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    Berkshire Hathaway’s big mystery stock wager could be revealed soon

    Berkshire Hathaway, led by legendary investor Warren Buffett, has been making a confidential wager on the financial industry since the third quarter of last year.
    The identify of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.
    In a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.

    Warren Buffett tours the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.
    David A. Grogan | CNBC

    Berkshire Hathaway, led by legendary investor Warren Buffett, has been making a confidential wager on the financial industry since the third quarter of last year.
    The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.

    That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.
    The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.
    That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.
    “When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”
    Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.

    Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.

    Veiled bets

    Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.
    Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.
    While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.
    That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.
    At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.

    Schwab or Morgan Stanley?

    If it were a classic Buffett bet — a big stake in a single company —  that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.
    Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.
    Charles Schwab or Morgan Stanley could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.
    “Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”
    Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.

    Buffett & banks

    Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.
    Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.
    But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.
    Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.

    ‘Fear is contagious’

    Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.
    “The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”
    Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.
    It’s unclear how long regulators will allow Berkshire to shield its moves.
    “I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”
    — CNBC’s Yun Li contributed to this report.

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    Talent war between family offices and Wall Street drives up salaries

    Wealthy families are spending an average of $3 million to operate their private investing wings, known as family offices, according to a J.P. Morgan Private Bank report.
    The biggest cost is staffing, which has become more expensive as family offices have tripled in number over the past five years.
    That’s leading to competition for talent with banks, private equity firms and hedge funds.

    Sdi Productions | E+ | Getty Images

    A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
    The typical family office costs more than $3 million a year to operate, as competition for talent drives up staffing expenses, according to a new study.

    Wealthy families are spending anywhere from $1 million to more than $10 million a year to operate their family offices, with the average now at around $3.2 million, according to the J.P. Morgan Private Bank Global Family Office Report released this week. While the costs vary widely depending on assets, experts say expenses are growing across the board as family offices explode in size and number and compete more directly with private equity, hedge funds and venture capital.
    “There’s a real war for talent within family offices,” said William Sinclair, U.S. head of J.P. Morgan Private Bank’s Family Office Practice. “They’re competing for talent against private equity and hedge funds and banks.”
    Smaller family offices spend less, of course. According to the report, which surveyed 190 family offices with average assets of $1.4 billion, family offices that manage less than $500 million spend an average of $1.5 million a year for operating costs. Family offices between $500 million and $1 billion spend an average of $2.7 million, and those above $1 billion average $6.1 million. Fifteen percent of family offices spend more than $7 million, while 8% spend more than $10 million.
    The biggest cost is staffing, which has become more expensive as family offices have tripled in number over the past five years. Family offices are increasingly competing with one another for senior talent, according to recruiters.
    More importantly, family offices are shifting more of their investments into alternatives, which include private equity, venture capital, real estate and hedge funds. According to the J.P. Morgan survey, U.S. family offices have more than 45% of their portfolios in alternatives, compared with 26% for stocks.

    As they expand their reach into alternatives, they’re increasingly in direct competition with big private equity firms, venture capital firms and deal advisors to bring in top talent.
    “We’ve seen over the last decade, the professionalization and institutionalization of the family office space,” said Trish Botoff, founder and managing principal of Botoff Consulting, which advises family offices on recruiting and staffing. “They’re building out their investments teams, hiring staff from other investment firms and private equity firms, so that has a huge impact on compensation.”
    According to a family office survey conducted by Botoff Consulting, 57% of family offices plan to hire more staff in 2024 and nearly half are planning on extending raises of 5% or more to their existing staff. Experts say overall pay at family offices is up between 10% and 20% since 2019 due to frenzied demand for talent in 2021 and 2022.
    The average compensation for a chief investment officer for a family office with less than $1 billion in assets is about $1 million, according to Botoff. The average comp for a CIO overseeing more than $10 billion is just under $2 million, she said. Botoff said more family offices are adding long-term incentive plans, such as deferred compensation, on top of their base salary and bonus, to sweeten the packages.
    Competition is even driving up salaries for lower-level staff. Botoff said one family office she worked with was hiring a junior analyst who asked for $300,000 a year.
    “The family office decided to wait a year,” she said.
    Competition with private equity firms is getting especially costly. As more single-family offices do direct deals, buying stakes in private companies directly, they’re trying to lure talent from the big private equity firms such as KKR, Blackstone and Carlyle.
    “It’s the biggest quandary,” said Paul Westall, co-founder of Agreus, the family office advisory and recruiting firm. “Family offices just can’t compete at a senior level with the big PE firms.”
    Instead, Westall said, family offices are recruiting midlevel managers at PE firms and giving them more authority, better access to deals and higher pay. Family offices are now sometimes giving PE recruits a “carry” — meaning a share of the profit when a private company is sold — similar to PE firms.
    He said better pay, access to billionaires and their networks, and the benefit of “not feeling like just a cog in a big wheel” are making family offices more attractive places to work.
    “If you look back 15 years ago, family offices were where people went to retire and have work-life balance,” he said. “That’s all changed. Now they’re bringing in top talent and paying their people, and that’s pushed them into competition with the big firms and the banks.”
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    ‘Trader justice’: Ex-SocGen trader fired for risky bets claims he was made a ‘scapegoat’

    A former Societe Generale trader who was fired for unauthorized risky bets has lambasted the French bank for making him a “scapegoat” and failing to take its share of responsibility.
    Kavish Kataria, who was dismissed from the bank’s Delta One desk last year, said the profits and losses on his trades were reported on a daily basis to superiors in Hong Kong and Paris.
    A SocGen spokesperson declined to comment on the post, but provided a statement on the dismissal and said the incident “didn’t generate any impact.”

    A logo outside a Societe Generale SA office building in central Paris, France, on Monday, Feb. 5, 2024. 
    Bloomberg | Bloomberg | Getty Images

    A former Societe Generale trader who was fired for unauthorized risky bets has lambasted the French bank for making him a “scapegoat” and failing to take its share of responsibility for missing the trades.
    Kavish Kataria, who was dismissed from the bank’s Delta One desk last year, said the profits and losses on his trades were reported on a daily basis to superiors on his Hong Kong team as well as those in the Paris head office, while a daily email about the transactions was also sent out.

    “Instead of taking the responsibility of the lapse in their risk system and not identifying the trades at the right time they fired me and terminated my contract,” Kataria said in a LinkedIn post Thursday.
    The comments come after SocGen confirmed earlier this week that Kataria and team head Kevin Ng were dismissed last year after an internal review of their transactions. A SocGen spokesperson declined to comment on the post, but provided a statement on the pair’s dismissal.
    “Our strict control framework has allowed us to identify a one-off trading incident in 2023, which didn’t generate any impact and led to appropriate mending measures,” the statement said.
    Although SocGen did not lose any money from the trades, losses could have spiraled into the hundreds of millions of dollars had there been a market downturn, a person familiar with the matter told the Financial Times.
    Kataria had been dealing in options on Indian indexes, which he was not permitted to do, the person said. However, because most were intraday trades, they were not immediately detected, the FT reported.

    Kataria said the trades were auto-booked and a “daily email was sent to the entire group mentioning the trades have been reconciled.”
    “It’s very easy for other people to say that we were not aware of the trades done by me,” he wrote. “This means either you were not doing your job properly or either you were unfit for the same.”
    Kataria joined the bank in Hong Kong in 2021 and claimed he made $50 million for the desk in the last eight months alone.
    In his LinkedIn post, he called for better regulation after he was dismissed with seven days’ salary and his bonus for the previous year was withheld.
    “Trading Industry is so big but there are no rules or regulations which fight for trader justice,” he said.
    Risk management is a critical area of focus for banks, and SocGen remains scarred by the 4.9 billion euros ($5.2 billion) in losses accrued in 2008 by “rogue trader” Jerome Kerviel, who worked on the same derivatives desk as Kataria.
    The French bank on Friday reported a lower-than-expected 22% slide in first-quarter net income, as profits on equity derivative sales offset weakness at its retail bank and fixed income trading. More

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    China’s automakers must adapt quickly or lose out on the EV boom in the face of regulatory scrutiny abroad and competition at home

    Adoption of battery and hybrid-powered cars has surged in China, but an onslaught of new models has fueled a price war, while regulatory scrutiny grows abroad.
    “The speed of elimination will only pick up,” Feng Xingya, president at GAC, told reporters on the sidelines of the Beijing auto show in late April. That’s according to a CNBC translation of his Mandarin-language remarks.
    “The difference today is that the overcapacity now has come together with vehicles that are very competitive,” said Stephen Dyer, co-leader of the Greater China Business at consulting firm AlixPartners, and Asia leader for its automotive and industrials practice.

    Chinese new energy vehicle giant shows off the latest version of its Han electric sedan at the Beijing auto show on April 26, 2024.
    CNBC | Evelyn Cheng

    BEIJING — Chinese automakers, including state-owned auto giant GAC Group, can’t afford to take it easy in the country’s electric car boom if they want to survive.
    Adoption of battery and hybrid-powered cars has surged in China, but an onslaught of new models has fueled a price war that’s forced Tesla to also cut its prices. While Chinese automakers also look overseas for growth, other countries are increasingly wary of the impact of the cars on domestic auto industries, requiring investment in local production. It’s now survival of the fittest in China’s already competitive EV market.

    “The speed of elimination will only pick up,” Feng Xingya, president at GAC, told reporters on the sidelines of the Beijing auto show in late April. That’s according to a CNBC translation of his Mandarin-language remarks.
    GAC slashed prices on its cars one week before the May 1 Labor Day holiday in China, Feng said, noting the price war contributed to its first-quarter sales slump. The automaker’s operating revenue fell year-on-year in the first quarter for the first time since 2020, according to Wind Information.
    To stay competitive, Feng said GAC is partnering with tech companies such as Huawei, while working on in-house research and development. The automaker is the joint venture partner of Honda and Toyota in China, and has an electric car brand called Aion.

    “In the short term, if your product isn’t good, then consumers won’t buy it,” Feng said. “You need to use the best tech and the best products to satisfy consumer needs. In the long term, you must have a core competitive edge.”

    Expanding outside China

    Like other automakers in China, GAC is also turning overseas. Domestic sales of new energy vehicles, which include battery-only and hybrid-powered cars, have slowed their pace of growth as of March, versus December, according to China Passenger Car Association data.

    Last year, GAC revamped its overseas strategy with an ultimate goal of selling 1 million cars abroad — electric, hybrid and fuel-powered, Wei Haigang, general manager of GAC International, told CNBC in an interview last week.
    The company still has a long way to go. It only exported about 50,000 cars last year, Wei said. But he said the goal is to double that to at least 100,000 vehicles this year, and reach 500,000 units by 2030 — with sales targets and strategies for different regions of the world, beginning with the Middle East and Mexico.
    “We are now going all out to speed up our overseas expansion,” he said in Mandarin, translated by CNBC.
    China’s overseas car sales surged last year, putting the country on par with Japan as the world’s largest exporter of cars. The EU and the U.S. have in the last year announced probes into China-made electric vehicles, amid efforts to encourage consumers to shift away from fuel-powered cars.

    Factories go global

    Part of GAC’s international strategy is to localize production, Wei said, noting the company is using a variety of approaches such as joint ventures and technology partnerships. He said GAC opened a factory in Malaysia in April and plans to open another in Thailand in June, with Egypt, Brazil and Turkey also under consideration.
    GAC plans to establish eight subsidiaries this year, including in Amsterdam, Wei said. But the U.S. isn’t part of the company’s near-term overseas expansion plans, he said.

    The difference today is that the overcapacity now has come together with vehicles that are very competitive

    Stephen Dyer
    AlixPartners, co-leader of the Greater China Business

    U.S. and European officials have in recent months emphasized the need to address China’s “overcapacity,” which can be loosely defined as state-supported production of goods that exceeds demand. China has pushed back on such concerns and its Ministry of Commerce claimed that, from a global perspective, new energy faces a capacity shortage.
    “There’s always been overcapacity in the Chinese auto industry,” said Stephen Dyer, co-leader of the Greater China business at consulting firm AlixPartners, and Asia leader for its automotive and industrials practice.
    “The difference today is that the overcapacity now has come together with vehicles that are very competitive,” he told CNBC on the sidelines of the auto show. “So in our EV survey I was surprised to find that about 73% of U.S. consumers could recognize at least one Chinese EV brand. And Europe was close behind.”
    Dyer expects that to drive overseas demand for Chinese electric cars. AlixPartners’ survey found that BYD had the highest brand recognition across the U.S. and major European countries, followed by Nio and Leap Motor.
    BYD exported 242,000 cars last year and is also building factories overseas. The company’s sales are roughly split between hybrid and battery-powered vehicles. BYD no longer sells traditional fuel-powered passenger cars.

    Tech competition

    In addition to price, this year’s auto show in Beijing reflected how companies — Chinese and foreign — are competing on tech such as driver-assist software.
    Chinese consumers placed almost twice as much importance on tech features compared with U.S. consumers, Dyer said, citing AlixPartners’ survey.
    He noted how Chinese startups are so aggressive that a car may be sold with new tech, even if the software still has problems. “They know they can use over-the-air updates to rapidly fix bugs or add features as needed,” Dyer said.
    Interest in tech doesn’t mean consumers are sold on battery-only cars. Dyer said that in the short term, consumers are still worried about driving range — meaning that hybrids are not only in demand, but often used without charging the battery.

    Even Volkswagen is getting in on the “smart tech” race. The German auto giant revealed at the auto show its joint venture with Shanghai’s state-owned SAIC Motor teamed up with Chinese drone company DJI’s automotive unit to create a driver-assist system for the newly launched Tiguan L Pro.
    The initial version of the SUV is fuel-powered, for which the company’s tagline is: “oil or electric, both are smart,” according to a CNBC translation of the Chinese.
    Battery manufacturer CATL had a more prominent exhibition booth this year, likely in the hope of encouraging consumers to buy cars with its batteries, as competitors’ market share grows, said Zhong Shi, an analyst with the China Automobile Dealers Association.
    Automotive chip companies Black Sesame and Horizon Robotics also had booths inside the main exhibition hall.

    What customers want

    Lotus Technology, a high-end U.K. car brand acquired by Geely, found in a survey of its customers their top requests were for automatic parking and battery charging, which would allow drivers to stay in the car.

    That’s according to CFO Alexious Kuen Long Lee, who spoke with CNBC on the sidelines of the Beijing auto show. He noted the company now has robotic battery chargers in Shanghai.
    Lotus and Nio last week also announced a strategic partnership on battery swapping and charging.
    “I think there is a handing over of the baton where the Chinese brands are becoming much bigger and much stronger, and the foreign brands are still trying to decide what’s the best energy route,” said Lee, who’s worked in China since 1998. “Are they still deciding on the PHEV, are they still thinking about BEVs, are they still thinking about the internal combustion cars? The entire decision-making process becomes so complex, with so much resistance internally, that I think they’re just not being productive.”
    But he thinks Lotus has found the right strategy by expanding its product line, and going straight to battery-powered cars. “Lotus today,” he said, “is similar to what international brands’ position [was] in China, probably back in 2000.” More

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    Amgen scraps experimental weight loss pill, moves forward with injection

    Amgen is scrapping an experimental weight loss pill but moving forward with an injection.
    Amgen will release initial data from a mid-stage study on its injectable drug later this year, and the company is “very pleased” with the results so far.
    The company has tried to take a different approach to obesity treatment than other drugmakers.

    The Amgen logo is displayed outside Amgen headquarters in Thousand Oaks, California, on May 17, 2023.
    Mario Tama | Getty Images

    Amgen on Thursday said it will stop developing its experimental weight loss pill and instead move forward with its injectable drug and other products in development for obesity.
    Amgen is among several drugmakers racing to join the red-hot weight loss drug space dominated by Novo Nordisk and Eli Lilly, which some analysts say could be worth $100 billion by the end of the decade. But the company has other opportunities to capture a slice of the market.

    “Given the profile we’ve seen with [the oral drug], we will not pursue further development. Instead, in obesity, we’re differentially investing in MariTide and a number of preclinical assets,” Jay Bradner, Amgen’s chief scientific officer, said during an earnings call Thursday.
    Amgen is developing an injectable obesity treatment called MariTide, which is in an ongoing midstage trial in obese or overweight adults without diabetes. The company will release initial data from that study later this year, and Bradner said Amgen is “very pleased” with the results so far.The company said it is working with regulators to plan a late-stage trial for the treatment. Amgen said Thursday it is planning a stage two trial on the drug in diabetes treatment as well.
    Amgen shares rose more than 10% in extended trading Thursday following the commentary on MariTide.
    Amgen also has other drugs in development for weight management. 
    The drugmaker’s oral drug, called AMG-786, is the second weight loss pill to be discontinued over the past year.

    Pfizer in December scrapped a twice-daily version of its obesity pill, danuglipron, after patients had a difficult time tolerating the drug in a midstage trial. The company is now developing a once-daily version of that drug.
    Investors are laser-focused on Amgen’s pipeline of experimental weight loss treatments. Amgen hopes to stand out among the crowded field of potential players with a different approach. 
    The company’s experimental injection helps people lose weight differently from the existing injectable drugs. Much similar to Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound, one part of Amgen’s treatment activates a gut hormone receptor called GLP-1 to help regulate a person’s appetite. 
    But while Zepbound activates a second hormone receptor called GIP, Amgen’s drug blocks it. Wegovy does not target GIP, which suppresses appetite like GLP-1, but may also improve how the body breaks down sugar and fat.
    Amgen’s injectable treatment also appears to help patients keep weight off after they stop taking it based on some clinical trial data. The drugmaker is also testing its drug to be taken once a month or even less frequently, which could offer more convenience than the weekly medicines on the market. 
    Patients given the highest dose of Amgen’s MariTide — 420 milligrams — every month lost 14.5% of their body weight on average in just 12 weeks, according to data from the phase one trial published in February in the journal Nature Metabolism. 

    Amgen’s first-quarter results

    Also on Thursday, Amgen reported first-quarter revenue and adjusted earnings that topped Wall Street’s expectations, partly due to products from the recently acquired Horizon Therapeutics. 
    Here is what Amgen reported for the first quarter compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

    Earnings per share: $3.96 vs. $3.87 expected
    Revenue: $7.45 billion vs. $7.44 billion expected

    Amgen posted a net loss of $113 million, or 21 cents per share. That compares to a net income of $2.84 billion, or $5.28 per share, for the year-earlier period.
    Excluding certain items, the company reported earnings of $3.96 per share. 
    Amgen booked $7.45 billion in revenue for the first quarter, up 22% from the same period a year ago. 
    That includes $914 million from Horizon Therapeutics products, including thyroid eye disease treatment Tepezza. 
    Excluding drugs from Horizon Therapeutics, Amgen said its product sales grew 6% from the year-earlier period. Ten products delivered double-digit volume growth during the first quarter, including cardiovascular drug Repatha, severe asthma treatment Tezspire and Blincyto, a therapy for a certain blood cancer.
    Amgen slightly narrowed its full-year guidance up from the bottom on Thursday as well. 
    The company expects 2024 revenue of $32.5 billion to $33.8 billion. That compares to a previous guidance of $32.4 billion to $33.8 billion. 
    Amgen expects a full-year adjusted profit of $19 to $20.20 per share. That compares to a previous guidance of $18.90 to $20.30 per share. 
    Analysts surveyed by LSEG expect full-year revenue of $32.95 billion and adjusted profit of $19.48 per share. 

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    Peloton CEO Barry McCarthy to step down, company to lay off 15% of staff as it looks to refinance debt

    Peloton announced Thursday that CEO Barry McCarthy will be stepping down just over two years after he took over from founder John Foley.
    Along with the CEO change, the company is laying off 15% of its staff, or about 400 employees, to bring spending in line with revenue.
    Peloton also announced fiscal third-quarter results that fell short of Wall Street’s expectations on the top and bottom line.

    Barry McCarthy, president and CEO of Peloton Interactive, walks to a morning session at the Allen & Company Sun Valley Conference on July 06, 2022 in Sun Valley, Idaho.
    Kevin Dietsch | Getty Images

    Peloton announced Thursday that CEO Barry McCarthy will be stepping down and the company will lay off 15% of its staff because it “simply had no other way to bring its spending in line with its revenue.”
    McCarthy, a former Spotify and Netflix executive, will become a strategic advisor to Peloton through the end of the year while Karen Boone, the company’s chairperson, and director Chris Bruzzo will serve as interim co-CEOs. Boone most recently served as the CFO of Restoration Hardware while Bruzzo was a longtime executive at Electronic Arts. Peloton is seeking a permanent CEO.

    The company also announced a broad restructuring plan that will see its global headcount cut by 15%, or about 400 employees. It plans to continue to close retail showrooms and make changes to its international sales plan.
    The moves are designed to realign Peloton’s cost structure with the current size of its business, it said in a news release. It’s expected to reduce annual run-rate expenses by more than $200 million by the end of fiscal 2025. About half of those savings are going to come from payroll reductions, while the rest will come from lower marketing spending, a reduced retail store footprint, and reduced IT and software spending, said finance chief Liz Coddington.
    The departments hit the hardest from the restructuring will be Peloton’s research and development, marketing and international teams, Coddington said.
    “This restructuring will position Peloton for sustained, positive free cash flow, while enabling the company to continue to invest in software, hardware and content innovation, improvements to its member support experience, and optimizations to marketing efforts to scale the business,” the company said.
    Peloton’s shares surged more than 12% in premarket trading but opened lower after the company’s conference call with Wall Street analysts concluded. Shares closed about 3% lower.

    Peloton board ready for its next CEO

    McCarthy took the helm of Peloton in February 2022 from founder John Foley and has spent the last two years restructuring the business and working to get it back to growth.
    As soon as he took over, he implemented mass layoffs to right size Peloton’s cost structure, closed some of the company’s splashy showrooms and enacted new strategies designed to grow membership. He overhauled Peloton’s executive team, oversaw its rebrand and created new revenue drivers like the company’s rental program.
    The last round of cuts, affecting 500 employees, was announced in October 2022. McCarthy later said the company’s restructuring was “complete” and it was instead pivoting to “growth.” 
    “We are done now,” McCarthy had said in November 2022 of the layoffs. “There are no more heads to be taken out of the business.”
    Contrary to Peloton’s founder, McCarthy redirected Peloton’s attention to its app as a means to capture members who may not be able to afford the company’s pricey bikes or treadmills but could be interested in taking its digital classes.
    In a letter to staff, McCarthy said the company now needed to implement layoffs again because it wouldn’t be able to generate sustainable free cash flow with its current cost structure. Peloton hasn’t turned a profit since December 2020 and it can only burn cash for so long when it has more than $1 billion in debt on its balance sheet.
    “Achieving positive [free cash flow] makes Peloton a more attractive borrower, which is important as the company turns its attention to the necessary task of successfully refinancing its debt,” McCarthy said in the memo.
    In a letter to shareholders, the company said it is “mindful” of the timing of its debt maturities, which include convertible notes and a term loan. It said it is working closely with its lenders at JPMorgan and Goldman Sachs on a “refinancing strategy.”
    “Overall, our refinancing goals are to deleverage and extend maturities at a reasonable blended cost of capital,” the company said. “We are encouraged by the support and inbound interest from our existing lenders and investors and we look forward to sharing more about this topic.”
    In a news release, Boone thanked McCarthy for his contributions.
    “Barry joined Peloton during an incredibly challenging time for the business. During his tenure, he laid the foundation for scalable growth by steadily rearchitecting the cost structure of the business to create stability and to reach the important milestone of achieving positive free cash flow,” Boone said.
    “With a strong leadership team in place and the Company now on solid footing, the Board has decided that now is an appropriate time to search for the next CEO of Peloton.”
    During a conference call with analysts, Boone said Peloton’s board is looking for a leader who can “architect and lead the next phase of growth for the company.”

    Disappointing earnings, lowered outlook

    Also on Thursday, Peloton announced its fiscal third-quarter results and fell short of Wall Street’s expectations on the top and bottom line. Here’s how the connected fitness company did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

    Loss per share: 45 cents vs. a loss of 37 cents expected
    Revenue: $718 million vs. $723 million expected

    The company’s reported net loss for the three-month period that ended March 31 was $167.3 million, or 45 cents per share, compared with a loss of $275.9 million, or 79 cents per share, a year earlier. 
    Sales dropped to $718 million, down about 4% from $748.9 million a year earlier. 
    Peloton has tried a little bit of everything to get the company back to sales growth. It removed the free membership option from its fitness app, expanded its corporate wellness offerings and partnered with mega-brands like Lululemon to grow membership, but none of the initiatives have been enough to grow sales.
    For the ninth quarter in a row, Peloton’s revenue fell during its fiscal third quarter, when compared with the year-ago period. It hasn’t seen sales grow compared with the year ago quarter since December 2021, when the company’s stationary bikes were still in high demand and many hadn’t yet returned to gyms amid the Covid-19 pandemic.
    The business is continuing to bleed money and hasn’t turned a net profit since December 2020. 
    For its current fiscal year, Peloton lowered its outlook for paid connected fitness subscriptions, app subscriptions and revenue. It reduced its connected fitness subscription outlook by 30,000 members, or 1%, to 2.97 million as it looks toward its current quarter, which is typically its toughest because people tend to work out less in the spring and summer months. 
    “Our Paid Connected Fitness Subscription guidance reflects an updated outlook for hardware sales based on current demand trends and expectations for seasonally lower demand,” the company said. 
    Peloton now expects app subscriptions to drop by 150,000, or 19%, to 605,000. 
    “We are maintaining our disciplined approach to App media spend as we evaluate our App tiers, pricing, and refine the Paid App subscription acquisition funnel,” the company said.
    As a result of expected downturns in its subscription sales, Peloton now projects full-year revenue to come in at $2.69 billion, a reduction of about $25 million, or 1%. That’s below expectations of $2.71 billion, according to LSEG.
    However, the company raised its full-year outlook for gross margin and adjusted EBITDA. It now expects total gross margin to grow by 50 basis points, to 44.5%, and adjusted EBITDA to grow by $37 million, to negative $13 million. 
    “This increase is largely driven by outperformance from Q3, combined with lower media spend and cost reductions from today’s announced restructuring plan,” the company said.

    The quest to reach positive free cash flow

    Last February, McCarthy set a goal of returning Peloton to revenue growth within a year. When it failed to reach that milestone, McCarthy pushed it back and said he now expects the company to be back to growth in June, at the end of the current fiscal year. 
    McCarthy had also expected Peloton to reach positive free cash flow by June — a goal the company said it reached early during its third quarter. It’s the first time Peloton has hit that mark in 13 quarters. In a letter to shareholders, Peloton said it generated $8.6 million in free cash flow but it’s unclear how sustainable that number is.
    Last month, CNBC reported that Peloton hadn’t been paying its vendors on time, which could temporarily pad its balance sheet. Data from business intelligence firm Creditsafe showed that Peloton’s late payments to vendors spiked in December and again in February after improving in January.
    The company didn’t provide specific guidance on what investors can expect with free cash flow in the quarters ahead but said it does expect to “deliver modest positive free cash flow” in its current quarter and in fiscal 2025.
    “While we firmly intend to return the business to growth, with today’s announced cost reductions, we’re lowering our cost base and we see a path to positive free cash flow without requiring a significant improvement in growth to get there,” Coddington said on the conference call. “I also want to clarify that we have carefully reviewed these cost measures to make sure that we do still have the capability to invest in innovation so that the business can grow profitably.”
    Part of the reason why Peloton had failed to reach positive free cash flow is because it’s simply not selling enough of its hardware, which is costly to make and has become less popular since the Covid-19 pandemic ended and people returned to gyms.
    “Looking at the numbers in more detail, the biggest problem lies in the part of the business where Peloton first made its name: exercise equipment. Revenue for connected fitness products plummeted by 13.6% over last year in a sign that consumers are still cooling on equipment that, while aesthetically and technically pleasing, is very expensive,” GlobalData managing director Neil Saunders said in a note. “A lot of people who want Peloton equipment already have it and are not likely to upgrade anytime soon; the balance of the market is either not interested or needs a lot of persuasion to buy into Peloton.”

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    Sony and Apollo send letter expressing interest in $26 billion Paramount buyout as company mulls Skydance bid

    Apollo and Sony have sent a letter to the Paramount board expressing formal interest in doing a $26 billion takeover of the company.
    A Skydance consortium could hear from a Paramount special committee on a recommendation of next steps as soon as Thursday, according to people familiar with the matter.
    Some Paramount investors have clamored for the board to engage with Apollo and Sony rather than take the Skydance deal, because all common shareholders would get a premium for their shares.

    Shari Redstone, non-executive chairwoman of Paramount Global, attends the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, July 11, 2023.
    David A. Grogan | CNBC

    Sony Pictures and private equity firm Apollo Global Management have sent a letter to the Paramount Global board expressing interest in acquiring the company for about $26 billion, according to people familiar with the matter.
    The expression of formal interest comes as David Ellison’s Skydance Media, backed by private equity firms RedBird Capital and KKR, awaits word from Paramount’s special committee on whether the panel will recommend its bid to acquire the company to controlling shareholder Shari Redstone.

    Skydance Media hasn’t heard anything from the special committee yet, though it expects to find out the special committee’s recommendations on next moves as early as Thursday, according to people familiar with the matter. Paramount’s panel could recommend approving Skydance’s offer or rejecting it, or it could come back to the Skydance consortium with alternatives or changes.
    Spokespeople for Paramount, Redstone’s National Amusements, the special committee and Skydance declined to comment. Sony and Apollo did not immediately respond to requests for comment.

    Paramount’s options

    If the special committee wants to continue negotiating with Skydance, or Redstone wants more time to consider her options while still talking to Ellison’s company, the sides could extend an exclusivity window that ends Friday. It’s also possible Skydance could walk away from the deal, which it has been negotiating on for months.
    If Skydance walks away, Redstone could turn her attention to negotiating a deal with Sony and Apollo, which would give all common shareholders a premium payout on their shares.
    Paramount Global shares jumped more than 12% on the news that Sony and Apollo submitted a letter formalizing its interest, earlier reported by The New York Times and The Wall Street Journal.

    Redstone initially rejected an offer by Apollo in favor of exclusive talks with Skydance. Redstone still prefers a deal that would keep Paramount together, as Skydance’s offer would, a person familiar with the matter said. A private equity firm would likely tear the company apart through a series of divestitures to extract value.
    The Sony-Apollo offer would make the former the majority shareholder and the latter a minority holder, according to a person familiar with the letter. That could also assuage Redstone’s fears that a new buyer could break apart the company, because Sony is another large Hollywood player and the owner of Sony Pictures.
    A $26 billion offer for Paramount Global values the company higher than the company’s current $22 billion enterprise value.
    Still, the special committee would likely want to review details on financing and get assurances that there are no regulatory challenges in merging with Sony, a non-U.S. entity. To do this, the special committee would have to inform the Skydance consortium that it wants to end its exclusive talks, which would likely drive Skydance away as a bidder, according to people familiar with the matter.
    That move would be applauded by a number of Class B shareholders, including Gamco, Matrix Asset Advisors and Aspen Sky Trust, who have all publicly expressed dismay about the Skydance transaction. Skydance’s “best and final” offer included merging its entertainment assets with Paramount, raising $3 billion to buy out common shareholders at about a 30% premium on an unaffected $11 per share price, and paying Redstone nearly $2 billion for her controlling stake.
    Redstone could also argue she’s more comfortable with pushing forward at Paramount Global without a sale. Earlier this week, the board removed Bob Bakish as the company’s CEO. Installing a new CEO and giving investors a new plan forward would be essential to assuage a restless common shareholder base, who would likely argue the Apollo-Sony bid, if real, is in the best interest of shareholders.

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    Wayfair shares surge 17% after furniture retailer cuts losses by more than $100 million

    Wayfair’s sales fell in the first quarter, but the furniture retailer narrowed its losses by more than $100 million after cutting 13% of its staff.
    The home goods company beat Wall Street’s expectations on the top and bottom lines and also saw active customers grow nearly 3% compared with the year-ago period. 
    Like some of its other digitally native peers, Wayfair has implemented a series of layoffs after it saw sales boom during the pandemic and then shrink. 

    The Wayfair app on a smartphone arranged in Hastings-on-Hudson, New York.
    Tiffany Hagler-Geard | Bloomberg | Getty Images

    Wayfair’s sales slid during its first quarter, but the online furniture retailer reduced its losses after cutting 13% of its workforce at the start of the year, the company announced Thursday. 
    Wayfair beat Wall Street’s expectations on the top and bottom lines and saw active customers grow nearly 3% compared with the year-ago period. 

    Here’s how Wayfair did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

    Loss per share: 32 cents adjusted vs. a loss of 44 cents expected
    Revenue: $2.73 billion vs. $2.64 billion expected

    Wayfair shares surged more than 17% in premarket trading Thursday.
    The company’s reported net loss for the three-month period that ended March 31 was $248 million, or $2.06 per share, compared with a loss of $355 million, or $3.22 per share, a year earlier. Excluding one-time items, the company lost 32 cents per share.  
    Sales fell to $2.73 billion, down more than 1% from $2.77 billion a year earlier. The steepest drop-off came from Wayfair’s international segment, where sales declined nearly 6% to $338 million compared with the year-ago period.
    Despite the sales drop, co-founder and CEO Niraj Shah struck a positive note in a news release, saying the quarter “ended on an upswing.” 

    “Shoppers are increasingly choosing Wayfair, with year-over-year active customer growth once again positive and accelerating compared to last quarter,” Shah said. 
    “For the first time since pre-pandemic, we’re seeing suppliers introducing large groups of new products into their catalogs as they look to build momentum for the next stage of growth,” he added.
    Like some of its other digitally native peers, Wayfair implemented a series of layoffs after it saw sales boom during the pandemic and then shrink when consumers started trading new couches and shelves for dinners out and travel after the Covid-19 pandemic ended. 
    In January, it announced plans to cut 13% of its global workforce, or around 1,650 employees, so it could trim its structure and reduce costs after it went “overboard” with corporate hiring during the pandemic, the company said previously. The restructuring – the third Wayfair implemented since summer 2022 – was expected to save the company about $280 million, it said previously. 
    Wayfair is still charting its path to profitability, but it reduced its losses by $107 million during the first quarter after implementing the latest round of job cuts. It also grew its active customer count at a time when the home goods sector faces pressure as high interest rates and a sluggish housing market weigh on sales. 
    During the quarter, Wayfair’s active customers grew 2.8% to 22.3 million, slightly ahead of the 22.1 million that analysts had expected, according to StreetAccount.
    On average, orders were valued at $285 during the quarter, compared with the $275.07 that analysts had expected, according to StreetAccount. While average orders were higher than Wall Street’s expectations, they fell slightly from the year-ago period, when the average order value was $287. That’s because of changes in Wayfair’s unit prices, which were inflated in 2021 and 2022 and started to come down last year, the company said.
    Read the full earnings release here.

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