The next big cartel fight begins
The Justice Department plans to block JetBlue’s deal to buy low-cost airline Spirit Airways for $3.8 billion, JetBlue confirmed on Monday. News of the lawsuit — which could come as soon as Tuesday — sent Spirit’s shares down nearly 9 percent.
Expect prosecutors to argue that the deal, which would create the fifth-largest airline in the US, would create an unacceptable level of consolidation in an industry already under scrutiny for delays, hidden fees and travel disruptions. And they’re expected to say there’s no sane way to avoid it other than by blocking the transaction.
The merger of the two would create a new airline giant, Doubling JetBlue’s market share to 10 percent. JetBlue has argued that the deal is good for consumers, pointing to what’s known as the “JetBlue effect,” where its entry into a market results in lower fares across the board. Adding Spirit’s capacity would amplify this phenomenon.
Additionally, JetBlue plans to redesign the famously no-frills, low-cost Spirit flight experience by removing seats, increasing legroom and turning the economics of each flight on its head.
But the Justice Department disagrees. It is planned to argue that there is also a spirit effect where the mere existence of the airline leads to lower fares. Regulators will also say that by removing seats on Spirit flights, the combined airline will not be able to increase revenue per passenger without raising fares – a major financial blow to passengers who tend to fly the airline.
Even divesting slots and routes at airports, a common concession in airline mergers, may not be enough. The department estimates that airlines have dozens of overlapping routes; JetBlue said it plans to divest Spirit holdings in markets like Boston, Fort Lauderdale and New York.
However, antitrust officials believe the loss of an independent spirit would constitute a major market disruption. Other airlines, whose business models differ from Spirit’s, may not be willing to buy slots that JetBlue may have for sale. And critics of airline consolidation have questioned whether divesting slots and routes on other airline deals was enough to address competition concerns.
Other regulators may also play a role. The Department of Transport has reviewed the deal and has the power to block it or impose conditions if it thinks the merger would unfairly restrict competition.
HERE’S WHAT HAPPENS
Meta is expected to cut more jobs. The social media giant is set to lay off thousands of employees as early as this week, according to Bloomberg, in what would be its second round of cuts since November. Airbnb and the software developer Atlassian are also cutting jobs.
Moody’s will warn Congress about the debt limit. Mark Zandi, the rating agency’s chief economist, is about to testify that America could lose a million jobs and plunge into recession if House Republicans don’t agree to raise the federal borrowing limit.
The White House is considering asking for more power over TikTok. Officials in the Biden administration are considering whether to support bipartisan legislation that would give them additional powers over police apps that could threaten Americans’ data security, reports The Times.
Twitter collapses again. On Monday, large parts of the social network were offline for several hours and greeted users with a cryptic error message. Elon Musk later said the cause was internal coding work, which Platformer says was done by the only engineer working on a given project. Twitter’s thinned ranks mean such problems could arise again.
Powell is back in the hot seat
Can the Fed cool scorching inflation without plunging the US economy into recession? Jay Powell, the Fed Chair, is likely to have questions about that and more as he testifies before Congress Tuesday and Wednesday — and investors will be scrutinizing every word for clues as to how high interest rates could go.
Powell’s statement ushers in a momentous stretch for the markets. On Friday, the Bureau of Labor Statistics will release the February jobs report, and on March 14 investors will get the latest CPI data. Powell is likely to ask many questions about how a strong labor market and stubbornly high inflation are affecting Fed interest rates.
Expect Powell to be hawkish on inflation. He is likely to reiterate that the central bank is not done raising rates and that it is premature to start thinking about rate cuts. Bill Adams, Comerica Bank’s chief economist, told DealBook that he expects interest rates to remain high “well into 2024.”
The prospect of further rate hikes has made markets more volatile in recent weeks. Celebrities – including Mary Daly, President of the San Francisco Fed; Christopher Waller, a Fed governor; and Jamie Dimon, CEO of JPMorgan Chase — have said in recent days that the central bank may need to do more to fight inflation.
Fears of a recession are growing, even as employers continue to hire. Economists are expecting big gains in Friday’s jobs data and that could force the Fed to remain aggressive on rate hikes.
The many trials of a bitcoin trading giant
Grayscale Investments, an asset management firm, is suing the SEC for the right to convert its Bitcoin Trust, a $14 billion crypto fund once popular with retail investors, into an exchange-traded fund, the kind of mainstream investment product , which is preferred by Wall Street.
But Grayscale faces a lawsuit of its own. The company and its parent company, Digital Currency Group, were sued Monday by Alameda Research, the trading subsidiary of bankrupt crypto exchange FTX. The lawsuit, filed in the Delaware Court of Chancery, accuses Grayscale of charging exorbitant management fees and preventing shareholders from redeeming their stakes in the Bitcoin and Ether trusts.
Alameda argues that if Grayscale allowed the redemptions, it would “collectively free up at least $9 billion for shareholders and a quarter billion” for FTX, which is trying to get money back for investors after its collapse in November.
According to Grayscale, the SEC is at the root of the problem. If Grayscale were allowed to convert its Bitcoin fund into an ETF, the company argues, it could lower fees and allow for more redemptions. However, some shareholders say Grayscale doesn’t need to wait for the SEC to ease fees or redemptions.
The SEC’s reasoning: The agency believes that the Bitcoin market is too volatile to allow ETF conversion. It has approved bitcoin futures ETFs under the oversight of the Chicago Mercantile Exchange, but turned down ETF applications for funds like Grayscale’s Bitcoin Trust that exchange “spot” prices for the cryptocurrency.
Grayscale will argue Tuesday that such a distinction is arbitrary and violates the Administrative Procedures Act by treating similar products differently. If its argument fails in DC’s Court of Appeals, the company has agreed to take the matter to the Supreme Court.
The risks of doing business in Hong Kong
Hong Kong has faced a slew of challenges over the past three years – from tough pandemic restrictions to Beijing’s tightened grip – that have eroded its status as Asia’s financial hub.
DealBook got its first glimpse of a new report for the think tank Atlantic Council, in which Rhodium Group’s Logan Wright details how difficult it is for international companies to keep going. His prognosis is that success is anything but certain.
The big challenges: Pandemic measures, which drove scores of expat executives and local professionals out of Hong Kong, took their toll on the economy. But according to Mr. Wright, the biggest hurdles are the myriad ways Beijing can exercise even more control, including:
The National Security Law enacted in 2020 means access to reliable information has been restricted, company executives could be arrested and customer data confiscated by the Chinese government.
There are a few steps companies can take, according to Wright, including lobbying Hong Kong and Chinese authorities on the importance of maintaining the territory’s special status to remain attractive to global companies.
However, other measures are more about risk mitigation, including contingency plans for dealing with customers who are sanctioned and data that may be confiscated.
Ken Griffin takes the lead
With investment giant Citadel making a record $16 billion last year, there was little doubt who would top the Rich List, Institutional Investor’s closely monitored ranking of hedge fund tycoons’ performance.
Ken Griffin, the founder of Citadel, would almost certainly top this year’s list. But many of its peers also had billion-dollar paydays as their industry beat major stock and bond indexes in 2022.
The top 25 executives earned $21.6 billion last year, even as investor worries about central banks raising interest rates to fight inflation roiled markets. Hedge Fund Research’s HFRI 500 index, which tracks most of the world’s largest hedge funds, fell 4.25 percent last year, while the S&P 500 fell 19 percent.
Here are the top earners according to Institutional Investor:
This year’s top 25 was notably short of executives from technology crossover funds, such as Coatue Management, Tiger Global Management and Viking Global Investors, which have long been pillars. Their firms had benefited from investments in fast-growing tech start-ups, but the collapse in valuations of early-stage companies hit their hedge-fund backers hard.
READ THE SPEED
Sen. Bernie Sanders, an independent of Vermont, plans to subpoena Howard Schultz to force the Starbucks CEO to testify about anti-union efforts. (New York)
Oil companies defied President Biden’s climate bill; now they are seeking subsidies from it. (FT)
The best of the rest
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