This is an audio transcript of the FT News Briefing podcast episode: ‘Cracks widen in Israel’s war cabinet’
[MUSIC PLAYING]
Persis Love
Good morning from the Financial Times. Today is Monday, March 4th, and this is your FT News Briefing.
China is trying to level the playing field for its AI start-ups. And Bayer faces even more problems over its weedkiller Roundup. Plus, Warren Buffett is questioning whether it still makes sense to be in the utility business.
Eric Platt
It’s a business that Berkshire loves because you kind of have this expected rate of return, right? You’re gonna invest $1bn and it’s gonna return you X in so many years. But that has been upended by climate change.
Persis Love
I’m Persis Love, in for Marc Filippino. And here’s the news you need to start your day.
[MUSIC PLAYING]
China is helping their artificial intelligence start-ups get ahead. Smaller companies are being offered vouchers that can be used to pay for important computing resources, like time in data centres to train their AI. Because the US has restricted China’s access to the chips needed to power AI, computing resources in the country are thin on the ground. As a result, Chinese internet giants like Alibaba, Tencent and ByteDance are keeping a lot of their resources for themselves. But while these vouchers may help AI start-ups with rising costs, analysts say there’s still not enough chips to go around.
[MUSIC PLAYING]
German pharmaceutical company Bayer has been struggling with a ton of lawsuits related to its weedkiller called Roundup. The suits allege that an active ingredient in Roundup gave people cancer. In 2021, Bayer said it would stop selling consumer products with that specific ingredient. But legal proceedings have continued to pile up, and the company’s share price has fallen by over 50 per cent in the last year. Here to talk about how Bayer is trying to contain the crisis is the FT’s Patrick Temple-West. Hi, Patrick.
Patrick Temple-West
Hello.
Persis Love
So before we talk about Bayer’s legal situation, maybe we should start with a quick look at the company’s financial picture.
Patrick Temple-West
Yes. So back in February, Bayer said it’s slashing its dividend 95 per cent. So it’s the lowest level that is allowed under German law for a company of its size to free up cash. And analysts have told us, and they’ve published this as well, that a contributing factor for this dividend cut was its Roundup litigation in the US.
Persis Love
OK. So it’s not been easy. And when it comes to the cases pertaining to Roundup, they’ve been going on for years. So what sort of legal strategy is Bayer considering now?
Patrick Temple-West
So there is a federal law that Congress has passed that gives the Environmental Protection Agency the authority to sign off on herbicide, pesticide that are used in agriculture and gardening, that gives them the authority to approve labels. And Bayer has said that the EPA has approved its label for Roundup. So with its mushrooming courtroom losses, Bayer is trying a new strategy by going state by state in the US to get legislation passed that would say the Environmental Protection Agency’s rules for pesticides labelling supersede any courtroom, any legal litigation that Bayer and other companies might be facing. So if a company has had its label approved by the EPA, which says, OK, this product might be dangerous for your health if used improperly, that would stand as overriding anything at the court level in these states.
Persis Love
So basically saying we’ve taken the steps to protect ourselves and our customers from any further damage.
Patrick Temple-West
Yes. And we have the EPA’s blessing in having approved the labels for this. And if the states say, then those labels are OK, then that undercuts any legal arguments at the local level.
Persis Love
Right. And how is this strategy working out for Bayer?
Patrick Temple-West
It’s not going too well so far. Bayer has only tried this in three states. They’ve tried it in Idaho, Iowa and Missouri — all states where Bayer has a presence. From Bayer’s perspective, they have lost already in Idaho. Legislation is still working its way through Iowa and Missouri. Trial attorneys have not laid down here. They still see opportunities to make millions of dollars for potential victims and for themselves. They’re trying to bring people forward, trying to get the word out there, that if you think you might have gotten sick from Roundup, we can take your case to court and maybe we can win you a big multimillion-dollar settlement from Bayer. It’s a sign that Bayer’s legal strategy has not worked on Roundup.
Persis Love
So given that it’s not going well, what are the potential consequences for Bayer who, you know, is already struggling?
Patrick Temple-West
Yes, it’s a major uncertainty. And what we’ve been told is that Bayer can’t really make a whole lot of strategic changes at this point, because banks, advisers don’t want to say, you know, you could break up the company, move things around, without certainty over the Roundup liabilities. It’s a major question for Bayer how they’re going to get around this.
Persis Love
Patrick Temple-West writes about corporate governance for the FT. Thanks, Patrick.
Patrick Temple-West
Thank you.
[MUSIC PLAYING]
Persis Love
Growing tensions in Israel’s war cabinet will be on stark display today, but this time in the US. Senior minister Benny Gantz has plans to visit the White House, and Prime Minister Benjamin Netanyahu is not happy about it. He’s ordered the Israeli embassy in Washington to boycott Gantz’s meetings, and his allies have accused Gantz of acting like a Trojan horse against Israeli interests. The visit also highlights just how frustrated Washington is with Netanyahu after 150 days of war in Gaza. As the humanitarian crisis grows, US President Biden has been ramping up his criticism of the Israeli offensive. The US on Saturday began airdrops of aid packages over Gaza. It comes days after 100 civilians seeking food were allegedly killed by Israeli soldiers.
[MUSIC PLAYING]
Berkshire Hathaway has a massive energy and utility business, but now the conglomerate’s CEO Warren Buffett doesn’t seem all that committed to it. Berkshire Hathaway Energy is facing a ton of lawsuits over wildfires in the western United States, and Berkshire could potentially be on the hook to pay out tens of billions of dollars. I’m joined now by the FT’s Eric Platt, who covers Berkshire Hathaway. Hi, Eric.
Eric Platt
Hey.
Persis Love
So tell me a little bit about this energy and utility business from Berkshire Hathaway. Where does it operate? How big is it? You know, things like that.
Eric Platt
Yeah. Berkshire Hathaway Energy is a mammoth utility in the US, and this has been a unit that’s been growing under Berkshire and under Buffett for decades. I think they put their assets as being worth about $134bn. They provide service to 12mn customers. They have operations in the UK and Canada, and I would say probably a dozen or so states like California, Washington, Iowa, North Dakota. And it’s a business that Berkshire loves because you kind of have this expected rate of return, right? You’re gonna invest $1bn and it’s gonna return you X in so many years. And so it’s very predictable. But that has been upended by climate change and the big shift that the utility sector is undergoing as suddenly wildfires become all the more deadly and dangerous.
Persis Love
Yeah, I’m glad you brought that up, because I want to ask you about the lawsuits. What are the basics of them?
Eric Platt
So Berkshire Hathaway Energy has several different subsidiaries. One of its biggest is PacifiCorp, and it has operations in Oregon, Washington and California. And in 2020 and 2022, there were a number of wildfires that caused hundreds of thousands of acres to burn. And last year, a jury found PacifiCorp was negligent in its operations, in not shutting down power lines quick enough when, you know, high wind and other, kind of, environmental factors prompted or caused a spark. And Berkshire has said plaintiffs are seeking about $8bn in damages, a figure that can be doubled or tripled, which is just kind of a massive sum for this one utility unit. They’re also facing hundreds of millions of dollars that they have to pay out for the response from US authorities when these wildfires happened, right, to put out the wildfires. So collectively, this is, you know, some of the biggest litigation facing Berkshire in at least my time covering the company for many years.
Persis Love
So how has Warren Buffett reacted to these lawsuits?
Eric Platt
So recently, Warren Buffett sent out his annual letter to shareholders. This is a letter that’s like, closely followed by both investors and anyone in the industries that Berkshire touches. And what was so striking was that he was just talking about whether or not the utility business, which is so core to Berkshire, would be one that’s that core going forward. It could be a signal that, you know, we’re actually be shifting out of this business or not putting more money into this business until we understand what the economics actually look like.
Persis Love
OK. And because wildfires have gotten more frequent and more destructive over the past few years because of climate change, does that mean we’re gonna see an existential shift in the utility sector, do you think?
Eric Platt
Yeah, I think this is really the biggest risk the utility industry is facing at this moment. They’re, you know, spending tons of money burying power lines and insulating cables because they know if they’re held responsible, they could be on the hook for billions or tens of billions of dollars. And so the industry is really pushing for, whether it’s state regulators or potentially even, kind of, legislation and Congress to provide them the capital or the ability to raise rates so that they can pay for these upgrades because they know without them, without this extra capital, it’s just a cost they can’t bear. It’s why you’ve seen PG&E file for bankruptcy. I believe that was in 2019 or so. It’s why Hawaiian Electric is really struggling right now with the liabilities that it might face over the Maui wildfires last year. These businesses aren’t built for that. And it raises kind of this existential question for investor-backed utilities in the US.
Persis Love
Eric Platt is a senior corporate finance correspondent for the FT. Thanks, Eric.
Eric Platt
Thank you so much.
[MUSIC PLAYING]
Persis Love
You can read more on all these stories at FT.com for free when you click on the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.
[MUSIC PLAYING]
