Transcripts For CNBC Power Lunch 20161024 : vimarsana.com

Welcome in, everybody, to power lunch. Im tyler mathisen. Glad you could join us. Three hours left in the trading session and stocks showing animal spirits. They are in the green. As you see, the dow industrials up about a third of a percent or 65 points. Ditto the s p 500, a third of a percent of 2148, thats a sevenpoint gain and the nasdaq leading the way up. 75 . Big winners, boeing, 3m and microsoft, microsoft trading at an all time nominal high. Im michelle carusocabrera. Here is what else is happening at this hour. Consumer reports naming lexus its most reliable automotive brand. More on that coming up in the next hour. Nike topping forbes list of most valuable sports brands. Oil cracking below 50 a barrel, right around 49, 50. Right now crude down 1. 9 . Back to you, tyler. Thank you very much. We got a big two hours ahead. But lets kick it all off with the deal of the year. At t, there you are, announcing plans to buy time warner for 85 billion. The ceos of both companies weighing in on the deal earlier today on cnbc. This is one where the nature of this deal is unique for me, what we have done before, that is a vertical integration. It is a big merger, but a vertical integration. And as you think about the areas that have been really contentious over the last few years and our industry and jeffs industry, they have been horizontal mergers, where the government was concerned about a competitor being taken out of the marketplace. This has none of that. We were talking about what is happening in media, all these new products, like subscription vod networks, all the increase in mobile consumption of video. And as we got into it, we were talking about what the Media Companies are doing, what the Distribution Companies need to do, we realized that if we had ourselves together, that we could create more innovations for consumers, so they can have more choices of package, they can end up with more competit n competition, lower prices. Lets get reaction now from both sides, what do you think of all of this . Well, bigger is bigger, ill say that. Im not sure bigger necessarily is better, but bigger is bigger. I wish they had done these kinds of deals, sitting on the time warner side, when i worked at time warner, what i worked at time warn, the only deals they did didnt work like aol. A disaster. We understand the difference between vertical and horizontal integration . You have three companies. Mathisen, carusocabrera, we all compete against each other. This is the idea that mathisen buy s dom, youre on the same business, youre separate, the three of us exist and thats their argument. I dont know if the government is going to see it that challenging to get the deal done. Could be massively wrong. Just seems like this is the kind of deal that the government, they blocked office depot and staples, blocked cisco and u. S. Foods, horizontal deals, but lots of overlap. This will be challenging as they say. Lets talk more about that. At t, david berk and on time warner we have rich tullo. Guys, good to have you here. You rate at t, had it at a buy. Still a buy . Yes, we think so. For income warranted investors. It has the same appeal it did before. Attractive yield and modest earnings growth. We dont think this announcement changes anything. We view it as a potential positive and it could expand the companys growth rate, it diversifies from the slow growing wireless business and further strengthens the ability of the company to maintain its dividend. Youre not concerned about the ceo being distracted as he deals with one integration when it comes to directv and also trying to get this deal done with the regulators . Is he going to be able to keep his eye on the ball. If youre focused on the dividend, youre not worried about him running the company . Clearly you have to worry about the day do day abraisions a operations, thats a lot between the directv deal closing last year and this deal that will go on through the end of next year. Thats a lot to go on for them to deal with. What about the debt . It is large, isnt it . 180 billion if you add the two companies. However, we think it is manageable and the company talks about being able to delever over the next several years. We think thats a commitment. They want to maintain their Investment Grade Credit Ratings and we think theyll do what they need to do. It is potentially they may sell assets. You dont see any risk to the dividend as a result of this deal, especially since youre focused on income . No, the company Just Announced a Dividend Increase over the weekend, in addition to the announcement of the takeover, and the Third Quarter Earnings Release, they raised the dividend 2. 1 to 1. 96 annually. For at t, the dividend is a sacred cow. On the debt side, point of note, 180 billion is more than many small and midsized countries, including your favorite place, greece. Rich, lets talk about the other side, time warn, the natural reaction, of course, with us, and everybody is who is next . Do you think this deal, assuming it is done, creates a runway for others to be purchased and if so, who might they be . Yeah, we have been looking at that as well. We would think amc would need to be acquired by an ott provider. Netflix about a billion dollars worth of cash over the last 12 months. Amc generates about 600 million in cash. So that would fill a hole. It would also buy netflix, a bunch of content that they need, the Conversion Rate of amcs content being successfully reviewed is about 70 titles for every one port title. Netflix, about 12 good titles for every one poor title. So that would invigorate netflix a bit, since they plan on sending 6 billion on content, might as well spend it wisely. What about fox . We know one thing about mr. Murdoch, he does not like to be left out when deals are happening, they already split the company up into two sides. Do you believe that 21st century fox will in some ways have to come in here and be a buyer . We dont cover fox. But of the names we cover, like amc being acquired, we also think pandora being acquired, activist on the board, owns 9 of the stock, and, you know, for the same reasons strategically why at t would buy time warner, we think pandora is a nice fit for somebody who wants to go in, a little more diversified smaller way. What do you think about the way time warner is trading, the probability of the deal actually happening. Because, you know, somebody is waking up on the west coast, just tuning in, it would normally see the company that is getting acquired, that stock would move higher, but the stock, time warner hasnt been moving higher. So it is important to understand this is not a cash deal, it is a cash and stock deal. So the reaction, although a little negative, shouldnt be unanticipated. We liken it to charter, when charter decided to buy time warner for a long time, trading at a discount. And now charter is trading to well above 200 a share. You could have bought charter for 175 and Time Warner Cable for a lot cheaper. So were not going to look at this necessarily as a vote of disapproval for the deal, but just market technicals and concerns about why is it trading so far off of the Acquisition Price . 20, thats a big gap. Yeah. Well, i was just explaining that it is going to be some time and so, you know, with time, and it is not a cash deal, you get a bigger discount, right . So, you know, time warner traded about 20 lower than with the deal was actually completed, man a little bit more, and you shouldnt expect not to see that here. We saw it with tivo as well, they merged. Time warner right now, stock off its highs but has gotten nice pop on this news, right . Do you sell it on the risk that the deal doesnt actually happen and then just take your money now and think back to twitter, right . Or do you hold on and wait for the integration because you think it is so good . We thought about that over the weekend, and we decided to raise our price target to 107. Because we see this price right now and, you know, 90 a share. You have, you know, quite a bit of upside, 17 upside. And not allow downside, right . This is a cash deal, 54 a share in cash and at t, is at t going to trade below 15 a share, probably not a high probability of doing that. Therefore, you know, it is kind of rational to own time warner here. Okay. David berk, rich tullo, thank you very much. At t getting all the attention, but bankers were extra busy this weekend. Rockwell collins buying be aerospace and Td Ameritrade buying scott trade. Lets talk about both and begin with phil lebeau. First off, who is be aerospace . A lot of people are not familiar with be aerospace, but were familiar with them in terms of when were flying. Were talking about seats, were talking about the products that are used in the galleys for when the crews are serving passengers, the interior of the plane is the strength for be aerospace. So when you look at rockwell buying be aerospace, this is a vertical integration, 62 a share in cash and stock. The deal valued at 6. 4 billion, 22. 5 premium to be aerospace Closing Stock price on friday. And as i mentioned, youre basically creating a global aviation supply giant. Rockwell strengths, they supply planemakers like boeing, airbus, et cetera. Strength, avionics and the cockpit, where they have long been accelerating. Be aerospace supplies the airlines, their strength, aircraft interiors, put it all together and from front to back, you have basically one stop shopping, whether youre an aircraftmaker or an airline, look at shares of Rockwell Collins and be aerospace, by the way, Rockwell Collins expects 160 million in sinner ja ensin. You know, phil, because we talked about the regulatory burdens on at t and time warner, this deal, rockwell, be, seems like it could fall under more regulatory scrutiny. This is that aforementioned horizontal deal, cockpit throughout much of the plane. If youre a smaller parts manufacturer, it may be more difficult for you to get on a plane now. Well, you could make the argument they dont overlap. Thats the argument they make from Rockwell Collins. They dont overlap, their feeling is it is a winwin and not one that is going to hurt competition. If youre a supplier, sure it is going to be tough to compete with these guys, but they would make the argument that were not pricing anybody out of the mark e we market. We have a portfolio of products that you want on your plane. All right, phil, thank you very much. Phil lebeau reporting from chicago. Now to dominic chu taking a look at the Td Ameritrade deal. So it is not nearly as big as that megamedia merger you were talking about in the news world. In the world of online brokerage, it got tighter with privately held scott trade selling itself out. This deal has two major components. The brokerage business at scott trade will be sold to larger rival Td Ameritrade. 2. 7 billion. It is a mix of cash and stock. Then you got the scott trade Retail Banking operations, theyre going to be sold to canadian Banking Group toronto, dominion or td bank as you might know it here to those u. S. Customers. That deal for 1. 3 billion in cash. The total price tag then 4 billion and the deal is expected to close in september of next year. So this is also the Td Ameritrade can grow its brokerage footprint, adding nearly 500 more branches and employ 1,000 investment consultants. Meanwhile, td bank itself gets a Retail Banking business that for now caters mostly to those scott trade brokerage clients, around 13 billion in cash and securities. All part of this particular deal. Scott trade founder and ceo roger ryany, remember the commercials back in the day, will join the Td Ameritrade board of directors. This is about consolidation in brokerage and thats why it is a big deal. A lot of our viewers and readers and listeners probably have accounts, schwab, fidelity or Td Ameritrade or scott trade. All going to be part of Td Ameritrade now. Dom, thank you very much. More on what this deal means for investors coming up on the closing bell. The companys ceo, tim hockey, will be their guest. Up next, why all this dealmaking might just be a big canary in the coal mine for your money. Were going to explain. And with just 61 shopping days now left until christmas, one wall street firm declaring this retailer their big holiday winner. That name is coming up when power lunch returns. Today, i am helping people work better. And also feel better. I am helping hospitals personalize treatments using billions of data points. And working with medtronic to predict the highs and lows of diabetes, hours in advance. And i am working with orreco to use Biomarker Data to boost the performance of athletes. Hello, my name is watson. Working together, we can outthink anything. This is the new comfort food. Hello, my name is watson. And it starts with foster farms simply raised chicken. California grown with no antibiotics ever. Lets get comfortable with our food again. Overall stocks are trading modestly higher today. We ask, is the sudden rush of deals the sign of a market top . 1999, huge year for m a, so was 2007. We know what happened in the years right after those. Lets bring in mark hepenstal and brad mcmillan. Mark, lets start with you. Companies buy other Companies Generally for one of two reasons. Lets simplify it. Number one, you got a business, i want or need, and want to get into your business and i want to grow that way or, two, i see organic growth slowing and i need to figure out a way to get into other businesses or cut my costs because im worried about growth down the line. Do you think that this deal may be the sign of a macro market top, only because there is so many cost synergies involved . I wonder if it says the number two reason. To me i think it is more likely the number two reason. Certainly if you look at the prospects for a lot of these deals announced today, it means to me organic Growth Prospects doesnt look that great. So talking about one of the Biggest Companies in the world. What does that tell you about the Macro Economy and the stock market . We view the stock market as pretty fully valued at 25 times trailing earnings. We view that as a pretty full valuation. There has been a push out there, risk curve, by Central Banks, forcing investors to take more risk and the equity Market Performance benefited at a result of that. We think companies are rushing to take advantage of low Interest Rates. What do you think . Often when you see big megadeals, that signals a market peak. You worried about that . I am worried about that. Not immediately. And the reason i say that is if you go back to some of the periods you mentioned, 1998, 1999, 2005, 2006, it is typically a clustering of these kinds of deals that significantny pfize tsignifican significantny signifies it is immediate. I went back to the 15 big ticket mergers and typically what happened, the gap between a serious market pullback and the merger was about 15 months. What this says to me is that, yes, risk is now elevated, but were probably going to see more deals like this and thats when we should start to worry. Were 15 months away, in other words, potentially . That sounds like a reasonable estimate. The other thing, you look at market pullbacks, you typically only see them when we have a recession. The way jobs and the other metrics have been acting, were probably at least a year away from a recession and therefore a year or more away from market pullback. Therefore, probably starting a year or so from now, im going to start paying attention, but right now im not that concerned. You know, mark, do you think to brads point there, do you think this deal will spawn other, not necessarily copycat deals, as people begin to think, wow, these guys saw something, they saw low Interest Rates, they saw high market prices, this is the moment for me to move. Well, certainly Companies Across the board are taking advantage of the low Interest Rate environment and whether it is to do share buybacks, Dividend Increases or whether to do m a activity. We have seen record corporate issuance for the past two years, sort of spurring this type of behavior, shareholder friendly, and bond holder unfriendly. If you saw more deals to brads point, and they started to cluster, would you start to worry it was a sign of a market top . I think that you do have to worry because we do think that the tailwind that has been Interest Rates is eventually going to turn into a head wind. We think that may happen sooner than other folks do. Were forecasting the fed to increase Interest Rates in december, so you may see this mad rush, and i will say the Regulatory Environment in washington is such that i think the likelihood of this deal getting done, i would handicap it below 50 50. All right. Time will tell. Thank you very much. Mark, appreciate it. Brad, appreciate it as well. Time and time warner will tell. Thank you very much. Coming up, going up in smoke. Listen to this. An rv packed with marijuana candy bursts into flames. The full Details Behind this must see video when power lunch returns. Just like that, a moment turns romantic. So why pause to take a pill . And when youre having fun why stop to find a bathroom . With cialis for daily use, you dont have to plan around either. 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