1: executive has been saying that they're doing to counter UH
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  Speaker 1: this effect? Or are they do they have any control
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  Speaker 1: over it? UH women to control over things like policy directly.
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  Speaker 1: But I was at the m y U Hospitality Conference
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  Speaker 1: a couple weeks ago. A lot of talk about Brand
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  Speaker 1: America and trying to publicize the brand of the United
• 3:33
  Speaker 1: States being open for business for travelers. The fear they
• 3:36
  Speaker 1: have is there's another lost decade of travel, much as
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  Speaker 1: what we had after O eleven, where for a variety
• 3:43
  Speaker 1: of reasons there might be a reduction in inbound visits
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  Speaker 1: to the United States. The labor implications are also worth
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  Speaker 1: noting because this, as you just described, may have an
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  Speaker 1: effect on employment trends from people from Mexico. And it's true.
• 4:00
  Speaker 1: Go ahead, yeah, I was gonna say that in states
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  Speaker 1: like Nevada. Nevada employees, a large number of workers in
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  Speaker 1: the hospitality industry were according to UH, PEW and other
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  Speaker 1: research poll organizations, there's some evidence that the large percentage
• 4:14
  Speaker 1: of those individuals may be undocumented. So if there were
• 4:17
  Speaker 1: to be more stringent enforcement or focus on those on
• 4:21
  Speaker 1: those rules, UH difficult to quantify, but that could potentially
• 4:25
  Speaker 1: affect or disrupt the labor pool. If it reduces the
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  Speaker 1: labor to pool, could actually potentially resulted in increase in
• 4:32
  Speaker 1: labor costs because of reduction and supply of workers. Much
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  Speaker 1: of that is based on UH speculation, but you know,
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  Speaker 1: those are the broader concerns. If in fact, that particular
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  Speaker 1: topic gets more scrutiny. Well, I don't know if you've
• 4:44
  Speaker 1: got a chance to see the story, but this comes
• 4:46
  Speaker 1: out of Washington, out of the post there. Apparently there's
• 4:49
  Speaker 1: a restaurant in Baltimore which was visited by immigration and
• 4:53
  Speaker 1: Customs enforcement agent demanding the papers of the people that
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  Speaker 1: worked at this dock side restaurants called boat House Canton.
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  Speaker 1: And as a result of demanding these papers, all thirty
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  Speaker 1: workers quit the staff. So they I mean the kitchen
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  Speaker 1: staff resigned as a as a result of this. So
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  Speaker 1: the implications can not just be you know, large scale
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  Speaker 1: changes in tourism and travel, but can affect very uh
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  Speaker 1: specific businesses this way absolutely well, you know, I have
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  Speaker 1: to wonder though the hotel industry is under other pressure
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  Speaker 1: aside from the immigration ban from specific countries, UH and
• 5:36
  Speaker 1: and just the general geopolitical environment. But it's being you know,
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  Speaker 1: seriously challenged by Airbnb and other disintermediation sites that are
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  Speaker 1: looking to pair people with homes that happen to be vacant.
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  Speaker 1: I mean, do you have a sense of whether perhaps
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  Speaker 1: hotel executives are using this as an excuse to cover
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  Speaker 1: for maybe business they've lost. I wouldn't say it's an excuse.
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  Speaker 1: But again, it's difficult when you see declines in travel
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  Speaker 1: from certain UH, non US source markets, whether that's related
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  Speaker 1: to something specifically like currency or a structural industry change,
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  Speaker 1: or it's related to travel policy. It's somewhat difficult to stay,
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  Speaker 1: and the lodging cycle is maturing, room RAAK growth is
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  Speaker 1: slowing down. UH. Some of that is largely cyclical. UH.
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  Speaker 1: Certainly the hotel industry has been adapting to the reality
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  Speaker 1: of competition from um entities like Airbnb, and then of
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  Speaker 1: course you have this overlay of uncertain travel policies from
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  Speaker 1: the U. S. Government. So it's difficult to parse in
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  Speaker 1: terms of which of these effects are having the most
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  Speaker 1: discernible impact, but certainly they all they all come into
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  Speaker 1: play here. I want to thank you very much for
• 6:40
  Speaker 1: coming in and sharing this information with us. Brian Egger
• 6:42
  Speaker 1: as our senior gaming and Lodging analyst for Bloomberg Intelligence,
• 6:47
  Speaker 1: speaking about the travel ban, that partial travel ban that
• 6:51
  Speaker 1: is expected to go into force at eight p m.
• 6:54
  Speaker 1: Eastern PIM. I'm still taken by what Brian said that
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  Speaker 1: some of the big hotel executives said that at visits
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  Speaker 1: from people from the Middle East of Mexico were down
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  Speaker 1: twenty here over year. It's presenting a challenge. And I
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  Speaker 1: just want to offer a footnote having to do with
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  Speaker 1: that restaurant in Baltimore boat House. Uh. The owner says
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  Speaker 1: every worker had passed the restaurant's vetting process and appeared
• 7:16
  Speaker 1: to be in the United States legally. So just to
• 7:19
  Speaker 1: give you that detail him. There was a fascinating story
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  Speaker 1: today on the Bloomberg talking about the I R S
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  Speaker 1: probing this Chronic Disease Fund, which is to nonprofit right
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  Speaker 1: tax exempt status, and it has to do with the well,
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  Speaker 1: a couple of companies that are involved in this cell
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  Speaker 1: Jean Genetech, Novartis and Buyer. And here to tell us more,
• 7:51
  Speaker 1: we've got Robert Langreth. He is our expert when it
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  Speaker 1: comes to healthcare reporting. Robert, thanks very much for being
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  Speaker 1: with us. Maybe you could describe how is it that
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  Speaker 1: these companies are connected to this nonprofit and what is
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  Speaker 1: the I R S saying about their participation. Well, so
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  Speaker 1: there are these these charities that have spun up in
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  Speaker 1: the wake about ten years ago in the Medicare drug
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  Speaker 1: band that came about, and there are these charities that
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  Speaker 1: have spun up that essentially help patients pay for their
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  Speaker 1: co pays are really expensive drugs for cancer and multiple grosses.
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  Speaker 1: And these charities that turns out are largely funded by
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  Speaker 1: the drugmakers themselves. But they're uh and it turns out
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  Speaker 1: there and there's controversy over, you know, over are these
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  Speaker 1: are these charities essentially you know, helping you know, by
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  Speaker 1: paying for patients co pays and Medicare and other government programs.
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  Speaker 1: Are they essential you know, helping the government uh, help
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  Speaker 1: helping the drugmakers, you know, bill Medicare for some really
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  Speaker 1: really expensive drugs and helping drugmakers keep up prices very
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  Speaker 1: very high. So one of these charities, it turns out,
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  Speaker 1: we found out that the US Internal Revenue Service opened
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  Speaker 1: approbe into its tax exempt status and they are essentially
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  Speaker 1: from the court followings that you can tell the i
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  Speaker 1: RS is looking at, you know, whether the charity was
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  Speaker 1: a quote conduit for drug makers, was giving impermissible benefits
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  Speaker 1: to its corporate donors. And what that means, according to
• 9:18
  Speaker 1: one of the tax experts we looked at is that
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  Speaker 1: essentially the i r S is exploring whether whether the
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  Speaker 1: the charity essentially may have operated more like instead of
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  Speaker 1: being a real tax charity for the public. They've operated
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  Speaker 1: more like you know, but an effect more like a
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  Speaker 1: marketing on the arm of their drug company donors. Well, Robert,
• 9:41
  Speaker 1: let me, let me just try to make sure that
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  Speaker 1: I understand the flow of cash here. So, pharmaceutical companies
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  Speaker 1: set up a nonprofit organization to help poor people obtain
• 9:53
  Speaker 1: medications that otherwise might be too expensive for them. And
• 9:56
  Speaker 1: as part of this program, the nonprofit seeks any reimbursements
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  Speaker 1: that it could get from Medicaid or medicare as well
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  Speaker 1: as donations from who. Yeah, So basically someone the pharmaceutical
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  Speaker 1: company does not set up a charity, a charity like
• 10:13
  Speaker 1: is is supposed to be when they say they are independent.
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  Speaker 1: And this this charity chronic that these funds says it
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  Speaker 1: is court fully independent. But it turns out that in
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  Speaker 1: two thousand eleven, the year that the IRS analyzed, you know,
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  Speaker 1: almost all its donations were from drug companies. Uh and uh.
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  Speaker 1: And it turns out and these donations were earmarked for
• 10:35
  Speaker 1: specific disease funds, and it often had often turned out
• 10:39
  Speaker 1: and that that a law, the vast majority of the
• 10:44
  Speaker 1: money that the dominant donor would give would offensively flow
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  Speaker 1: back the patients taking the donor companies drugs Robert, what
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  Speaker 1: I what this is? But what I want just to
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  Speaker 1: ask you more specifically. So, if you're a company and
• 11:00
  Speaker 1: you donate money to a tax exempt organization, you get
• 11:02
  Speaker 1: the deduction for making that contribution. Correct supposedly, Okay, so
• 11:07
  Speaker 1: now you've got a tax deduction. But it's almost like
• 11:10
  Speaker 1: a washing machine, a spin cycle, because the money goes
• 11:12
  Speaker 1: to the nonprofit. But then the nonprofit uses that very
• 11:16
  Speaker 1: money to actually buy the drugs from the company that
• 11:19
  Speaker 1: gave the money in the first place. Se the nonprofit
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  Speaker 1: uses the money to help patients getting to pay their
• 11:26
  Speaker 1: co pays for drugs for that disease. And yes, the
• 11:28
  Speaker 1: i r S analysis showed that most patients and many
• 11:31
  Speaker 1: of these funds, like for example, a cell Gene was
• 11:34
  Speaker 1: a big donor for fund for multiple loma, but it
• 11:38
  Speaker 1: turned out that nine four point five percent twous and
• 11:41
  Speaker 1: eleven of the money the charity spent on helping patients
• 11:45
  Speaker 1: co pays when the patients taking cell gene drugs, for example.
• 11:50
  Speaker 1: And so the i r S IS sent summons is
• 11:53
  Speaker 1: to six different drug companies asking for more information about
• 11:56
  Speaker 1: their donations, including Bilogin, Johnson, and Johnson, Arose and nov
• 12:00
  Speaker 1: artists and there, and they're looking into this very carefully
• 12:03
  Speaker 1: and you know whether and whether into specifically whether it
• 12:09
  Speaker 1: is charity you know, has a right to retain as
• 12:12
  Speaker 1: tax exempt status, so this could and and yeah, it's
• 12:21
  Speaker 1: a it's a wonderful story. Robert, thank you very much
• 12:23
  Speaker 1: for bringing it to our attention. Robert Langrath is a
• 12:26
  Speaker 1: healthcare reporter for Bloomberg And Uh, I really recommend the story.
• 12:30
  Speaker 1: A charity funded by drugmakers draws I r S probe
• 12:34
  Speaker 1: on tax exemption. So very interesting because the amount of
• 12:39
  Speaker 1: money that we're talking about, for example, Selgen gave forty
• 12:43
  Speaker 1: two million, Genetech fourteen million, nov Artists three four million,
• 12:47
  Speaker 1: and so on. Well, to me, the issue though, really
• 12:49
  Speaker 1: is what you exactly nailed, which which is the tax
• 12:52
  Speaker 1: exemption they get for putting revenue back in their pockets.
• 12:55
  Speaker 1: Kind of interesting. Uh, spin cycling, do you know that
• 13:14
  Speaker 1: the twenty seven thousand flights and two point two million
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  Speaker 1: passengers take to the guys in the United States every day?
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  Speaker 1: And that means a lot of coordination and unfortunately it
• 13:27
  Speaker 1: means a lot of delays for many travelers. Here to
• 13:29
  Speaker 1: tell us more about the air Traffic Control System is
• 13:32
  Speaker 1: James Burnley. He is a partner at the Venable, but
• 13:36
  Speaker 1: it's more importantly for our topic today. He is the
• 13:39
  Speaker 1: former U S Secretary of Transportation from and just full disclosure.
• 13:45
  Speaker 1: Venable is a lobbying firm which represents American Airlines. Mr Burnley,
• 13:49
  Speaker 1: thank you very much for joining us. Can you describe
• 13:52
  Speaker 1: the current state of the air traffic control system? Good morning.
• 13:57
  Speaker 1: I'm gladed to be with you. The system is very safe,
• 14:01
  Speaker 1: and our controllers keep it that way by gradually slowing
• 14:06
  Speaker 1: it down because they're working without dated equipment UM and
• 14:11
  Speaker 1: we are at at this moment at the lowest ub
• 14:15
  Speaker 1: in twenty eight years in terms of fully qualified controllers.
• 14:19
  Speaker 1: But again I emphasize the system is safe. There is
• 14:22
  Speaker 1: a UM major effort underway in Congress as we speak
• 14:28
  Speaker 1: h to separate the air traffic control system from the
• 14:31
  Speaker 1: federal government. Sixty other countries have taken similar actions in
• 14:34
  Speaker 1: the last twenty five years. Because we're trying to run
• 14:37
  Speaker 1: a twenty four hour day, seven day a week, incredibly
• 14:40
  Speaker 1: complicated business serving those twenty seven thousand flights a day,
• 14:44
  Speaker 1: and it's bound up in red federal red tape and
• 14:47
  Speaker 1: procurement rules and personnel rules, It gets caught in budget
• 14:50
  Speaker 1: fights and it's just no way to run a big business.
• 14:54
  Speaker 1: So there's data showing that about half of all flight
• 14:57
  Speaker 1: delased are results of air traffic control inefficiencies, which is
• 15:03
  Speaker 1: rather stunning in my opinion. And you were talking about
• 15:06
  Speaker 1: how there are currently discussions ongoing in Congress to move
• 15:11
  Speaker 1: the f a A to a nonprofit that is separate
• 15:13
  Speaker 1: from the government. What surprises me is that there is
• 15:16
  Speaker 1: quite a bit of opposition to this plan. Can you
• 15:19
  Speaker 1: talk about why there has been a sort of party
• 15:23
  Speaker 1: divide about whether or not to privatize the f a
• 15:26
  Speaker 1: A and why there has been, frankly in the past,
• 15:29
  Speaker 1: bipartisan opposition to this move. Well, let me go at
• 15:33
  Speaker 1: it slightly differently, if I could. UM. In the mid
• 15:36
  Speaker 1: nine the first really serious, well thought out proposal to
• 15:41
  Speaker 1: take this step was made by the Clinton administration, and
• 15:46
  Speaker 1: it did not go anywhere in Congress. The Bush administration
• 15:50
  Speaker 1: Bush forty three UM attempt at a sort of reduced
• 15:54
  Speaker 1: version of what Clinton had proposed. The current proposal is
• 15:58
  Speaker 1: modeled on what the Canadians did in mid nineties, and
• 16:01
  Speaker 1: that is to spend off air traffic control into a
• 16:03
  Speaker 1: nonprofit corporation, has a board that is appointed by the
• 16:07
  Speaker 1: various users of the system, and it has worked incredibly well. UM.
• 16:13
  Speaker 1: So that's what we're debating today. UM. We find opposition
• 16:18
  Speaker 1: uh from several quarters, but support comes from the Air
• 16:21
  Speaker 1: Traffic Controllers Union for this reform as well as most
• 16:24
  Speaker 1: of the major airlines. The primary voice of opposition is
• 16:28
  Speaker 1: an association that represents the corporate jet operators, believe it
• 16:32
  Speaker 1: or not, and that's because they are getting heavily subsidized
• 16:36
  Speaker 1: under the current structure. They pay a tiny fuel tax,
• 16:39
  Speaker 1: and yet they use the same quality and quantity of
• 16:42
  Speaker 1: services for their planes that um seven three seven Jews
• 16:47
  Speaker 1: that are that are flown by my client, American Airlines.
• 16:50
  Speaker 1: So they're staring up a lot of opposition, a lot
• 16:53
  Speaker 1: of misinformation, and and it is unfortunately become a fairly
• 16:58
  Speaker 1: polarized issue. It should not be. I mean again, this
• 17:00
  Speaker 1: is this is an issue that back in the nineties
• 17:04
  Speaker 1: the Democratic administration of Bill Clinton and algal Are worked
• 17:08
  Speaker 1: very hard to try to push Mr Brindam, Can you
• 17:11
  Speaker 1: describe the technological improvements that would be gained by having
• 17:16
  Speaker 1: a revamped system and finally getting something twenty first century
• 17:20
  Speaker 1: in place. Let me give you one example that I
• 17:23
  Speaker 1: think it's very stark. UM our controllers today keep track
• 17:28
  Speaker 1: of the planes that that individual controller is responsible for.
• 17:31
  Speaker 1: On paper strips. The Canadians got rid of paper strips
• 17:38
  Speaker 1: in the f a A. Has a contract today if
• 17:42
  Speaker 1: all goes perfectly, will mean that we get rid of
• 17:45
  Speaker 1: paper strips and our only in our eighty nine business
• 17:49
  Speaker 1: busiest facilities. So we're talking about a plan that leaves
• 17:57
  Speaker 1: paper strips in use in many of the smaller facilities.
• 18:01
  Speaker 1: Why is this taking way through this century? Well, again,
• 18:05
  Speaker 1: we're talking about UM federal budget fights. For example, the
• 18:09
  Speaker 1: first time we did sequestration in the f a A
• 18:12
  Speaker 1: closed down the training academy in Oklahoma. Took nearly a
• 18:15
  Speaker 1: year to get the pipeline filled back up with trainees.
• 18:20
  Speaker 1: UM the Inspector General at d T the g a O,
• 18:24
  Speaker 1: which is you know, as an investigative arm of Congress,
• 18:27
  Speaker 1: UM have written countless reports over the last thirty years
• 18:32
  Speaker 1: about the disconnects and simply trying to buy new equipment
• 18:36
  Speaker 1: that you get because of appropriations issues, because of Congress
• 18:42
  Speaker 1: doing twenty three short term extensions in the early two
• 18:45
  Speaker 1: thousands of the f A a s basic authorizing legislation.
• 18:49
  Speaker 1: We're trying to run this huge, complex, seven day a week,
• 18:52
  Speaker 1: twenty four hour day business and you just can't do
• 18:55
  Speaker 1: it within the federal government expect the kinds of outcomes
• 18:59
  Speaker 1: that we all expect. Yeah, well, I mean it's clearly
• 19:02
  Speaker 1: a bit of a mess, and it seems like everybody
• 19:05
  Speaker 1: agrees with that, and it needs to be modernized. Are
• 19:07
  Speaker 1: two big issues that strike me as compelling arguments for
• 19:12
  Speaker 1: why the f A has not been privatized. First of all,
• 19:16
  Speaker 1: there's a security issue, right because, uh, this is a crucial,
• 19:20
  Speaker 1: uh nexus of transportation for the US and if that
• 19:23
  Speaker 1: could be compromised in any way, Uh, that could be
• 19:26
  Speaker 1: a really a huge issue. That's number one. And number two,
• 19:31
  Speaker 1: if the financial interest is sort of moved, even to
• 19:34
  Speaker 1: a nonprofit, there's a question of which parties will benefit more.
• 19:37
  Speaker 1: And you know, can consider the needle be pushed in
• 19:39
  Speaker 1: one direction or another. How would you respond to those things? Well,
• 19:43
  Speaker 1: security is not an issue. No one wants to change
• 19:46
  Speaker 1: our current set up on security. Security of course, for
• 19:49
  Speaker 1: all transportation is now handled by the Department of Homeland
• 19:52
  Speaker 1: Security and t s A, not by the Air Traffic
• 19:55
  Speaker 1: control system, so that would not change in any way.
• 19:59
  Speaker 1: The air traffic control system would still be regulated by
• 20:03
  Speaker 1: the f A. A nobody's proposing to take the whole
• 20:05
  Speaker 1: FAA out of the government. Just see our traffic control
• 20:08
  Speaker 1: system part of it. The FAA regulators who write all
• 20:12
  Speaker 1: kinds of aviation safety regulations would remain within the Departments Transportation,
• 20:17
  Speaker 1: just like the regulators a NITZA that write regulations for
• 20:21
  Speaker 1: safety and the automobiles, and the Federal Railroad Administration and
• 20:25
  Speaker 1: other such arms. So that would that would just not
• 20:29
  Speaker 1: be a problem. The interests involved here the first and
• 20:34
  Speaker 1: foremost of the interest of passengers. And today you can
• 20:39
  Speaker 1: pick any two major hubs and once you will find
• 20:41
  Speaker 1: because we do have an incredibly safe system, we're keeping
• 20:45
  Speaker 1: it safe by swowing things down gradually, so that today,
• 20:49
  Speaker 1: compared to twenty years ago, for example, between New York
• 20:52
  Speaker 1: and Washington, the airline schedules, if the planes fly according
• 20:58
  Speaker 1: to the published schedules, are need to thirty minutes longer
• 21:01
  Speaker 1: just from New York to d C compared to twenty
• 21:04
  Speaker 1: years ago. You can pick any other two city pairs
• 21:08
  Speaker 1: of larger cities, and you'll find some more examples. So
• 21:11
  Speaker 1: it is becoming a major drag on the economy, first
• 21:14
  Speaker 1: and foremost for those of us, the passengers, And thank
• 21:17
  Speaker 1: you very much. James Burnley. He is a former U
• 21:21
  Speaker 1: S Secretary of Transportation to nine currently a partner at
• 21:26
  Speaker 1: Venable labbying firm representing American airlines, talking about the future
• 21:30
  Speaker 1: of our air traffic control system. We did get news
• 21:45
  Speaker 1: today that Walgreen's Boots Alliance scrapped its deal to purchase
• 21:49
  Speaker 1: Right Aid, and partly this is because of the Federal
• 21:53
  Speaker 1: Trade Commission scrutiny of this deal is possibly violating anti
• 21:56
  Speaker 1: trust rules. Um Brick Sutherland gods like columnist joins us
• 22:00
  Speaker 1: now to give us a little bit of perspective and Brooke,
• 22:02
  Speaker 1: you know, Walgreens seems to be doing just fine. It's
• 22:05
  Speaker 1: for as far as trading goes. But so let's focus
• 22:07
  Speaker 1: on right Aid because at least based on the share activity,
• 22:12
  Speaker 1: the activity and the equities, this looks catastrophic for them,
• 22:15
  Speaker 1: is it. Yeah, you know, it's not a great deal
• 22:18
  Speaker 1: for Right Aid. You know, I do think that Walgreens
• 22:20
  Speaker 1: is playing a pretty decent price for the number of
• 22:23
  Speaker 1: stores that they're getting, But I mean, you think about it,
• 22:25
  Speaker 1: right it is essentially giving over half of its stores,
• 22:28
  Speaker 1: but then it's still has to go on and try
• 22:30
  Speaker 1: to compete against a Walgreens that's now going to be
• 22:34
  Speaker 1: better off, and of CBS that's already huge, And so
• 22:37
  Speaker 1: I mean, it's you really have to sort of wonder
• 22:39
  Speaker 1: if this was really regulators intention where they block this
• 22:43
  Speaker 1: deal on the premise that Walgreens and right Aid will
• 22:46
  Speaker 1: will have too much pricing power and there's going to
• 22:48
  Speaker 1: be antitrust concerns. But now you're essentially just going to
• 22:51
  Speaker 1: be left with the exact same situation where right It
• 22:53
  Speaker 1: is essentially not able to as effectively compete well, and
• 22:57
  Speaker 1: we should just say that, yes, Walgreens is no longer
• 23:00
  Speaker 1: going to buy right Aid outright, but they are going
• 23:02
  Speaker 1: to purchase about of right aid stores. What proportion of
• 23:08
  Speaker 1: their stores aren't that's about half, okay, half something like that.
• 23:14
  Speaker 1: But I mean, here here's an interesting parallel, right because
• 23:16
  Speaker 1: in the same week that we're talking about this, Staples
• 23:19
  Speaker 1: and Sycamore partners right and Staples was going to buy
• 23:22
  Speaker 1: office depot. Regulators nixed that deal, so they tried to
• 23:26
  Speaker 1: shop themselves around and they ended up being bought by
• 23:29
  Speaker 1: private equity for six point nine billion. So is that
• 23:32
  Speaker 1: what happens do you believe to the rest of right
• 23:34
  Speaker 1: A I I think you have to ask that question.
• 23:38
  Speaker 1: I mean, so Staples is getting purchased at a very
• 23:40
  Speaker 1: low price, and if right Aid sells itself down the road,
• 23:43
  Speaker 1: is it going to command anywhere near what it was
• 23:46
  Speaker 1: potentially going to sell itself to Walgreen's fork. No, I
• 23:48
  Speaker 1: don't think so. I mean, I think retail in general
• 23:51
  Speaker 1: is in a tough spot. Drug store type things. People
• 23:53
  Speaker 1: are increasingly going to Amazon for um and like I said,
• 23:58
  Speaker 1: they're in a tough spot now where they have to
• 23:59
  Speaker 1: compete eating against a much larger competitor that's now getting
• 24:03
  Speaker 1: even bigger UM. And I think you know, the real
• 24:06
  Speaker 1: sort of question here is is do regulators need to
• 24:09
  Speaker 1: change their sort of paradigm for the way that they
• 24:11
  Speaker 1: view these deals. Amazon has clearly changed the retail landscape,
• 24:15
  Speaker 1: and is it really Can you really justify saying that
• 24:19
  Speaker 1: these companies will be too strong when they're combined and
• 24:22
  Speaker 1: have too much pricing power or do you have to
• 24:24
  Speaker 1: maybe take a step back and rethink this because the
• 24:26
  Speaker 1: end resulture exactly. Yeah, the end result is that you
• 24:30
  Speaker 1: you know, prevent these companies from combining, but do you
• 24:33
  Speaker 1: know some of them may not be able to survive
• 24:35
  Speaker 1: on their own. I think that's certainly true for Staples
• 24:37
  Speaker 1: office depot. You know, when you look down the road,
• 24:39
  Speaker 1: will they ever be back to what they were? No?
• 24:41
  Speaker 1: And I don't think right aid is necessarily going to
• 24:43
  Speaker 1: be back to what it was. Either it may continue on,
• 24:46
  Speaker 1: but it's not going to be, you know, in a
• 24:47
  Speaker 1: position of strength. So what what do you think right
• 24:50
  Speaker 1: aids rationalization was for agreeing to sell just the stores
• 24:55
  Speaker 1: and not itself. They have not been doing very well.
• 24:59
  Speaker 1: They're results have gotten significantly weaker since when they originally
• 25:03
  Speaker 1: agreed to sell to Walgreens. And this deal was actually
• 25:05
  Speaker 1: aren't amended once before, partly because Right aids results had deteriorated,
• 25:10
  Speaker 1: partly because they were already sort of getting pushed back
• 25:13
  Speaker 1: from antitrust authorities, and they amended the deal to try
• 25:16
  Speaker 1: to head off some of those complaints. Um, you know,
• 25:19
  Speaker 1: I think right aid is maybe looking for a cash
• 25:22
  Speaker 1: infusion and to to just sort of do something. But
• 25:26
  Speaker 1: you know what's interesting is that their share is their
• 25:29
  Speaker 1: share prices down about but their bond prices are surging.
• 25:34
  Speaker 1: And this is compelling to me because basically this indicates
• 25:38
  Speaker 1: that bond traders are saying something happened where they have
• 25:41
  Speaker 1: more cash and we're going to get paid, But it
• 25:44
  Speaker 1: doesn't mean that their growth prospects are any better. Is
• 25:47
  Speaker 1: that an accurate reading? Yeah? I think so. I think
• 25:49
  Speaker 1: that's a good way of looking at I mean, on
• 25:51
  Speaker 1: the other hand, if you do have a smaller store count,
• 25:54
  Speaker 1: that is maybe not a bad place to be in
• 25:56
  Speaker 1: as a retailer in general these days. But they have
• 25:59
  Speaker 1: to use this in the right way. How do they
• 26:01
  Speaker 1: actually make their stores more profitable because they're not all
• 26:04
  Speaker 1: that profitable right now. How do you get people coming
• 26:07
  Speaker 1: in there? How do you compete with Amazon? How do
• 26:09
  Speaker 1: you compete with Walgreens? I mean, they really have to
• 26:11
  Speaker 1: use this money in the right way. Well, it's gonna
• 26:14
  Speaker 1: just ask you know, this infusion of cash right from Walgreens,
• 26:20
  Speaker 1: as you mentioned, at least the stock is down about
• 26:23
  Speaker 1: twenty five of right aid Um just just really shows
• 26:27
  Speaker 1: that bond holders, bond investors, they only care about getting
• 26:31
  Speaker 1: paid back. They really don't have an interest in whether
• 26:34
  Speaker 1: the company is going to be a successful company in
• 26:37
  Speaker 1: the future or not. They just want to get paid
• 26:39
  Speaker 1: for the bonds that they hold. Is that a decent description? Yeah?
• 26:43
  Speaker 1: I mean that that well, right, And there's just a
• 26:46
  Speaker 1: different calculation. It's not about how much the company is
• 26:48
  Speaker 1: going to grow, but they's not about the company at all.
• 26:50
  Speaker 1: They don't really care as long as they get the
• 26:52
  Speaker 1: money from the bonds, right. But it indicates to me
• 26:54
  Speaker 1: that these bond holders do not think that right, AI's
• 26:57
  Speaker 1: going to file for bankruptcy anytime soon. No, And I
• 26:59
  Speaker 1: you know, I don't think they're hovering on the brink here.
• 27:01
  Speaker 1: I guess my point about the regulators is just sort
• 27:03
  Speaker 1: of the longer term question about the survivor nature of
• 27:08
  Speaker 1: these companies, and you know how strong they're truly going
• 27:11
  Speaker 1: to be if you don't allow them to go through
• 27:13
  Speaker 1: with these deals for Staples off as depot. I really
• 27:16
  Speaker 1: do believe that that merger was sort of their best hope,
• 27:19
  Speaker 1: and you could combine the companies and sort of take
• 27:21
  Speaker 1: out the cost and work on making the business that
• 27:24
  Speaker 1: they do have as profitable as possible and sort of
• 27:26
  Speaker 1: have that scale to take on the Amazons and the
• 27:29
  Speaker 1: Walmarts and everyone else out there. And now you instead
• 27:33
  Speaker 1: have Staples selling to a private equity firm, and the
• 27:36
  Speaker 1: endgame here is still really sort of a question mark.
• 27:39
  Speaker 1: I want to thank you very much for joining us.
• 27:40
  Speaker 1: Brooks Sutherland is Bloomberg Gadfly colums covering deals and as
• 27:45
  Speaker 1: we learned, Walgreen's buying those stores. Read her column. Yes,
• 27:50
  Speaker 1: she's awesome. Well I was gonna see yes, of course.
• 27:55
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 27:58
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 28:02
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 28:05
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 28:09
  Speaker 1: It's one before the podcast. You can always catch us
• 28:12
  Speaker 1: worldwide on Bloomberg Radio