The Morning Playbook: Bill Ackman takes Valeant-Allergan saga to another level

Your top financial news for Sept. 10


Top of the Morning

The Globe and Mail’s Kevin Carmichael makes the case that the United States government will take unilateral action to stem the flood of tax inversions:

In a speech Monday, Treasury Secretary Jacob Lew said he still was reviewing his options, but promised a response to tax “inversions” like the one Burger King is planning “in the very near future.” Mr. Lew said he sees the increasing popularity of the strategy as a threat to the U.S. tax base, compelling him to act. He also spoke of the practice in moralistic terms, calling it “wrong.”…

There is no outcry within [Obama’s] own ranks to rethink his position on inversions; if anything Democratic lawmakers want him to act because they know the odds of coming to a legislative compromise with Republicans are extremely low.

Control of the Senate will come down to the ability of Democratic senators to hold states such as North Carolina, Louisiana and Arkansas. Any voters in these places who would be angered by the Democratic President doing something to block corporate tax dodgers already were against him and his party. The political incentive to move on inversions outweighs the risk of making a messy tax system messier.

On the Homefront

TSX 60 futures are moving higher ahead of the open after the composite index booked a decent gain on Tuesday.


The loonie is hovering around 0.91 against the greenback this morning after the pair’s roller-coaster ride on Tuesday.


The complicated commodity complex. Canada’s oil stocks took a beating on Monday, but bounced back on Tuesday. Traders are currently forced to balance the potential for slowing growth in China, a massive consumer of energy products, with an incremental boost in demand stemming from the resurgence of the world’s largest economy and Canada’s most important trading partner, the United States. And that’s just the demand half of the equation. On the supply side, geopolitical tensions, the shale revolution, rising input costs, and the liberalization of Mexico’s domestic industry will continue to affect projections for production over the short-to-medium term, and in turn, the price of crude. What’s more, the strengthening greenback typically tends to weigh on major commodities, which, of course, are priced in U.S. dollars. In general, commodities – especially oil – have held up better than most anticipated heading into 2014.


The Ack-attck unleashed on Allergan. Valeant Pharmaceuticals’ (VRX) quest to acquire Botox-maker Allergan, with help from Pershing Square’s Bill Ackman, has been the must-watch story of 2014. The Canadian pharma giant’s hostile bid has not been well-received, to say the least, with Allergan questioning the sustainability of its business model and its accounting practices. However, in a letter sent to the Botox maker’s Board of Directors, Bill Ackman cranks up the rhetoric to a whole new level. The billionaire blasts the Board for actions he deems “professionally and personally embarrassing for you,” and calls for them to go against the wishes of Allergan CEO David Pyott. A spokesperson for Allergan says that Ackman’s “hyperbole, bluster, and personal attacks do not change the fact that Valeant’s offer is grossly inadequate.” It’s unclear what Ackman and Valeant stand to gain from this display of vitriol; perhaps the billionaire thinks escalating the chaos surrounding this transaction might push more long-term shareholders away from Allergan and attract short-term, event-driven funds that would be more likely to support the deal.


More companies to follow Encana’s lead? Following the announcement that it was selling the remainder of its 60-percent stake in PrairieSky (PSK), investors have been wondering not only about what Encana (ECA) might do with this cash, but also if other companies are looking to take a page out of its book. The Financial Post’s Yadullah Hussain highlights Cenovus (CVE) and Canadian Natural Resources (CNQ) as companies that might be looking to spin off their royalty assets. Investor demand for this type of company might be satiated in the short-term, however, as the secondary offering of PrairieSky was reportedly met with much less demand than its initial public offering.


Canadian grocer reports earnings. Empire Company Ltd. (EMP.A), the owner of Sobeys, is slated to report its Q1 fiscal 2015 results this morning. The stock drifted lower during the first five months of 2014, but is currently up 3 percent year-to-date after going on a year over the summer. Analysts are expecting earnings per share of $1.35 on revenues of about $6.2 billion. In its previous earnings report, Empire beat expectations on the bottom line, reported revenues in-line with estimates, and hiked its quarterly dividend by one penny to $0.27. At that time, management also announced plans to close 50 underperforming Sobeys locations.


A check-up on capacity utilization. At 8:30am (EDT), Statistics Canada will publish the nation’s capacity utilization rate for Q2. The Bank of Montreal forecasts that this metric will rise by half a percentage point to 83 percent, which would be its highest level in eight years. Note that capacity utilization never gets too close to 100 percent – companies like to leave room to meet an unexpected increase in demand, and running all of their equipment at full steam increases the likelihood that something will break down and require maintenance.

UPDATE: Canada’s capacity utilization rate rose to a seven-year high in Q2, but came in below the consensus estimate.


The low-rate party has resumed. In fact, it never ended. The Bank of Montreal (BMO) has lowered its posted five-year fixed mortgage rate below 3 percent once again, making it the lowest amongst Canada’s big banks. RateSpy, which brought this news to our attention, points out that well-qualified borrowers have been able to get discounted rates below 3 percent from a variety of lenders. A spokesperson for BMO cited low bond yields as the rationale for this move.

Daily Dispatches

Apple dominated headlines on Tuesday. “The bond market would have you believe it is the center of the universe and the Fed is the oracle to whom the bond vigilantes pray to and occasionally mock,” writes Adrian Miller, director of fixed income strategy at GMP Securities. “But in truth the center of the universe is Apple and Tuesday saw them further solidify their heavenly position with the announcement of two new iPhones, mobile payments and an Apple watch.” While consumers may have been captivated, traders were not placated by the tech giant’s massive product launch. The new iPhones will be available soon, however, the Apple Watch won’t be available until 2015. The stock peaked shortly before the unveiling of the Apple Watch, and ended the day down 0.4 percent.


The French government announced that it won’t be able to meet the European Union budget deficit target of 3 percent of GDP until 2017. This news comes shortly after the nation posted a budget deficit of €84.1 billion through July.


Some more discouraging news out of Japan as core machinery orders rose 3.5 percent month-over-month in July, less than economists had forecast. A broad array of data – not just the backward-looking large contraction in Q2 – suggests that the economy has lost a substantial amount of steam after the sales tax was hiked in April.