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Coke Bottles Up, Palm Lets Down, and Wal-Mart Gets Vudu

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. This is our look back at five notable headlines for investors. Joining me as always with the Friday five is Morningstar markets editor Jeremy Glaser. Jeremy, thanks for being here.

Jeremy Glaser: Glad to be here, Jason.

Stipp: So what do you have for the Five this week?

Glaser: Coke is following Pepsi's lead. The battle for General Growth Properties heats up. We'll have our footnote of the week. Is this the end of the road for Palm? And finally, we'll take a quick peek at Wal-Mart's latest acquisition.

Stipp: All right. Well, let's pop the top off a Coke and start there.

Glaser: Last year Pepsi made quite a splash by buying their North American bottling and distribution network. Coke followed suit this week by saying that they're going to buy Coca-Cola Enterprises, or at least their North American operations. They'll have control of the entire chain, from marketing to actually getting it to the convenience store.

They think that by doing this, they'll be able to get new products to market faster and can stop some of the contentious negotiations that they sometimes have between themselves and their bottlers.

Now this is a business they spun off years ago because they didn't want the dead weight of all these trucks and factories on their balance sheet. It's not clear if that dead weight is really going to help them now, but they seem to value this flexibility and are willing to pay for it. I think it will take some time to see if this works for both Pepsi and Coke, but they both are now on the same pathway.

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Stipp: Well, now that they've both jumped in they can definitely have more of an apples to apples comparison, then.

Glaser: I think so.

Stipp: So for number two, you talked about this last week. General Growth Properties, that story has been developing this week. What did you see on that front?

Glaser: We postulated that there could be some more people who are out there wanting to bid for General Growth, and it turns out that that's the case. Brookfield Asset Management, which is a Canadian real estate firm, looks to partner with General Growth to take them out of bankruptcy and create two companies. One, General Growth Properties that will have some of the better malls, and then General Growth Opportunity, which will have some of the less desirable assets and a lot of the debt.

Bond holders, instead of getting all cash, like they would with Simon, would get some equity instead. Not 100% clear which of these deals is going to prevail. The bankruptcy judge will have a lot to say about that.

As for the bond holders, there were also rumors that Westfield, which is an Australian property company might be interested. And Blackstone Group might be joining Simon to up the bid. I think we're going to be hearing about this for a few weeks, but it does show there's a lot of interest in these assets.

Stipp: A lot more cooks in the kitchen this week than there were last week. So for number three, our Footnote of the Week. Footnoted is a company that Morningstar merged with recently. Tell us about what they dug up in the filings.

Glaser: They were looking at some of the Toyota filings. As we all know, Toyota's been having quite a few problems. And after they received a subpoena for information about some of their accelerator problems on Feb. 8, it took until Feb. 22 before they had a filing with the SEC that said that they were having these government problems.

This is a pretty big delay and much longer than what would be allowed for any American-domiciled company. The rules around how Toyota has to disclose because they are a Japanese company are really gray. Even the SEC doesn't completely understand them.

So it seems like there's nothing illegal about this huge delay, but it's something to give investors pause when they're buying foreign companies knowing that the transparency and the disclosure is going to be very different than buying an American-based company.

Stipp: Interesting one to watch. So speaking of things that may be breaking down or hitting the end of the road, Palm had some problems this week and really had a tough week. Tell us about what happened there.

Glaser: Palm came out and said that everybody needs to way lower their expectations when it comes to Palm's sales. They originally thought that adoption of Web OS, which is their new operating system, and phones like the Palm Pre and the Palm Pixi was going to be great, and that they had all these orders on the books from carriers.

But the carriers are noticing that nobody is buying these phones. They've cut back their orders pretty substantially or delayed them for the coming years. The operating system just hasn't taken off in the mind of consumers.

I noticed at the Consumer Electronics Show that there was not a lot of buzz about people developing for Web OS. Not a lot of apps out there. I think they're really nice phones and they made a splash when they were introduced, but they haven't been able to capitalize on it.

It's not clear if Palm will ever get a chance to re-launch again. They don't have a big new platform like they did before. And with Microsoft coming out with Windows Mobile 7, and with Apple and with Google and so many other players there, it's hard to see where Palm is going to be able to build out their niche.

Stipp: Well, it looks like you certainly had Palm's number at the CES this time around, Jeremy. So for number five, Wal-Mart making another foray into online. What are they doing this time?

Glaser: Wal-Mart has somewhat of a checkered history in the online space. They tried DVD by mail before, which they ended up folding. But this time they're trying to do online web video delivery through a company called Vudu. You have to buy a box to get HD streaming or go from other consumer electronics devices like a DVD player or your TV itself.

This is an interesting move for Wal-Mart. I think it shows that they really see the future is not in DVDs, it's not in physical media, but it's in delivering that electronically into people's homes.

I think that companies like Netflix and Time Warner Cable and Comcast are going to need to take notice that Wal-Mart intends to be in this space. They're going to make a big push so that as physical DVD sales fall off for them, they want to replace that with online sales. There's going to be a lot of competition here. It'll be interesting to see who comes out on top.

Stipp: Well certainly someone as big as Wal-Mart is entering the fray, you have to sit up and take some notice.

Glaser: I think so.

Stipp: Thanks for joining me, Jeremy.

Glaser: You're very welcome.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.