B12| Tuesday, July 30, 2019 ***** THE WALL STREET JOURNAL.
BOJ Hasn’t Got Much Firepower Left
Central bank has few options to follow anticipated interest-rate cuts by counterparts in U.S. and Europe
HEARD
ON
THE
STREETFINANCIAL ANALYSIS & COMMENTARY
Grubhub’s Stock May Be Too Hard to Digest
It shouldn’t be surprising that
there is a food fight in the stock
market overGrubhub.
While the market continues to
grow impressively, so does competi-
tion. Many restaurants initially felt
they had no choice but to add on-
line delivery or die. Now, however,
resistance may be less futile, allevi-
ated by negative media coverage
and the possibility of regulatory ac-
tion. Investors largely seem confi-
dent that food apps will continue to
race ahead but they are less sure
about which horse to bet on.
Over the past two months, the
New York Post has cataloged some
of Grubhub’s issues, including erro-
neous charges to restaurant cus-
tomers, the employment of “fake”
listings and the potential for com-
mission-rate caps. Grubhub has de-
nied some of the Post’s claims.
Several banks, including Stifel
and BTIG, dismissed the Post’s re-
ports as noise, viewing weakness in
Grubhub’s stock as a near-term buy-
ing opportunity. Still, beyond claims
specific to Grubhub, regulatory is-
sues could weigh on the sector.
Grubhub’s stock performance has
been, to put it mildly, choppy over
the past 12 months. Shares rose to
a record last September but have
since dropped 50% as competitionhub’s short interest as a percentage
of free float is now over 20%, ac-
cording to FactSet, climbing
steadily from just over 4% in Sep-
tember. For comparison, Uber’s
short interest is under 5%.
Heading into its earnings report
Tuesday, it is hard to know whether
a solid quarter could force bearish
investors to cover. After Grubhub
reported first-quarter results, the
stock sold off 3%, even though the
company posted 39% annual reve-
nue growth, as profitability de-
clined as a result of increased in-
vestments in growth. The second
and third quarters are seasonally
less strong for the business, and an-
alysts are predicting second-quarter
sales to be the weakest of 2019.
Despite competitors’ heavy
spending, Grubhub still managed to
expand restaurants served by 16%
from February to June, according to
KeyBanc. Moreover, recent restau-
rant additions may be a signal that
formal partnerships with some of
the largest U.S. chains such as
McDonald’sandStarbuckscould
be on the horizon, according to
Mark May of Citi Research.
Still, with competition and con-
troversies heating up, investors may
want to skip the next few courses.
—Laura Formanhas threatened the company’s mar-
ket lead. Meanwhile,DoorDashhas
raised $1 billion this year alone;
Postmatesfiled for its initial public
offering in February; andUberwent
public in May. The ride company,
which runs Uber Eats, not only
raised an eye-popping sum but in
its filings also shed light on how
high the cost of acquiring new eat-
ers could climb amid competition.
While Grubhub’s stock price has
recovered since a trough in May,
there are plenty of skeptics. Grub-GrubhubsharepriceSource: FactSet$16060801001201402018 2019PfizerChief Executive Albert
Bourla knows a deal when he sees
one.
The pharmaceuticals giant has
agreed to merge its off-patent
drugs business with generics man-
ufacturerMylan. Pfizer sharehold-
ers would own the majority of the
new company, which would include
well-known drugs including
EpiPen, Lipitor and Viagra.
Mylan shares surged Monday in
response to the news. Pfizer’s
stock fell as it reported second-
quarter results, but its sharehold-
ers should be reassured.
The generics industry has hit a
major rough patch: Consolidation
of major drug-buying consortia
has led to falling prices for manu-
facturers in the United States.
That has eroded revenues and led
to severe share-price declines for
companies in the sector. Adding
scale is one possible way to con-
tend with those harsh realities.
Mylan also has a large presence
overseas and a well-regarded pipe-
line of new products, such as
cheaper versions of expensive bio-
logic medications.
Should the deal reach the finish
line, it certainly helps that Mr.
Bourla is buying low. Mylan’s
shares were down more than 75%
from their 2015 peak as of Fri-
day—par for the course in the be-
leaguered sector. Over that time,
Pfizer’s shares have risen by more
than 20%.
Familiarity increases the
chances of success. The companies
already work together on manufac-
turing EpiPen, which should limit
headaches from integrating opera-
tions. And while industry sales
aren’t growing, the generic-drug
business still generates significant
cash flow. Thanks to that cash
flow, the new company will have
less leverage on its balance sheet
than Mylan did as a stand-alone
company, despite plans to issue
$12 billion in fresh debt to be paid
out to Pfizer.
Just as importantly for Pfizer,
the deal accomplishes a goal that
the company has discussed in vari-
ous forms for years: separating its
business of newer drugs with pat-
ent protection from its maturing
products. Spinning out older drugs
may increase the valuation of
newer medicines in its portfolio
such as the pneumonia vaccine
Prevnar 13 or prostate-cancer drug
Xtandi.
To that end, Pfizer agreed last
month to buy cancer specialistAr-
ray Biopharmafor more than $10
billion and agreed last Decem-
ber to combine its consumer-
health business withGlaxoSmith-
Klineand eventually spin it out. A
possible deal with Mylan would be
entirely consistent with this strat-
egy.
That ought to return Pfizer
shares, which have rallied about
7% over the past year, to healthy
spirits. —Charley GrantInvestors rarely endorse deals as
wholeheartedly as they didLondon
Stock Exchange Group’s roughly
$15 billion proposed acquisition of
data providerRefinitivon Monday
morning. The euphoria needs to be
balanced by recognition that this
would mark a big step up in the
risk curve.
LSE stock jumped 15% Monday.
Early Saturday, the company, which
owns big clearing and index units
as well as its eponymous capital-
markets business, confirmed a Fi-
nancial Times report that it was in
talks to buy Refinitiv. LSE would
pay $27 billion, including $12.2 bil-
lion of net debt that it would as-
sume. Refinitiv’s current owners,
Blackstoneand its financial part-
ners andThomson Reuters, would
get a 37% share of LSE.
Blackstone looks like the clearest
winner. Together with its partners,
it agreed to buy a 55% stake in Re-
finitiv, as it was renamed, from
Thomson Reuters in January 2018
at a stated valuation of $20 billion.
The deal was highly leveraged and
the partners put in just $3 billion of
equity. On paper, the LSE deal
would turn that into at least $7.5
billion in less than two years.
The caveat is that the payoff is in
LSE stock, not cash, and the sellers
would be subject to lockup agree-
ments. In effect, the Blackstone
consortium is rolling its bet on Re-
finitiv into a larger vehicle, giving
up some control in exchange for a
share of the extra cost savings
available through a merger. LSE es-
timated these savings at £350 mil-
lion ($427.6 million) five years after
the deal’s completion—equivalent to
almost 6% of the companies’ com-
bined 2018 sales.
LSE’s existing shareholders also
would get the benefit of those cost
savings—one reason why the shares
jumped Monday. The other reason
is that the company, by assuming
Refinitiv’s private-equity debt load,
would leverage up, boosting earn-
ings per share. Net debt would be
equivalent to 3.3 times earnings be-
fore interest, taxes, depreciation
and amortization, according to cal-
culations by Exane BNP Paribas.
That compares with a multiple of
1.8 times at the end of last year and
LSE’s target range of between one
and two times.
Yet LSE also would assume mas-
sive operational risk in trying to
swallow a larger entity. The U.K.
company made Ebitda of $1.4 billion
last year, less than the $1.6 billion
Refinitiv made. LSE has integrated
data acquisitions successfully be-
fore, notably U.S. index provider
Frank Russell, but nothing on this
scale.
The company said the deal would
help it offer a fuller range of trad-
ing and data services. The rise of
electronic trading and passive in-
vesting, which have put pressure on
the industry’s fees, lurk in the back-
ground. With big cost savings on of-
fer, investors are less likely to quib-
ble with the strategic logic.
LSEmaywell announce full de-
tails of the deal alongside half-year
results Thursday, when Chief Execu-
tive David Schwimmer will in any
case need to face the press and in-
vestment community. A convincing
explanation of how such a complex
integration would work and a plan
to reduce leverage will help keep in-
vestors on board.—Stephen Wilmot
London Stock Exchange
has integrated data
acquisitions successfully
before, but none this big.
The company’s shares have fallen 50% since their record last September as competition has threatened its market lead.RICHARD B. LEVINE/ZUMA PRESSLSE’s Big
Wa g e r
Carries a
Lot of Risk
LondonStockExchangeshareprice
Source: FactSet
Note: £1=$1.24
£65
45505560Feb. March April May June Julybut killed off activity elsewhere in
the market.
The BOJ could try truly uncon-
ventional policies, like Milton
Friedman’s helicopter money: put-
ting cash directly in the hands of
consumers, rather than swapping
government bonds for bank re-
serves as conventional quantitative
easing does.
But despite the fact that the
country’s economic challenges are
so entrenched, the institutional
conservatism of the country’s eco-
nomic policy makers makes such a
shift unlikely.
The simplest move, and the one
with the least damaging side ef-
fects, would be for Prime Minister
Shinzo Abe and Finance Minister
Taro Aso to restring the second ar-
row of Abenomics: activist fiscal
policy.
They appear primed to do the
opposite: In October, Mr. Abe is set
to implement an ill-advised in-
crease in Japan’s sales tax to 10%
from 8%. After decades of nearly
nonexistent inflation, such rises
are highly noticeable for consum-
ers. The latest one in 2014 pushed
Japan back into recession.
—Mike BirdEconomic growth and inflation
expectations look shaky. What is a
central banker to do after exhaust-
ing every policy in the textbook?
The Federal Reserve and Euro-
pean Central Bank look likely to
cut interest rates in the coming
months, leaving the Bank of Japan
in a quandary: It has gone practi-
cally as far as it can in cutting in-
terest rates and purchasing gov-
ernment bonds.
Early Tuesday, the BOJ left pol-
icy unchanged, separating itself
from other major central banks.
The Japanese central bank said it
“will not hesitate to take additional
easing measures if there is a
greater possibility that the mo-
mentum toward achieving the price
stability target will be lost.” That
line hadn’t appeared in the BOJ’s
statement on monetary policy after
its previous meeting in June.
Japan’s problem isn’t just weak
world trade and a slowing Chinese
economy. Other central banks cut-
ting rates is likely to put upward
pressure on the yen, reducing the
value of foreign earnings for Japa-
nese companies and potentially
hitting the country’s exports.
The BOJ may still have someforecasts suggesting prices won’t
rise at the 2% rate it aims for at all
during the next three years.
Restarting the mammoth gov-
ernment-bond purchases of 2012 to
2016 would have a diminished im-
pact this time around, with yields
already pinned at around 0% by
the BOJ’s yield-curve control pol-
icy. The central bank already owns
nearly half of the total amount out-
standing, and its policies have alllow-caliber ammunition left in its
arsenal: extending its guidance to
promise lower interest rates for
longer, for example. Gov. Haruhiko
Kuroda insists the BOJ can cut in-
terest rates further, but with com-
mercial banks already screeching
about eroding interest margins,
any further reduction would be
cosmetic at most. Even the central
bank itself no longer believes it can
hit its inflation target, with its ownCentral-bankassetsrelativetogrossdomesticproductSource: FactSet100020406080%2007 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19Japan
Eurozone
U.S.OVERHEARD
This oil company is hot, hot,
hot. Literally.
As toasty as Texas can get in
the summer, it doesn’t hold a
candle to Riyadh, Saudi Arabia’s
capital, where the average high in
August is around 110 degrees
Fahrenheit. Yet the world’s largest
energy producer, Saudi Aramco,
has picked next month to hold its
inaugural investor relations call.
Not only is the weather inaus-
picious but the company’s share-
holder will presumably be there in
person rather than having the
good sense to dial in from cooler
climes. Aramco, which postponed
a planned initial public offeringlast year, has a single owner: the
Saudi government.
It does have a new set of bond-
holders, though. They snapped up
$12 billion of the company’s debt inan April deal. Nervous owners—
the bonds initially lost value—will
appreciate the update. Anyone
else curious about what could
have been the world’s most valu-
able public company can listen
in, too.
Although some Saudi officials
were worried about opening up
Aramco’s books to the public via
an IPO, the firm’s bond offering
disclosed detailed financial data
for the first time. Buyers don’t
seem to have been fazed by what
they saw. Now that the market
has had time to pass its verdict,
it is a good bet they won’t just
be phoning it in.Pfizer Is
Buying Low
And Smart in
Generics Bet
Aramco’s investor call is next month.AHMED JADALLAH/REUTERS