NIGHTLY BUSINESS REPORT for October 21, 2016, PBS - Part 1



Contessa Brewer>

Electric (NYSE:GE); Stock Markets; Laura Slatkin; NEST Fragrances>

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Where there`s smoke? Deal buzz lights up tech, tobacco and media. Tonight, the reshaping of American business.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tale of two blue chips. Why investors cheered McDonald`s (NYSE:MCD) quarter, but jeered General Electric`s.

MATHISEN: And business sense. Meet the woman who pioneered the home fragrances industry, and ended up making millions.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Friday, October 21st.

HERERA: Good evening, everyone. And welcome.

Numerous reports tonight of big corporate mergers, very big. The combined price tag of all would be in the nine figures.

So let`s begin tonight with a potential get-together of two very familiar names. AT&T (NYSE:T) and Time Warner (NYSE:TWX). Such a deal would reflect the fast consolidation of the media communications and Internet industries. The acquisition of Time Warner (NYSE:TWX) would give AT&T (NYSE:T) control of a lot of popular content, including CNN, HBO and valuable cable channels.

The speculation sent shares of Time Warner (NYSE:TWX) up more than 7 percent, and AT&T (NYSE:T) lower by about 3 percent.

But the deal isn`t done yet. And there are additional reports that even Apple (NASDAQ:AAPL) may be interested.


HERERA: Media companies think bigger is better these days. And a merger of AT&T (NYSE:T) with Time Warner (NYSE:TWX) might be the biggest of all. Adding AT&T (NYSE:T) with the market cap near $233 billion to Time Warner (NYSE:TWX) at about $68 billion, would create a media powerhouse, bigger than Comcast (NASDAQ:CMCSA) (NYSE:CCS), the producer of this program, and bigger than Disney (NYSE:DIS), 21st Century Fox and CBS (NYSE:CBS) and Viacom (NYSE:VIA). Those last two are reported to be in merger talks, too.

AT&T (NYSE:T)/Time Warner (NYSE:TWX) would be the biggest media deal since Comcast (NASDAQ:CMCSA) (NYSE:CCS) bought NBC Universal (NYSE:UVV) in 2011. In this case, AT&T (NYSE:T) would get Time Warner (NYSE:TWX) content from HBO, CNN, TNT, TBS, Warner Bros., the Cartoon Network and others. AT&T (NYSE:T), known for its telephone, wireless Internet and satellite services is looking for growth. It tried to buy T-Mobile in 2011, but regulators killed the deal. Now, it`s looking at video, which accounts for most of the content pushed through its pipes.

And that`s why it bought DirecTV last year, for about $50 billion, instantly making AT&T (NYSE:T) the biggest player in pay television.

AMIR ROZWADOWSKI, BARCLAYS CAPITAL: When you think about how content is being consumed today, more and more millennials are consuming content over tablets, over their smartphones. And, really, when you think about the opportunity set, there is a tremendous opportunity to push content.

HERERA: Companies like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Verizon (NYSE:VZ) are all aiming to get into the streaming game.

Risk? Media bets carry plenty. In 2000, AOL (NYSE:AOL) bought Time Warner (NYSE:TWX) for $160 billion. At the time, it was the largest corporate takeover ever. But the dot-com ended, and two companies never got in sync.

Today`s Time Warner (NYSE:TWX) is a different company, though. CEO Jeff Bukus has shaped a pure content creator. It sold AOL (NYSE:AOL) to Verizon (NYSE:VZ) and spun off Time Warner (NYSE:TWX) Cable and Time Inc., its publishing division.

Two years ago, 21st Century Fox tried to buy Time Warner (NYSE:TWX), offering $80 billion. But Time Warner (NYSE:TWX) thought it could do better.

So, how much would AT&T (NYSE:T) need to make a deal work? Stay tuned.


MATHISEN: Stay tuned indeed.

James Dix joins us to discuss whether an AT&T (NYSE:T)/Time Warner (NYSE:TWX) deal would make sense. He`s a media analyst at Wedbush Securities.

That sounds, James, like as good a question -- place to start as any. I find it really ironic -- I used to work for Time Warner (NYSE:TWX), by the way, a full disclosure. Time Warner (NYSE:TWX) recently spun off its cable business. It eschewed, backed away from this idea of marrying content and distribution, that is the very business model that AT&T (NYSE:T) seems now to be banking on if indeed it bought Time Warner (NYSE:TWX).

So, why does it make sense for Time Warner (NYSE:TWX) to do this or AT&T (NYSE:T)?

JAMES DIX, WEDBUSH SECURITIES MEDIA ANALYST: Oh, it certainly may make more sense for Time Warner (NYSE:TWX) than it does for AT&T (NYSE:T), especially if Time Warner (NYSE:TWX) is largely going to be a seller in this transaction.

But I think you`re right. You basically had a company, Time Warner (NYSE:TWX), which has been talking to investors for a while about the advantages of spinning off and getting a cleaner corporate structure, more focus on content -- as you noted -- splitting out Time Warner (NYSE:TWX) cable here to some extent, this is an about-face in terms of that strategy.

Now, of course, it would be AT&T (NYSE:T) presumably driving that strategy. But vertical integrations like this, it seems difficult to see their big synergies on their face.

And also -- yes, go ahead.

HERERA: You know, one of the issues that has been brought up by various analysts in this whole discussion is that if AT&T (NYSE:T) does want to go this route, the Time Warner (NYSE:TWX) is really the only player they could go after, because it`s the only one with a single class of stock. All the others have several classes of stock, and so it makes it much more difficult to do any kind of a deal.

DIX: Yes, I suppose that -- I mean, that kind of begs the question of whether this is a good road to go down for AT&T (NYSE:T) in the first place. Once you made that decision, then you can make the decision whether Time Warner (NYSE:TWX) is really your best option, and as you said, because it`s -- does not have super voting shares in many ways. It`s the only option at this type of scale.

That`s one of the reasons why Time Warner (NYSE:TWX) is much more likely to be the subject of these types of reports and this type of activity than the other big media names in the space, because it lacks that super voting structure that might block a deal.

MATHISEN: I assume that this would be done with a lot of debt. AT&T (NYSE:T) already has a lot of debt. If I`m an AT&T (NYSE:T) shareholder, who loves that dividend, and this company is going to take on a lot of debt, what does that say about the safety of my dividend and the future of my stock?

DIX: Yes. I mean, I cover Time Warner (NYSE:TWX). I do not cover AT&T (NYSE:T). I guess what I would say is that -- one advantage is that interest rates are relatively low. So, therefore, debt is not -- you know, can be more accretive in these types of calculations than it might be if interest rates were higher.

But again, I think you really have to think about what the strategic implications are, and what`s the real benefit and plan as opposed to just whether the numbers make sense in terms of an arithmetic calculation.

MATHISEN: Quick yes or no, does Time Warner (NYSE:TWX) need AT&T (NYSE:T)?

DIX: No, I don`t think so. You can make an argument that having greater vertical integration allows for maybe a better bundle down the road. But Netflix (NASDAQ:NFLX) did without it.

MATHISEN: All right. James Dix with Wedbush -- thanks.

HERERA: Now on to deal number two, which involves two chip makers. Qualcomm (NASDAQ:QCOM) is reportedly near an agreement to acquire NXP Semiconductor for about $37 billion. That deal would make Qualcomm (NASDAQ:QCOM) a bigger supplier to the automotive industry. It already supplies chips to smartphone makers like Apple (NASDAQ:AAPL). The move would expand Qualcomm`s reach as the smartphone market starts to slow.

The deal could be announced within days. Qualcomm (NASDAQ:QCOM) is reportedly offering NXP Semi $110 a share. Shares of both companies moved in opposite directions.

MATHISEN: And the third deal is in the tobacco industry. British American Tobacco made a $47 billion offer to buy the rest of Reynolds American (NYSE:RAI) it does not already own. Such a combination would create the world`s largest listed tobacco company by both revenue and market value. It would also create the world`s largest player in e-cigarettes and other vaping products.

The deal would combine well-known brands, British American owns Dunhill, Kent, Kool and Rothmans. Reynolds American (NYSE:RAI) owns Newport (NASDAQ:NEWP), Camel, Pall (NYSE:PLL) Mall and, who could forget, Grizzly Snuff.

Shares of Reynolds American (NYSE:RAI) up 14 percent today. British American Tobacco shares down 4 percent.

HERERA: Well, that potential deal news was not enough to lift the broader market. Stocks finished mostly flat with consumer discretionary stocks the best performing sector. The Dow Jones industrial average fell 16 points to 18,145, the NASDAQ rose 15, the S&P 500 fell fractionally. For the week, the major indexes rose just slightly.

MATHISEN: It was a sluggish quarter for General Electric (NYSE:GE), despite topping Wall Street`s earnings expectations. The company missed revenue projections and cut its full year sales forecast. G.E.`s oil and gas business proved to be a big drag on those results, and that pressured shares which fell fractionally in trading today.

Seema Modi now with more on the company`s quarter.


SEEMA MODY, NIGHTLY BUSINESS REPORT CORRESPONDENT: After a weak first half of the year, Wall Street was hoping for a rebound in revenue growth from the industrial giant. But weakness in General Electric`s oil and gas business continues to hurt sales, prompting the company to lower its full year revenue forecast.

Analysts had been targeting second-half growth of about 50 percent in GE`s power business, its largest division. In the third quarter, power revenue grew only about 7 percent. Goldman Sachs (NYSE:GS) is calling it a weak operational quarter.

But despite the challenging environment, CEO Jeff Immelt remains positive of the company`s long term outlook.

JEFF IMMELT, CEO, GENERAL ELECTRIC: The oil and gas team is executing well in a tough environment. We continue to aggressively manage costs while positioning for long-term growth. The business fully leverages the GE Store and will come out of the cycle stronger.

MOODY: GE lifted its cash flow outlook and announced a boost to its share buyback by an additional $4 billion.



HERERA: Fellow Dow component, McDonald`s (NYSE:MCD), was one of the bright spots in today`s session. Its quarterly earnings were better than expected. Thanks to the popularity of its all-day breakfast menu. The results provided further evidence for investors that its turn-around plan is taking hold. The stock up more than 3 percent in trading today.

Susan Li has more on McDonald`s (NYSE:MCD) results.


SUSAN LI, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three things that helped McDonald`s (NYSE:MCD) in the recent quarter: One, preservative-free chicken McNuggets, which boosted by 10 percent. Two, Japan sales jumping close to 18 percent on promotions like Pokemon Go happy meals. And three, sustained all-day breakfast sales. Analysts have concerned the breakfast boost was fading at it goes up against the one-year anniversary.

Now, the drags in the quarter: China saw sales fall on costs from the South China Sea ruling which Yum also said in their recent earnings. McDonald`s (NYSE:MCD) did mention on the earnings call they are in the final stages of selling off their China, Hong Kong and other Asia businesses and they expect these sales to be completed by year-end.

Back here in the U.S., the Golden Arches, like the rest, is trying to find growth in a restaurant recession, hurt by cheaper grocery prices, at their cheapest relative to restaurant prices and close to 30 percent.

McDonald`s CEO Steve Easterbrook says a gap in prices is just one factor negatively impacting sales.

STEPHEN EASTERBROOK, CHAIRMAN & CEO, MCDONALD`S: I think the broader macro economic issues of consumer confidence and just uncertainty of wage increases that the slight squeeze on discretionary spending with gas prices edging back up and health care costs going back up. So, I think those are the sort of things we see affecting customers.

LI: Now, before today, McDonald`s (NYSE:MCD) stock was down 16 percent since May, and trading close to the lowest in a year. This quarterly report card, though, may change that momentum.



MATHISEN: Still ahead, what we know about today`s massive attack on the Internet that caused widespread outages.


HERERA: A massive internet outage shut down or slowed major websites across cyberspace. Sites like Twitter, Spotify and Amazon (NASDAQ:AMZN). Dyn, a company that is responsible for routing the traffic request was apparently hit by targeted strikes. After the first attack was resolved, Dyn reported a second one midday and a third one later in the afternoon.

Eamon Javers has been following the story all day from Washington.

Eamon, do we know yet who is doing this?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: We don`t know who is doing it, Sue. But, interestingly enough, what Dyn said today is that this is coming from tens of millions of different IP addresses, all around the world. It`s a global attack, what`s called a distributed denial of services attack.

And NBC News` Pete Williams did speak to a senior U.S. intelligence official today who said their initial assessment is this is what`s called Internet vandalism, rather than a state-sponsored attack. So, at least early on here, they seem to be ruling out that it was Russia or China, maybe, behind it.

MATHISEN: Who has the ability to influence those tens of millions of computers to do what they`re doing?

JAVERS: Well, that`s an open question. We`ll find out as investigators dig deeper into this. But the interesting thing here is that investigators at Dyn said that what they saw here was a botnet of devices hooked up to the so-called Internet of things. So, we think of these botnets being cloned computers around the world that are used for this cyberattacks.

In this case, though, they said it could have been things like DVRs or cameras on phones or even those toasters you see that can be hooked up to the Internet nowadays. All of those devices now are also attached to the Internet, and they said that a lot of those were used in part of this attack today.

So, that`s why it was so difficult for Dyn to fend all of traffic off at the same time. It all came inbound all at once.

HERERA: Very frightening. Thank you, Eamon, very much.

JAVERS: You bet.

HERERA: Eamon Javers in Washington.

MATHISEN: Arizona usually votes Republican, but this year, it is a battleground state for a change. And it is at the center of one of the most controversial issues of this election season: immigration.

Contessa Brewer reports tonight from Phoenix.


CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT: At Digital Air Strike, a social media marketing and brand reputation company, CEO Alexi Venneri worries about the way the Trump presidency might affect her business.

ALEXI VENNERI, DIGITAL AIR STRIKE CEO: There`s a lot of need for more business in the country. It absolutely concerns me. If he became the guy in charge to make some of the decisions and to follow through on some of the threats he`s made, I see them as threats and that concerns me.

So, it worries me. It could limit our ability to do that and ultimately could hurt our job creation.

BREWER: Arizona is a red state. It`s only voted for a Democrat for president once in the last 68 years. Now, Hillary Clinton`s leading Donald Trump by five points in the "Arizona Republic" poll.

ROBERT GRAHAM, ARIZONA REPUBLICAN PARTY CHAIRMAN: When I see the tied numbers, that`s astonishing to me that we`re even that close. But we are.

And then it comes down to, who do we get out to vote? We`re going to get Republicans out to vote more.

BREWER: "The Arizona Republic" endorsed Hillary Clinton, the first Democrat in its 125-year history. The newspaper was bombarded by threats in response. But the editorial board reflects what is happening politically, as conservative Arizonans denounce Donald Trump.

DAN NOWICKI, THE ARIZONA REPUBLIC: I don`t think they like kind of the swaggering playboy lifestyle. You know, the multiple marriages, that kind of rubs them the wrong way.

BREWER: Arizona`s Latinos have almost $40 billion in purchasing power. And statewide, almost 15 percent of all businesses are owned by foreign- born entrepreneurs.

NOWICKI: The closer you get to the border, the less they want a wall. People live down there, they`re concerned about border security. But just building a medieval-style wall or whatever exactly Trump is talking about is not what they`re looking for.

BREWER: As Trump support has lagged, his accusations have increased. He calls the election process rigged.

Is there any possibility this election is rigged?

MICHELE REAGAN, ARIZONA SECRETARY OF STATE: I can tell you in Arizona, nobody knows what the vote is going to be, except for the voters.

BREWER: In Arizona, the voter registration system was hacked, but not compromised. Arizona business owners are looking for growth and stability, even if it means higher corporate taxes.

VENNERI: I`m always looking for ways that we can reduce the size of government and taxes overall as a business owner. But ways we can stimulate the economy and help us as a business owner ultimately create more jobs.

BREWER: Alexi Venneri is hoping for a future worth cheering for.

For NIGHTLY BUSINESS REPORT, I`m Contessa Brewer, Phoenix, Arizona.


HERERA: Honeywell posts its first profit drop in five years and that`s where we begin tonight`s "Market Focus".

The conglomerate said weakness in the aerospace division caused decline but results still better than expected. The company also said it expects earnings for the current quarter to rise by double digits. Shares finished the day up fractionally to $108.96.

Moody`s (NYSE:MCO) said it expects the Justice Department to file a lawsuit against the ratings agency over alleged violations related to the grading of mortgage bonds and other securities leading up to the 2008 housing crisis. Moody`s (NYSE:MCO) also reported an increase in quarterly profit and revenue, prompting it to race its full-year earnings outlet. Shares fell 5 percent to $102.24.

The mobile network equipment maker Ericsson posted a loss a week after its quarterly earnings would be nearly wiped out. Sales also fell with the company citing a weak telecom equipment market and stronger competition. Shares off 5 percent to $5.10.

And a strange day for luxury retailers Coach (NYSE:COH) and Burberry. First, there were reports Coach (NYSE:COH) was working with an investment bank on a potential merger with Burberry. Then later in the morning, different reports came out and said the two companies were not in active talks. Shares of Coach (NYSE:COH) fell 1 percent to $35.55.

HERERA: Our market monitor likes cloud computing and social media companies. He has names of companies he says reflect the new reality of tech. Last time he was on, back in December, he recommended Amazon (NASDAQ:AMZN), which is up 22 percent. Facebook (NASDAQ:FB), which is up 24 percent. And Workday, which is 10 percent higher.

Joining us now is Mark Lehmann. He`s president of JMP Securities.

Nice to have you back, Mark. Welcome.

MARK LEHMANN, JMP SECURITIES PRESIDENT: Thank you. Thank you for having me.

HERERA: So, the new reality of tech. What do you mean by that?

LEHMANN: The new reality of tech really tells a couple stories. One is you have cloud computing, which is what we saw in the Microsoft (NASDAQ:MSFT) report. And companies like Salesforce and Amazon (NASDAQ:AMZN) are going that way. And also obviously social media, and what we see in companies like Facebook (NASDAQ:FB) and others.

And that`s the new reality of tech. And you need to play in those large- growing markets. And if you`re not, you`re probably stagnating and not growing the top line and bottom line.

MATHISEN: You still like Facebook (NASDAQ:FB). Tell us why you`re so hot on Facebook (NASDAQ:FB).

LEHMANN: I do. I think they have had a tremendous year. I think they`re monetizing their subscribers in a great way.

Obviously, there`s over 1 billion people who check their Facebook (NASDAQ:FB). I like to call it the World Cup Finals every day. A billion people check their Facebook (NASDAQ:FB) every day.

Instagram now has over 500 million users and I think that kind of after user base and that kind of action on their two platforms is growing. And the amount of time they`re on those platforms is also going up.

And advertisers crave that kind of attention and that kind of demographic and that is not slowing down. And although the stock is coasting towards an all-time high near $132 today. You usually get an opportunity when people worry that growth is slowing and worry the margins are unsustainable and I think those are the times you want to pick up shares of Facebook (NASDAQ:FB).

HERERA: OK. Next on the list is Microsoft (NASDAQ:MSFT), which had a big pop the other day on its earnings, which blew past Wall Street estimates. Would you still buy it at this point, given the price move it`s had recently?

LEHMANN: Yes, you know, I would. The stock eclipsed its $99 high, which is a seminal moment for the company. They`ve really invented the company over the last few years.

They still own the desktop. That`s the term we don`t use a lot anymore in Wall Street. But they still own that market. But their move to cloud computing has been rapid. They`re investing in the data centers and in the cloud, and I think they`re doing a wonderful job of getting there as more of that business starts to mature in the kind of growth accelerates, you`re going to see a multiple expansion there, tied with the EPS move, you probably will see growth in that stock.

And, being again, they pay a dividend, which is kind of a rarity for a high-tech, high-growth company. And that`s a really important thing for dividend growth managers who get both that dividend and also get the kind of growth we saw in the last quarter.

MATHISEN: Everybody has got their eye on Salesforce. Most especially because of rumors they may do some big acquisition. You like the stock. How worried are you that Mr. Benioff goes in and buys a big company that may pay a lot of money for one?

LEHMANN: He`s going to buy something, OK? Probably the most interesting thing of this campaign season is when we saw Colin Powell`s e-mail talking about the Salesforce playbook. It`s fascinating to me. It`s fascinating to my analyst Pat Walravens. But what the stock has done, and that rumor of the last three or four weeks has gone down by about 15 percent.

And I think nobody has done a better job of moving their customer toward the cloud. Nobody has done a better job than Marc Benioff at running his company. And I think, right now, you have a maximum amount of fear that they`re going to do something that is detrimental to the stock. And they`re going to do quite well and I think that`s the stock you want to go forward.

HERERA: We have to leave it there. Mark, thank you.

LEHMANN: Thanks.

HERERA: Have a great weekend. Mark Lehmann with JMP Securities.

LEHMANN: You too.

HERERA: Coming up, the sweet smell of success. Meet the woman lighting up the fragrance market one candle at a time.

Tonight`s "How I Made My Millions" is next.


MATHISEN: The prestige beauty industry in the U.S. grew to $16 billion last year, partly on the strength of so-called luxury candle sales. They were up double digits. One company cashing in is NEST Fragrances. In tonight`s "How I Made My Millions" segment, we check out the business scents of NEST`s founder Laura Slatkin.


MATHISEN: When Laura Slatkin picks up a scent, she knows a winner when she smells one.


MATHISEN: She proved she had a nose for business back in 2008, the day she launched NEST Fragrances -- her brand of luxury aromatic products for bath, body and home.

SLATKIN: We sold 1,000 candles in one day. And I screamed at the top of my lungs, because I knew that we had hit on our hands.

MATHISEN: Still, NEST is not what you would call an overnight success. It`s more like the culmination of decades spent learning the intricacies of an industry she helped pioneer. A business she unwittingly married into when she tied the knot with Harry Slatkin.

SLATKIN: Harry`s brother, Howard Slatkin, is a world renown interior designer. And he had this beautiful shop on East 70th Street and he asked Harry and I, would we like the shop as a wedding present and we looked at these charming little candles that he made, and we said, wow, wouldn`t it be cool if we started a home fragrance company.

MATHISEN: In 1992, they did just that. Quitting their well-paying Wall Street jobs to found a scented candle concept called Slatkin and Company out of the interior design shop.

SLATKIN: We actually used the cash flow from the shop to manage the initial business. And remember, we were fighting the fact that it wasn`t really an industry.

MATHISEN: Thirteen years later, the Slatkins were selling products exclusively in high-end retail stores and reportedly bringing in $15 million to $20 million in sales annually.

Nancy McKay, then an executive at Estee Lauder, took notice.

NANCY MCKAY, CEO, NEST FRAGRANCES: I believe they are the reason that home fragrance is growing the way that it is today.

MATHISEN: According to a study by the market research firm, the MPD Group, sales of Prestige Fragrance Candles are up 18 percent, and Reed Diffusers up 36 percent since April of 2015.

But Slatkin and Company was attracting more than a decade before that, namely Limited Brands (NYSE:LTD) founder, Les Wexner, who bought the home fragrance business in 2005 for an undisclosed amount and hired Harry.

MCKAY: And so, Laura was actually faced with a challenge.

SLATKIN: I was really worried about my husband, whether he would really enjoy working for a large company. So, NEST Fragrances started as a backup plan.

MATHISEN: The company also began as a private label business, with Laura creating home fragrance collections for more than 80 luxury brand clients, while she waited out a three-year non-compete agreement.