CEO Daily: Monday, 31st July

July 31, 2017, 11:47 AM UTC

Good morning.

Big Tobacco is still reeling this morning from the Food and Drug Administration’s announcement on Friday that it wants to cut the nicotine levels in traditional cigarettes to amounts that are non-addictive.

The news had wiped some $35 billion off the market value of the biggest four companies in the sector, Altria, Philip Morris International, BAT and Imperial Tobacco. The last two are down heavily again this morning in London.

The FDA’s move stands in sharp contrast to the lighter-touch regulation agenda that the new Trump administration has brought to other sectors. Wall Street is having its regulatory burden lightened. Constraints on pollution that the Obama administration had intended to put on the auto and utility sectors are also being unwound, and the Federal Communications Commission is determined to break up the ‘Net Neutrality’ regime proposed under Obama, in favor of letting the market—rather than bureaucrats—meet the challenge of getting inconceivable amounts of data to consumers in the format they want.

What explains the difference? I would venture it’s the asymmetrical nature of the problem. There is no argument to offset the overwhelming weight of scientific evidence against combustible nicotine products beyond narrow corporate interest. By contrast, there are plenty of arguments to make in favor of the others. Lighter financial regulation increases access to capital and supports growth. Cheaper energy has an immediate impact on consumers’ disposable income (and the running costs of businesses), and regardless of the merits of the arguments for and against Net Neutrality, they owe at least as much to philosophy and self-interest as they do to objectively-proven, peer-reviewed science. It obviously helps that the coalition of support for Big Tobacco has been whittled down over time to a degree where it enjoys very few friends outside its own circles.

Either way, it looks like the tobacco industry’s remarkable record of creating value for shareholders despite being in secular decline is facing its biggest challenge yet.

News below, including M&A shenanigans in the cable and mobile carrier business. (Reuters has also just reported that Discovery has agreed to buy Scripps Networks for $11.9 billion)

Geoffrey Smith

(Alan Murray tells me he is ‘trying to catch up on his sleep’. The conspiracy theorist in me suspects that this isn’t true because he never sleeps, but I pass it on in the absence of a more convincing explanation.)

Top News

 Kelly Moves from DHS to Replace Priebus

President Donald Trump moved retired General John Kelly from the Department of Homeland Security to be his new chief of staff. He replaces Reince Priebus, who had failed to deliver a new health care plan despite GOP control of both House and Senate. The announcement sparked speculation that Trump could try to move Attorney General Jeff Sessions to fill the job vacated by Kelly, instead of firing him. Separately, the White House indicated Trump would sign the bill expanding sanctions on Russia, Iran and North Korea that had been passed by bipartisan majorities in the House and Senate. Russia responded by ordering 755 U.S. diplomats to leave, reducing the diplomatic presence in Russia to parity with the Russian one in the U.S. Fortune

 Softbank Mulls Direct Offer for Charter After Rebuff 

Softbank is considering a direct offer for Charter Communications after the cable giant rejected its plans for a merger with Sprint, according to Bloomberg. The U.S.’s No. 2 cable provider had leapt to an all-time high on reports of an imminent merger Friday. Charter’s management has to parlay its traditional reach into something that will withstand society’s transition from cable-based to mobile connectivity. Charter’s resistance means Softbank will have to pay heavily for a long-term solution for Sprint, whose persistent losses suggest it doesn’t have the scale to make it on its own. Any ambitions Softbank has will hinge on convincing Charter’s largest shareholder John Malone, who has shown himself more than willing recently to reshuffle his portfolio to protect its long-term value. Bloomberg

Oil Prices Hit Four-Month Highs After Venezuela Unrest

Crude oil prices hit a four-month high overnight, cheered by the sight (finally) of some big drawdowns in U.S. inventories and further evidence of the U.S. drilling boom running out of steam. (The Baker Hughes rig count eked out another minuscule gain of only 2 last week). Prices were also lifted by threats of U.S. sanctions against OPEC member Venezuela after more civil unrest this weekend. President Nicolas Maduro had called for a referendum on his plans to create a new constitutional body that would further marginalize the opposition-controlled Congress. Eight people died in protests against the motion, with millions heeding the opposition call for a boycott. Fortune

Activists Look to Hijack Dow-Dupont Merger

Activist investors are looking to hijack the planned merger and restructuring of chemical giants Dow and Dupont in a concerted attempt to pressure Dow CEO Andrew Liveris into changing his strategy. The concerns of Jana Partners, Trian Fund Management, Glenview Capital Management and Third Point revolve around Dow Corning’s place in a new three-pronged structure foreseen by Liveris’ plan, and whether it should be in the specialty-chemicals business or the materials business. The Wall Street Journal cited Jana founder Barry Rosenstein alleging “empire-building” and “ego-massaging.” According to the paper, Liveris said that the investors are "trying to push him to create value in a spreadsheet;" he rejected Rosenstein’s view in tauroscatological terms. WSJ, subscription required


Around the Water Cooler

Missile Diplomacy in Asia 

President Donald Trump and Japan’s Prime Minister Shinzo Abe said they would seek further action against North Korea after the rogue Communist state successfully tested a missile that experts said could strike the U.S. mainland. But what they can hope to achieve at the UN isn’t clear, given Chinese resistance. Trump’s tweets this weekend again hinted at economic retaliation against China for its perceived refusal to control its client. On Sunday, the U.S. conducted a successful test of the Terminal High-Altitude Air Defense system that it wants to deploy in South Korea, but which China and Russia say destabilizes the strategic balance in east Asia. Fortune

Apple Shuts Its Window Through the Great Firewall

Apple removed from sale in China virtual private network apps that would allow users to skirt the country’s “Great Firewall.” The move follows the opening of Apple’s first data center on mainland Chinese soil earlier in July. Together, the steps fall into line with Beijing’s policy of exercising censorship over the Internet and ultimate power over its citizens’ data. VPNs allow users to connect to web servers outside China, giving them access to content illegal locally (such as reports of high-level corruption). In return, Apple removes a lot of the possible legal jeopardy of doing business in a market it badly needs. Fortune

FDA's Consolation Prize for AstraZeneca 

The FDA offered AstraZeneca some consolation after its disappointment with cancer immunotherapy drug Imfinzi last week. It awarded the ‘breakthrough’ designation to the drug, paving the way for a speedy regulatory review and confirming its potential in the (admittedly smaller) market for early-stage lung cancer treatment. AstraZeneca’s shares recovered about one-quarter of what they lost on the announcement that Imfinzi was no better at treating late-stage cancer than chemotherapy. According to The Times of London, that may not be enough to save CEO Pascal Soriot’s job. Reuters

Audi's Stadler Could Be the First Victim in German Car Scandal

Audi CEO Rupert Stadler could be the first victim of the latest scandal around the German car industry, according to Der Spiegel. VW’s luxury arm was named in reports of anti-competitive agreements among the big three German groups last year. The report undermined top management's strategy of denying knowledge of illegal activities underneath them. (Audi had also built the engines for Porsche that were discovered to be running illegal software last week.) A separate report by Bild-Zeitung accused the vehicle registration body KBA this weekend of turning a blind eye to Porsche’s use of such 'defeat devices.' The industry is set to hold crisis management talks with the German government on Wednesday. Der Spiegel



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