Sep 15, 2020

DealBook: Can Airlines Avoid Another Bailout?

13-16 minutes - Source: NYT

Credit...Charlie Riedel/Associated Press

Two weeks that could decide the future of the airline industry

Airlines are staring down a Sept. 30 deadline that could determine winners and losers in the beleaguered sector. By then, they must decide whether to take out dilutive government-backed loans or try to raise funds in some other way. At the same time, all are coming to the realization that the rescue aid they’ve used to pay their idled workers will soon run out, and it looks unlikely that more is in store.

What airline executives decide to do is based on bets on how strongly (or not) they expect travel to recover, and the stakes couldn’t be higher.

This is the state of play:

Airlines were offered two sources of money as part of the CARES Act: $25 billion in loans to cover general costs and $25 billion in payroll grants to keep workers employed. The terms of the loans were significantly more onerous — including restrictions on executive pay and dividends — than the conditions attached to the grants. (After all, the Treasury Department didn’t want the loans to be seen as bailing out an industry that had spent billions on stock buybacks before the pandemic.) Airlines have until the end of the month to decide whether to tap those loans, while the payroll-linked grants won’t be extended if Congress doesn’t pass another stimulus bill.

Airlines are trying to avoid taking the government loans — if they can.

Delta announced plans yesterday to take out $6.5 billion in bonds and loans backed by its frequent flier program, in lieu of the rescue loans on offer. Southwest has said it won’t take up the loans, either.

United raised $5 billion this summer in a loan backed by its frequent flier miles, but it hasn’t said whether it will also tap government funds.

American, which raised about $2 billion privately this summer, expects to take out a $4.75 billion Treasury loan.

Airlines that were already weaker than their rivals could become even more so by accepting the Treasury loans, with all the restrictions they entail. “Absolutely, I think it puts them at a disadvantage,” Southwest’s C.E.O. Gary Kelly told CNBC.

Regardless of what they do, without more grants there will be furloughs. Delta has warned it might have to furlough more than 1,900 pilots, American said it might have cut up to 19,000 workers and United could furlough as many as 36,000 employees. Outside the U.S., where airlines have had less support from the government, there have already been bankruptcies, including Avianca and Aeromexico.


Today’s DealBook Briefing was written by Andrew Ross Sorkin in Connecticut, Lauren Hirsch in New York, and Michael J. de la Merced and Jason Karaian in London. And introducing Ephrat Livni in Washington, who joins the DealBook team this week.



Credit...Adam Hunger/Associated Press

Steve Cohen agrees to buy the Mets (again). The hedge fund billionaire is taking a 95 percent stake in the team at a $2.4 billion valuation, The Times reports. The sale, which follows a failed agreement in January, doesn’t include SNY, the regional sports TV network run by the team’s current owners, the Wilpon family.

The U.S. blocked some Chinese imports over accusations of forced labor. Restrictions on imports of clothing, hair products and tech goods from the Xinjiang province were tied to claims that they were produced by Uighur Muslims and others held in internment camps.

A Nissan executive goes on trial, but it isn’t Carlos Ghosn. Greg Kelly, a longtime lieutenant to the ousted Nissan chairman, is accused of helping Mr. Ghosn hide tens of millions of dollars of pay. Unlike his former boss, who fled to Lebanon, he remains in Japan.

Citigroup may be hit by regulators over risk controls. The Office of the Comptroller of the Currency and the Fed are said to be planning to reprimand the bank for failures of its risk management systems, The Wall Street Journal reported. The issue reportedly accelerated plans for the bank’s C.E.O., Mike Corbat, to retire.

Nikola is facing an S.E.C. inquiry over a short-seller’s claims. The examination comes days after an investment firm, Hindenburg Research, published a lengthy report accusing the electric truck maker of exaggerating the capabilities of early vehicles. Nikola denied the claims and asked the S.E.C. to investigate … Hindenburg.


Credit...Kim Kyung Hoon/Reuters

The roughly $40 billion sale of Arm to Nvidia is one of the biggest tech deals of the year, and completes the transformation of SoftBank from a tech owner and operator into a risk-taking investor. Here’s how it came together, which DealBook’s Michael de la Merced pieced together from interviews with sources familiar with the talks.

Selling Arm to Nvidia was on SoftBank’s mind when the tech conglomerate began thinking about options for the chip designer in March. Putting Arm and Nvidia together, executives believed, would create a dominant force in the computer chip industry, combining Arm’s designs for chips that power smartphones — and soon, Macs — and Nvidia’s graphics chips, which are mainstays of cloud computing and A.I. applications. (Of course, antitrust regulators and Arm customers like Apple will scrutinize the deal, so its contours may change.)

SoftBank executives approached Nvidia in April, relying on a relationship they had built with the chip-maker’s founder and C.E.O., Jensen Huang, during a previous investment in his company. The next month, Nvidia said it wanted to proceed with what would be the biggest semiconductor deal on record.

Suggestions of a potential I.P.O. of Arm were a red herring. One of the people with knowledge of the talks described them as a way to maintain negotiating leverage with Nvidia. Meanwhile, the deal talks were restricted to a small group of executives: For SoftBank, that included Masa Son, its founder, and the executives Akshay Naheta and Spencer Collins; at Nvidia, that group included Mr. Huang and its C.F.O., Colette Kress.

A handful of banks worked on certain aspects of the transaction. SoftBank hired the boutique banks Zaoui & Company and Raine Group, as well as Goldman Sachs, while Nvidia used Morgan Stanley. But the key negotiations were handled by company executives over video calls.

By SoftBank’s own reckoning, the deal was good — but not yet a home run. Executives have argued that the Arm deal fetched a “good” price, not a high one. (Excluding earnouts and a stock payment to Arm employees, SoftBank is taking home $33.5 billion to start, versus the $32 billion it paid for Arm in the first place.)

• Historically, SoftBank has had lofty ambitions for valuations for itself and its investments — it is reportedly considering taking itself private because of frustration over its market cap. Here, it’s counting on the 6.7 percent to 8 percent stake it will take in Nvidia to boost the value of the deal: Executives argue that the combined company could grow into a $1 trillion valuation, from around $300 billion today. To which, we say: We shall see.

A deal to bring on Oracle as an American technology partner for the Chinese-owned app has been submitted for government review, ahead of a Sept. 20 deadline. The question now is whether the proposal — a far cry from the complete sale of TikTok’s U.S. operations originally envisioned — is enough to assuage President Trump’s concerns about national security.

What we now know about the transaction: Oracle would most likely oversee TikTok users’ data, potentially worldwide, The Times reported. Oracle and some existing ByteDance investors, including Sequoia and General Atlantic, may also have voting control over the app despite owning only a minority stake. TikTok would move its headquarters to the U.S., which the parties say could create more than 20,000 jobs. And TikTok’s Chinese-based parent, ByteDance, would maintain control of the app’s crucial algorithms.

Where do key Trump advisers stand? In the pro-deal camp are Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross. Arguing against the proposal are the White House trade adviser Peter Navarro (who isn’t playing a big role in the discussions) and Senator Josh Hawley of Missouri, an influential Republican who demanded TikTok’s “total separation” from Beijing.

Where does Mr. Trump stand? That’s the big unknown. He had previously rejected proposals for TikTok that didn’t involve an outright sale of its American business, and has threatened to shut down the app if there’s no such deal. (For more on the political optics of the Oracle agreement, see the Deal Professor’s take below.)

A final thought: In her latest “On Tech” newsletter, our colleague Shira Ovide writes that the whole drama has been a wasted opportunity:

The fight about TikTok wasn’t only about TikTok. It should have been a moment for engaged debate about what Americans should expect out of our technology and our government. Instead, the big questions went unasked and unanswered.


Credit...Hayoung Jeon/EPA, via Shutterstock

Steven Davidoff Solomon, a.k.a. the Deal Professor, is a professor at the U.C. Berkeley School of Law and a faculty co-director at the Berkeley Center for Law, Business and the Economy. Here, he considers the message that a TikTok’s partnership with Oracle would send about the White House’s political priorities.

The Committee on Foreign Investment in the United States, or Cfius, is the governmental body charged with deciding whether Oracle’s deal with TikTok passes muster.

Cfius administers the Exon-Florio law, which gives it the power to block deals if they “impair national security.” There is no real judicial review of this process, and any resolution is allowed to be confidential.

This means that the Oracle-TikTok deal will be assessed deep in the bowels of the government. And during that time, it seems that politics is now the primary determinant of TikTok’s fate. This is, after all, an election year.

Although President Trump had called for an American owner to take over TikTok, this deal is nothing of the sort. While the details are not yet public, what is likely is that ByteDance’s U.S. venture capital and private equity shareholders will mirror their ownership in TikTok’s U.S. business by flipping their shares in the parent into shares of the American subsidiary.

For Oracle, it looks mostly like a data-hosting deal, and the tech giant may even give TikTok discounts to do it. That is a nice reversal of fortune for TikTok.

After all the drama over ownership, will simply housing the data in the U.S. be enough to assuage the regulators? It wasn’t been enough in other divestitures involving Grindr, the dating app, and StayNTouch, a hotel-key management system. In those cases, the U.S. was not satisfied that data could be shielded from China by the companies’ Chinese owners. How is that not the case here?

Normally, this type of deal would be dead on arrival. But China has put the U.S. in check by blocking the export of TikTok’s algorithms. The U.S. could hold out and demand stricter concessions — or just shut TikTok down. But this is a political process, and we don’t know if there are side deals with China to push this through. Again, this is an election year.

Perhaps no clean “win” was ever going to result for the U.S. in this battle, but it would be nice to know what exactly the White House was fighting for.


Credit...Dia Dipasupil/Getty Images

Macy’s and New York City yesterday announced a “reimagined” Thanksgiving Day Parade. Instead of the usual one-day affair over a 2.5-mile route, floats will show in and around Herald Square over two days with 75 percent fewer spectators, no one under 18 participating and other pandemic-era limitations.

It’s another hit to New York City’s tourist industry. Held since 1924, one estimate last year found that the department store’s costs to put on the parade were around $10 million to $12 million annually. “That’s just conjecture,” Orlando Veras of Macy’s told DealBook, declining to comment on the economics of this year’s coronavirus-related changes. “We have never disclosed any costs associated with the parade,” he said, and the company considers it a “gift” to the city. “When you give a gift, you take the price tag off.”


• UBS’s chairman, Axel Weber, has reportedly been studying the possibility of a merger with Credit Suisse. (Bloomberg)

• Verizon is buying the TracFone prepaid wireless brand from the Mexican telecom America Movil for up to $7 billion. (CNBC)

Politics and policy

• Donors from Wall Street feel their influence has waned in this election cycle. (Reuters)

• Gary Cohn, the former Trump economic adviser, said he hasn’t decided whether to vote for President Trump or Joe Biden. (CNBC)


• Palantir’s latest offering documents suggest the data analytics company could be valued at about $25 billion when it goes public. (Reuters)

• Amazon plans to hire 100,000 workers in the U.S. and Canada for its warehouse operations. (NYT)

Best of the rest

• Making a case for disposable products. (City Journal)

• How Hershey is trying to promote safe Halloween trick-or-treating during the pandemic. (WSJ)

• Behind the scenes of New York’s first pandemic-era fashion show. (NYT)

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