(FROM THE WALL STREET JOURNAL 8/25/15)
The sharp decline in stocks the past three days may have scared
investors, but it didn't get in the way of Merger Monday, as some
speculated could happen.
On Monday, Southern Co. agreed to buy AGL Resources in an $8
billion deal that will create the second-largest utility company in
the U.S. in terms of customers. The price represents a 38% premium
to where AGL's shares closed on Friday.
Also on Monday, the private-equity firm Sycamore Partners agreed
to take Belk Inc., a department-store chain, private in a deal
valued at $3 billion, including debt.
If the rout continues, it could stem the appetite of companies
to combine. Many companies have been using their stock, trading at
high levels, as currency for deal making. A tumbling stock market,
along with the uncertainty it creates, could cause chief executives
to rethink mergers and acquisitions.
"The question in the room is whether this is the correction that
everyone has anticipated or if it's a more fundamental reset. I
believe it's the former, not the latter," said Bill Curtin, global
head of M&A at the law firm Hogan Lovells. "If it's a
correction, then corporates with strong balance sheets will plow
ahead with M&A," added Mr. Curtin, who says companies could use
the slump as an opportunity to snap up assets on the cheap.
Southern Co. shares closed nearly 4.9% lower on Monday. AGL
shares rose 28% and stock in Belk fell by 14%.
-- Dana Mattioli
Life Insurers Lose Out
Car insurers versus life insurers? Go with the car insurers
right now, say some industry analysts.
Stock and credit analysts are noting that nonlife insurers
generally are better positioned to weather a stock-market rout than
life insurers. But in both halves of the insurance world, analysts
and investors have their focus somewhere else: the Treasury market,
as the benchmark 10-year Treasury yield hovers around 2%.
"I am probably most nervous that interest rates follow markets
down, and the Fed continues to delay taking rates up," said Colin
Devine, a managing director at Jefferies LLC, in an interview. The
ultralow interest-rate environment since the financial crisis of
2008-09 "is becoming a bigger and bigger problem," he said.
Most insurers earn substantial income from investing premiums,
but life insurers typically depend more heavily on their investment
portfolios than do car, home and some sorts of business insurers.
That is because life insurers can collect premiums for decades
before paying out a claim, as with life insurance and polices that
pay for nursing-home care.
For many existing policies on life insurers' books, the
companies expected to earn far-higher yields than newly invested
cash fetches today. The 10-year Treasury yield peaked at 15% in the
1980s, and has generally declined since, hitting a mid-2012 low of
1.404%. The yield appeared to be edging upward and was nearly 2.5%
as recently as mid-July.
Now, many investors are once again piling into Treasurys for
their safety. As Treasury prices have risen, rates, which move in
the opposite direction, have fallen. If they continue doing so, Mr.
Devine anticipates life insurers will be taking charges against
earnings to boost reserves to reflect reduced expectations for
interest income.
Many consumers will also feel some pain as insurers seek to
avoid losses on older blocks of business. In recent months, at
least a couple of insurers have increased annual charges in certain
types of life insurance as allowed by the contracts, to the dismay
of the often-elderly policyholders.
Analysts note that low rates also have other ramifications,
including raising the cost of running risk-management programs.
Such hedging programs are important for insurers selling
income-stream guarantees with variable annuities, which are a
tax-advantaged way to invest in stock funds. Over the past decade,
those income-stream guarantees have been popular with many
retirees.
In a note to clients, David Havens, a credit specialist with
Imperial Capital LLC, compared assets and equity of the life and
nonlife parts of the U.S. insurance industry. The life side had an
assets/equity ratio of 9.3; the figure for the property-casualty
insurers was 2.6.
If the stock-market declines were to continue, "it stands to
reason that life insurers are at greater risk of asset- value
erosion than P&C insurers," he wrote. "This is true on both
sides of the Atlantic, and beyond."
Mr. Havens added that it isn't time to panic, because life
insurers "have worked long and hard over the last several years --
particularly in Europe -- to bolster their balance sheets," and
companies generally have more capital, "and a better handle on
risk," than they did prior to the market slide of 2008.
Life insurers get whacked by falling stock prices in a couple of
ways. In Europe, more than in the U.S., the insurers hold stocks in
their investment portfolios, though there is less equity risk than
several years ago, because of the toughening solvency requirements
overseas, Mr. Havens said.
Indirectly, life insurers see a drop in fee income from their
asset-management businesses, and falling stock markets also expose
"latent risk in complex products," such as variable annuities, he
said.
Netflix Shareholders
Endure a Jolt
As global markets plunged in a tumultuous day of trading Monday,
Netflix Inc. was whipsawed more than most.
The streaming service's shares were even more volatile than
usual. The stock went from being the worst performer in the S&P
500 index to one of the best and back down again -- at times
plunging as much as 18% and rising as much as 5.5%. The shares
ended the day down 6.8% to $96.88, almost on par with the declines
in the day's hardest-hit sector: energy.
Netflix has long been a volatile stock, valued based on high
hopes for ambitious global growth and the promise of future
earnings. Even with the recent drop, Netflix shares have still
almost doubled this year and trade at an eye-popping multiple of
218 times earnings.
"A lot of the performance of the stock has been a function of
expectations of long-term growth," Guggenheim Securities analyst
Michael Morris said of Netflix. "The weakness in the overall market
reflects uncertainty about global growth prospects. Any company
whose valuation is based on growth potential is going to be at a
greater risk and see more impact from growth fears than
others."
Netflix had been a high-flying stock this year.
Before the declines of the last three trading days, Netflix
shares had increased 150% year to date, faring far better than the
S&P 500's 1% gain during that time.
The company is in the midst of an aggressive push to expand
abroad, with plans to provide its video streaming service in every
major market by the end of 2016.
-- Nathalie Tadena
(END) Dow Jones Newswires
August 24, 2015 20:14 ET (00:14 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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