PLC, according to people familiar with the matter, in a takeover likely to be valued at well over $20 billion and mark the largest healthcare merger of the year.
The U.S. biotechnology company was the last of three suitors standing in an auction for Horizon, the people said, after French drugmaker
Sanofi SA
said Sunday it was out of the running.
A deal could be finalized by Monday assuming the talks with Amgen don’t fall apart, the people said.
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Major news in the world of deals and deal-makers.
Horizon develops medicines to treat rare autoimmune and severe inflammatory diseases that are currently sold mostly in the U.S. Its biggest drug, Tepezza, is used to treat thyroid eye disease, an affliction characterized by progressive inflammation and damage to tissues around the eyes.
The company is Nasdaq-listed, but based in Ireland and has operations in Dublin, Deerfield, Ill., and a new facility in Rockville, Md.
Horizon said last month it was fielding takeover interest from Amgen, Sanofi and
Johnson & Johnson,
a disclosure prompted by a Wall Street Journal report.
Johnson & Johnson later said it had dropped out.
Last year, revenue from Tepezza more than doubled, driving Horizon’s overall net sales 47% higher to $3.23 billion. Horizon has said that annual global net sales of the drug are targeted to eventually peak at more than $4 billion as the company aims to win approval to sell it in Europe and Japan.
That type of growth is attractive to big drug companies—with many sitting on big piles of cash—that rely on acquisitions as a key strategy to expand sales. Many big drugmakers are looking for new sources of revenue to offset losses when some of their main products lose patent protection.
Analysts expect Amgen will lose sales when patents begin expiring on its big-selling osteoporosis drugs Prolia and Xgeva later this decade. The pair of drugs accounted for nearly $5.3 billion of Amgen’s $26 billion in revenue last year.
In October, Amgen completed a $3.7 billion deal for ChemoCentryx and its drug to treat a rare immune-system disease.
Adding Horizon would provide more rare immune-disease drugs to Amgen’s lineup, which also includes the biotech’s Enbrel and Otezla immune-disease therapies. Amgen could help sell more of Horizon’s products overseas, according to analysts.
Acquiring Horizon could add about $4 billion in new revenue for Amgen by 2024, according to Jefferies & Co.
Other big life-sciences companies have been inking deals in recent months.
Johnson & Johnson recently struck a $16.6 billion deal to acquire heart device maker Abiomed Inc. to bolster sales of its medical-gear division, which had been lagging behind those of its pharmaceutical unit.
Merck
& Co. followed with a deal of its own, agreeing to buy blood-cancer biotech
Imago BioSciences Inc.
for $1.35 billion, ahead of the patent expiration of its cancer immunotherapy Keytruda.
Pfizer Inc.,
meanwhile, agreed in August to buy Global Blood Therapeutics Inc. for $5.4 billion, in a deal that would give the big drugmaker a foothold in the treatment of sickle-cell disease.
A deal for Horizon would likely rank as the largest healthcare acquisition globally in 2022, ahead of the Johnson & Johnson-Abiomed tie-up. The selloff in stocks this year amid rising interest rates, while putting a damper on deal activity, has also made some companies more attractive targets. At the stock’s peak about a year ago, Horizon was valued at roughly $27 billion.
The shares, which fell sharply earlier this year, have surged since the possibility of a takeover surfaced, and the company now has a market value of about $22 billion.
Horizon’s other drugs include Krystexxa for treating gout, a form of inflammatory arthritis, and Ravicti for a rare, potentially life-threatening genetic disease known as urea cycle disorder that raises ammonia levels in the blood.
Drugs treating rare diseases have emerged as a large source of pharmaceutical sales because they can command high prices that health insurers have been willing to pay.
Write to Ben Dummett at ben.dummett@wsj.com, Dana Cimilluca at dana.cimilluca@wsj.com and Laura Cooper at laura.cooper@wsj.com
had been working for close to a year to calm regulators’ concerns about its acquisition of videogame developer
Activision Blizzard Inc.,
ATVI 0.54%
but the Federal Trade Commission’s suit to block the deal raised doubts about the company’s pledge not to shut out rivals.
The FTC this week took one of its biggest swings ever against a big technology company and sued to stop the planned $75 billion acquisition, setting the stage for a court challenge over a deal the antitrust agency said would harm competition.
The commission’s complaint said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft has repeatedly said it wouldn’t engage in such actions. The FTC’s complaint accused Microsoft of reneging on a similar pledge to a European regulator in the past, a criticism the company disputes.
Earlier this week, as the possibility of a lawsuit grew, Microsoft touted the deal’s benefits to gamers through an op-ed article in The Wall Street Journal and announced an agreement to give a competitor access to one of Activision’s most popular games. The FTC filed its lawsuit on Thursday.
“The Proposed Acquisition, if consummated, may lessen competition substantially or tend to create a monopoly,” the FTC said in its complaint against Microsoft.
Executives at the Redmond, Wash., company have said it would take a long time to get all the approvals needed from regulators around the world, and it had given itself close to 18 months for the process. The deal could now miss Microsoft’s mid-2023 deadline, and some analysts said Microsoft might want to drop the acquisition.
Microsoft should “take the hint and give up the deal that, if completed, might end up a Pyrrhic victory of executive distraction and expensive regulatory concessions,” John Freeman, vice president at investment-research firm CFRA Research, wrote in a note to investors.
Competitors had expressed concerns the deal would block them from access to Activision games such as the popular ‘Call of Duty’ franchise.
Photo:
Allison Dinner/Associated Press
At stake is Microsoft’s big ambitions for its videogaming business, which had revenue of $16 billion in the company’s last fiscal year. That total represents less than 10% of Microsoft’s overall revenue. The business is a crucial part of Microsoft’s plans to diversify to attract more noncorporate customers.
The FTC’s move came after the company had avoided the brunt of the anti-tech backlash of recent years.
The suit represents a “somewhat meaningful setback” for Microsoft because of the company’s longtime lobbying efforts, said Stifel Nicolaus analyst Brad Reback. “They’ve worked very hard to stay on the right side of government agencies.”
Microsoft’s representative in Washington—its vice chairman and president,
Brad Smith
—has been building relationships in the capital for decades. He had helped cultivate an image of the software giant as one of the friendly technology leaders, an enviable position in a regulatory environment that has been increasingly hostile toward tech titans.
One of the longest-serving leaders inside Microsoft, Mr. Smith joined the company in 1993 and was a legal adviser through its bitter antitrust disputes with regulators worldwide in the 1990s.
“We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,” Mr. Smith said after the lawsuit was filed. “While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court.”
In its complaint, the FTC accused Microsoft of previously suppressing competition from rivals through its 2021 acquisition of ZeniMax Media Inc., parent of “Doom” developer Bethesda Softworks, despite giving assurances to European antitrust authorities that it would do otherwise. Microsoft said the FTC’s ZeniMax allegation is misinformed.
Brad Smith, Microsoft’s vice chairman and president, has been building relationships in Washington for decades.
Photo:
Zed Jameson/Bloomberg News
Microsoft officials have expressed confidence in closing the Activision deal, which it has valued at $68.7 billion after adjusting for Activision’s net cash. Lawmakers and industry representatives have said it would be hard for any of the biggest U.S. tech companies—including
Apple Inc.,
Amazon.com Inc.,
Google parent
Alphabet Inc.
or
Facebook
owner Meta Platforms Inc.—to win approval for a large acquisition in the current political environment.
In recent years, as government scrutiny and competition between the biggest tech companies have been increasing, Microsoft has tried to appease regulators.
For example, in May, Microsoft announced a set of principles it would abide by when dealing with cloud-service providers in Europe, hoping to assuage concerns its cloud business was hurting European cloud companies. The principles included pledges to work with European cloud providers and support the success of software vendors running on Microsoft’s cloud.
Amid concern the deal could hurt attempts to unionize at Activision or elsewhere in the gaming industry, Microsoft in June said it was open to working with any labor unions that want to organize.
As PlayStation maker
Sony Group Corp.
and others said they were concerned the acquisition could leave competitors locked out of Activision’s popular “Call of Duty” franchise, Microsoft this week said it would make it available for the first time on Nintendo Co.’s Switch gaming consoles for at least 10 years.
Microsoft this week also made its case to the public. “Blocking our acquisition would make the gaming industry less competitive and gamers worse off,” Mr. Smith, wrote in the Monday op-ed article in the Journal. “Think about how much better it is to stream a movie from your couch than drive to Blockbuster. We want to bring the same sort of innovation to the videogame industry.”
It is too soon to tell whether the FTC can succeed in blocking the acquisition. The agency likely will have to go before a federal judge, a process that could take months to unfold, said Eric Talley, a professor at Columbia Law School.
The case could be difficult for the regulator to win because courts have traditionally not seen deals among companies that specialize in different phases of the same industry’s production process—so-called vertical mergers—as competitive dangers, he said.
“It may require the commission to convince a judge to change the law somewhat,” he said. “That makes it a difficult case for the FTC to win, though they presumably knew this going in.”
Write to Sarah E. Needleman at Sarah.Needleman@wsj.com
Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.50%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.18%,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust
VNO,
+1.01%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Brandywine Realty Trust
BDN,
+1.82%
11.52%
12.82%
1.30%
$1,132
Offices
Sabra Health Care REIT Inc.
SBRA,
+2.02%
9.70%
12.04%
2.34%
$2,857
Health care
Medical Properties Trust Inc.
MPW,
+1.90%
9.18%
11.46%
2.29%
$7,559
Health care
SL Green Realty Corp.
SLG,
+2.18%
9.16%
10.43%
1.28%
$2,619
Offices
Hudson Pacific Properties Inc.
HPP,
+1.55%
9.12%
12.69%
3.57%
$1,546
Offices
Omega Healthcare Investors Inc.
OHI,
+1.30%
9.05%
10.13%
1.08%
$6,936
Health care
Global Medical REIT Inc.
GMRE,
+2.03%
8.75%
10.59%
1.84%
$629
Health care
Uniti Group Inc.
UNIT,
+0.28%
8.30%
25.00%
16.70%
$1,715
Communications infrastructure
EPR Properties
EPR,
+0.62%
8.19%
12.24%
4.05%
$3,023
Leisure properties
CTO Realty Growth Inc.
CTO,
+1.58%
7.51%
9.34%
1.83%
$381
Retail
Highwoods Properties Inc.
HIW,
+0.76%
6.95%
8.82%
1.86%
$3,025
Offices
National Health Investors Inc.
NHI,
+1.90%
6.75%
8.32%
1.57%
$2,313
Senior housing
Douglas Emmett Inc.
DEI,
+0.33%
6.74%
10.30%
3.55%
$2,920
Offices
Outfront Media Inc.
OUT,
+0.70%
6.68%
11.74%
5.06%
$2,950
Billboards
Spirit Realty Capital Inc.
SRC,
+0.72%
6.62%
9.07%
2.45%
$5,595
Retail
Broadstone Net Lease Inc.
BNL,
-0.93%
6.61%
8.70%
2.08%
$2,879
Industial
Armada Hoffler Properties Inc.
AHH,
-0.08%
6.38%
7.78%
1.41%
$807
Offices
Innovative Industrial Properties Inc.
IIPR,
+1.09%
6.24%
7.53%
1.29%
$3,226
Health care
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
LTC Properties Inc.
LTC,
+1.09%
5.99%
7.60%
1.60%
$1,541
Senior housing
Source: FactSet
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Prologis Inc.
PLD,
+1.29%
2.84%
4.36%
1.52%
$102,886
Warehouses and logistics
American Tower Corp.
AMT,
+0.68%
2.66%
4.82%
2.16%
$99,593
Communications infrastructure
Equinix Inc.
EQIX,
+0.62%
1.87%
4.79%
2.91%
$61,317
Data centers
Crown Castle Inc.
CCI,
+1.03%
4.55%
5.42%
0.86%
$59,553
Wireless Infrastructure
Public Storage
PSA,
+0.11%
2.77%
5.35%
2.57%
$50,680
Self-storage
Realty Income Corp.
O,
+0.26%
4.82%
6.46%
1.64%
$38,720
Retail
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
VICI Properties Inc.
VICI,
+0.41%
4.69%
6.21%
1.52%
$32,013
Leisure properties
SBA Communications Corp. Class A
SBAC,
+0.59%
0.97%
4.33%
3.36%
$31,662
Communications infrastructure
Welltower Inc.
WELL,
+2.37%
3.66%
4.76%
1.10%
$31,489
Health care
Digital Realty Trust Inc.
DLR,
+0.69%
4.54%
6.18%
1.64%
$30,903
Data centers
Alexandria Real Estate Equities Inc.
ARE,
+1.38%
3.17%
4.87%
1.70%
$24,451
Offices
AvalonBay Communities Inc.
AVB,
+0.89%
3.78%
5.69%
1.90%
$23,513
Multifamily residential
Equity Residential
EQR,
+1.10%
4.02%
5.36%
1.34%
$23,503
Multifamily residential
Extra Space Storage Inc.
EXR,
+0.29%
3.93%
5.83%
1.90%
$20,430
Self-storage
Invitation Homes Inc.
INVH,
+1.58%
2.84%
5.12%
2.28%
$18,948
Single-family residental
Mid-America Apartment Communities Inc.
MAA,
+1.46%
3.16%
5.18%
2.02%
$18,260
Multifamily residential
Ventas Inc.
VTR,
+1.63%
4.07%
5.95%
1.88%
$17,660
Senior housing
Sun Communities Inc.
SUI,
+2.09%
2.51%
4.81%
2.30%
$17,346
Multifamily residential
Source: FactSet
Simon Property Group Inc.
SPG,
+0.95%
is the only REIT to make both lists.
to resume pumping oil from its Venezuelan oil fields after President Nicolás Maduro’s government and an opposition coalition agreed to implement an estimated $3 billion humanitarian relief program and continue dialogue in Mexico City on efforts to hold free and fair elections.
Following the Norwegian-brokered agreement signed in Mexico City, the Biden administration granted a license to Chevron that allows the California-based oil company to return to its oil fields in joint ventures with the Venezuela national oil company, Petróleos de Venezuela SA. The new license, granted by the Treasury Department, permits Chevron to pump Venezuelan oil for the first time in years.
Biden administration officials said the license prohibits PdVSA from receiving profits from Chevron’s oil sales. The officials said the U.S. is prepared to revoke or amend the license, which will be in effect for six months, at any time if Venezuela doesn’t negotiate in good faith.
Venezuela produces some 700,000 barrels of oil a day, compared with more than 3 million in the 1990s.
Photo:
Isaac Urrutia/Reuters
“If Maduro again tries to use these negotiations to buy time to further consolidate his criminal dictatorship, the United States and our international partners must snap back the full force of our sanctions,” said Sen.
Robert Menendez
(D., N.J.), the chairman of the Senate Foreign Relations Committee.
The U.S. policy shift could signal an opening for other oil companies to resume their business in Venezuela two years after the Trump administration clamped down on Chevron and other companies’ activities there as part of a maximum-pressure campaign meant to oust the government led by Mr. Maduro. The Treasury Department action didn’t say how non-U.S. oil companies might re-engage with Venezuela.
Venezuela produces some 700,000 barrels of oil a day, compared with more than 3 million barrels a day in the 1990s. Some analysts said Venezuela could hit 1 million barrels a day in the medium term, a modest increment reflecting the dilapidated state of the country’s state-led oil industry.
Some Republican lawmakers criticized the Biden administration’s decision to clear the way for Chevron to pump more oil in Venezuela. “The Biden administration should allow American energy producers to unleash DOMESTIC production instead of begging dictators for oil,” Rep. Claudia Tenney (R., N.Y.) wrote on Twitter.
Biden administration officials said the decision to issue the license wasn’t a response to oil prices, which have been a major concern for President Biden and his top advisers in recent months as they seek to tackle inflation. “This is about the regime taking the steps needed to support the restoration of democracy in Venezuela,” one of the officials said.
The Wall Street Journal reported in October that the Biden administration was preparing to scale down sanctions on Venezuela’s regime to allow Chevron to resume pumping oil there.
Jorge Rodriguez led the Venezuelan delegation to the talks in Mexico City, where an agreement was signed.
Photo:
Henry Romero/Reuters
Under the new license, profits from the sale of oil will go toward repaying hundreds of millions of dollars in debt owed to Chevron by PdVSA, administration officials said. The U.S. will require that Chevron report details of its financial operations to ensure transparency, they said.
Chevron spokesman Ray Fohr said the new license allows the company to commercialize the oil currently being produced at its joint-venture assets. He said the company will conduct its business in compliance within the current framework.
The license prohibits Chevron from paying taxes and royalties to the Venezuelan government, which surprised some experts. They had been expecting that direct revenue would encourage PdVSA to reroute oil cargoes away from obscure export channels, mostly to Chinese buyers at a steep discount, which Venezuela has relied on for years to skirt sanctions.
“If this is the case, Maduro doesn’t have significant incentives to allow that many cargoes of Chevron to go out,” said
Francisco Monaldi,
director of the Latin America Energy Program at Rice University’s Baker Institute for Public Policy. Sending oil to China, even at a heavy discount, would be better for Caracas than only paying debt to Chevron, he said.
The limited scope of the Chevron license is seen as a way to ensure that Mr. Maduro stays the course on negotiations. “Rather than fully opening the door for Venezuelan oil to flow to the U.S. market immediately, what the license proposes is a normalization path that is likely contingent on concessions from the Maduro regime on the political and human-rights front,” said
Luisa Palacios,
senior research scholar at the Columbia University Center on Global Energy Policy.
The license allows Venezuelan oil back into the U.S., historically its largest market, but only if the oil from the PdVSA-Chevron joint ventures is first sold to Chevron and doesn’t authorize exports from the ventures “to any jurisdiction other than the United States,” which appears to restrict PdVSA’s own share of the sales to the U.S. market, said Mr. Monaldi.
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The license prohibits transactions involving goods and services from Iran, a U.S.-sanctioned oil producer that has helped Venezuela overcome sanctions in recent years. It blocks dealings with Venezuelan entities owned or controlled by Western-sanctioned Russia, which has played a role in Venezuela’s oil industry.
Jorge Rodriguez,
the head of Venezuela’s Congress as well as the government’s delegation to the Mexico City talks, declined to comment on the issuance of the Chevron license.
Freddy Guevara,
a member of the opposition coalition’s delegation, said the estimated $3 billion in frozen funds intended for humanitarian relief and infrastructure projects in Venezuela would be administered by the United Nations. He cautioned that it would take time to implement the program fully. “It begins now, but the time period is up to three years,” he said.
The Venezuelan state funds frozen in overseas banks by sanctions are expected to be used to alleviate the country’s health, food and electric-power crises in part by building infrastructure for electricity and water-treatment needs. “Not one dollar will go to the vaults of the regime,” Mr. Guevara said.
Chevron plans to restore lost output as it performs maintenance and other essential work, but it won’t attempt major work that would require new investments in the country’s oil fields until debts of $4.2 billion are repaid. That could take about two to three years depending on oil-market conditions, according to people familiar with the matter.
PdVSA owes Chevron and other joint-venture partners their shares of more than two years of revenue from oil sales, after the 2020 U.S. sanctions barred the Venezuelan company from paying its partners, one of the people said. The license would allow Chevron to collect its share of dividends from its joint ventures such as Petropiar, in which Chevron is a 30% partner.
Analysts said the new agreement raises expectations that will take time and work to fulfill. “Ensuring the success of talks won’t be easy, but it’s clear that offering gradual sanctions relief like this in order to incentivize agreements is the only way forward. It’s a Champagne-popping moment for the negotiators, but much more work remains to be done,” said Geoff Ramsey, Venezuela director at the Washington Office on Latin America.
—José de Córdoba and Ginette Gonzalez contributed to this article.
Write to Collin Eaton at collin.eaton@wsj.com and Andrew Restuccia at andrew.restuccia@wsj.com
A research paper published at Harvard University is advocating that central banks should buy bitcoin
BTCUSD,
+2.41%
as a hedge against sanctions by other countries.
The paper, titled “Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves,” was authored by Ph.D. candidate Matthew Ferranti from Harvard’s economics department, and likens central banks’ gold reserves to potential bitcoin holdings.
Ferranti points out that central banks in countries across the globe should look into holding bitcoin as a hedge against possible financial sanctions. He gives the example of the unprecedented financial sanctions levied against Russia by the U.S. and many western nations following its invasion of Ukraine — billions in Russian assets were frozen after the Ukraine war began.
“Sanctions risk may diminish the appeal of U.S. Treasuries, propel broader diversification in central bank reserves, and bolster the long-run fundamental value of both cryptocurrency and gold,” Ferranti writes.
In the paper, Ferranti says El Salvador is a model for central banks owning bitcoin. The country, headed by bitcoin bull Nayib Bukele, has purchased millions of dollars worth of the crypto and has even made bitcoin an official national currency.
See also: ‘We just bought the dip’: El Salvador expands bitcoin holdings
Since the inception of popular cryptos like bitcoin and ether
ETHUSD,
+3.74%,
part of its appeal has been the lack of involvement from central banks, in favor of the decentralized nature of the digital asset.
In the wake of the recent crypto winter and collapse of popular crypto exchange FTX, as well as financial issues for crypto companies Voyager and Celsius, some crypto bulls have called for increased regulation and transparency for the industry.
The paper comes after FTX struggled with liquidity issues in November, eventually leading to a bankruptcy filing. Sam Bankman-Fried resigned as CEO and later apologized for the collapse of his former company.
See: Why do people invest in crypto? ‘It’s partly fraud and partly delusion,’ says Charlie Munger.
Also see: Tom Brady, Steph Curry and Kevin O’Leary set to lose big from FTX bankruptcy filing
Bitcoin’s price is down over 70% over the past year, and the price for ether is also down over 70% over the same period. The total market cap for all crypto nearly hit $3 trillion during parts of 2021, but is now around $800 billion.
To make the deal work, Mr. Musk has been trying to add subscription revenue and reassure advertisers about the platform’s future. Twitter was losing money before Mr. Musk bought the company, and the deal added a debt burden that requires fresh sources of cash.
It is tough to determine the state of the company. Twitter no longer has to file regular financial reports to the Securities and Exchange Commission, which are crucial tools for determining a company’s financial health.
Analysts and academics have been able to piece together a picture of the company from information Mr. Musk has offered as well as details of the deal and the company’s last regulatory filings. Bankruptcy could be one result. Mr. Musk, the world’s richest person, could also raise new funds, or buy back debt from lenders, giving Twitter a buffer to turn around its business.
Here is a look at their assessments of Twitter’s financial situation and prospects.
Twitter Finances, Pre-Musk
Twitter is and was a popular tool for politicians, celebrities and journalists. But as a business, it was stagnating.
It hasn’t booked an annual profit since 2019, and posted a loss in eight years of the past decade. The company’s net loss narrowed in 2021, to $221.4 million from $1.14 billionthe previous year.
Twitter has struggled to attract new users and increase revenue, which came in at about $5.1 billion last year. In its last quarterly filing as a public company, for the period ended June 30, revenue was $1.18 billion, down slightly year-over-year.
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Nearly 90% of its revenue last year came from advertising, and it traditionally has been the company’s main source of revenue. In 2021, Twitter took in $4.51 billion from advertisers, and $572 million from licensing data and other services.
The company had more than $2 billion in cash and less than $600 million in net debt before the takeover talks—very little debt for a company in the S&P 500 index. But that cash position was down 35% from a year earlier as of June 30, filings show, and Mr. Musk paid for Twitter by taking on $13 billion in debt. He paid for the rest in equity, some contributed by multiple investors.
Twitter had a market capitalization of $37.48 billion in March, the month before Mr. Musk agreed to buy it, S&P data showed. Social-media stocks have slumped sharply since then. But now, according to
Jeffrey Davies,
a former credit analyst and founder of data provider Enersection LLC, “This thing’s probably not worth more than what the debt stack is, quite frankly, unless you put a lot of option value just on Elon.” Mr. Musk last month said he and investors were overpaying for the company in the short term.
Revenue Under Musk
Mr. Musk said earlier this month that Twitter had suffered “a massive drop in revenue” and was losing $4 million a day. It isn’t clear if that reflects the broader downturn in the digital ad market or the pause in advertising by several companies since Mr. Musk bought the business.
Some companies, including burrito chain
Chipotle Mexican Grill Inc.,
cereal maker
General Mills Inc.
and airline
United Airlines Holdings Inc.,
have paused their ad spending on Twitter over uncertainty around where the company is headed. The departure of several top executives from its ad department have soured relationships, The Wall Street Journal has reported.
The exodus of advertisers poses a threat for a company so reliant on that revenue stream. “As an online ad company, you’re flirting with disaster,” said
Aswath Damodaran,
a finance professor at New York University’s Stern School of Business.
Elon Musk has purchased Twitter, ending a monthslong saga over whether or not he would go through with his offer to acquire the social media platform. WSJ takes an inside look at the tweets, texts and filings to see exactly how the battle played out. Illustration: Jordan Kranse
Deal negotiations for long-term contracts that usually begin at the end of the year haven’t taken place yet or have been put on hold. Those deals comprise more than 30% of Twitter’s U.S. ad revenue, The Wall Street Journal reported.
Revenue will likely remain under pressure until advertisers fully grasp the new business model, potentially leading many of them to return to the platform, said
Brent Thill,
a senior analyst at Jefferies Group LLC, a financial-services firm. “Those advertisers will come back if they feel that the users are there and there’s an ability to monetize their advertisement,” Mr. Thill said.
But that could take time. Mr. Thill said it could take months for advertisers to get clarity. “It’s an enigma,” he said.
Market-research firm Insider Intelligence Inc. recently cut its annual ad-revenue revenue outlook for Twitter by nearly 40% through 2024.
Mr. Musk wants the company to lean more on subscriptions and depend less on digital advertising. He said last Tuesday that the company’s upgraded subscription service, costing $7.99 a month, would launch Nov. 29.
A walkway at Twitter headquarters in San Francisco. The company has aggressively cut staff to reduce expenses.
Photo:
George nikitin/Shutterstock
Reducing Costs
The company has moved quickly to slash costs, including cutting its staff by half. Salaries and other compensation make up a large chunk of overall expenses. The company had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier, filings show.
The layoffs of roughly 3,700 people could save the company roughly $860 million a year, if the employees that are leaving made an average of about $233,000 annually—the company’s most recently disclosed median pay figure. The estimated savings would represent about 15% of Twitter’s $5.57 billion in costs and expenses last year. Its costs and expenses climbed 51% from the previous year, as hiring drove up its payroll.
More employees left the company last week, rejecting Mr. Musk’s demand that they commit to working “long hours at high intensity” to stay.
Debt Mountain
Before Mr. Musk’s acquisition, net debt totaled $596.5 million as of June 30, according to S&P Global Market Intelligence, a data provider. That compares with a negative balance of $2.18 billion the prior-year period, indicating a cash surplus.
Twitter paid $23.3 million in interest expense in the quarter ended June 30, according to a filing.
Now, the company will have to pay at least $9 billion in interest to banks and hedge funds over the next seven to eight years, when the $13 billion in debt matures, according to a review of Twitter’s loans by Mr. Davies, the former credit analyst.
The interest payments are substantial for a company that reported $6.3 billion in total operating cash flow over the past eight years, he said.
What’s more, the company’s debt stack now includes floating-rate debt, meaning that interest costs are set to rise as the Federal Reserve continues to increase interest rates. Twitter’s debt was entirely fixed rate before the deal.
Twitter’s credit ratings, which were below investment grade before the transaction with Mr. Musk, have deteriorated further.
Moody’s
Investors Service on Oct. 31 downgraded Twitter’s rating to B1 from Ba2, a two-notch drop, and S&P Global Ratings on Nov. 1 downgraded it to B- from BB+, a five-notch drop.
If Twitter files for bankruptcy, Elon Musk’s $27 billion investment would likely be wiped out.
Photo:
Susan Walsh/Associated Press
Financial Prospects
Twitter’s financial challenges could result in the company filing for bankruptcy, raising equity or buying back some debt from its lenders, analysts and academics said.
If Twitter files for bankruptcy, as Mr. Musk warned was possible in an all-hands meeting earlier this month, his $27 billion investment would likely be wiped out because equity holders are the last to be paid when a company restructures.
Buying back debt from lenders at a steep discount would help the company reduce its debt load and interest costs as well as its valuation, which would be beneficial in the long run, Mr. Davies said.
“I don’t think they can issue any more debt,” Mr. Davies said. “It’s a really, really tough structure.”
The company could also replace some of the debt with equity, both from Mr. Musk and from outside investors, said
David Kass,
a finance professor at the University of Maryland’s
Robert H. Smith
School of Business. For that, Mr. Musk would need to persuade potential investors that he has a viable long-term business plan, he said. Replacing debt could enable the company to generate cash. Mr. Musk has said some of his latest
Tesla Inc.
stock sale, yielding almost $4 billion in cash, was because of Twitter.
If successful, the company could generate positive free cash flow in two or three years, which it could use to pay down the residual debt and eventually go public again, Mr. Kass said. “The prospect of an eventual IPO within three to five years would be a very attractive enticement for large funds,” he said.
—Theo Francis and Jennifer Williams-Alvarez contributed to this article.
, the used-car dealer that was a pandemic winner, is rushing to conserve cash as once-plentiful financing options dry up and business deteriorates.
On Friday, Carvana laid off about 1,500 people, its second round in six months. Its weakening finances mean raising funds would be difficult and costly, and it could run out of cash in a year, analysts say.
Few companies have been hit harder by rising interest rates than Carvana. The company’s interest expense nearly doubled early this year when it paid up to get financing for an acquisition. Its cost to finance car purchases is up by three-quarters this year, and some of its real estate has lost value. Car buyers, meanwhile, are holding off purchases in the hope that rates fall.
In a memo to Carvana’s employees announcing the layoffs, Chief Executive
Ernie Garcia III
blamed an uncertain economic environment that he said was particularly tough on fast-growing companies that sell products affected by higher interest rates. “We failed to accurately predict how this would all play out and the impact it would have on our business,” he said.
The company said it has millions of satisfied customers, and that disrupting the auto industry isn’t easy. “We have seen many e-commerce companies written off early in their journey only to become market leaders. We plan to follow suit,” a spokesman said. Earlier this month, Carvana executives said cash flows and profitability are the strategic focus now.
WSJ’s Ben Foldy explains the factors that helped drive Carvana’s growth and why investors are now questioning its future. Illustration: Preston Jessee
Carvana became wildly popular among car buyers, with heavy advertising and haggle-free cars delivered to their doors. Investors bought in, driving the shares up more than sixfold. The stock has fallen more than 97% from its peak last year. Carvana’s bonds are trading at distressed levels.
“They built an infrastructure across the enterprise with the assumption that the growth would be there,” said Daniel Imbro, a managing director at Stephens Inc.
The ratings firm S&P Global Ratings warned that Carvana’s liquidity likely would erode faster than expected, and changed the outlook on its CCC+ rating to negative earlier this month. It said the company’s standing to raise more cash from stock and bond investors has deteriorated.
Less than a year ago, Carvana was still trying to keep up with demand. In February, it agreed to buy a car-auction business that would help boost inventory. Car sales slowed, though.
The day the deal was completed in May, Mr. Garcia said it had overshot on growth and laid off 2,500 workers. Days earlier, it had issued a $3.275 billion bond with a 10.25% coupon to fund the purchase. The high coupon almost doubled Carvana’s annual interest expense and reflected investors’ fears of a recession and rising inflation.
Carvana CEO Ernie Garcia III and his father, Ernest Garcia II, when the company went public in 2017.
Photo:
Michael Nagle/Bloomberg News
Carvana thrived when interest rates were low because it could borrow cheaply to buy cars and make loans to customers. Its credit line from
Ally Financial
to buy cars had an average 2.6% interest rate last year, compared with 4.5% at the end of September. Ally required Carvana to set aside 12.5% of the amount borrowed as of late September, up from 7.5%, further tightening its cash situation. An Ally spokesman declined to comment.
Carvana earned big profits selling its car loans to investors who were hungry for yield. Gains from the loans help Carvana offset the losses it makes selling cars. When investors turned choosier on these securities in the spring, Carvana sold many of the loans to Ally instead, on less-favorable terms. The gains it books from loan sales fell by around one-third in the third quarter from the year-earlier period.
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Mr. Garcia told analysts on a call Nov. 3 that the company would keep cutting costs and that it has access to around $4 billion in liquidity, in addition to its $316 million cash and some other assets. The amount includes what it can borrow on credit lines to buy cars and make loans. It also included around $2 billion of real estate, which isn’t typically considered a liquid asset.
The company’s chief financial officer said Carvana could borrow against the real estate, which includes sites it bought this year. It previously raised around $500 million from selling some sites where it inspects cars and then leasing them back for 20 or 25 years.
That step might work, analysts said, but would also add expenses. They said any real-estate deals would likely occur piecemeal over time, or involve high rent payments because of Carvana’s credit troubles.
Scott Merkle, a managing partner at SLB Capital Advisors, which specializes in sale-leaseback transactions, said the long-term leases in the space generally rely on financially sound tenants that can be expected to make their lease payments for years. He said that overall conditions for sellers have softened in that market because of higher interest rates, but that sale-leasebacks still provide a better cost of capital for companies than other financing.
Carvana said it is testing ways to make more from its car sales, such as having customers pick up cars from its vending machines.
Photo:
USA TODAY NETWORK/Reuters
Some Carvana-leased properties have received a tepid response on the market. A 12-story “flagship” car-vending machine in Atlanta that Carvana sold and leased back in December was relisted this summer. It is still on the market, and the asking price has since been lowered.
Carvana said it is testing ways to make more from its car sales, such as taking payment before delivery and having customers pick up cars from its vending machines.
“We’ve got a bunch of committed liquidity. We’ve got a bunch of real estate, and I think that we feel like that puts us in a good position to ride out this storm,” Mr. Garcia told analysts on the Nov. 3 call.
—Ben Foldy, Will Feuer and Ben Eisen contributed to this article.
Write to Margot Patrick at margot.patrick@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com
said it fired three of the founder’s top deputies.
Gary Wang, an FTX co-founder and its chief technology officer; FTX engineering director Nishad Singh; and Caroline Ellison, who ran Mr. Bankman-Fried’s trading arm, Alameda Research, were terminated from those roles after FTX tapped
John J. Ray
to oversee the companies’ bankruptcy, an FTX spokeswoman said late Friday.
Mr. Bankman-Fried resigned on Nov. 11, when FTX filed for bankruptcy. He was replaced by Mr. Ray, a veteran restructuring executive who once oversaw the liquidation of Enron Corp.
FTX and Alameda sought protection from creditors after executives at both businesses revealed that FTX had lent billions of dollars worth of customer assets to Alameda to plug a funding gap, The Wall Street Journal previously reported. In a Thursday court filing, Mr. Ray highlighted numerous failings, including “the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals.”
On a Nov. 9 video call with Alameda employees, Ms. Ellison said that she, along with Messrs. Bankman-Fried, Wang and Singh, were aware of the decision to send customer money to the trading firm, the Journal previously reported.
The four executives also comprised the board of what they called the Future Fund, a philanthropic arm charged with making grants to nonprofits and investments in “socially-impactful companies.”
Messrs. Bankman-Fried, Wang and Singh all owned stakes in at least some of the FTX companies, according to Mr. Ray’s court filing.
“Mr. Bankman-Fried ultimately agreed to resign, resulting in my appointment as the debtors’ CEO,” Mr. Ray wrote in the filing. “I was delegated all corporate powers and authority under applicable law, including the power to appoint independent directors and commence these Chapter 11 cases on an emergency basis.”
Write to Justin Baer at justin.baer@wsj.com and Hannah Miao at hannah.miao@wsj.com
Billionaire Dallas Maverick’s owner Mark Cuban recently offered his perspective on the implosion of crypto platform FTX late this week.
“‘That’s somebody running a company that’s just dumb-as-fucking greedy.’”
— Mark Cuban
Cuban, speaking on Friday at a conference in Washington, D.C. hosted by Sports Business Journal, shared the view that avarice was at the root of the downfall of one-time crypto darling Sam Bankman-Fried, whose firm FTX Group just filed for chapter 11 bankruptcy.
“So what does Sam Bankman [Fried] do, he’s just–‘gimme more, gimme more, gimme more.’ So I’m gonna borrow money, loan it to an affiliated company and hope and pretend to myself that the FTT tokens that are in there on my balance sheet are gonna to sustain their value.”
Check out: Mark Cuban says buying metaverse real estate is ‘the dumbest shit ever
FTX’s collapse marks a stunning turnabout for a company, which was once valued at $26 billion, and whose founder, Bankman-Fried was viewed by many in the crypto industry as a venerable actor in the Wild West of digital exchanges.
On Thursday, the 30-year-old entrepreneur tweeted: “I f—ked up, and should have done better,” referencing the collapse of his exchange.
Embattled FTX, short billions of dollars, sought bankruptcy protection after the exchange experienced the crypto equivalent of a bank run. FTX, an affiliated hedge fund Alameda Research, and dozens of other related companies also filed a bankruptcy petition in Delaware on Friday morning. Boasting a nearly $16 billion fortune recently, Sam Bankman Fried’s net worth had all but evaporated in the wake of the FTX implosion, according to the Bloomberg Billionaires Index.
The price of FTX’s native token FTT went down about 88.8% over the past seven days to around $2.74, according to CoinMarketCap data.
The U.S. Justice Department and the Securities and Exchange Commission are looking into the crypto exchange to determine whether any criminal activity or securities offenses were committed.
Regulators and are examining whether FTX used customer deposits to fund bets at Alameda Research, a no-no in traditional markets, according to reports.
Cuban, who is one of the stars of the investing show “Shark Tank” and owns the NBA’s Dallas Mavericks, is a big investor in crypto and blockchain-related platforms. According to a CNBC report, he has said that 80% of his investments that aren’t on Shark Tank are crypto-centric.
See: Tom Brady, Steph Curry and Kevin O’Leary set to lose big from FTX bankruptcy filing
For his part, Cuban is part of a class-action lawsuit accused of misleading investors into signing up for accounts with crypto platform Voyager Digital, which filed for bankruptcy in July. The suit alleges that Cuban touted his support for Voyager and referred to it “as close to risk-free as you’re gonna get in the crypto universe.”
Cuban mentioned Voyager in his Friday interview. Representatives for the billionaire investor didn’t immediately respond to a request for comment.
The Mavericks owner took to Twitter on Saturday to say that the crypto implosions “have been banking blowups. Lending to the wrong entity, misvaluations of collateral, arrogant arbs, followed by depositor runs.”
Cuban’s net worth is $4.6 billion, according to Forbes.
FTX CEO Sam Bankman-Fried appeared at a Senate committee hearing earlier this year on cryptocurrencies.
Photo:
Sarah Silbiger/Bloomberg News
Alameda Research’s chief executive and senior FTX officials knew that FTX had lent its customers’ money to Alameda to help it meet its liabilities, according to people familiar with the matter.
Alameda’s troubles helped lead to the bankruptcy of FTX, the crypto exchange founded by
Sam Bankman-Fried.
Alameda is a trading firm also founded and owned by Mr. Bankman-Fried.
In a video meeting with Alameda employees late Wednesday Hong Kong time, Alameda CEO
Caroline Ellison
said that she, Mr. Bankman-Fried and two other FTX executives,
Nishad Singh
and
Gary Wang,
were aware of the decision to send customer funds to Alameda, according to people familiar with the video. Mr. Singh was FTX’s director of engineering and a former Facebook employee. Mr. Wang, who previously worked at Google, was the chief technology officer of FTX and co-founded the exchange with Mr. Bankman-Fried.
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Alameda faced a barrage of demands from lenders after crypto hedge fund Three Arrows Capital collapsed in June, creating losses for crypto brokers such as
Voyager Digital Ltd.
, the people said.
Ms. Ellison said on the call that FTX used customer money to help Alameda meet its liabilities, the people said.
On Friday, FTX, Alameda, FTX US and other FTX affiliates filed for bankruptcy protection.
Bankruptcy means that it could be a long time before individual investors and others owed their funds are able to potentially recover any of them, if ever.
Ms. Ellison didn’t return a phone message and an email seeking comment. Messrs. Singh and Wang didn’t respond to multiple messages seeking comment. Ryne Miller, FTX US’s chief legal officer, declined to comment.
Cryptocurrency platform FTX filed for chapter 11 on Friday and CEO Sam Bankman-Fried resigned. WSJ’s Vicky Ge Huang explains what happened to the company and what this could mean for investors. Photo: Olivier Douliery/AFP
Write to Dave Michaels at dave.michaels@wsj.com, Elaine Yu at elaine.yu@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
