July 2007 Archive
Soon-to-be-married papermakers Abitibi and Bowater received shareholder approval for their merger last week, despite a modicum of dissent earlier on. Third Avenue Management, which owns a 12% stake in Abitibi, figured the deal was unfair to Abitibi shareholders, who will end up owning 48% of the combined entity while Bowater holders receive a 52% stake. Indeed, the distribution seems questionable when you consider that Abitibi has more assets to contribute, but apparently most shareholders believe the inequity is offset by potential financial improvements.
The combined AbitibiBowater will become a top 10 global paper company and a top 5 player in North America. Through the merger, Abitibi and Bowater expect to save $250 million in costs and have combined revenue of $8 billion. While the deal will likely ease the companies’ suffering from lower demand for newsprint and other paper types, that trend will continue to create challenges even for a larger market player.
Online movie rental company Netflix is locked in what is turning into an epic battle with arch rival Blockbuster and has made its latest move — lowering prices by $1 last week on its most popular plans. This is the latest in the price wars; Blockbuster reduced its rates on certain plans earlier this year.
Full disclosure: Our household is a Netflix one, driven there several years ago by my intense dislike of Blockbuster’s in-store late fees. (Blockbuster’s earlier attempt to drop late fees for in-store customers backfired when it decided to surreptitiously make the customer buy the movie instead.) Of course, if we were heavy renters, we might be upset by Netflix’s throttling practice.
Still, Blockbuster’s newest online plan, Total Access, where customers can have their movies delivered by mail with no late fees but can also go to the store for new movies, sounded appealing. Apparently, other customers thought so too, as Netflix lost 55,000 users in its second quarter, ending the quarter with 6.7 million subscribers, it announced last week. (Blockbuster has about 3.6 million online subscribers, including a whopping 600,000 new subscribers in Q2. The massive promotional spend, however, left the company at a loss for quarter.)
The dip in Netflix subscribers (its first net subscriber loss ever) combined with a lowered earnings forecast last week sent Netflix shares plummeting to its lowest point in two years. And to add insult to injury, the Netflix Web site unexpectedly was down for about 18 hours right after the company’s announcement of lower rates and a renewed focus on customer service.
Netflix may have revolutionized the movie rental industry, but Blockbuster is a fierce competitor as it plays catch up online and plays its retail card, appealing to the instant gratification gene most Americans have. Netflix hasn’t ignored this development and has introduced a new service that allows subscribers to watch a select number of movies instantly via their computer. Netflix also claims that its movie recommendation service gives it a leg up. (More Netflix news here.)
As the price wars go on, both companies will suffer. It’s a pretty tricky game, trying to woo a fickle consumer. Whoever has staying power appears to have the upper hand. Though, if Blockbuster has to result to this (courtesy of The Onion), then all bets are off.
Nevada regulators wrapped up a public-comments session Friday over UnitedHealth’s proposed $2.6 billion acquisition of Sierra Health Services. Those fighting against the merger fear the creation of a health insurance monopoly in the state that would hurt small businesses, raise premiums, and lower reimbursements to providers. The fight over the Sierra/UnitedHealth tie-up echoes what’s going on with another big health care merger farther east. Pennsylvania insurer Highmark has agreed to buy another of the state’s Blue Cross licensees, Independence Blue Cross, in a deal that would give Highmark control of 53% of Pennsylvania’s health insurance market. Not everyone is sanguine about the deal.
State officials in both places would do well to pay attention to the after-the-fact wrangling California is going through with Blue Cross of California, which was acquired by WellPoint in 2004. State regulators signed off on that deal in return for promises that the companies would maintain coverage and refrain from unnecessary premium increases. Blue Cross of California’s actions since that time have made some wonder whether the two companies had their fingers crossed.
Negotiations between the Detroit Three and the United Auto Workers (UAW) union are officially underway, and the stakes are pretty darn high. UAW president Ron Gettelfinger is looking to secure another four-year contract that would grant UAW-represented workers a modicum of job security at a very insecure time for the US car industry.
On the other side of the table, GM, Ford, and Chrysler hope to wring cost reductions from the negotiations, primarily in the area of health care and pension benefits. The Detroit Three claim the US manufacturing operations of its Japanese rivals pay about $25 less per hour for labor, a notion Gettelfinger refutes, sort of. According to the reporting of an AP staff writer, Gettelfinger said he doubts the presence of a labor cost gap, but then conceded that such a gap is possible. Let the gamesmanship begin!
Gettelfinger is playing it coy when it comes to Ford, the member of the Detroit Three most agree is in the worst shape. When talks kicked off at Ford last week, Gettelfinger said he wouldn’t comment on how Ford’s financial predicament would affect the UAW’s approach at the bargaining table. But he did say “… they’ve got a lot of cash, by the way.” What Gettelfinger didn’t say is that much of Ford’s cash was borrowed — and most of Ford’s factories and subsidiaries like Volvo and Ford Motor Credit were put up as collateral. Nice try, Ron.
Of course what would UAW bargaining be without vague threats of a strike? To make the threat appear, well, threatening, about 100 protestors, mostly retirees, gathered outside GM HQ to wave signs and engage the media. Protestors pointed to excessive executive bonuses and overseas plant construction as proof belying the disingenuous claim of, “We’re flat broke!” coming from the Detroit Three.
Unfortunately for UAW workers, the Detroit Three’s balance sheets tell a competing story.
What can a Canadian drugstore executive bring to ailing American retail icon The Gap? Investors and shoppers will soon find out now that Gap has named 45-year-old Glenn Murphy its new chairman and CEO. After the disastrous tenure of former chief executive Paul Pressler, who joined the apparel chain from Walt Disney theme parks, Wall Street hoped the clothing giant would recruit a new leader with industry experience to lead Gap out of its fashion malaise.
Instead it picked a drugstore guy … albeit a successful one. After a six-month search, it appears The Gap couldn’t find an apparel industry veteran who wanted the job. According to the New York Times it appears Murphy pitched himself to Gap’s Board, which cited his experience revitalizing major retail brands to support its choice. As there are few major retail brands more in need of juice than The Gap, the company hopes Murphy is up to the job!