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Five Big Decisions in the Market

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five.

Its decision time in the market--lots of big decisions with potentially big consequences.

Here with me to talk about the details is Morningstar's Jeremy Glaser, markets editor.

Thanks for joining me, Jeremy.

Jeremy Glaser: Jason, always an easy decision to be here.

Stipp: What you have for the Friday Five this week?

Glaser: Well, this week, we're going to take a look at the AT&T/T-Mobile merger, at Best Buy, bank dividends, Walgreen, and finally the European debt crisis.

Stipp: A very unexpected decision we got on Sunday was news of a potential merger between AT&T and T-Mobile. What's the story behind that, and why is this such a big decision?

Glaser: It really was surprising--nobody thought that AT&T and Deutsche Telekom were going to come together to sell this T-Mobile unit. Sprint had been circling it for a while. I think there was a lot of talk that Deutsche Telekom was going to sell T-Mobile, but not necessarily to AT&T, and the big reason is that AT&T Wireless was already so big, there was concern that the federal government was just never going to allow a deal of this size to go through, and I think that's really where the real decision point is right now: Will the FCC, will the Department of Justice, allow that much concentration in the wireless industry?

So far, certainly we've heard from Washington that they're going to be looking at this very closely, that they haven't started the formal process yet, but we haven't heard a lot of really angry comments from senators, from representatives, from other people and government. Everyone seems to be taking a very much wait-and-see approach, and aren't just opposed to it flat out. I think that's probably a good sign for AT%T; I think it probably says a lot about their incredibly large lobbying effort that they have in D.C., and certainly AT&T may be able to get this deal to go through; it's going to be a big decision, and if it does, according to our analyst and from what we've seen, it certainly looks like it could be a good deal for AT&T shareholders.

Stipp: So, on the retail side, mobile certainly seems to be a big chunk of business for Best Buy. Given the news that may be coming out of mobile because of this potential merger, does Best Buy need to make any decisions about their business?

Glaser: They may have to. Best Buy earnings from this last quarter, which they just released this week, showed that they really are making a ton of money and growing a lot of profitability from the mobile side of the business.

Sales of things like flat-panel TVs and computers have been a little bit anemic; people are looking at places like Wal-Mart and Costco, and from online at Amazon for those items. But for mobile phones, people seem to really want to hold them in their hand before they actually go out and buy, and buying online hasn't been as popular of an option.

Best Buy has opened up some dedicated mobile stores; they've dedicated more floor space and more staff to activate and to sell new lines to people who want to upgrade their handsets or start a new cell phone contract. And that's been a big part of their business.

And I think that if we see AT&T and T-Mobile merge, that's going to take a big hit on Best Buy. There are more stores out there for the combined company; certainly a lot of T-Mobile stores will close, and some AT&T stores will close, but they will still be a larger proportion of them out there, and Best Buy is going to have to work even harder to get more people to shop with them versus going with the carrier directly.

It could be a problem for them; they might have to make some decisions about how to grow other parts of their business if that happens, but that's probably still a year or two away before they really feel that impact, but certainly something I'm sure the Best Buy executives are thinking about right now.

Stipp: In financial services, the banks just went through another round of stress tests, with the government making some decisions on the heels of those tests. What did we learn from that?

Glaser: The government did have to decide if the capital plans that the large banks had submitted were adequate and if they were going to be allowed to raise their dividends, or do share buybacks, or in any way return capital to shareholders.

It seems like the Federal Reserve made some split decisions. On some stronger banks like Wells Fargo, BB&T, no one was terribly surprised that they approved the plans, and they were allowed to increase their dividends and allowed to start paying that money back.

For Bank of America, they flat-out rejected it. There were no reasons given. There is some speculation that they are just worried about some litigation risks that Bank of America still faces. They are not happy with their level of capital, and basically said that Bank of America wouldn't be able to pay out a dividend.

And somewhat surprisingly, Citigroup came out and decided that they, too, want to pay a dividend, but unfortunately, they could only afford one-tenth of $0.01, so they decided to do a reverse stock split to make it up to $0.01. So, it's not much of a substantial dividend, but it shows that Citi really wants to be viewed as a strong bank again, wants to get rid of their tarnished reputation and make investors think about them as a real growth story instead of a distressed story.

We will see how that works; I think investors will have a lot of decisions there. But certainly the government seems to be allowing the stronger banks to separate from some of the weaker banks, and that's something that we are going to see for a while now.

Stipp: Back to M&A, Walgreens made a decision in cyberspace this week. Was it a good decision?

Glaser: Somewhat of a perplexing one for me, personally. Certainly Walgreen has had great success with sales. They've really been able to push both prescription sales and front-of-the-store sales. They have been moving into more categories such as fresh food, selling beer and wine in their stores, something they hadn't done for many years, and trying to really be one-stop shopping for people who are busy, who just pass their neighborhood Walgreens.

But they decided to spend quite a bit of money on, $400 million, which certainly seems like a lot for a business that has actually never made any money, and it's not really clear how it fits in with the rest of Walgreen's strategy of getting people into the store to do more of that front-of-the-store purchasing. Walgreens has been struggling with keeping their profitability up. Buying an unprofitable business doesn't seem like a great way to ameliorate that problem. We will see if it works out. I don't think it's a deal that's going to see any regulatory hurdles, but it could be one where the shareholders wish that the government may have stepped in to stop it.

Stipp: Lastly, Jeremy, some decisions made in Europe that underscore the fact that the crisis is still going on there. What did we learn, and what's the impact?

Glaser: It's certainly dropped off the front page of the papers, but the European debt crisis continues to go on. In Portugal, we saw that very clearly, that it's difficult to push these austerity measures on a population.

The parliament there voted down the large austerity package that was going to keep Portugal from having to go to the EU bailout fund. The prime minister is going to have to resign.

Certainly, it just shows how difficult it is to have these really large cuts in spending when you have a population that feels like they are being somewhat railroaded by the international community into taking on these big cuts, and obviously nobody likes austerity, but the problem is, the bailout fund still isn't really codified in the way that it needs to be. It's probably big enough for Portugal, but if other countries continue to run into these problems and aren't able to put these austerity measures forward, they might have to go into the fund as well; it may have to expand in size.

There doesn't seem to be a lot of appetite for that. They keep putting off the decision to make it larger, to make it permanent, to create a real structure around it. Those are decisions they are going to need to make, and I think if they made them sooner rather than later, they would be able to stave off a lot of problems, but it just shows how difficult it is. This is problem that we have been talking about for a while and probably will be talking about for years to come.

Stipp: Jeremy, a decisively interestingly, Friday Five this week. Thanks for joining me.

Glaser: You are very welcome, Jason.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.