The Wall Street Journal-20080111-breakingviews-com - Financial Insight- Consumer Goods Feel Pinch- Macy-s- Gap- J-C- Penney Join Ranks of Companies Hurt by Housing-s Woes
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breakingviews.com / Financial Insight: Consumer Goods Feel Pinch; Macy's, Gap, J.C. Penney Join Ranks of Companies Hurt by Housing's Woes
The credit squeeze has been big and bad financial news for months, but now it is hitting consumers -- and consumer-goods companies -- in much of the world.
Yesterday brought fresh bad news on outlooks from Capital One Financial, which provides consumer credit, and Macy's, Gap and J.C. Penney, which sell midprice goods in the U.S. They join a long list that includes: AT&T, British retailer Marks & Spencer, Best Buy, computer maker Lenovo Group and high-end European consumer-electronics group Bang & Olufsen.
There are several reasons for consumers to feel the pinch. The tough financial times seem to have led banks to tighten lending standards. That matters in the U.S. and United Kingdom, where consumers had been borrowing to sustain their spending.
Then there is confidence -- or lack of it. Tougher financial times are making house prices wobbly on both sides of the Atlantic. Without the real-estate cushion, homeowners are less willing to spend, even if the banks are willing to lend.
During the holidays, people normally reflect on the year ahead. It wouldn't be surprising if many concluded that, with storm clouds gathering, it was time to hold back. Or trade down. Wal-Mart Stores, which benefits from tight-fisted consumers, did well in December.
Finally, inflation is squeezing spending power. The price of food and energy is up sharply. Worse yet, the price of imported goods, which had been falling, is rising. In the past year, the inflation rate for Chinese imports into the U.S. has swung to 2.3% from a negative 1.3%. German import prices are rising at a 3.5% rate, despite a strong currency.
The lesson for investors is clear. The mix is bad for profits and share prices at consumer-goods companies. World-wide, consumer stocks are trading at a multiple of this year's estimated earnings that is 12% higher than market averages, according to Societe Generale. That is partly because their earnings have been expected to increase faster than the average. Recent disappointments on that front are unlikely to be the last.
Blackstone Hedges Its Bets
Blackstone Group's planned hedge-fund purchase looks like a bargain. GSO Capital Partners is a good fit, and the two firms' bigwigs even have some shared history. Blackstone's move also looks to have trumped Merrill Lynch, which snapped up a stake in GSO last year.
The private-equity firm is buying GSO for $930 million, part of which will be paid out over five years. That values the hedge fund at only 9% of its $10 billion in assets under management. That is cheap compared with Blackstone's own market value, which stands at more than 20% of its $98 billion in investor funds, and that after falling nearly 40% since its stock-market debut in June.
Along with a hedge fund that diversifies its investment offering, the private-equity firm also gets GSO co-founder Bennett Goodman, a well-regarded deal maker. He helped build Donaldson, Lufkin & Jenrette's private-equity finance business, along with Blackstone President Tony James, before DLJ was sold to Credit Suisse First Boston in 2000.
The deal is smart for GSO, too. The shine has come off alternative- asset managers since the credit bubble burst. Big buyout firms such as Kohlberg Kravis Roberts have held off on plans to list. Smaller managers like GSO now have little chance. Selling to publicly traded firms like Blackstone may be the best opportunity for an exit. GSO, which specializes in debt investments, including structured credit, faces challenges. With structured finance out of favor and credit markets turbulent, Blackstone's deep pockets could be a boon.
Merrill may not feel so good about the deal. It bought a roughly 20% stake in GSO in May, and there is a good chance it paid top dollar. Since then, the stock of private-equity and hedge-fund outfit Fortress Investment Group has fallen about 50%. If that is any guide, Merrill could be out of pocket -- but at least it will collect a dollop of needed cash from the sale.
-- Edward Hadas and Lauren Silva
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This column is by breakingviews.com, an online financial commentary site.
