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Amazon's Whole Foods Bid Could Spell Trouble for Payment Companies

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches

Amazon's Whole Foods Bid Could Spell Trouble for Payment Companies

Terminal providers and merchant acquirers, two subsets of the payments industry that rely on foot traffic and transaction volume, might see changes ahead as a result of Inc.'s bid for Whole Foods Market Inc.

Amazon shocked analysts June 16 when it announced an all-cash transaction to buy Whole Foods for $13.7 billion. But the companies did not hold a conference call to discuss the deal, and public statements offered little in the way of a blueprint for what comes next. Analysts and others quickly scrambled to try to make sense of the deal and its implications.

Credit Suisse analyst Paul Condra speculated in a June 16 note that Vantiv Inc. and VeriFone Systems Inc. would be most directly affected if the deal portends the end of the status quo in grocery retail. Condra acknowledged that the risks of retail changing dramatically are poorly understood but said he expects investors to focus on these exposures.

"Even if we don't know how to size the impacts or what specifically [they] will be, I think the market is going to price in a little bit more risk," he said in an interview.

New pressures or weakening in the grocery industry where Vantiv, a payment processor, has a lot of business would negatively impact the company, Condra said.

Right now, Whole Foods uses Vantiv for payment processing. But Amazon uses JPMorgan Chase & Co.'s payment processing and merchant acquiring business. Condra thinks the online retailer's first move could be to shift Whole Foods' payment processing from Vantiv to Chase. But even if this happens, he said Vantiv would lose less than 1% of its net revenue.

"They're not going to lose business, but maybe growth slows," he said. "Maybe there's a bit of a hit to the stock multiple because people see this as a threat to the business."

Guggenheim Securities analyst Jeffrey Cantwell believes the near-term impact would be largely limited to basis points of revenue over the next few years. Cantwell expects some shift in how consumers spend money, but even over the long term, it will not drastically affect Vantiv.

"By the time this has a sizable enough impact further down the road, it's going to be a different company," he said in an interview. "You have the longer term, more structural impact, which I'm arguing will be partly offset by growth in their other channels."

Merchant acquirers like Vantiv will still have payment volume routed through them, even with the shift to e-commerce, Barclays analyst Darrin Peller noted in an interview. But Verifone and other terminal manufacturers might be at a greater risk.

If the world shifts more to e-commerce, then demand for the in-store terminals that VeriFone provides shrinks, Peller said, though this shift is not yet as widespread in grocery retail as it is in other retail sectors.

"The bread and butter for them really is big-box retail lanes in the U.S.," Credit Suisse's Condra said. "Grocery stores have always been seen as this safe haven. This introduces a new threat to that retail channel that wasn't really there before."

Still, not all analysts think this deal spells the end of the status quo for grocery stores.

"[Amazon] has been in the food business for over 10 years and to now come to the conclusion that it needs physical brick and mortar stores is a pretty big deal," wrote Jefferies analyst Daniel Binder in a June 16 research note. "It suggests stores are in fact important and not just some defensive point of view that traditional brick and mortar players have taken."

Peller offered another scenario for brick-and-mortar stores, in which consumers might pick up items in person after paying for them online. The payment process might still exist, but it will look different, and the physical terminals where cards are swiped soon may not be needed.

"The real winners are going to be the companies that can capture the mobile mindshare of the consumer [and] have a good capability built around e-commerce processing," he said.

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.

Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall Wednesday mid-day in the Florida panhandle as a Category 3 hurricane, oil and gas producers continued to shut in production Tuesday, leading to a drop in output and rise in prices.

Shut-in Gulf of Mexico oil production more than doubled from Monday to nearly 700,000 b/d Tuesday. That drop in output contributed to WTI rising to nearly $75/b, with Gulf Coast sour crude Mars rising concurrently.

Natural gas prices followed suit, with Henry Hub reaching its highest level since January. That strength could be short lived as power outages lead to falling demand for natural gas for generation.