Biggest Dividend

posted by Michael Flaherty on Jul 24

Dubai’s investment plans for markets outside the oil rich emirate are big – big enough to rival some of the mega-deals sought by U.S. private equity giants.  Dubai’s overseas investment focus underscores the wave of oil wealth headed for equities markets from New York to London.                ? ?                   ? ?           
    In a series of interviews with Dubai executives, Reuters reports that the country’s private equity arm is, among other things, targeting as much as $10 billion of investments in Europe and Japan.
    Middle Eastern investors picked up the pace of their foreign investment last year, a trend that has only gained in size and speed. Among the factors drawing Mid-East oil money to the U.S. and Europe was a correction in the overheated stock markets in Dubai and Saudi Arabia. The Abu Dhabi Investment Authority plunked down $600 million for a 40 percent stake in Apollo Management’s European fund, which listed last year.
    Top executives at both Dubai International Capital and Istithmar, an investment fund that also invests on behalf of Dubai, reveal in the Reuters interviews not only their global investment strategy but also their plans for individual deals such as Barneys and deals focused on media and airlines.
    Dubai International Capital even chimed in on its thoughts about HSBC’s valuation, and how it, as a major shareholder in the bank, thinks that subprime worries are overdone. The fund sees an EADS turnaround as well.
   The interviews come amid a larger, global push by foreign governments growing increasingly aggressive as equity investors abroad, a topic outlined on the front page of the Wall Street Journal on Tuesday.
     

(Photo: Dubai International Capital’s Chief Executive Officer Ansari talks during an interview with Reuters in Dubai)

posted by Nicole Maestri on Jul 18

Target is better known for its bright red bull’s-eye and its trendy TV ads, than it is for its PR strategy and executive showcases. 
 
Indeed, Target has let its stores and its sales  — which rose 13 percent to $59.49 billion last fiscal year — speak for themselves. But now there appears to be someone else who wants to speak for the company. An ”activist” investor (a group formerly known as ‘corporate raiders’) is at their doorstep, and for many companies lately, that’s meant bad news. What to do? The Abernathy MacGregor Group has some answers, and according to the PR firm, a company under pressure from a hedge fund has just as good a chance of winning an activist battle as they do losing one. 

James MacGregor, vice chairman of Abernathy MacGregor, in a letter to clients, says most activists are looking for cash and a quick pay out on their investment.

“An activist investor is like a guy standing at an ATM. What he wants is fast cash, and he’ll push as many buttons — in this case your buttons — as necessary to get that cash,” said MacGregor, who was writing in general and not in response to the Target situation.

Hedge fund manager William Ackman disclosed on Monday that his fund owns a 9.6 percent stake in Target, and he plans to speak to its management about trying to boost the retailer’s stock price.
    
Ackman’s firm, Pershing Square Capital Management, has gained prominence for forcing change at high-profile companies, including waging a battle against Wendy’s, where he pressured management to sell its Tim Hortons coffee chain to boost shareholder value.
 
So what chance does a company have of defending itself against an activist shareholder?
 
In a letter to clients titled “Dealing with Investor Activism”, MacGregor says activists won about 60 percent of the attacks that went public last year.
 
“If you wind up in an activist’s sights, you’ve got a 50-50 chance of emerging without damage,” he writes, referring to all activist situations, whether public or not.

The PR man’s optimism is counter to that of Morgan Stanley’s Robert Kindler, who says activists will win every time. 
    
MacGregor suggests management meet with the activist because chances are he will go public if a meeting is declined. But if a company rejects the activist’s demands, MacGregor said the activism begins and typical actions include:    
    – Demanding a meeting with the full board
    – Going public, via the news media, with accusations of lousy governance and lousy performance
    – Reaching out to other shareholders for expressions of support
    – Demanding seats on the board
    – Threatening legal action
    – Threatening a proxy fight
 
MacGregor does not recommend having the activist meet with the board –”The activist’s motivation all too often is to intimidate or divide the board or to gather grist for subsequent legal actions,” he writes.  He also recommends keeping any media response limited and calm. 
  
MacGregor says an activist wins if he convinces the board he has enough support to win a proxy fight if he wages one or if the activist convinces the board the fight is not worth the pain.

A company wins when an activist backs down, possibly concluding the company cannot create the cash-generating events he wants or other shareholders fail to rally to the activist’s side. Then there’s the “self-mutilation” ploy used by some companies, he writes:  “They effect an otherwise unattractive transaction that eliminates the possibility of the activist’s desired event.”

So what other advice does MacGregor have? “Scout your vulnerabilities well in advance. Articulate a credible value creation strategy. Make sure your investors know and understand that strategy. Play straight with activists. Avoid mud-slinging contests. Execute. Perform. Don’t panic.”   

(Photo credit. Reuters file)

posted by Michael Flaherty on Jul 18

So how does JPMorgan CEO Jamie Dimon really feel about equity bridge loans? He said in a second quarter earnings call that he hopes the loans go the way of the “dinosaur.”  Equity bridge loans appear only at the height of a leveraged buyout frenzy, when investment banks are throwing themselves at the feet of private equity firms–serial dealmakers in need of bank financing and the biggest fee generators on Wall Street.

LBO firms, in an effort to leave rivals out of deals, tell the banks that they want them to cough up part of a deal’s equity check, in addition to financing the deal’s debt. Bankers say it’s a high risk, low return proposition. Dimon appears to agree.

Below is part of what Dimon had to say about the loans on Wednesday. For a longer transcript of his answer, click here.

I think equity bridges are a terrible idea. I think they’re a bad — I think they’re a bad financial policy. I don’t think they’re good for the banks. I don’t think they’re good for the private equity guys, so I hope they go the way of the dinosaur because they’re basically a one-sided put on our balance sheet. I also think the street is topped up on them. There is only so much you can do and feel comfortable with. It is kind of silly to take that downside risk and have none of the upside potential.

(Reporting by Tim McLaughlin)

posted by Michael Flaherty on Jul 17

After several sunny years of glowing press and rising market share, UBS Investment Bank in recent months suffered a string of setbacks. Star dealmakers quit. Cost levels rose and profit growth lagged rivals that were bolder about financing leveraged buyouts and trading.
    Market wags quickly predicted Zurich-based UBS would experience the same fate of other European banks on Wall Street: embarrassing, expensive failure.       
    UBS Investment Bank CEO Huw Jenkins, in an interview with Reuters correspondent Joseph A. Giannone on Monday, played down the departure of star dealmaker Ken Moelis and other bankers, detailed plans to expand its U.S mergers business and become a top 5 leveraged lending player. In summary, UBS will quiet a lot of critics when second quarter results are released, according to Jenkins.
    Below are parts of Jenkins’ exclusive interview with Reuters on Monday. For a full transcript of the interview click here.

There’s been a lot of talk in recent weeks about UBS needing to make up ground with Wall Street rivals on a number of fronts — leveraged lending, costs, banker departures. What have you done to address these issues?  
   “It’s been interesting that over the last week, since we announced Peter Wuffli’s departure, a lot of the press coverage has focused on the investment banking division, our cost income ratio and the speed of our growth plan. I think it’s also fair to say a lot of focus has been on the fact that (investment bank president Kenneth) Moelis and (global investment banking co-head Jeffrey) McDermott left the firm, suggesting that there is some kind of a malaise in the investment banking division, whereas our internal and our clients’ perception is we’re just going gangbusters in terms of the growth of our U.S. investment banking division.”  
    “What a difference a week makes. We’ve acted as advisor to the special committee of Alcan (on Rio Tinto’s takeover); the Western Mining IPO in China, our first A-share IPO in China, which was up approximately 260 percent on its first day. We were exclusive financial advisor to MatlinPatterson Global Advisors LLC on the sale of Huntsman Corp. There is another side of the story, which is that maybe this thing is really in the process of turning itself around. The fundamental health of the business and internal excitement is greater today than its ever been.”  
 
What about the impact of Ken Moelis’ departure and other banker departures?     
    “The good news is the momentum of the business has not been impacted. We clearly had some colleagues from all ranks and levels leave to join Ken’s new company — around ten. 
    “We focus on our key industry practices and our key M&A and capital markets franchises and have made a few good hires so we’re in very good shape. We hired (senior bankers) Jim Metcalfe, Bill Drewry and Bill Houlihan as managing directors in U.S. investment banking, among others. 
   But being realistic, Ken’s starting up a small company. He doesn’t have room for that many people.” 
      
Did you need to provide new pay packages to stem defections?    
   “We don’t talk about compensation arrangements. We’ve been very focused on stabilizing and committing to our teams. The one thing I’m comfortable about is we’ve been able to do that and that we have been able to stabilize and that has not involved creating a large amount of guarantees as part of that process. As with any firm there have been a couple (of guaranteed packages), though not during these past few months.” 

How is the investment banking division doing? 
    “We feel that, if anything, our franchise and breadth of footprint is really broadened and deep now in the U.S. There are sectors we can improve and strengthen. I’d say we are doing that now through internal growth. We have had very strong campus recruiting efforts in the U.S. for past 6 years and that’s creating a healthy pipeline for future bankers and leadership. It’s not just about 50 senior bankers. It’s about a department with 1,000 people in the U.S. with a very strong bench in my view, and 2,700 people in investment banking globally, which includes industry practices, M&A and equity capital markets.” 
    “In terms of hiring, we have bunch of graduates coming on during the summer and lateral hires in the 30-50 range.” 

(Reporting by Joseph Gianonne)

(Photo. Huw Jenkis, Reuters file)

posted by Megan Davies on Jul 17

Daily fluctuations aside, Tribune shares have pretty much been trading way below the $34 that real estate magnate Sam Zell is offering to take the company private.

The deal is structured in two parts, with the first stage cleared in May. But an industry-wide decline in newspaper advertising revenue and more risk-averse debt markets have caused some nervousness that the deal will founder.

Concerns have been raised about whether Tribune, owner of the Chicago Tribune and the Los Angeles Times — not to mention the Chicago Cubs — will generate enough cash flow to meet a leverage test detailed in its deal agreement or if Zell will seek to renegotiate the terms.

The spread on the deal is wider than the typical 5 percent or so, indicating concern among investors about the deal closing. Shares on Tuesday were trading around $30 – a spread of around 13 percent.

There are two schools of thought on Tribune,” said analyst Ed Atorino of Benchmark Co.

“One is they will make it happen and do what they have to do to complete the transaction by the end of year and be able to meet one of the stringent guidelines in the debt covenant, which is a 9-1 debt-to-cash flow ratio.

“The other … says earnings will be short of expectations, they’ll have a tough time meeting the numbers and they may have to delay the closing until they fix it — or perhaps maybe not complete it.”

We, of course, would love to know what you think will happen.

posted by Jessica Hall on Jul 17

Chemical and plastics maker Basell finally inks an acquisition after two failed attempts, but analysts suggest that even this third effort could get scuttled by a rival bidder.

Basell agreed on Tuesday to buy Lyondell Chemical Co. for $12.14 billion. The deal comes just five days after Basell’s agreement to buy chemicals maker Huntsman Corp. collapsed due to a higher bid from Apollo Management’s Hexion Specialty Chemicals business. Basell also recently lost out on a bid for General Electric Co.’s GE Plastics.

Is Basell’s $48-per-share deal with Lyondell also cursed? 

“We do not rule out the possibility of a higher bid by either an integrated oil company or a major foreign energy company,” said JPMorgan analyst Jeffrey Zekauskas. ”We speculate that a strategic bidder could value the refining and petrochemical assets of (Lyondell) at $50 per share or above.” 

Shares of Lyondell surged $6.88, or 17 percent, in early trading to $47. 

 ”Any energy or raw material asset has a scarcity premium, so it would not be a surprise to see other bidders,” said one arbitrageur who declined to be named. 

posted by Michael Flaherty on Jul 16

Blackstone has made it clear that among the reasons for going public is the ability to use the firm’s equity to make acquisitions. Most of the more than $7 billion it raised through the June IPO and the China state government deal will go to paying out employees and buying up partnership units. But Blackstone has stock as currency now, and a market cap of more than $30 billion. So who should Blackstone buy? Lazard, according to one banker who used to work there.
    
    The question of how Blackstone plans to grow its business has been batted around Wall Street for several months now. Will Blackstone become the next Goldman Sachs by buying Bear Stearns or Lehman Brothers? Or will they beef up their restructuring group? Maybe grow their small M&A advisory business?
    
    Blackstone declined to comment on its plans. Several bankers interviewed said that the firm is unlikely to do anything big, at least for now. But that hasn’t stopped the theories.
    
    William Cohan, the former Lazard banker who wrote a tell-all book about the bank called “The Last Tycoons,” spelled out why Blackstone should buy Lazard on Monday. Speaking to CNBC’s Erin Burnett (the subject of a New York Post interview over the weekend), Cohan gave his reasons:

    Cohan: You have to ask yourself, how are these two aging billionaire M&A warriors going to perfect their legacy…How is Steve Schwarzman on the one hand going to transform Blackstone in to Goldman Sachs, and how is (Lazard’s) Bruce Wasserstein on the other hand going to exit the scene gracefully, perfecting his reputation…? And I think if you look at the circumstances surrounding this, both from the social and a strategic point of view, the fit is excellent in both situations.
    
    Burnett: And, you are talking about here what Blackstone would get…Lazard is a famous name, number ten in worldwide M&A…and a bigger in terms of the number of senior bankers that are working there.
    
    Cohan: Exactly. And look at it. Blackstone is not ranked in the top 25 from (an M&A standpoint) and has 14 managing directors in their M&A group…Lazard has 149 managing directors in their M&A group…and about a billion dollars in revenue. And there is more to it than that…Not only is it M&A that you get… but the hidden jewel of Lazard is the asset management business–$125 billion of assets under management. How does it compliment Blackstone?…Blackstone, with $85 billion in assets under management, (has) most of that in private equity. They have about $30 billion, $35 billion of assets in alternative investments. 
     
    Burnett: …Is it not the right time to buy Lazard? 
   

    Cohan: Well, yes…The actual market cap of Lazard when you fully dilute the shares owned by partners is closer to $6.5 billion and has 22 price to earnings. Blackstone…probably trades at about a 25 p/e. So it would be accretive to Blackstone’s earnings. And let’s talk about it from a social perspective. Bruce Wasserstein and Steve Schwarzman are friends. They’ve known each other from Harvard Business School and Lazard doesn’t really have anybody who can run the firm in the future, I don’t think. If you look at what is going on now, Bruce is not running it day-to-day.

(Unofficial transcript provided by CNBC)

(Photo, Bruce Wasserstein. Reuters file)

posted by Jessica Hall on Jul 16

Pancake house IHOP Corp. ordered up a large feast on Monday when it announced its $1.9 billion acquisition of bar-and-grill chain Applebee’s International Inc.  –  a company nearly twice its size. 

IHOP, which has a market capitalization of about $980.6 million, will use securitized debt backed mostly by Applebee’s restaurant and real estate assets to fund the purchase of the much larger company, whose market value is $1.82 billion.

IHOP, which franchises 99 percent of its 1,319 restaurants, plans to revamp Applebee’s business model away from owning and operating its own restaurants to becoming predominantly a franchisor. Applebee’s has nearly 2,000 restaurants, of which 508 were company-owned. 

“The value is in the restaurants and the real estate. You’ve seen this play in Sears-Kmart, Toys R Us and elsewhere. The companies may have problems, but the land they are sitting on still has value and the brand names still have value that can be leveraged,” said one consumer investment banker who declined to be named.

Applebee’s, which has been under shareholder pressure to improve its stock price, said earlier this year it was reviewing its options. The company has struggled amid weak consumer spending, higher gas prices that siphon away consumers’ disposable income, as well as stiff competition from rivals and grocery stores that are selling more prepared meals.

“While the sale price (of Applebee’s) is somewhat less than we expected, it does illustrate value of franchised businesses with tools such as securitized lending, refranchising and G&A (general and administrative) reductions that are available,” said UBS Equity Research analyst David Palmer. 

“Importantly, the 9-tmes forward EBITDA (earnings before interest, taxes, depreciation and amortization) price highlights the value of a franchised business with owned real estateeven one with long-term issues like (Applebee’s),” Palmer said.

Other companies such as pizza-delivery chain Dominos Pizza Inc. have recapitalized on their own. Palmer suggested that Brinker International, which owns Chili’s Grill & Bar, could help its stock price by following IHOP’s plans for Applebee’s.
 
(Photo credit: IHOP website)  

posted by Kenneth Li on Jul 16

Pali Capital media analyst Richard Greenfield, whose “Dear (name the media Chief Executive here)” research notes are both notorious for vitriol and renown for analysis, is now taking a page from billionaire investor Carl Icahn and urging the world’s largest media company to break itself up.

Greenfield upgraded his recommendation to “Buy” from “Neutral” on the belief that the sell-off or split-off of AOL, a split-off of Time Warner Cable, a sell-off of Time Inc. and a $14 billion stock buyback could send shares rising to at least $25 over the next 12 months. That’s a nice premium to its current level of about $21.

Greenfield says a Time Warner board meeting later this month will “hopefully set in motion some of the structural changes” and render a decision on a possible buyback. (Time Warner is virtually done with a $20 billion buyback that it announced following its resolution with Icahn last year.)

Some reporters on the beat will agree with at least one thing in Greenfield’s note: “Investors need a ‘PhD’ in TWX. Time Warner reported Q1 07 results by issuing a 17-page press release (detailing reported earnings, earnings before impairment charges, one-time gains/losses, merger/restructuring charges, legal reserves and other miscellaneous non-recurring items), 13 pages of trending schedules, three pages of business outlook, and a 20-page slideshow to accompany the earnings call; not to mention a book-like 10-Q.

“While one certainly has more than enough information to analyze TWX, its complexity has, without doubt, become a liability in the public market.”

Thanks Rich. Can we move on to Liberty Media now?

posted by Caroline Humer on Jul 13

Alcan’s bonds may be a risky bet after Rio Tinto’s big ticket $38 billion deal to buy the company.

The transaction, which Rio will pay for by ramping up debt, will lead to a weaker credit profile for both companies, Gimme Credit analyst Carol Levenson wrote in a note.

The move seems out of character for Rio, known as a conservative company wary of adding to its debt, Levenson wrote. It also has not been particularly acquisitive, and given the size of the deal, the Alcan purchase brings along higher execution and financial risk.

Levenson said that Rio Tinto’s free cash flow was $1.6 billion in 2006 and that Alcan’s was lower, which will make it difficult for the combined company to reduce what she estimates will be a debt load of $47 billion.

Before any stock issuances or divestitures – the companies plan to sell Alcan’s $6 billion packaging business fairly quickly – she estimates credit quality dropping to the mid triple B rating range. “With Alcan 2013 paper seen trading at 90 basis points, and the eventual outcome still far from certain, we would gratefully sell,” she wrote.