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Four food firms prepare bids for British cereal maker Weetabix: sources

LONDON America’s third-biggest cereal company, Post Holdings (POST.N), and the UK’s Associated British Foods (ABF.L) are among a group of four bidders vying for British cereal brand Weetabix, sources familiar with the matter said on Friday.

The 84-year-old business could fetch at least 1.5 billion pounds ($1.88 billion), based on a valuation of more than 11 times Weetabix’ core earnings, the sources said.

Weetabix, owned by China’s Bright Food, has also attracted interest from Cereal Partners Worldwide (CPW), a joint venture between Nestle (NESN.S) and General Mills (GIS.N), and Italian pasta maker Barilla, the sources said.

The parties are working to put the finishing touches to their offers which are due in next week, said the sources, who declined to be identified as the matter is private.

Weetabix, ABF, and Nestle declined to comment, while Bright Foods, Post, Barilla and General Mills were not immediately available.

Reuters exclusively reported on Dec. 20 that state-owned Bright Food had hired Goldman Sachs to run an auction for the well-known British brand which had earnings before interest, tax, depreciation and amortization (EBITDA) of 130 million pounds in 2016.

The bidders have been asked to submit non-binding offers ahead of a deadline of next week, the sources said, adding that private equity investors had not been invited to the process as they would struggle to compete against industry players who can reap synergies from the combination.

Post’s cereal brands include Cocoa Pebbles, Raisin Bran and Grape Nuts. ABF – which trades on a multiple of 10.75 times its EV/EBITDA – owns Jordans and Dorset cereals in the UK as well as Kingsmill bread and Mazola corn oil.

Barilla is best known for its pastas and sauces, but also makes Wasa crispbread. Cereal Partners Worldwide sells General Mills brands, such as Cheerios.

Bright Food took control of Weetabix from private equity firm Lion Capital in 2012.

The cereal industry has continued to struggle since then from mounting competition from other breakfast options like yogurts and smoothies and a shift away from gluten and wheat.

(Reporting By Pamela Barbaglia; Editing by Elaine Hardcastle)

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Ford braced for $600 million Brexit currency hit

PARIS Ford’s (F.N) 2017 earnings will be hit by a delayed currency impact of at least $600 million from Britain’s vote to leave the European Union, the U.S. carmaker told Reuters, putting last year’s record European profit levels beyond reach.

The company will no longer benefit from currency hedges that had been shielding it from the pound’s slump since the June 23 referendum, Ford of Europe boss Jim Farley said on Friday.

“When Brexit happened we were fully hedged for the first quarter with the stronger pre-Brexit exchange rate,” Farley said. “As we enter the rest of the year, especially the second half, we now face the full effects of the weaker sterling.”

Ford is Britain’s biggest engine maker as well as its top-ranked car brand by sales, with a 12 percent market share. The UK government has said it will trigger the two-year process for exiting the EU by the end of March.

The pound hit a seven-year low against the euro in October and remains almost one-fifth below its value at the end of 2015, when uncertainty over Brexit began to weigh. GBP=

Sterling’s slump is the “only major headwind” Ford currently faces in Europe, Farley said. “We think it could be upwards of $600 million this year.”

Farley was speaking a day after Ford published 2016 results that included a record $1.2 billion European profit, while reiterating that this year’s global earnings would be lower. Its shares ended 3.3 percent lower on Thursday.


Ford, which employs 14,000 workers in Britain and 25,000 in Germany, also repeated warnings against the introduction of trade tariffs with a final Brexit settlement.

The company builds engines at two UK sites for vehicles assembled in mainland Europe, many of which are then sold back in Britain. A weaker pound hurts the exchange value of UK revenues and squeezes the profitability of vehicles with euro-denominated parts and production costs.

“We’ve all built our businesses on an integrated model between the UK and the EU,” Farley said. “We would expect both entities to work for a free-trade arrangement like (the one) we have today.”

British Prime Minister Theresa May has said Britain will leave the EU single market to increase control of immigration, while calling for the “greatest possible” market access.

But German Chancellor Angela Merkel responded earlier this month that London should not get an attractive Brexit deal that might encourage other departures.

(Editing by Alexander Smith)

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U.S. economy slows on wider trade gap; business spending rises

WASHINGTON U.S. economic growth slowed sharply in the fourth quarter as a plunge in shipments of soybeans weighed on exports, but steady consumer spending and rising business investment pointed to sustained strength in domestic demand.

Gross domestic product increased at a 1.9 percent annual rate, the Commerce Department said on Friday in its first estimate of fourth-quarter GDP. The economy grew at a 3.5 percent annual rate in the third quarter.

The slowdown masked a surge in home building spending and a rebound in business investment on equipment after four straight quarterly declines.

The economy expanded 1.6 percent for all of 2016, the worst performance since 2011, as it struggled with weak oil prices, a strong dollar and efforts by businesses to reduce a large inventory overhang.

U.S. President Donald Trump vowed during last year’s election campaign to deliver 4 percent annual GDP growth, largely on the back of a plan to cut taxes, reduce regulations and increase infrastructure spending.

“The details of the report were quite sound. The U.S. economic expansion got its mojo back and the momentum appears to be carrying over into 2017,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

A measure of private domestic demand increased at a 2.8 percent rate last quarter. Economic growth in the third quarter was driven in part by an outsized jump in soybean exports.

Excluding soybeans, GDP increased at about a 2.7 percent rate in both the third and fourth quarters, according to analysts. Economists polled by Reuters had forecast GDP rising at a 2.2 percent rate in the fourth quarter.

In the first half of 2016, weak corporate profits because of cheaper oil and the robust dollar undercut business spending. The inventory correction resulted in companies placing fewer orders with manufacturers. The economy grew 2.6 percent in 2015.

With oil prices rising and global demand picking up, the economy appears set for continued expansion. A labor market at or near full employment also is starting to lift wages and is supporting consumer spending.

Although Trump has offered little detail on his economic policy, his promises have been embraced by consumers, businesses and investors. Consumer and business confidence have soared, while the U.S. stock market has rallied to record highs.

A separate report on Friday showed consumer sentiment hitting a 13-year high in January.

“While the size and the timing of the tax cut, infrastructure spending and regulatory rollback are uncertain, economic growth could double during the second half of the year,” said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo.

But uncertainty over the Trump administration’s trade policy and sustained dollar strength pose a risk to the economy.


In the fourth quarter, exports fell at a 4.3 percent rate, reversing the 10 percent increase notched in the third quarter. The fourth-quarter drop in exports was the biggest since the first quarter of 2015.

At the same time, rising domestic demand drew in imports, which increased at their quickest pace in two years. The resulting trade deficit sliced 1.70 percentage points from GDP growth, the biggest drag since the second quarter of 2010.

Most of the hit came from soybean exports, which fired up GDP growth in the third quarter after a poor harvest in Argentina and Brazil. Trade added 0.85 percentage point to GDP in the third quarter.

The dollar .DXY firmed against a basket of currencies. Stocks on Wall Street were trading mostly lower after surging to record highs during the week. Prices for U.S. government debt rose.

A stronger economy would mean further interest rate increases from the Federal Reserve. The U.S. central bank has forecast three rate hikes this year. It raised its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 percent to 0.75 percent.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.5 percent rate in the fourth quarter. The moderation from the third quarter’s brisk 3.0 percent pace came amid modest household income gains.

Income at the disposal of households after accounting for taxes and inflation increased 1.5 percent in the fourth quarter after rising 2.6 percent rise in the prior period. Savings fell to $791.2 billion from $818.1 billion in the third quarter.

With domestic demand rising, businesses accumulated inventories at a rate of $48.7 billion in the last quarter, up from $7.1 billion in the third quarter. Inventories added 1.0 percentage point to GDP growth, double the contribution in the third quarter.

Business investment pushed higher, with spending on equipment increasing at a 3.1 percent rate, the first increase in over a year. The gain reflected a surge in gas and oil well drilling, in tandem with rising crude oil prices.

Spending on mining exploration, wells and shafts increased at a 24.3 percent rate after declining at a 30.0 percent pace in the third quarter. Energy services firm Baker Hughes said last Friday that U.S. energy companies added 29 oil rigs in the week to Jan. 20, bringing the total count to 551 – the most since November 2015.

Investment in nonresidential structures, however, fell at a 5.0 percent pace in the fourth quarter after rising at a 12.0 percent rate in the prior period.

Investment in home building rose at a 10.2 percent rate, rebounding after two straight quarterly declines. Government spending picked up as a rise in state and local government investment offset a decline in federal government expenditures.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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German prosecutors open fraud inquiry into former Volkswagen CEO

BERLIN German prosecutors are investigating former Volkswagen (VOWG_p.DE) chief executive Martin Winterkorn on suspicion of fraud, looking into when he first knew that the carmaker was rigging diesel emissions tests.

It is the second investigation into Winterkorn’s role in the scandal by prosecutors in the German town of Braunschweig near Volkswagen’s (VW) Wolfsburg headquarters. The former CEO is already being investigated over possible market manipulation.

VW’s acknowledgement in September 2015 that it had used software to reduce emissions levels when cars were being tested in the United States wiped billions of euros from its market value, forced Winterkorn’s resignation and led to investigations and lawsuits around the world.

VW has said its executive board did not learn of the software violations until late August 2015 and formally reported the cheating to U.S. authorities in early September that year.

Appearing before German lawmakers last week Winterkorn refused to say when he first learned about systematic exhaust emissions cheating but said it was no earlier than VW has officially admitted.

“For now, Dr. Winterkorn is sticking with the statement he made before a German parliamentary committee of inquiry (into the scandal) on Jan. 19,” Felix Doerr, a Frankfurt-based lawyer for Winterkorn, said in an emailed statement.


Braunschweig prosecutors said on Friday they had searched 28 homes and offices in connection with their investigation this week. The number of people accused in connection with the emissions scandal had risen to 37 from 21, including Winterkorn.

“Sufficient indications have resulted from the investigation, particularly the questioning of witnesses and suspects as well as the analysis of seized data, that the accused (Winterkorn) may have known about the manipulating software and its effects sooner than he has said publicly,” they said in a statement.

It will take weeks to sift through everything found in this week’s raids, prosecutors said.

VW pledged full cooperation with prosecutors but declined further comment. Its shares were trading down 1.7 percent at 149.90 euros at 1420 GMT.

The latest investigation will add to the carmaker’s legal headaches and encourage investors seeking 8.8 billion euros ($9.4 billion) in damage claims in Germany for the collapse of VW’s share price after the scandal broke.

“Lawyers looking to sue VW for market manipulation would certainly have more ammunition, in our view, if the former CEO was found guilty of fraud,” said London-based Evercore ISI analyst Arndt Ellinghorst who has a “Buy” recommendation on the stock.

Winterkorn, 69, and the 36 other people are under investigation on suspicion of fraud and violating competition law, prosecutors said.

The separate market manipulation probe announced last June centered on whether VW should have disclosed the possible financial damage caused by the manipulation prior to Sept. 22, 2015 when it admitted to its actions.

Winterkorn denied any wrongdoing when he quit on Sept. 23, 2015 but said he was clearing the way for a fresh start at VW with his resignation.

Winterkorn ran VW for more than eight years and oversaw a doubling in sales and an almost tripling in profit.

Europe’s largest automaker took a major step this month toward ending its biggest-ever corporate crisis when it agreed to plead guilty in a $4.3 billion deal with the U.S. Justice Department.

In total, VW has now agreed to spend up to $22 billion in the United States to address claims from owners, environmental regulators, U.S. states and dealers.

(Additional reporting by Jan Schwartz; Editing by Keith Weir and Alexander Smith)

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Toshiba to sell part of chip business, first step in offsetting huge charge

TOKYO Toshiba Corp’s (6502.T) board on Friday approved plans to make its core memory chip business a separate company and seek outside investment in it, aiming to avoid being crippled by an upcoming multi-billion dollar writedown for its U.S. nuclear business.

The drastic step will be only one of many tough choices the Japanese conglomerate must take, as the proceeds are set to cover just part of the charge for cost overruns at a newly acquired U.S. power plant construction business – a figure that local media has put at 680 billion yen ($6 billion).

Toshiba’s memory chip business – the world’s biggest NAND flash memory producer after Samsung Electronics (005930.KS) – is its crown jewel, accounting for the bulk of its operating profit.

Toshiba is looking to sell roughly 20 percent for more than 200 billion yen and potential investors include private equity firms, business partner Western Digital Corp (WDC.O) and the government-backed Development Bank of Japan, sources have said.

It is rushing to complete the sale by the end of the financial year in March as failure to do so will likely mean that shareholder equity – whittled down to just $3 billion in the wake of a 2015 accounting scandal – would be wiped out by the charge.

Mark Newman, an analyst at Sanford Bernstein in Hong Kong, said the move would only be a short-term band-aid.

“The NAND business is the only one with value, as it makes up all of the semi-conductor profits, which comprise 75 percent of the overall company’s profit. I won’t be surprised if they sell another 20 percent in a few years time and then another 20 percent.”

It also remains to be seen how well the sale process will go given Toshiba’s tight timeframe to get it done and caution on the part of potential investors.

“Partnering with Toshiba could be risky due to uncertainties over its nuclear business,” said an official at a global private equity firm.

“Chip businesses are highly cyclical and need massive capital investment. Funds are cautious because they have had their fingers burnt with chip investments in the past,” said the official, who was not authorised to speak to media and declined to be identified.

A raft of private equity funds, including Silver Lake and Permira, have signed non-disclosure agreements with Toshiba, sources said.

While Western Digital, which operates a NAND plant in Japan with Toshiba, may seem like a natural buyer of a large stake in the chip business, a sale might be difficult to pull off before March as it would likely invite a review by anti-trust regulators.


Toshiba will hold a news conference at 4.30 Tokyo time (0730 GMT). It may give an estimate of the size of the writedown, a person familiar with the matter has said.

The final figure for the writedown will be announced on Feb. 14 when it reports third-quarter results.

Toshiba estimates the value of its memory chip business at 1-1.5 trillion yen ($9-13 billion), a person with direct knowledge of the matter has told Reuters.

The business generated sales of 845 billion yen and operating profit of 110 billion yen in the past financial year.

Toshiba Chief Executive Satoshi Tsunakawa recently told the company’s main creditors of its plans, a person with direct knowledge of the matter has said, adding that Toshiba is also looking at selling other businesses.

Its main banks have agreed to not call in some loans early for now even as recent downgrades of the firm’s credit ratings violate some provisions in debt agreements, people with direct knowledge of the matter have said.

Japanese business weekly Toyo Keizai reported that Terry Gou, chief executive of Foxconn, the world’s largest contract electronics maker, is interested in either taking a stake in or buying some of Toshiba’s businesses.

Foxconn, formally known as Hon Hai Precision Industry Co (2317.TW), is interested in Toshiba’s broadcasting equipment business, the weekly said, adding high definition imaging technology for TV networks is likely to be the focus of its interest.

A representative for Foxconn had no immediate comment.

($1 = 114.7700 yen)

(Reporting by Makiko Yamazaki; Additonal reporting by Umesh Desai in Hong Kong, Junko Fujita, Taro Fuse and Taiga Uranaka in Tokyo; Editing by Edwina Gibbs)

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Asia shares inch down, dollar extends gains in light holiday trade

SINGAPORE Asian shares were fractionally lower on Friday in holiday-thinned trade but were on track for a solid advance this week, while oil and the dollar retained gains in the wake of strong U.S. corporate earnings.

European markets were heading for a quiet start, with financial spreadbetter CMC Markets predicting Britain’s FTSE 100 would open flat and France’s CAC 40 .FCHI would start the day down 0.1 percent.

It forecast that Germany’s DAX .GDAXI, which on Thursday closed at its highest level since May 2015, would open 0.2 percent lower.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.1 percent, with several markets closed for the Lunar New Year holiday. It was on track to end the week up 1.85 percent.

Japan’s Nikkei .N225 closed up 0.3 percent, after data showed December core consumer prices fell at the slowest annual pace in nearly a year, suggesting inflation should pick up in coming months.

The Nikkei posted a 1.7 percent gain for the week.

Markets in China were shut for the Lunar New Year holiday, and will reopen on Feb. 3. Hong Kong shares barely moved on Friday, when the market closed at midday.

Overnight on Wall Street, all three major indices hit life-time intraday highs, with the Dow Jones Industrial Average .DJI also rising 0.2 percent to close at a record high after breaching 20,000 on Wednesday.

The SP 500 .SPX and the Nasdaq .IXIC edged back down to end the day a touch below Wednesday’s record close.

“U.S. stock markets tend to be a sentiment leader for world markets and in what’s become a familiar pattern over recent years, the quarterly profit reporting season is supporting that sentiment,” Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

“Around a third of companies in the SP 500 index have now reported and overall earnings are ahead of consensus forecasts,” he said.

The MSCI World index .MIWO00000PUS was steady on Friday. It hit a record intraday high on Thursday before ending the day about 0.1 percent below its previous close.

European shares climbed to a one-year high on Thursday, lifted by Johnson Johnson’s $30 billion deal to buy Swiss biotech firm Actelion.

The Mexican peso MXN= tumbled about 0.8 percent against the dollar on Friday after the White House said the U.S. might impose a 20 percent tax on Mexican imports to pay for a border wall between the two countries.

That followed Mexican President Enrique Pena Nieto’s decision to pull out of a meeting in Washington after his U.S. counterpart Donald Trump tweeted that it would be better for the Mexican leader not to visit if his country wouldn’t pay for the wall.

Trump’s office later walked back the idea of a tax, saying that was “one way” of making Mexico pay.

The dollar index .DXY, which tracks the greenback against its trade-weighted rivals, was up 0.35 percent at 100.73 on Friday. On Thursday, it touched a seven-week low but closed up 0.35 percent.

The index is set to end the week flat, after market jitters following Trump’s protectionist inaugural speech weighed on the dollar early in the week.

But since then, Trump’s actions show “continuity from his campaign days, so the markets expect him to go ahead with the fiscal stimulus as well,” said Minori Uchida, chief FX analyst at Bank of Tokyo Mitsubishi UFJ.

The dollar rose 0.4 percent to 115.14 yen, extending Thursday’s 1.3 percent surge and putting it on track for a 0.5 percent weekly gain.

The prospect of higher U.S. inflation boosted U.S. 10-year Treasury yields US10YT=RR to 2.5158 percent on Friday. On Thursday, they hit 2.555 percent, their highest level this year, before settling back down at 2.508.

The euro slid 0.15 percent to $1.06655 on Friday, adding to its 0.6 percent loss from Thursday.

In commodities, oil retained its gains from Thursday that were driven by the resurgence of risk appetites. But a jump in U.S. inventories this week capped its advance.

U.S. crude CLc1 was little changed at $53.78 a barrel, after Thursday’s near 2 percent surge. It is poised for a 2.6 percent weekly increase.

Global benchmark Brent LCOc1 eased 0.1 percent to $56.19, heading for a rise of 1.3 percent for the week.

Gold widened losses on Friday, its fourth straight session of declines, as investors dumped the precious metal for riskier, higher returning assets.

Spot gold fell 0.5 percent to $1,182.30 an ounce, heading for a 2.3 percent loss for the week, its first weekly decline in five.

(Additional reporting by Yuzuha Oka in TOKYO; Editing by Shri Navaratnam and Richard Borsuk)

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Weak exports seen crimping U.S fourth-quarter economic growth

WASHINGTON U.S. economic growth likely slowed in the fourth quarter as a plunge in shipments of soybeans weighed on exports, but a healthy increase in consumer spending and rising business investment should underscore the economy’s underlying momentum.

Gross domestic product probably increased at a 2.2 percent annual rate after accelerating at a 3.5 percent pace in the third quarter, according to a Reuters survey of economists. The government will publish its first estimate of fourth-quarter GDP on Friday at 8:30 a.m. (1330 GMT).

“Trade was a big boost to growth in the third quarter, that’s going to reverse,” said Gus Faucher, a senior economist at PNC Financial Services Group in Pittsburgh. “Consumer spending, business investment and housing will add to growth, so we will still see a solid improvement in the fourth quarter.”

But fourth-quarter GDP data could surprise on the upside after data on Thursday showed a drop in the goods trade deficit in December and a jump in wholesale inventories. The Atlanta Federal Reserve is forecasting the economy growing at a 2.9 percent rate in the fourth quarter.

Economists estimate trade could have subtracted as much as 1.5 percentage points from GDP growth in last quarter, reversing the 0.85 percentage point contribution in the third quarter. Most of the drag is expected to come from soybean exports, which fired up GDP growth in the third quarter after a poor soy harvest in Argentina and Brazil.

With a labor market that is at or near full employment starting to lift wages and supporting consumer spending, the outlook for the economy is bright. Growth this year could also get a boost from President Donald Trump’s pledge to increase infrastructure spending, cut taxes and reduce regulations.

Although Trump has offered little detail on his economic policy, his promises have been embraced by consumers, businesses and investors. Consumer and business confidence have soared, while the U.S. stock market has rallied to record highs.


“There is still great uncertainty over the details, particularly in regards to trade policies. That being said, risks to the U.S. growth outlook are likely to the upside,” said Sam Bullard, a senior economist at Wells Fargo Securities in the Charlotte, North Carolina.

A strong economy would also mean further interest rate increases from the Federal Reserve. The U.S. central bank has forecast three rate hikes this year. It raised its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 percent to 0.75 percent.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have increased at a rate of at least 2.7 percent in the fourth quarter. It rose at a 3.0 percent pace in the third quarter.

Business investment likely shifted into higher gear, with spending on equipment expected to have rebounded after four straight quarters of declines. The anticipated gain in business investment is likely to be driven by rises in gas and oil well drilling, in tandem with the recovery in crude oil prices.

Energy services firm Baker Hughes said last Friday that U.S. energy companies added 29 oil rigs in the week to Jan. 20, bringing the total count to 551 – the most since November 2015.

“We could see the first signs of an investment comeback in the oil and gas sector. That should continue to support growth the in the early months of 2017,” said Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York.

The gains in both consumer and business spending are expected to have resulted in a measure of private domestic demand rising at a brisk 3.0 percent, accelerating from the 2.4 percent pace notched in the third quarter.

Inventory investment likely contributed to growth for a second straight quarter. JPMorgan is forecasting inventories adding six-tenths of a percentage point to GDP growth, up from the 0.5 percentage point contribution in the third quarter.

Investment in home building probably rebounded after two straight quarters of decline, making a modest contribution to growth. While government spending is expected to have picked up, economists said a downward surprise could not be ruled out.

“Since 1992, there appears to be bias for it to be weak during presidential election years,” said Ryan Sweet, senior economist at Moody’s Analytics in Westchester, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

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Amid rising bilateral tensions, Mexico mogul Slim calls news conference

MEXICO CITY Mexican mogul Carlos Slim, who was attacked by President Donald Trump during his election campaign but who later met with the U.S. leader in Florida, on Thursday called a press conference for Friday amid growing tensions between the two nations.

The rare news conference, in which a spokesman said Slim would take reporters’ questions, comes as Mexico wrestles with Trump over the highly divisive proposition of a border wall and threats to trade between the two neighboring countries.

Trump has consistently riled Mexicans by pledging to build a wall on the U.S. southern border and make Mexico pay for it, as well as threatening to ditch a joint trade deal and impose punitive tariffs on Mexican-made goods.

Those pledges sparked criticism from business leaders including billionaire Slim, who said Trump’s plans could destroy the U.S. economy. But following the Nov. 8 election, Slim offered a more upbeat take, saying that if Trump succeeded, it would be good news for Mexico.

In December, after Trump won the U.S. election, the two men dined at Trump’s Mar-a-Lago resort in Florida, with Arturo Elias, Slim’s son-in-law and spokesman, saying the meal was “very cordial and with a very good vibe for Mexico.”

Slim’s press conference was set for 12.30 pm local time (1830 GMT) on Friday, in Mexico City.

Slim, the top shareholder in The New York Times Co (NYT.N), is one of the world’s richest people, with an empire that encompasses telecoms, mining, banking and construction.

(Reporting by Gabriel Stargardter and Noe Torres)

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Alphabet posts strong revenue growth, higher taxes hit earnings

Google parent Alphabet Inc posted fourth-quarter profit below analysts’ estimates on Thursday, hurt by a higher tax rate, but analysts cheered the company’s progress in diversifying its business beyond advertising.

While advertising still accounts for the lion’s share of Google’s revenue, rising 17.4 percent to $22.4 billion in the quarter, Alphabet Chief Financial Officer Ruth Porat underscored that the company is broadening its business – pointing to growth in hardware, app sales and the cloud business.

The company’s other revenue, which captures such businesses, climbed 62 percent to $3.4 billion.

“We see tremendous potential ahead for these businesses, as well as in the continued development of non-advertising revenue streams for YouTube,” Porat said on a call with investors.

The results were met with a mixed reaction from Wall Street, which sent shares down 2.2 percent to $838 in extended trade after closing at $856.98 on Nasdaq. Google faced a higher tax rate of 22 percent, compared to 19 percent for the year overall, contributing to the dent in profitability.

“If you look above that, it’s business as usual,” said analyst James Wang of ARK Investment Management. “There has been no margin compression in the actual business.”

Executives suggested that they are beginning to reap the rewards of their investment in hardware. Porat spotlighted the company’s line of Nest smart home products, saying sales doubled during the key holiday period including Black Friday and Cyber Monday.

Google-branded hardware also showed promise as Google Home, a smart speaker, and the Pixel smartphone gained traction over the holidays, Google Chief Executive Sundar Pichai said during the call.

“We’re committed to this for the long term as a great way to bring a beautiful, seamless Google experience to people,” he said.

The company posted a stronger-than-expected 22.2 percent increase in quarterly revenue as advertisers spent more to reach an expanding user base that spends more time on smartphones and YouTube.

Research firm eMarketer has estimated that Google will capture $60.92 billion in search ad revenue this year, or 58.8 percent of the search ad market worldwide.

Paid clicks, or clicks on Google ads, rose 36 percent, compared with a 33 percent increase in the third quarter. Paid clicks are those ads on which an advertiser pays only if a user clicks on them.

Analysts on average had expected a rise of 26.9 percent, according to FactSet StreetAccount.

Cost-per-click dropped 9 percent, a slide that has continued as Google sells more mobile ads, which command lower prices. However, the shift is not necessarily alarming as it suggests Google is selling more ads on YouTube, which are seen as a key growth driver, Rice said.

Alphabet’s Other Bets revenue increased to $262 million from $150 million a year earlier, while the operating loss of $1.09 billion narrowed from $1.21 billion.

Other Bets includes broadband business Google Fiber, home automation products Nest, self-driving technology company Waymo as well as X, the company’s research facility that works on “moon shot” ventures.

Verily Life Sciences, one such bet, announced Thursday that Singapore-based investment company Temasek had invested $800 million for a minority stake in the company. The investment reflects Alphabet’s greater fiscal discipline under Porat and suggests a potential new model for the other bets, said analyst Jan Dawson of Jackdaw Research.

“Getting external investors involved helps spread that risk out and reduces Google’s exposure,” he said. “It also allows some things to move faster than they would if it were just Google’s cash backing them.”

Alphabet’s net income rose to $5.33 billion, or $7.56 per Class A and B share and Class C capital stock, in the fourth quarter, from $4.92 billion, or $7.06 per share, a year earlier. See graphic on earnings: (

Excluding items, the company earned $9.36 per share, below the average estimate of $9.64 per share, according to Thomson Reuters I/B/E/S.

The company’s consolidated revenue rose to $26.06 billion above the average estimate of $25.26 billion.

(Reporting by Anya George Tharakan in Bengaluru and Julia Love in San Francisco; Editing by Saumyadeb Chakrabarty, Bernard Orr)

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