Weekly Research Briefing: Holiday Marriages

Arthur J. Gallagher has agreed to acquire AssuredPartners in a $13.45 billion deal.

The insurance brokerage, risk-management and consulting-services firm said Monday that buying the insurance broker would expand its retail middle-market property and casualty focus across the U.S.

Gallagher intends to acquire shares of AssuredPartners’ parent company from its private equity backers for gross consideration of $13.45 billion, which doesn’t include a $1 billion deferred tax asset that is expected to reduce the consideration to $12.45 billion.

Omnicom has agreed to buy Interpublic in a $13bn all-share deal that will create the world’s largest advertising agency in revenue terms and reshape the global marketing industry.

Under the terms of the deal, Interpublic shareholders will receive 0.344 Omnicom shares for each share of theirs. Once the transaction is closed Omnicom shareholders will control 60.6 per cent of the combined company, and Interpublic shareholders will own 39.4 per cent.

The deal comes as artificial intelligence brings significant disruption to the marketing industry, allowing companies to create cheaper, faster, and more targeted advertisements and forcing agencies to invest hundreds of millions of dollars to harness the technology...

The combined US group — which generated $25.6bn in revenues annually in 2023 — will be larger than France’s Publicis and the UK’s WPP, the next biggest holding companies in the industry based on net revenues.

BlackRock will buy private credit firm HPS Investment Partners for about $12 billion in an all-stock deal, the companies said on Tuesday, as the world's largest asset manager seeks to expand in a red-hot market.

Private credit, or lending to companies by institutions other than banks, has grown rapidly in recent years as stricter regulations made it more expensive for traditional lenders to finance riskier loans...

HPS was founded in 2007 as a division of Highbridge Capital Management, the hedge fund unit of JPMorgan's asset management arm. In 2016, top HPS executives acquired the firm from JPMorgan.

Since then, the New York-based company has become a massive private credit player, with assets under management vaulting to about $148 billion as of September from $34 billion in 2016.

HPS originally aimed to do an initial public offering, but was approached by a number of parties including BlackRock, a source familiar with the matter said.

Apollo Global Management Inc.-owned packaging company Novolex said it will purchase rival Pactiv Evergreen Inc. for $18 a share, or $6.7 billion including debt.

The deal disclosed Monday in a statement confirms an earlier Bloomberg report that Novolex was exploring a potential takeover.

The purchase price is 23% above Pactiv’s Friday closing price of $14.68. Pactiv’s shares gained 19% to $17.53 at 9:40 a.m. in early trading in New York on Monday.

Companies in the fragmented packaging sector are looking for scale to boost profitability. Recent moves include Amcor Plc’s agreement to acquire Berry Global Group Inc. for about $8.4 billion in November, and International Paper Co.’s April deal for DS Smith Plc. for £5.8 billion ($7.2 billion).

Pactiv Evergreen’s packaging products include including resealable sandwich bags, egg cartons and plastic cups, according to its website. Previously called Reynolds Group, it went public in 2020.

CVC Capital Partners Plc offered to take CompuGroup Medical SE & Co. KGaA private in a deal that values the German software provider at €1.18 billion ($1.2 billion).

CVC has offered €22 a share in cash for the German technology company, which makes software serving the health-care industry, it said in a statement on Monday, confirming an earlier Bloomberg News report. CVC agreed to a strategic partnership with CompuGroup’s majority shareholder around the founding Gotthardt family, who plans to retain its roughly 50.1% interest following the takeover.

Shares of CompuGroup on Monday jumped as much as 34% in Frankfurt, their biggest intraday advance since July 2008. CompuGroup had closed at €16.35 on Friday.

Mondelez International Inc., the snacks and sweets company, is exploring an acquisition of iconic US chocolate maker Hershey Co., in a potential deal that would create a food giant with combined sales of almost $50 billion, according to people familiar with the matter.

Chicago-based Mondelez has made a preliminary approach about a possible combination, said the people, who asked not to be identified because discussions are private.

Shares in Hershey Co. rose as much as 19% on Monday for their biggest intraday gain in more than eight years after the Bloomberg News report. The stock was trading up 12% at 10:57 a.m. in New York, giving the company a market value of $40 billion. Mondelez fell 2%, giving it a market capitalization of roughly $83 billion.

One of the more popular themes in Wall Street’s outlook for 2025 is expectations for a mergers and acquisitions (M&A) boom thanks to a business-friendly incoming president.

“With the election now behind us, an expected reduction in regulatory uncertainty should boost that confidence,” Goldman Sachs’ David Kostin wrote in his 2025 outlook report. “During the past four years, federal regulators adopted an aggressive antitrust posture and challenged many proposed business combinations. The uncertainty of completing a deal dissuaded many management teams from pursuing acquisitions.”

Kostin believes 2025 could come with 750 deals, each worth north of $100 million. That would be a roughly 25% jump from this year’s M&A deal volume. In his report, he identifies and recommends buying the stocks of companies likely to be acquired.

“Looking forward, solid economic and earnings growth, relatively loose financial conditions, and rising CEO confidence should support increased M&A activity in 2025,” he said.

"I mean, a lot of M&A was stymied by the fact it's not just sometimes you can't get through the courts or something like that, but it takes two years. It takes three years. So make believe you're a bank and we've seen this happen. And one of these deals actually took three years. It takes three years to get it done. So you've done a deal, it's binding, you haven't closed it, but now you've got to run the company. You can't get the synergies. You're going to be losing people. You want to start working in a common culture and common technology, but you can't do it. So yeah, a lot of companies are looking at, will be looking much more aggressively at acquisitions and deployment of capital, and they should." - JPMorgan CEO Jamie Dimon

“Unequivocally, the ‘Do Not Enter’ sign that stood in front of bank mergers has been removed,” said Bill Burgess, co-head of investment banking at boutique investment bank Piper Sandler.

“That is especially true for smaller banks where right now there are far more sellers than buyers, but all systems are go for a resurgence of deals.”

Although the number of US banks peaked in the 1980s at more than 14,000 and has been steadily declining, there are still more than 4,000, the vast majority of which are local minnows with a few billion dollars in assets.

Investors believe these smaller banks could be ripe for consolidation, caught between rising regulatory and technology costs and the relentless march of JPMorgan Chase’s asset-gathering machine.

“I feel pretty confident that over the next two to three years, consolidation in the regional banking sector will bring the number of banks down to 1,000 to 2,000 from 4,500 today,” Bob Diamond, the dealmaking former chief executive of Barclays, said on Tuesday at the Financial Times’ Global Banking Summit in London.

$LULU CEO: "We are pleased with our business over the extended Thanksgiving weekend and the traffic trends we saw across both our store and e-commerce channels. In fact, on Black Friday, we had the most visits ever to our Shop app and e-commerce site. Unlike others in this space, we do not run sale events across our entire store"

"In the last few weeks, as the holiday sales begun and the election is behind us, we have seen customer demand increase again." - Best Buy Co. CEO Corie Barry

"I would say the U.S. consumer economy, we obviously have just gotten through Black Friday and Cyber Monday, consumer confidence is relatively high." - Microsoft EVP & Chief Commercial Officer Judson B. Althoff

"...we continue to see healthy consumer spending. So spending remains strong or healthy. At the end of the day, there's positive and negatives across the macro. But as I said, it's -- there are supportive and stable backdrop for the consumer itself." - Mastercard EVP of Investor Relations Devin Corr

"...coming back to the lower income customer, as we've discussed previously, that customer really bore the brunt of cost of living increases in 2022...Over the past year or so what we're seeing is that as their real incomes have stabilized and started to pick back up, they're spending more and we think that's helping to support the strength of our underlying trend." - Burlington Stores CEO Michael O’Sullivan

Southwest Airlines is the latest airline lifting its revenue guidance for the final quarter of the year as travel demand holds steady.

The carrier Thursday said it now expects a key revenue measure to rise 5.5% to 7% in the fourth quarter, up from previous guidance for 3.5% to 5.5% growth.

The increase in revenue per available seat mile is based on both higher-than-expected demand and benefits from changes to the company’s revenue management, Southwest said...

“The company is encouraged by recent revenue trends and forward bookings, including fourth quarter holiday travel, and currently expects strong revenue trends and tactical initiative performance to carry into 2025,” the airline said.

The outlook lift comes a day after JetBlue bumped up its revenue guidance for the year in light of higher-than-expected demand following the U.S. election.

@neilksethi: BoA (Murphy): "November US light vehicle sales increased 5.8% YoY (selling day adjusted) for a SAAR of 16.5mm [best of the year so far], an increase from 16.0mm in October. This was above our mid-month estimate of 16.0mm and the Bloomberg consensus of 16.1mm.

"The U.S. economy is in very good shape and there’s no reason for that not to continue... the downside risks appear to be less in the labor market, growth is definitely stronger than we thought, and inflation has come in a little higher. So the good news is that we can afford to be a little more cautious as we try to find neutral." - Federal Reserve Chair Jerome Powell

"Conversely, based on what we know today, one could argue that there is a case for skipping a rate cut at the next meeting. Monthly readings on inflation have moved up noticeably recently, and we don't know whether this uptick in inflation will persist, or reverse, as we saw a year ago." - Federal Reserve Governor Christopher Waller

@SoberLook: The Household Survey reported another sharp decline in jobs, even as the Establishment Survey (official US employment data) continues to reflect gains.

@ernietedeschi: The typical unemployed worker is now taking 2 1/2 more weeks to find a job than in late 2022. I'll be able to break this down further by new entrants, etc., next week.

This isn't a macroeconomic catastrophe, but it's a sign of weak hiring relative to supply.

So, the lesson and epiphany for me is the realization that it is not helpful to be looking at lofty multiples on a one-year trailing or one-year forward basis in an era where we are going through a major technological revolution. The benefits are next to impossible to estimate, but the one thing we know about the equity market is that it typically is a very forgiving asset class. And the market clearly continues to anticipate and price in a future boom in productivity that will lead to a secular shift in the trendline for corporate profitability. It may be wrong, but that is the bet — and it does not look as though Mr. Market is about to fold. Not at least until we actually do get an earnings recession, or all those AI and related orders don’t end up getting filled and we find out that the TAM (Total Addressable Market) was far too inflated. It doesn’t seem as though we are at that point yet, but we will need to keep a firm eye on the supply-demand backdrop for AI, just as everyone should have been doing for fiber optics and telecom equipment of all kinds in the Internet mania in the late 1990s.

That is the first part of this revelation: the fact that generative AI is a game-changer for the future. And if it is, then the multiples based on a long time frame may not be in a bubble at all. This comes back to the view that traditional valuations, at the least, are not that helpful right now. If it weren’t for the “Model Shift” generated by the AI boom, which is spreading to all sorts of industries and triggering a rare significant expansion in R&D spending (which shows up in GDP but not in the monthly durable goods orders and shipments data), it would be easy to label a 22x one-year forward P/E multiple as some sort of bubble. But I now realize that investors have shifted out their earnings projections way into the future, and if the technology experts are prescient, this will be a difference-maker from a productivity growth backdrop in years to come, and at a time when the pandemic has unleashed an unexpected upward shift in the productivity curve. One productivity enhancer followed by another.

The S&P 500 will extend its record-setting rally to 7,100 by the end of next year amid a strong economy, according to Oppenheimer Asset Management, whose outlook is now the most bullish among peers.

Fundamentals “suggest the current resilience of the economy and the stock market appear poised to continue into next year,” the firm’s Chief Investment Strategist John Stoltzfus wrote in a note.

The broadening of the rally to various sectors, market capitalizations and styles suggests “the current bull market likely has legs strong enough to climb the proverbial ‘wall of worry’ into and through 2025,” he said. His new target implies upside of about 17% from the latest close, making it the most optimistic among strategy teams tracked by Bloomberg...

Stoltzfus expects artificial intelligence developments to provide a big boost to the equity market, calling it a “watershed point” for technology and economic progress.

“We’re not suggesting paradise on earth nor are we expecting a ‘Goldilocks world’ but rather a genuine potential for AI to provide greater efficiencies in key areas that are challenging progress today across the sectors and society,” he said. “Companies in all eleven sectors could benefit from improved productivity via AI to further serve the needs of business and customers”

For 2025, the bottom-up EPS estimate for the S&P 500 (which reflects an aggregation of the median EPS estimates for CY 2025 for all of the companies in the index) is $275.24. If $275.24 is the final number for the year, it will mark the highest (annual) EPS number reported by the index since FactSet began tracking this metric in 1996. However, what is the likelihood that $275.24 will be the final EPS value for the S&P 500 in 2025?

In other words, how accurate is the bottom-up EPS estimate for the S&P 500 one year in advance?

Over the past 25 years (1999 – 2023), the average difference between the bottom-up EPS estimate at the beginning of the year (December 31) and the final EPS number for that same year has been 6.3%. In other words, industry analysts on average have overestimated the final EPS number by 6.3% one year in advance.

Analysts overestimated the final value (the final value finished below the estimate) in 17 of the 25 years and underestimated the final value (the final value finished above the estimate) in the other 8 years.

Elon Musk’s artificial intelligence start-up xAI has pledged to expand its Colossus supercomputer tenfold to incorporate more than 1mn graphics processing units, in an effort to leap ahead of rivals such as Google, OpenAI and Anthropic.

Colossus, built in just three months earlier this year, is believed to be the world’s largest supercomputer, operating a cluster of more than 100,000 interconnected Nvidia GPUs. The chips are used to train Musk’s chatbot Grok, which is less advanced and has fewer users than market-leader ChatGPT or Google’s Gemini.

Work has already begun to increase the size of the facility in Memphis, Tennessee, according to a statement from the Greater Memphis Chamber on Wednesday. Nvidia, Dell and Supermicro Computer would also establish operations in Memphis to support the expansion, the chamber of commerce said, while it would establish an “xAI special operations team” to “provide round-the-clock concierge service to the company”.

The cost of acquiring so many GPUs would be significant. The latest generation of Nvidia GPUs typically cost tens of thousands of dollars, although older versions of the chips can be cheaper. Musk’s planned expansion of Colossus would require an investment likely to reach tens of billions of dollars — plus the high cost of building, powering and cooling the vast servers in which they would sit. xAI has raised about $11bn in capital from investors this year.

A severe shortage of cattle, which has fueled grocery-store price hikes and wiped-out billions in meat-processor profits, is primed to get worse before the next election cycle. The US beef herd is already the smallest since 1961 after years of depressed prices, severe droughts and surging costs forced farmers to send more females to slaughter. Now, the possibility of new tariffs and immigration reform risk constraining supplies further still...

But raising cattle has grown increasingly difficult, even before Trump’s upcoming return to Washington. Thanks to a combination of high interest rates, costly feed prices, farmer debt, bad weather and a shifting consumer preference toward cheaper chicken, struggling ranchers have been culling heifers at too fast a clip to rebuild the number of calves necessary to expand their herds. In fact, the shortage of beef cattle has gotten so acute that some milk producers are breeding hybrid dairy-beef calves to sell into the low-inventory meat market...

The down cycle wasn’t supposed to last this long. This past February, the USDA expected the cattle inventory to start rebuilding in 2025. It is now saying the recovery won’t meaningfully start until 2027, as elevated borrowing costs and poor pastureland mean it’s too risky to take on new cows — given the investment takes a few years to come to fruition. Even as the beef industry has experienced periods of growth over the past decades, the animal count has dropped almost 40% since a peak in 1975. During the current downcycle, which started in 2020, the herd has been shrinking at the fastest pace since the big farm crisis of the 1980s.

"Homeowners like McGregor are struggling in every corner of Texas to keep their homes insured, paying more for less coverage as climate change wreaks havoc on providers.

Home insurance in the state is now among the most expensive in the country, trailing only Florida and Louisiana, according to a Houston Chronicle analysis of U.S. Census survey data. Insurance carriers from Allstate and State Farm to smaller start-ups have responded to the rising frequency and intensity of storms not by pulling out of local markets en masse, as has happened in more regulated states like California, but by jacking up premiums and dropping homeowners in risky areas.

The Texas Department of Insurance recorded a 21% jump in statewide rates last year, the biggest annual spike in at least a decade. In the last five years, rates in Texas have risen faster than anywhere else in the country, based on data tracked by S&P Global.

The Houston metropolitan area has the highest average premiums in the state, according to the Chronicle’s analysis, with communities closest to the coast paying nearly three times the national average for home insurance.

But it’s not just a coastal crisis. Homeowners in Amarillo and Lubbock have seen their premiums surge from one year to the next as wind storms and wildfires rip across the panhandle and West Texas. Rates have soared in Central and North Texas too as softball-sized hail has shredded roofs and tornadoes have destroyed neighborhoods.

In the Dallas-Fort Worth area, home insurance last year ranked among the top 20 priciest in the country, topping every metropolitan area in California and many across the East Coast and Florida.

“We don’t have a healthy home insurance market anywhere in the state,” state Sen. Tan Parker of Flower Mound told lawmakers recently, noting that he was dropped by his provider earlier this year, and is now paying more than three times as much for coverage."

Oregon has just approved the state’s largest solar farm – and one of the country’s largest – on about 10,000 acres of active farmland in Morrow County as it pushes to fulfill ambitious clean energy mandates.

The mammoth project also takes a novel approach to offset the negative economic impacts to the local agricultural economy.

Sunstone Solar will feature nearly 4 million solar panels, capable of producing up to 1,200 megawatts of power – enough to provide emission-free electricity to about 800,000 homes for a year – and a battery energy storage system that can store up to 7,200 megawatts hours.

Sunstone’s project will take a massive chunk of agricultural land out of production. It will occupy 9,442 acres within a 10,960-acre site of private land about 15 miles southeast of Boardman.

That’s an area roughly the size of 7,000 football fields. The site is zoned for exclusive farm use and has been cultivated in dryland winter wheat. More than half of the site is considered high-value farmland and a third has water rights.

The project was approved last month by the Energy Facility Siting Council, a state board that oversees the siting of large energy facilities. Construction is expected to begin in 2026.

@geoffnorcott.bsky.social‬: Massive away win for the little fella.‬