Business News: Jewelry Industry 'Hostage' to Gold Bubble

Business News: Jewelry Industry 'Hostage' to Gold Bubble

Jewelry Industry 'Hostage' to Gold Bubble

Posted: 22 Dec 2010 04:21 AM PST

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By Ben Elgin, Madelene Pearson and Benjamin Harvey

(For more on Gold’s Affliction, see {EXT2 <GO>}.)

Dec. 22 (Bloomberg) -- In June, Bill Doddridge flew his single-engine Cessna 400 to Twentynine Palms Airport near California’s Mojave Desert and headed for an abandoned mine, a .45-caliber pistol on his belt. He was looking for gold.

The firearm was to ward off rattlesnakes. The precious metal would be a sideline to his jewelry business. He sifted through dirt, climbed into shafts, and later bought the property, shuttered since World War II.

“If we’re not making money selling gold, we might as well get into mining it,” says Doddridge, 55, chief executive officer of Tustin, California-based Goldenwest Diamond Corp., a privately held company that owns 17 Jewelry Exchange stores and an online site. “It’s a whacked out world.”

The rising value of bullion -- reaching a record $1,431.25 an ounce on Dec. 7 -- has upended the economics of jewelry for buyers and sellers alike, with a mix of outcomes around the world. U.S. purchases of gold jewelry have fallen 36 percent by volume in three years. Women in India, where demand is booming, are buying hollow bangles made to look like solid gold. European jewelers are mixing the metal with steel and ceramics. Turkish exporters are closing offices as orders fall.

“The jewelry business is being held hostage by something completely out of its control,” says Michael Langhammer, CEO of Quality Gold, a Fairfield, Ohio, privately held wholesaler that Langhammer says is redesigning pieces to use more silver.

Customers’ Buying Power

Gold’s price has climbed about 200 percent since the debut in November 2004 of a bullion-backed exchange traded fund created by a World Gold Council trust, allowing the metal to be acquired on the New York Stock Exchange as easily as shares.

Global purchases of gold jewelry were $20.9 billion by value in the third quarter, 38 percent above the year-ago period, according to the London-based World Gold Council, which represents mining companies, and GFMS Ltd., a research firm in London. Demand by volume has diminished in some countries and increased in others, and the gold jewelry industry has to adjust to customers’ buying power depending on where they are.

Not knowing how high the price will go makes deciding on styles and ingredients a challenge, Doddridge says. He acquired the mine, for a sum he won’t disclose, as a defense. “Gold is the only thing screwing up this business,” says Doddridge, who expects his total 2010 sales to be up about 7 percent and sales of gold items to be down about 25 percent.

Tungsten, Titanium

Designers are scaling back on gold parts or relying on gold that isn’t as pure. At Richline Group, a manufacturer in Mount Vernon, New York, owned by Warren Buffett’s Berkshire Hathaway Inc., 40 percent of sales are in gold, compared with more than 70 percent in 2006, says Chief Marketing Officer Mark Hanna. Signet Jewelers Ltd., with more than 1,300 shops in the U.S. and about 550 in the U.K., is offering more silver, tungsten and titanium, says Ed Hrabak, senior vice president of merchandising at the world’s largest jewelry retailer.

Rome-based Bulgari SpA, the world’s third-largest jeweler, fine-tuned the diamond encrusted rings in its B.zero1 line, which were solid gold in 2000 and incorporate ceramics now.

“We are focusing more than in the past on the combination of different materials,” says Francesco Trapani, Bulgari’s CEO. “This is an interesting way to introduce something more appealing, more exciting to the final client -- a way of proposing things that can be less expensive.”

‘Gold-Centric’ Customers

Tara Jewels Ltd. invented Honeydium, a mix of silver, copper, zinc and indium that the Mumbai-based company says on its website gives “the perception” of 10-karat yellow gold.

In India -- both the largest consumer of bullion and biggest manufacturer of gold jewelry -- the passion for gold bangles, necklaces and earrings is centuries old. Despite the price, third-quarter growth in demand for gold jewelry was 36 percent, according to the World Gold Council.

“The Indian consumer is gold-centric,” says Rajeev Sheth, managing director of Tara Jewels, which supplies Wal-Mart Stores Inc. and other retailers and owns 30 domestic shops. “That won’t change if it becomes $2,000 an ounce or $3,000 an ounce.”

Tara Jewels plans to raise about 2 billion rupees ($44 million) in an initial share sale next year to expand its retail network in India, where the economy grew 8.9 percent in the third quarter. The company has a plant in Panyu, China, and three factories in Mumbai, including one with 1,600 workers who walk on mats with raised ridges to dislodge gold flecks that catch in their shoes.

The Real Thing

The gold products in stores change as values mount, Sheth says. The company is selling 1- and 2-gram gift coins for housewives with 5,000-rupee gold-buying budgets that put 5-gram (0.2 ounce) coins out of reach.

Gold is a requisite wedding gift in India and an investment displayed on married women’s arms. Only the real thing is prized, and anything under 18 karats -- 75 percent pure -- isn’t considered real.

“Gold is a must,” says Dhara Shah, a bride-to-be, as she shops with her aunt for 22-karat pieces at Dwarkadas Chandumal Jewellers, where an electronic sign displays the price of bullion in red letters.

The walls are festooned with bridal sets, necklaces and earrings that contain as much as 100 grams of the metal and command 230,000 rupees or more. Shah says her budget is about 350,000 rupees, and she’s spending it now.

The price of gold “is going to go up more,” Shah, 27, says. “People are going to buy, however poor they are or however rich they are. It’s a good investment.”

Only 60 Grams

Madhurima Vasisht, a housewife in Delhi, couldn’t give her younger daughter as many pieces for her wedding this year as she did for her older daughter, who married five years ago. “My budget has just gone upside down,” she says.

In Bangalore, Purushotham Hemanth, 25, says he can only afford 60 grams of gold for his February wedding, not the 80 grams he had planned on. “I always wanted to give my wife the best bangles and necklaces,” says Hemanth, a real estate agent. “It is proving to be a bit difficult to raise the money.”

To accommodate salaries that aren’t rising as fast as gold, retailers say they have to be creative. “The budget remains the same, the income remains the same, but they want the jewelry to look big enough,” says Deepak D. Tulsiani, the second- generation owner of Dwarkadas Chandumal Jewellers.

More Hours

That means making light-weight pieces, and bangles that are hollow, which is more labor intensive. At the Bank brothers’ one-room workshop in Mumbai, 90 grams of gold can be fashioned into six bangles, 2- to 3-centimeters wide, in about 12 hours. Using fewer grams takes hours more, says Abhijit Bank, 41, who owns the shop with his 37-year-old brother Sujit.

In the workshop, in an alley past the sari wholesalers behind Zaveri Bazar, 10 craftsmen sit at wooden benches. Watched over by posters on the green walls, including one of Lord Ganesha, remover of obstacles and bringer of good fortune and luck, they use blow torches to bend the metal, tweezers to place gems into earrings and conical rods to shape bangles.

“They need to be more careful, because light gold is very soft,” Abhijit Bank says, sitting cross-legged on the floor.

At Istanbul’s six-century-old Grand Bazaar, one of the world’s largest covered markets, gold is so central that rents are paid in it. Around 5 kilograms covers a year in a 215- square-foot shop. There are more than 1,200 jewelry merchants in more than 60 streets and alleyways.

Locals still come seeking the bangles and coins given at weddings, births and other special occasions. Tourists who are the bazaar’s mainstay are showing less interest in gold because of the price, retailers say.

Labor Costs

“European clients aren’t buying anymore,” says Ismail Yilmaz, a 24-year veteran of the bazaar who works for the jeweler Sait Koc.

Domestic demand in Turkey was up 3 percent by volume in the third quarter, according to a World Gold Council report citing GFMS data. Exports have fallen 20 percent over the past three years, according to the Istanbul Mineral and Metals Exporters’ Association, as production migrates to lower-wage countries.

The luxury business has been “cut like a knife,” says Cihan Kamer, chairman of Atasay, which makes gold jewelry for export. Since 2008, Atasay has closed six of its nine foreign offices, including one it opened in New York 27 years ago.

The industry is squeezed by the steep price of gold and high labor costs, says Cihat Cirpici, owner of Hibas Kuyumculuk, a wholesaler that moved its operations to Dubai from Istanbul. Minimum wage in Turkey is 760.50 liras a month, or around $500.

Wedding World

“We can’t set the price on gold, we can only put the price on labor,” Cirpici says. “Before, if you had $5 million in capital, you could do a lot with gold. Now, you can’t.”

The slump is apparent at Kuyumcukent, or Goldsmith’s City, a seven-story complex behind Ataturk Airport that was imagined by the Jewelers Cooperative of Istanbul as an integrated production, processing and retailing center.

When it opened four years ago, merchants were told rent would be free until the shops were 50 percent occupied. They still pay nothing. The cooperative is rebranding Kuyumcukent, as Wedding World.

“People who have been in this business all their lives are moving to diamonds, if they’re lucky, or otherwise they’re unemployed, or driving taxis,” says Alaatin Kameroglu, chairman of the Istanbul Goldsmiths’ Association. He estimates employment in the sector has fallen 20 percent in two years.

“If the price of gold keeps going up,” he says, “worse things will happen.”

‘Auspicious’ Gold

In China, gold demand may double within a decade, according to the World Gold Council. In the next five years, household wealth may more than double to $35 trillion, surpassing Japan’s to become the second highest, according to Credit Suisse AG analysts. Sales of gold jewelry rose 8 percent by volume and 39 percent by value in the third quarter, gold council data show.

“When the price is going up, there are still people going in,” Cheng Binghai, chairman of the Shanghai Gold & Jewelry Trade Association, said in a Bloomberg Television interview.

Caishikou Department Store in Western Beijing’s Xuanwu district has posted a sign at the entrance. “The Number One Gold Shop in China,” it declares.

Yan Jie says he drove two hours to the store from Baoding in Hebei province with his fiancé Yang Hongwei, a 23-year-old accountant, and his parents.

“Although we haven’t fixed a date for the wedding, we’d like to buy gold now before the price goes crazy,” says Yan, a government worker who is also 23. His mother, Gao Xuemei, 46, says no other metal will do as she settles on “Rejoicing Dragon and Phoenix” rings for 3,532 yuan ($528) for the couple.

Mao Pendants

“Buying and holding gold is just an auspicious thing to do,” says Gao, who runs a tea house. “Gold, as wedding gifts to children, will not only keep its value, but also give them a decent look.”

Among the items at the store are 31.99-gram pendants portraying the face of Mao Zedong and bars stamped with images of the God of Fortune and Rabbit, the sign for Chinese lunar year of 2011. The bars, most of them weighing from 50 grams to 1,000 grams, are priced at 327 yuan per gram.

The Asian and U.S. markets couldn’t be more different, says Sheth of Tara Jewels. Honeydium, the new alloy, is intended for Americans and others who aren’t emotionally attached to gold, Sheth says.

“They would rather have a big oversized gold-plated silver ring for Christmas with diamonds in it than have a tiny thin piece of gold with diamonds in it,” he says. “They are more concerned about perceived value -- bang for the buck.”

Consumer and retail stories: RTOP <GO> Top commodity reports: CTOP <GO> Top metal and mining stories: METT <GO>

--With assistance from Michael Wei in Beijing, Armorel Kenna in Milan, Jay Shankar in Bangalore, Hemal Savai and Adi Narayan in Mumbai, Andrew Roberts in Paris, Malavika Sharma in New Dehli and Margaret Conley in Shanghai. Editors: Anne Reifenberg, Melissa Pozsgay

To contact the reporters on this story: Ben Elgin in San Francisco at belgin@bloomberg.net ; Madelene Pearson in Mumbai at mpearson1@bloomberg.net; Benjamin Harvey in Istanbul at bharvey11@bloomberg.net.

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net.

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India Can&rsquo;t Find Enough Laborers for $1 Trillion Plan

Posted: 21 Dec 2010 10:47 PM PST

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By Madelene Pearson and Malavika Sharma

Dec. 21 (Bloomberg) -- Vimla, 26, wipes the dust from her forehead with a faded blue sari and fills a round metal dish with broken stones that she carries, barefoot, across a building site as part of the construction of New Delhi’s Metro.

“My job doesn’t need any training,” said Vimla, who only uses one name. She would have to make about 800 trips to carry the load of India’s most common small dump truck. Pointing to her supervisor, a man in a hard hat, she says: “I do what he says. If I was educated, maybe I could do his job.”

Builders including Larsen & Toubro Ltd., India’s biggest engineering company, say that while India has millions of unskilled workers like Vimla, it doesn’t have enough trained masons, carpenters and machine operators needed to construct the roads, railways and ports it needs.

Prime Minister Manmohan Singh said last month that infrastructure is the biggest bottleneck to faster economic growth. His government plans to spend $1 trillion to boost the expansion rate to 10 percent, from 7.4 percent last fiscal year.

“Lack of skilled workers impacts on all three fronts: quality, delivery and costs,” said K.V. Rangaswami, president of construction at Mumbai-based Larsen. “Skills cannot be imparted overnight.” He said the lack of a trained workforce will be a major setback to the economy if the shortage isn’t solved.

Bottom Half

The world’s fastest-growing major economy after China will expand 9.7 percent in 2010 and 8.4 percent the following year, the International Monetary Fund said Oct. 6. India is ranked at 91 of 139 nations for its quality of infrastructure, behind Ethiopia and Indonesia, according to the World Economic Forum’s Global Competitiveness Index.

“Shortage of a skilled labor force is one of the challenges that construction companies will have to deal with as India steps up infrastructure plans,” said Mahesh Patil, who oversees about $3 billion as head of domestic equities at Birla Sun Life Asset Management Co. in Mumbai. “Our outlook is positive for construction companies as we expect execution of projects to improve.”

Birla Sun’s holdings include Larsen & Toubro and Lanco Infratech Ltd., according to data compiled by Bloomberg.

India’s construction industry is the nation’s biggest employer after agriculture. It had about 31.5 million workers, 83 percent of them unskilled, in 2005, according to a report last year by the New Delhi-based National Skill Development Corp. More than three out of four of those laborers are in transport network and port projects, with the rest in real estate, it said. Construction is expected to employ 83 million people by 2022, the report said.

‘Virtuous Cycle’

The nation’s investment in roads, rail and ports and other projects may reach about $500 billion in the five years ending March 2012, the Planning Commission said in March this year. Singh said the same month that that figure needs to expand to $1 trillion in the following five years.

Singh plans to raise half the $1 trillion spending from private financing. The government lifted the cap on foreign investment in bonds for the first time in 18 months on Sept. 24, allowing overseas investors to buy $5 billion more in debt maturing in more than five years sold by infrastructure companies. India auctioned permits on Dec. 2 to allow foreign funds to make limited purchases of the bonds within 90 days.

No Overstating

“You can’t ever overstate the importance of infrastructure to the growth India will take on in the next five, 10, 15 years,” Inderjeet Bhatia, associate director at Macquarie Capital Securities India Pvt., said in Mumbai. “It’s a massive virtuous cycle that can play out.”

Larsen and Toubro shares have advanced 18 percent this year, compared with a 14 percent gain in the Bombay Stock Exchange Sensitive Index. Mumbai-based Hindustan Construction Co. has lost 38 percent, partly because a unit was named in a government bribery investigation last month. Hyderabad-based Lanco Infratech is up 7.7 percent.

“The quantum of projects far exceeds the capacity of the market of the contractors to deliver them,” Russell Waugh, managing director of the Indian unit of Leighton Holdings Ltd., said in Mumbai. “India has developed a very good repertoire of skilled engineers and technically orientated people, but there has been a shortfall over the years of developing a skilled labor force to actually build things.”

Training Schools

Sydney-based Leighton, Australia’s biggest construction company, is building India’s longest road tunnel.

To help tackle the shortage, construction companies set up their own training schools. Larsen runs one in Panvel, about 56 miles from Mumbai’s financial center. On a recent day, Manoj Pehre was learning to bend steel rods into rectangles so they can reinforce concrete beams and columns.

With so few skilled workers, Pehre, 23, said his family hopes the training will be a first step toward running his own contracting business.

“They have good hopes and ambitions for me,” said the 23- year-old, standing in the midday sun in dark blue overalls and a yellow hard hat. “That I’ll make something big out of this training.”

Around him, other men learned carpentry, bricklaying and welding. The three-month apprenticeship costs Larsen 21,000 rupees ($467) per trainee. Virendra Mohod, 26, who’s studying masonry, said the education will give them better pay, job security and the chance to travel.

Trays of Rocks

He and Pehre are among the lucky ones. Most workers are like Vimla, who moved to Delhi from Jhansi, Uttar Pradesh, four years ago with her husband and her son Rinka. He clings to her waist as she carries trays of rocks on her head, near the $275- a-night Taj Palace hotel.

Even with company training schools, India doesn’t have enough formal institutions to train the number of people needed, said Leighton’s Waugh.

The Construction Industry Development Council, set up by the central government with industry backing in 1996 to improve quality in the building industry, said it has trained and certified more than 250,000 construction workers in the past 13 years. Among India’s 1.23 billion population, the unemployment rate among the labor force was 9.4 percent in the financial year ended March.

The skills shortage mirrors a similar deficit China faced during rapid development, said Liu Kaiming, executive director of the Institute of Contemporary Observation, a Shenzhen-based non-government organization dedicated to labor studies.

“The Chinese government has no systematic training system currently in place,” he said. As in India, companies have had to educate their own workers over the past two decades.

Suffering Nation

A report last month by the 115-year-old Confederation of Indian Industry in Delhi said “youth unemployability is a bigger crisis than unemployment -- 53 percent of employed youth suffer from some degree of skill deprivation.”

“As a nation, we are suffering,” said Vinayak Chatterjee, chairman of New Delhi-based Feedback Ventures, which provides professional and technical construction services and counts Larsen and the Infrastructure Development Finance Co. as shareholders. “We have not developed the training institutes to provide the manpower to cater for the boom.”

Plugging the skills gap will also require a cultural change, said A. Janakumar, a mechanical engineer and regional training manager at the Larsen institute in Panvel.

Trades traditionally are passed down through families, with masons and carpenters learning from their fathers. Laborers don’t get enough respect for their work, he said, and previously these jobs were done by underprivileged sections of the community. Workers also want to stay in their area and not move locations with construction jobs, he said.

“Fathers want sons to be engineers now, not carpenters,” said Janakumar. “They want sons to earn more and get more respect.”

--With assistance from James Rupert and Kartik Goyal in New Delhi and Rajhkumar Shaaw and Anil Varma in Mumbai. Editors: Adam Majendie, Anne Swardson.

To contact the reporter on this story: Madelene Pearson in Mumbai on mpearson1@bloomberg.net; Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@Bloomberg.net; Stephen Foxwell at sfoxwell@bloomberg.net

Higher Airfares Loom as Oil Climbs Toward $100 a Barrel

Posted: 22 Dec 2010 04:33 AM PST

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By Mary Schlangenstein and Mary Jane Credeur

Dec. 22 (Bloomberg) -- Delta Air Lines Inc., American Airlines and other large U.S. carriers may be poised to boost fares with fuel surcharges as crude oil moves closer to $100 a barrel.

“Every dollar that fuel rises erodes their earnings,” said Jim Corridore, a Standard & Poor’s equity analyst in New York. “It’s not good news to see fuel prices back up. Once we start approaching $100 a barrel, you’ll start to see fuel surcharges come back.”

Crude settled at a 52-week high yesterday of $89.82 on the New York Mercantile Exchange, underscoring the pressure on an industry whose two largest costs are jet fuel and labor. The price will top $100 by 2011’s second half, Goldman Sachs Group Inc. forecast in a report this month.

Airlines grounded hundreds of planes, dropped routes and cut thousands of jobs in 2008 as oil surged to more than $145 a barrel and jet fuel soared to a record $4.36 a gallon. The run- up extended losses at most carriers that began in late 2007 and lasted until earlier this year.

Delta spent $5.67 billion on fuel through Sept. 30, or 26 percent of its total expenses, while AMR Corp.’s American paid $4.74 billion, or 29 percent. United Continental Holdings Inc. couldn’t get a fuel surcharge to stick this month.

“At $100 plus oil in 2011, they have to price to that on fares or surcharges or both,” Kevin Crissey, a UBS Securities LLC analyst in New York, said in an interview. “The airlines are supposed to have several years of profitability to mend their balance sheets after this last downturn, and oil is eating into that.”

Adding Surcharges

Airlines adopt surcharges for expenses such as fuel by adding a specific amount onto their existing fare structures. Carriers have said that step can be simpler than adjusting the millions of prices in their computer systems.

Jet fuel for immediate delivery in New York Harbor closed yesterday at $2.54 a gallon, the most since 2008. The price has jumped 28 percent from a year earlier. The previous 12 months saw a 42 percent surge, preceded by a 48 percent plunge in late 2008 as the recession ravaged demand.

Volatility in fuel prices is the industry’s “No. 1 challenge,” Southwest Airlines Co. Chief Executive Officer Gary Kelly said.

“All you have to do is look back at the last decade to see what kind of havoc it wreaks on our industry,” he said in a Dec. 15 speech. “It is the single biggest threat to aviation.”

Crude and Fares

Every sustained $5 annual increase in the price of crude requires boosting round-trip fares about $7 to offset the cost on domestic operations, Jamie Baker, a JPMorgan Chase & Co. analyst, said in a Dec. 15 report. Only two of 10 industrywide fare increases succeeded in 2010, according to travel website FareCompare.com.

United Continental, the world’s largest carrier, was the first U.S. airline to try a fuel surcharge in 2010, raising one- way fares $10 on Dec. 6 after oil broached $89 a barrel. The Chicago-based company pulled back in most markets after Southwest, the biggest discounter, refused to match.

Seating-capacity cuts during the recession helped airlines phase out some of the cheapest tickets, so average fares inched up even as across-the-board increases fell through. The U.S. airfare consumer price index rose at least 10 percent each month from April through July, the Bureau of Labor Statistics said.

Oil’s rise may test the durability of airlines’ 2010 recovery, according to Dan McKenzie, a Chicago-based analyst with Hudson Securities.

‘Modest Amount’

“The industry has the wherewithal to offset a very modest amount of fuel-price volatility,” McKenzie said. “Where earnings estimates are vulnerable and where stocks are vulnerable is when fuel prices march up from $95 to $100.”

United, Atlanta-based Delta and Southwest, based in Dallas, all should return to profit, based on analysts’ estimates compiled by Bloomberg. Fort Worth, Texas-based AMR is the only carrier among the four largest in the U.S. still projected to lose money in 2010, according to the estimates.

The Bloomberg U.S. Airlines Index rose 24 percent this year through yesterday, almost twice the 13 percent gain for the Standard & Poor’s 500 Index.

While most airlines have planned to add back some domestic flying in 2011 as the economy strengthens, oil at $100 a barrel or more also may force them to reconsider, said Bob McAdoo, an analyst at Nashville, Tennessee-based Avondale Partners LLC.

“When you get $100 to $110, people are going to start looking at what they’re going to do to squeeze capacity down,” he said.

--With assistance from Mark Shenk in New York and Margot Habiby in Dallas. Editors: Ed Dufner, John Lear

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

Buyout Loans Increase as Banks Chase M&amp;A Fees: Credit Markets

Posted: 22 Dec 2010 05:03 AM PST

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By Karen Eeuwens

Dec. 22 (Bloomberg) -- Loans to finance acquisitions in Europe, the Middle East and Africa jumped to a three-month high as banks seek to capitalize on an increase in takeovers.

Emirates Telecommunications Corp., the United Arab Emirates-based phone company known as Etisalat, is leading companies in the region arranging $19 billion of loans this month to fund buyouts. The amount is the highest since September when BHP Billiton Ltd. obtained $45 billion of loans for its failed bid for Saskatchewan, Canada-based Potash Corp., according to data compiled by Bloomberg.

Mergers and acquisitions in Europe, Africa and the Middle East climbed 34 percent to $890 billion this year from all of 2009 as companies that accumulated cash during the recession look to expand, Bloomberg data show. Banks have lent 94.5 billion euros ($124 billion) in 2010 to fund takeovers in the region, compared with 51.2 billion euros last year, according to Societe Generale SA.

“Loan volumes going forward will be driven by new money and big M&A transactions,” said Damien Lamoril, co-head of European loan syndication in Paris at Societe Generale, France’s second-largest bank. “The BHP loan was a turning point and a testimony of market confidence. The market has demonstrated that it’s prepared to support and finance the right deals.”

Excluding the financial-services industry, the 1,000 biggest European companies by market value have amassed about $1.2 trillion in cash and equivalents based on their latest regulatory filings.

Loan Market

“Corporates are drawing upon their cash for acquisitions this year, but for the next large acquisition they will need to come to the bank loan market,” said Tom Muoio, a managing director in Credit Suisse Group AG’s loan capital markets team in London.

Fees earned from acquisition loans can be as much as double those earned on a similar-sized refinancing loan, he said. Refinancing accounted for three quarters of loan deals in the region this year, Bloomberg data show.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds worldwide instead of similar- maturity government debt was unchanged at 170 basis points, or 1.7 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.94 percent.

The cost of protecting U.S. corporate bonds from default fell for a second day and leveraged loan prices rose to the highest in almost six weeks. Speculative-grade company debt is likely to outperform investment-grade bonds next year, according to Janney Montgomery Scott LLC.

Bondholder Protection

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.8 basis point to a mid-price of 84.8 basis points in New York, according to index administrator Markit Group Ltd. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 1.1 basis point to 105.53 basis points at 10:40 a.m. in London.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Computer Sciences’ Swaps

Credit swaps on Computer Sciences Corp. jumped to the highest in almost three weeks as Chief Executive Officer Mike Laphen said the Falls Church, Virginia-based company plans to stay independent.

The contracts gained 9.4 basis points to 138.5, the highest since Dec. 2, according to data provider CMA. Joseph Vafi, an analyst with Jeffries & Co., said in a September report that a private-equity firm could pay $8.7 billion for the computer- services provider and earn a return of more than 25 percent over five years.

Junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, are likely to outperform high-grade debt in 2011 as risky companies strengthen their balance sheets and more-creditworthy issuers repurchase stock and engage in mergers and acquisitions, Janney Montgomery Scott said.

“Investment-grade issuers are looking to re-leverage while high-yield issuers are looking to deleverage,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott in Philadelphia. “The flow of dollars seems to be exiting investment-grade and flowing into high-yield, and that will really persist into 2011.”

The S&P/LSTA US Leveraged Loan 100 Index rose 0.8 cent to 92.58 cents on the dollar, the highest since Nov. 10. The index tracks the 100 largest dollar-denominated first-lien leveraged loans.

Most Traded

Bonds from Charlotte, North Carolina-based Bank of America Corp. were the most actively traded U.S. corporate securities by dealers, with 101 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Barclays Capital Global Aggregate Index of bonds has lost 0.44 percent this month, trimming this year’s gain to 3.72 percent.

The extra yield investors demand to own emerging markets bonds rather than government debt narrowed 1 basis point to 247 basis points, according to JPMorgan Chase & Co. index data.

Etisalat Loan

Etisalat is in talks with banks to raise $12 billion of loans to fund its bid for a stake in Mobile Telecommunications Co., or Zain, Kuwait’s biggest phone operator, three people familiar with the matter said Dec. 13.

Excluding BHP’s loan, which was canceled after the Potash deal was blocked by the Canadian government, it would be the biggest acquisition loan since August 2008, according to Bloomberg data. Spain’s largest gas supplier, Gas Natural SDG SA, got 18.3 billion euros of loans at that time to buy Madrid- based power producer Union Fenosa SA.

VimpelCom Ltd., Russia’s second-biggest mobile network operator, this month hired six banks for a $4 billion bridge loan to finance a planned merger with Orascom Telecom Holding SAE and Weather Investments SpA, according to Bloomberg data.

Barclays Capital, BNP Paribas SA, Citigroup Inc., HSBC Holdings Plc, ING Groep NV and Royal Bank of Scotland Plc agreed to provide the short-term financing, which will be refinanced with bonds next year. VimpelCom said Dec. 20 it will pursue a new agreement after its biggest shareholder Telenor ASA rejected an initial $6.5 billion proposal for the merger.

UPM-Kymmene Oyj, Europe’s second-biggest papermaker, said Dec. 21 it will fund the acquisition of rivals Myllykoski Oyj and Rhein Papier GmbH with 800 million euros of loans for four, six and seven years.

‘Bridge to Bonds’

Assa Abloy AB, the world’s largest maker of locks, said Dec. 13 it got 14 billion kronor ($2 billion) of short-term loans to fund the acquisition of a majority stake in Cardo AB and other deals, which will be refinanced next year, mainly through the capital markets.

About two-thirds of loans for mergers are likely to be refinanced with bonds next year, compared with about one third before 2007, according to Muoio at Credit Suisse.

“We’ll still see quite a large proportion of loans for M&A being bridge to bonds,” Muoio said. “It makes corporate financial sense to have longer-dated debt.”

--With assistance from Sapna Maheshwari, Mary Childs and Mitchell Martin in New York. Editors: Faris Khan, Ed Johnson

To contact the reporter on this story: Karen Eeuwens in London keeuwens@bloomberg.net.

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.

FreshDirect Said Planning to Raise Up to $200 Million

Posted: 22 Dec 2010 05:03 AM PST

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By Serena Saitto

(Updates with FreshDirect’s further comment in second paragraph.)

Dec. 21 (Bloomberg) -- FreshDirect Inc., the New York-based online grocer, plans to raise as much as $200 million to expand in Washington and Baltimore, according to two people with knowledge of the situation.

FreshDirect is working with Deutsche Bank AG on raising funds, said one of the people, who declined to be identified as the plans are private. Scott Helfman, Deutsche Bank’s spokesman, declined to comment. A FreshDirect representative said the company isn’t working with Deutsche Bank.

The grocer, led by Chief Executive Officer Rick Braddock, currently operates in the five boroughs of New York and parts of New Jersey and Connecticut. In July, Braddock told Bloomberg News the grocer might pursue an initial public offering to help fund its expansion.

“FreshDirect has been experiencing over 20 percent sales growth and will expand beyond the Tri-state” area, according to an e-mailed statement from the company. “Baltimore and D.C. are among the target expansion markets. We do not comment on any fundraising details.”

The company, founded more than a decade ago by Joe Fedele and Jason Ackerman, raised $31 million in 2003 in a private placement led by American International Group Inc.-sponsored investment funds with $15 million. The remaining $16 million was funded by individual investors including CIBC Capital Partners, Canyon Partners and Mercantile Capital Partners LLC.

FreshDirect vies for customers with other Internet food retailers such as Peapod, acquired by Royal Ahold NV in 2001. U.S. grocery chains such as Kroger Co. and Safeway Inc. have faced increasing competition from discount retailers such as Wal-Mart Stores Inc. and Target Corp.

--Editors: Julie Alnwick, Jeff St.Onge

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editors responsible for this story: Jeffrey St.Onge at jstonge@bloomberg.net; Robin Ajello at rajello@bloomberg.net

Cerberus&rsquo;s Feinberg Said to Recoup 90% of 2007 Bet on Chrysler

Posted: 22 Dec 2010 05:02 AM PST

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By Cristina Alesci and Zachary R. Mider

Dec. 22 (Bloomberg) -- Cerberus Capital Management LP’s bet on Chrysler survived bankruptcy and the 2008 financial crisis to recoup about 90 percent of the original investment, said two people with knowledge of the matter.

The hedge-fund and buyout manager said yesterday it will sell Chrysler’s former auto-lending unit to Toronto-Dominion Bank for $6.3 billion cash. The deal will return about 75 percent of the money put up by the New York-based firm and its investors, said the people, who asked not to be named because the information is private. Cerberus will keep $900 million of assets, accounting for about an additional 15 percent.

Cerberus and its founder, Stephen Feinberg, seized the spotlight at the height of the leveraged-buyout boom in 2007 with the $7.4 billion acquisition of 80 percent of the third- biggest U.S.-based automaker from Germany’s Daimler AG. The most severe economic decline since the Great Depression then sent both Chrysler and General Motors Corp., the biggest U.S. carmaker, into bankruptcy.

“They grabbed this transaction from the jaws of defeat,” said Paul Schaye, managing partner of Chestnut Hill Partners, a New York-based firm that helps private-equity firms identify targets. “They’re recovering their investment not from the car company but from the financial engineering around the car company.”

The Chrysler buyout remains the biggest to be led by Cerberus, and the acquisition of an 82-year-old American icon raised the profile of the firm and of the private-equity industry. Feinberg, 50, a former banker at Drexel Burnham Lambert Inc., founded Cerberus in 1992, naming it after the mythical three-headed dog that guards the gates of Hell.

GMAC

Cerberus lost its stake in the Chrysler automaker amid its bankruptcy and rescue by the U.S. government, while holding on to the lender, known as Chrysler Financial Corp. The automaker, now known as Chrysler Group LLC, is now controlled by managers from Italy’s Fiat SpA.

In its other big bet on the U.S. auto industry, Cerberus in 2006 bought a 51 percent stake in General Motors’ former auto lender, GMAC, now known as Ally Financial. A government rescue of Ally reduced Cerberus’s stake to about 15 percent as of Dec. 31, according to a regulatory filing.

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have about $7.5 billion in loans at the closing of the transaction, according to an investor presentation Toronto-Dominion released yesterday. About 90 percent of the loans are in the U.S., and 10 percent in Canada.

--With assistance from Jeffrey McCracken in New York. Editors: Christian Baumgaertel, Larry Edelman.

To contact the reporters on this story: Cristina Alesci in New York at Calesci2@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

No Congress Since 1960s Makes Most Laws for Americans as 111th

Posted: 22 Dec 2010 05:02 AM PST

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By Lisa Lerer and Laura Litvan

Dec. 22 (Bloomberg) -- However history judges the 535 men and women in the U.S. House of Representatives and Senate the past two years, one thing is certain: The 111th Congress made more law affecting more Americans since the “Great Society” legislation of the 1960s.

For the first time since President Theodore Roosevelt began the quest for a national health-care system more than 100 years ago, the Democrat-led House and Senate took the biggest step toward achieving that goal by giving 32 million Americans access to insurance. Congress rewrote the rules for Wall Street in the most comprehensive way since the Great Depression. It spent more than $1.67 trillion to revive an economy on the verge of a depression, including tax cuts for most Americans, jobs for more than 3 million, construction of roads and bridges and investment in alternative energy; ended an almost two-decade ban against openly gay men and women serving in the military, and is poised today to ratify a nuclear arms reduction treaty with Russia.

For all of its ambitious achievement, the 111th Congress, which may adjourn this week, also witnessed a voter-backlash driven by a 9.6-percent unemployment rate that cost Democrats control of the House and diminished their Senate majority.

“This is probably the most productive session of Congress since at least the ‘60s,” said Alan Brinkley, a historian at New York’s Columbia University. “It’s all the more impressive given how polarized the Congress has been.”

As lawmakers wrap up the session, Wall Street firms such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. are positioned to complete their best two years in revenue, General Motors Co. has emerged from bankruptcy with more than $23 billion repaid to the U.S. Treasury, and American International Group Inc. was able to sell $2 billion of bonds in its first offering since the company’s 2008 bailout.

Market Performance

The S&P 500 Index has gained 38.9 percent since Congress convened in January 2009, the biggest increase for a two-year congressional session since 1997-1998, according to data compiled by Bloomberg. The S&P 500 Index reached 1254.60 yesterday, the Dow Jones Industrial Average 11533.16.

Stimulus money created and saved jobs across the country, helping strapped state governments retain their workforces, according to government analyses. President Barack Obama’s Council of Economic Advisers said that in Ohio, for instance, the legislation created 122,000 jobs for teachers, police officers and construction workers.

“These policies carried the economy along during a period when the private sector was not engaged,’ said Ethan Harris, head of developed-markets economic research in New York at BofA Merrill Lynch Global Research.

Election Results

The careers of many lawmakers didn’t fare so well. Fiscally conservative Tea Party activists channeled their frustration with government spending and debt into political campaigns, most often to the benefit of Republicans challenging Democratic incumbents. In the Nov. 2 elections, Democrats lost 63 House seats, costing their party control of the chamber in next year’s Congress. In the Senate, the Democratic majority was shaved by six seats; the party will have 53 votes in next year’s session, Republicans 47.

“What we did was work, and our reward was, ‘Get out of here,’” said Representative Louise Slaughter, a New York Democrat and outgoing chairwoman of the House Rules Committee. While Slaughter won re-election, five of her New York colleagues were among Democrats defeated.

Party-line votes on most of the major measures engendered ill will among Republicans and helped stall in the Senate initiatives requiring significant bipartisan support. Blocked legislation included limits on greenhouse-gas emissions that scientists blame for global warming, a bill the House passed in June 2009, a measure offering undocumented immigrants a path to citizenship and the administration’s attempts to curb growing income inequality with tax increases for higher earners.

Republican Agenda

Those are unlikely to be tackled next year, when the House’s Republican majority will turn its attention to dismantling the health-care law and cutting domestic government spending by $100 billion.

Congress this year was also unable to approve a single one of the 12 annual appropriations bills that fund the government.

“I think it was a disaster,” said Senator Jeff Sessions, an Alabama Republican, of the congressional session.

Senator Richard Durbin of Illinois, the chamber’s No. 2 Democratic leader, saw it differently: “This whole two-year session has been dramatic in terms of its achievement and the changes that it’s brought about.”

End of Era

The policies embraced by the 111th Congress suggested the end of an era in Washington, as Democrats pushed to reverse three decades of deregulation that began under President Ronald Reagan, say economists.

“We’ve been in a trend toward an attempt to deregulate the economy,” said Harris. “You’re turning back the clock to an earlier period.”

The scope of regulations approved since Obama took office has made business hesitant to expand and hire new workers, he said. “Business is overwhelmed,” said Harris.

Congress scored its first big accomplishment weeks after Obama’s inauguration with passage in late February 2009 of a $814 billion stimulus bill. It has created or saved 3.3 million jobs, according to the Congressional Budget Office, while also steering more funds to road construction, broadband technologies and renewable energy ventures.

New Customers

The health-care legislation approved last March provided insurers including WellPoint Inc. of Indianapolis and drug- makers such as Pfizer Inc. of New York millions of new customers by requiring that all Americans have health insurance. These industries, as well as medical device-makers, will also face billions of dollars in new fees, and hospitals face a host of new standards designed to help curb soaring costs.

The health-care law is facing legal challenges, with the insurance provision a key dispute.

An overhaul of the rules governing the financial services industry, approved in July, aims to prevent a repeat of an economic collapse that led to the failures of Lehman Brothers Holdings Inc. and Washington Mutual Inc. It included $4 billion in aid to help thousands of unemployed property owners avoid foreclosure, while the program has fallen short of its goals.

Congress also passed laws to help ensure pay equity by enabling women to pursue lawsuits claiming they were underpaid, and to empower the federal Food and Drug Administration to regulate the tobacco industry, which includes restrictions on cigarette marketing.

New Justices

Additionally, lawmakers expanded state programs for health insurance for children, and they confirmed two Supreme Court justices, Sonia Sotomayor and Elena Kagan. Sotomayor became the first Latino to serve on the court, and the pair increased to three the number of women among the nine justices.

Following the November elections in which voters handed Democrats what Obama termed a “shellacking,” Congress in a lame-duck session made significant additions to its accomplishment list. Lawmakers approved an $858 billion measure that continues for two years Bush-era tax cuts for all income levels, extends aid for 13 months to the long-term unemployed, provides estate tax relief and cuts by two percentage points worker payroll taxes during 2011.

Congress in its last days also voted to repeal the “don’t ask, don’t tell” ban on military service by openly gay men and women. Yesterday it cleared the biggest food-safety overhaul in more than 70 years, giving the FDA more enforcement power. And the expected Senate ratification today of the new Strategic Arms Reduction Treaty will give Obama a key foreign-policy victory.

“What we’ve been able to do in the lame duck has been not just bipartisan by a fingernail, but bipartisan on a broad basis,” said Senator Claire McCaskill, a Missouri Democrat.

‘Cherry on Top’

From a market perspective, Congress’s biggest accomplishment was probably the tax cuts, with the estate tax breaks the “whipped cream, fudge and cherry on top,” said Ethan Siegal, president of the Washington Exchange.

Investors responded to the health-care and financial- services measures largely negatively, with health care viewed as “big government gone nuts,” he said.

Democrats say it will take years before the public recognizes their achievements. Many of the measures that passed were designed to forestall a bleaker recession, an argument that’s little comfort to many Americans as the nation’s unemployment rate has remained at 9.5 percent or higher for more than a year.

“It was hard to tell people that we accomplished anything important when their lives are so difficult,” said Representative Henry Waxman, a California Democrat and outgoing chairman of the House Energy and Commerce committee.

Changing Direction

The Tea Party movement, which worked to elect lawmakers advocating a new era of fiscal authority, has already begun to shift the direction of Congress.

Shortly after the election, Senate and House Republicans announced a voluntary ban on earmarks, the funding for pet projects added to bills by lawmakers. The incoming House Republican leadership has promised to turn the focus of the Appropriations Committee from funding government to identifying spending cuts.

Many of those efforts will likely fail in the Democrat- controlled Senate. And the party split between the two chambers is likely to bring the record of congressional productivity to an abrupt end in January.

“There’s just nothing that’s going to be accomplished,” said Brinkley. “What really is disturbing is that this is a period in which there is a lot to be done.”

--With assistance from Catherine Dodge in Washington. Editors: Don Frederick, Mark Silva

To contact the reporters on this story: Lisa Lerer in Washington at llerer@bloomberg.net; Laura Litvan in Washington at llitvan@bloomberg.net;

To contact the editors responsible for this story: Mark Silva at msilva34@bloomberg.net

Bloomberg Sues ECB to Force Disclosure of Greece Swap Documents

Posted: 22 Dec 2010 05:02 AM PST

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By Elisa Martinuzzi and Alan Katz

Dec. 22 (Bloomberg) -- Bloomberg News filed a lawsuit against the European Central Bank, seeking to make it disclose documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.

The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.

ECB President Jean-Claude Trichet withheld the documents after the European Union and International Monetary Fund led a 110 billion-euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from using the derivatives in that way again and show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

The EU is dependent “on member states taking an open and transparent approach in relation to their levels of debt,” Bloomberg said in its suit. “If Greece has failed to take such an approach in the past, there is a compelling public interest in relevant information being disclosed.”

An ECB spokeswoman declined to comment on the lawsuit.

The Greek government didn’t originally disclose the swaps, designed to help it comply with the deficit and debt rules it agreed to meet when it joined the euro in 2001.

‘Undermine Public Confidence’

Eurostat, the EU’s statistic’s agency, said last month the swaps added 5.3 billion euros to the country’s debt, without giving details. Repeated revisions of Greece’s national figures, beginning last year, spurred a surge in borrowing costs that pushed the country to the brink of default and triggered a region-wide debt crisis.

“The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy,” Trichet wrote in an Oct. 21 letter, turning down Bloomberg’s request for the documents. Disclosure “bears, in the current very vulnerable market environment, the substantial and acute risk of adding to volatility and instability.”

ECB officials first spotted “a swap operation in unusual terms,” in April 2009, seven months before the Greek crisis erupted, according to the March 3 cover note.

“It is wholly unclear what (if anything) the ECB did at that time to investigate further,” Bloomberg’s suit says.

Greece entered into a “large” number of private, off- market swaps from 2001 through 2007, Luxembourg-based Eurostat said in a report on Nov. 15. The agreements, which led to higher debt, were analyzed “in detail,” Eurostat said. A follow-up report on Greek data including swaps is due in weeks, a spokesman said at the time.

“Disclosure would help prevent these situations repeating themselves,” said Michael Spence, winner of the Nobel Prize for Economics in 2001 for his research on asymmetric information in markets. “It’s a tough call. Not everything can be disclosed, but markets need to know.”

--Editors: Edward Evans, Steve Bailey.

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Alan Katz in Paris at akatz5@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net

Murdoch&rsquo;s BSkyB Chances Improve as Hunt Gets Review

Posted: 22 Dec 2010 05:02 AM PST

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By Jonathan Browning

(Updates with analyst comment in seventh paragraph.)

Dec. 22 (Bloomberg) -- Rupert Murdoch’s News Corp.’s chance of winning regulatory approval to buy British Sky Broadcasting Group Plc got a boost after Conservative culture minister Jeremy Hunt was given responsibility for the review.

Business Secretary Vince Cable yesterday was stripped of the authority to decide whether the transaction gives News Corp. too much power after he was quoted as saying he had “declared war” on Murdoch. Prime Minister David Cameron transferred that responsibility to Hunt, who earlier this year said that the range of voices in the media won’t change following the deal.

News Corp., the owner of four of the largest U.K. newspapers, in June offered 7.8 billion pounds ($12.1 billion) for the remaining 61 percent stake in BSkyB, the U.K.’s biggest pay-TV company. Media regulator Ofcom will report to the culture minister by Dec. 31 on how the deal might affect British media and whether to refer the case to the Competition Commission.

“The odds of a referral have decreased significantly,” said Conor O’Shea, an analyst at Kepler Capital Markets in Paris. “There’s a major perceived change in the way that Jeremy Hunt views things as opposed to Vince Cable.”

The proposed deal prompted a letter signed by the owners of newspapers including the Daily Telegraph and the Guardian calling for the bid to be challenged by the U.K. government. The Church of England also opposed the bid.

‘Disastrous Implosion’

BSkyB shares rose as much as 2.3 percent to 745 pence in London trading today and were up 1.9 percent as of 12:51 p.m. BSkyB in June rejected News Corp.’s initial 700 pence a share offer as too low. The companies are seeking regulatory approval before a new offer is made. News Corp. won European Union approval for the proposed purchase yesterday.

The likelihood of a deal going through after Cable’s “disastrous and very public implosion” increased to 90 percent from 66 percent, Investec Securities analyst Steve Liechti said today. Investec raised the target price for BSkyB’s stock to 793 pence from 700 pence.

“It does seem to me that News Corp do control Sky already,” Hunt said in an interview with the Financial Times after the bid was announced in June. “So it isn’t clear to me that in terms of media plurality there is a substantive change, but I don’t want to second guess what regulators might decide.”

Ed Miliband, leader of the U.K.’s opposition Labour Party, said today he will write to Cabinet Secretary Gus O’Donnell to ask whether Hunt “is a fit and proper person to be making the decision” given his past comments about the BSkyB bid.

Dilemma

The U.K. government decision may create a dilemma for the coalition of Cameron, whose Conservative Party was backed by Murdoch’s newspaper the Sun in Britain’s May general election. Cable, 67, is the No. 2 Liberal Democrat in Cameron’s Conservative-led coalition.

Murdoch “is trying to take over BSkyB, you probably know that,” Cable told Daily Telegraph reporters who posed as constituents without identifying themselves as journalists. “For the people who know what is happening, this is a big thing. His whole empire is now under attack.”

New York-based News Corp. said yesterday it was “shocked and dismayed” by the comments. Cable’s remarks “raise serious questions about fairness and due process,” company spokeswoman Miranda Higham said in a telephone interview.

Hunt, 44, is more in favor of business in the media and broadcasting market, Kepler’s O’Shea said. The culture minister, who has a degree in politics, philosophy and economics from Oxford University, also set up his own educational company that publishes guides and websites to find the right course or college, according to his Website.

Timeline

The culture and media department will follow Cable’s proposed timeline when deciding whether to refer the deal, according to a spokeswoman, who declined to be identified. Cable had said he will review Ofcom’s findings after lawmakers return to parliament on Jan. 10.

The uproar over Cable’s comments have bolstered News Corp.’s position, setting the stage for Murdoch’s company to claim that the Ofcom review was “tainted from the start,” said Frances Murphy, a lawyer who leads the antitrust group at Jones Day LLP in London.

“The U.K. government is now in an impossibly difficult position -- any block will look politically motivated and will be open to challenge,” Murphy said.

Cable’s demotion helped to make sure that the decision won’t be made on political grounds, said Michael Jeremy, an analyst at Daniel Stewart in London.

“The process has returned to its proper place,” Jeremy said. Cable’s comments made it more likely that Hunt’s actions will be “scrutinized for behavior which is shown to be unbiased.”

--With assistance by Erik Larson and Thomas Penny in London and Aoife White in Brussels. Editors: Simon Thiel, Anthony Aarons.

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net.

J&amp;J Directors Ignored &lsquo;Red Flags&rsquo; on Recalls, Probes, Suit Says

Posted: 22 Dec 2010 05:00 AM PST

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By David Voreacos and Alex Nussbaum

Dec. 22 (Bloomberg) -- A group of Johnson & Johnson shareholders accused the company’s directors of ignoring “red flags” foreshadowing product recalls and government probes of manufacturing defects and marketing practices.

The shareholders asked a judge to find that directors and top executives mismanaged J&J and order them to pay damages. They also want J&J to “improve its corporate governance and internal procedures,” according to a complaint filed Dec. 17 in federal court in Trenton, New Jersey. Any money recovered would go to the company and not investors.

J&J, the world’s biggest maker of health-care products, recalled more than 40 types of medicines this year because of contamination and incorrect labeling. U.S. lawmakers began investigating J&J after a recall of batches of children’s Tylenol in April forced the company to suspend operations at a Pennsylvania plant. The probe uncovered the use of contractors to buy defective Motrin painkiller.

J&J also faces government investigations into whether it illegally marketed drugs and devices for uses not approved by the Food and Drug Administration and paid kickbacks. On Dec. 17, shareholders amended their so-called derivative lawsuits that seek to force directors and officers to pay the company.

While J&J once set “the gold standard for integrity and excellence,” the directors’ “utter disregard for their fiduciary duties, including permitting and fostering a culture of systemic, calculated and widespread legal violations has destroyed J&J’s hard-earned reputation,” shareholders claim.

Carol Goodrich, a spokeswoman for New Brunswick, New Jersey-based J&J, said the company is reviewing the complaint and has no comment.

Shares Fall

J&J fell 15 cents to $62.34 in New York Stock Exchange composite trading yesterday. The company has dropped 3.2 percent this year, compared with a 1.1 percent gain in the Standard & Poor’s 500 Health-Care Index of 52 stocks.

The board received “years of red flag warnings of systemic misconduct,” according to the complaint. “These red flags came in the form of federal and state regulatory investigations, subpoenas and requests for documents, FDA Warning Letters, news articles and the recall of products accounting for hundreds of millions of dollars in corporate losses.”

Earlier this year, J&J got three letters from shareholders demanding that it “investigate a variety of alleged issues and take appropriate action,” according to an Aug. 9 court filing. The suing shareholders include the Minneapolis Firefighters’ Relief Association and the Hawaii Laborers Pension Fund.

Special Committee

In response, the board voted April 22 to appoint a special committee to investigate and named four independent directors. Charles O. “Chuck” Prince, the former Citigroup Inc. chief executive officer, was named chairman. Other members of the committee are Anne Mulcahy, former CEO of Xerox Corp.; William D. Perez, former CEO of Wm. Wrigley Jr. Co.; and Michael M.E. Johns, chancellor of Emory University.

The committee appointed Lowenstein Sandler PC of Roseland, New Jersey, as its independent counsel, according to the filing. Sidley Austin LLP of Chicago is defending the company in the derivative litigation.

The case is In Re Johnson & Johnson Derivative Litigation, 10-cv-2033, U.S. District Court, District of New Jersey (Trenton).

--With assistance from David Olmos in San Francisco and Jef Feeley in Wilmington, Delaware. Editors: Stephen Farr, Michael Hytha.

To contact the reporters on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; Reg Gale at Rgale5@bloomberg.net.

Dividends Up 8.8%, 2011 Estimated To Be Up 9%, But You're Still Down 18.5% from 2008

Posted: 21 Dec 2010 06:32 AM PST