Biggest Dividend

posted by Richard Beales on Sep 30

American International Group is throwing off its shackles. But taxpayers will be locked in for a while yet. The company’s deal with the government over its $100 billion of bailout funds makes the insurer’s finances simpler and healthier. That’s potentially good for shareholders. But initially the plan largely just rearranges the government’s interests. It is hard to see how it gets taxpayers cash back any sooner, while increasing their risk.

Bob Benmosche, the AIG boss, understandably likes the deal. It will remove the New York Federal Reserve as a senior secured creditor and swap the $49 billion scarlet letter of government bailout preferred shares for common stock. That should allow him to normalize a borrowing relationship with lenders right away and give him more flexibility. As for dealing with the government, the Treasury will take on the remaining New York Fed interests, leaving only one master for AIG to deal with.

Mr. Benmosche is right that the stigma of being one of the holdout recipients of Troubled Asset Relief Program aid as the program winds down wouldn’t be good for credibility. But AIG’s cheerful notion that the plan “provides for full repayment” of taxpayers is premature. Some $20 billion of New York Fed loans will be repaid, but the remaining Treasury interest will be ratcheted down the capital structure. Whether its 92.1 percent stake in AIG ends up being worth enough to repay taxpayers is up to financial markets.

To be fair, the Treasury would be in the money today. And Mr. Benmosche, having improved AIG’s performance, wants to increase its value further. Meanwhile, the government is making money on its sale of Citigroup shares, a precedent that hasn’t gone unnoticed. But selling a less than 30 percent stake in the bank, initially worth some $25 billion, is taking the government longer than originally anticipated. Mr. Benmosche’s suggestion that offloading a far larger stake in AIG may take 18 months sounds optimistic.

Normalizing AIG’s financial situation is a step forward. And the government could make money on its equity stake. However, as investment advisers repeatedly warn, stock prices can go down as well as up. Mr. Benmosche and his colleagues can breathe easier as soon as the plan gets locked in; taxpayers will have to wait.

posted by Jon Cook on Sep 30

Car rental company Avis has agreed to pay a $20-million break-up fee in its offer for Dollar Thrifty if rival Hertz walks away from its own takeover bid. Dollar Thrifty shareholders were due to vote on the Hertz offer on Thursday in Chicago, but announced they have delayed that vote, citing additional voting activity. *View article*

Hertz and Avis have been going back-and-forth in their bid to wrest control of Dollar Thrifty since Hertz initially announced its takeover bid last April. Hertz and Dollar Thrifty agreed to a sweetened deal earlier this month, currently worth about $50.95 a share or roughly $1.5 billion. The Wall Street Journal said the Avis deal isn’t likely to help Dollar Thrifty shareholders that much, as Avis’s additional $20 million break-up fee was just “45 percent of the $44.6 million break-up fee that would be due to Hertz immediately upon signing an Avis deal.” *View WSJ blog*

China’s Sinochem is working feverishly to put together a rival bid for Potash Corp to counter BHP Billiton’s $39-billion hostile takeover offer, sources told Reuters. Although BHP’s bid deadline isn’t until November 18, “sources close to the firm” told Reuters a decision could come soon. *View article*

Is there trouble looming for the hedge fund industry? Wall Street hedge fund firm D. E. Shaw this week laid off around 150 staff, roughly 10 percent of its 1,500-person workforce, according to Reuters Breakingviews columnist Rob Cox. Cox points out the layoffs are unlikely to be an isolated event as assets under management at hedge funds are down 29 percent since 2007. *View blog*

posted by Jeffrey Goldfarb on Sep 29

Wall Street just lost some insurance in more ways than one. At the eleventh hour, Liberty Mutual Group yanked the initial public offering of its property and casualty arm. The $1.2 billion deal would have been the biggest U.S. flotation so far this year. It was also being closely watched as a barometer of investor appetite for the swollen backlog of new share sales meant to keep bankers busy. Weaker trading volumes already had many of them nervous about their fates. If IPOs flag too, more jobs could be on the line.

Liberty Mutual fell back on an old chestnut to explain the indefinite postponement: an "unfavorable environment." Of course, the environment was less unfavorable for Country Style Cooking Restaurant Chain, the Chinese eatery whose new issue a day earlier closed 47 percent above the offer price. The specifics of the insurance industry and Liberty Mutual Agency undoubtedly made this particular deal hard to get away. Policy sales expectations, comparative valuations, a dual share structure and use of the proceeds all conspired to keep prospective buyers at bay.

But pickier investors could spell trouble for already edgy Wall Street underwriters. The summer months have been painful, leading to a cascade of downward earnings revisions ahead of third-quarter results. Choppy markets and a bumpy M&A patch have led to a hiring freeze at Morgan Stanley and some culling at Bank of America Merrill Lynch. It was hoped that equity issuance would provide some insurance across the industry. The pipeline for equity offerings was bulging at more than $300 billion, including IPOs -- where the fees are highest for securities firms -- of around $75 billion.

The last-minute Liberty Mutual delay isn't the only bad omen. Plans submitted in May by Toys R Us, owned by a group of private equity firms including Kohlberg Kravis Roberts, to raise $800 million almost certainly will have to wait until next year. French lodging group Accor also on Wednesday canceled a highly anticipated IPO of its stake in a casino and luxury hotel operator. Other new issues are struggling to achieve their desired prices. If more of these expected share sales meet a Liberty Mutual-like fate, many banks will find themselves with little choice but to cut more of their increasingly idle employees loose.

posted by Wei Gu on Sep 29

China is no longer blindly in love with new stocks, as seen in this week's flop of Ningbo Port. But other markets have caught the fever. Four Chinese companies rose on average around 50 percent on their debut in New York and Hong Kong in the past week. Cash-rich global investors are hungry for China's high rates of growth. A flood of new supply may test their appetite.

The excitement over the latest crop of overseas-listed China stocks is reminiscent of recent years' booms on the Shanghai and Shenzhen markets. Children's clothing maker Boshiwa <1698.HK>, and restaurant chain Country Style Cooking , rose by 41 percent and 47 percent respectively on their debuts. On domestic markets, the story is very different. China's third-largest port operator fell 4 percent on September 28, its first day of trading.

Global investors are chasing Asian growth. Asian equity funds, excluding Japan, had their best week of inflows in more than 15 months for the week ended September 22, according to fund tracker EPFR Global. Consumer-focused stocks, like Boshiwa, are particularly hot, as Chinese politicians air their promises to rebalance the export-led economy toward consumption.

China's urbanization and rising income levels have even made old themes suddenly sexy. Country Style Cooking, which specializes in quick meals for less than $3, wants to expand from a regional chain of 100 outlets to the whole nation. McDonald's, for example, has about 1,100 outlets in China.

But high expectations are baked into these prices. Country Style traded at as much as 52 times 2009 earnings by the end of its exuberant first day. Boshiwa was at 53 times its forecast 2010 earnings. Those valuations make their mainland-traded counterparts look positively cheap.

One reason for the exuberance -- scarcity value -- may be short lived. Global investors are bracing for a record year in equity offerings, including $33 billion out of China, according to Citi. While the likes of search engine Baidu have soared, countless other former darlings of overseas-listed China stock booms now languish, unloved and forgotten. The new generation may not be much different.

posted by Eric Martyn on Sep 29

Sanofi-Aventis is considering whether to raise its $18.5-billion bid for drugmaker Genzyme as soon as next week, Bloomberg said, citing sources. Sanofi has not ruled out a hostile bid but would prefer friendly negotiations, the report said. *View article *View factbox

India’s showpiece IT services companies are scouting for acquisitions in overseas markets as they focus on expanding geographical presence as well as client base to boost growth, Reuters reported from the India Investment Summit in Bangalore. *View article *Full coverage

Companies are flush with cash, financing is cheap and dealmaking has staged a comeback, according to Bloomberg’s third-quarter review of M&A activity. *View Bloomberg article

Want to start your own hedge fund? Vanity Fair offers its own five-step program. *View Vanity Fair article

posted by Eric Martyn on Sep 28

Facebook is likely to go public sometime after late 2012, a board member said. A stock market debut by a company valued in the tens of billions of dollars would be one of the most highly anticipated initial public offerings of the decade. *View article

Andrew Ross Sorkin from The New York Times takes a look at the secondary market’s implied market value for Facebook. Will Facebook ultimately be worth $33 billion or $3 billion? *View NYT article

Southwest Airlines’ $1.4 billion AirTran Holdings deal pays for itself, writes columnist Robert Cyran. *View article *Further reading

AOL has been in deal talks with TechCrunch, the WSJ reports. *View WSJ article

posted by Robert Cyran on Sep 28

Southwest Airlines' $1.4 billion AirTran Holdings deal pays for itself.

The dominant discount airline's takeover gives it valuable gates in Atlanta and several Northeast cities. While AirTran poses operational risk and comes at a 69 percent premium, the value of promised cost cuts is worth about $2.8 billion before accounting for the time value of money. Even if some savings disappear, the deal stacks up. Indeed, investors sent Southwest's shares soaring 10 percent on the news, adding almost $1 billion to the company's market capitalization.

For years, Southwest grew by basically repeating the same play. Offer basic service to second-tier airports at U.S. cities at discounted prices. Minimize ticketing costs. Put passengers at ease by having bubbly flight attendants make lots of jokes. Save money by flying only Boeing 737s. And try to keep planes full by sticking to short routes.

Purchasing AirTran mixes up the model a bit, however. For one, AirTran leases more Boeing 717s than 737s. The airline also has some international destinations. Southwest's even saying the acquisition improves its ability to attract lucrative business customers. And it may be culturally difficult to integrate because of its size -- AirTran employees would be close to 20 percent of the combined company's workforce.

On balance, these risks appear worth taking. Buying AirTran gives Southwest access to Atlanta, where Delta has largely had a lock on the market. That makes the city a fat target for tightly-run Southwest.

The deal's best attribute, though, looks purely financial. Southwest estimates cost savings of at least $400 million per year by 2013. The after-tax value of these savings would be worth as much as $2.8 billion. Unfortunately for investors, promised savings in the airline industry often disappear, transferred to customers in the forms of cheaper flights.

But only a fraction of the promised synergies need to show up to justify the $400 million premium that Southwest is paying. No wonder the company's investors are acting as ebullient as one of the company's flight attendants.

posted by Richard Beales on Sep 28

There's no quick way for the U.S. government to exit American International Group <AIG.N>. Converting $49 billion of preferred stock to common shares and selling them would, like the government's exit from Citigroup <C.N>, take a while. And that's assuming other share sales, needed for separate repayments relating to AIG, go smoothly.

As of June 30, AIG owed the government just over $100 billion -- though a further $4 billion has since been repaid. AIG has also made progress offloading assets. Big examples include the IPO of AIA, the Asian unit currently expected to debut on the Hong Kong market in the next month or so, and the $15.5 billion sale to MetLife <MET.N> of American Life Insurance, or Alico, which is winding its way towards closing. The New York Fed converted debt into preferred shares in these entities worth $16 billion and $9 billion, respectively, and the deals will help pay that off.

Back at AIG itself, there are around $49 billion of preferred shares owned by the Treasury. The Citi example shows how that block of prefs might be swapped into common equity and then sold, over time. In the Citi case, the government is turning a profit on its shares, potentially making the idea interesting for AIG as well.

But it looks like selling the government's Citi stake -- initially nearly 30 percent -- will take longer than the anticipated nine months from March. Offloading the Treasury's stake in AIG could take far longer, because the government already effectively owns 80 percent of the company, and converting the prefs could take that nearer to 90 percent.

Unfortunately, that's not all. A planned sale of AIA to the UK's Prudential <PRU.L> -- abandoned in June -- would have brought in a big slug of cash, but an IPO probably won't raise enough to pay back the New York Fed's preferred interest in AIA right away, let alone give AIG any proceeds to apply to its own obligations. Meanwhile the Alico sale will come with only $6.8 billion of cash. So the government will depend on further sales of AIA and MetLife equity interests to get its money back.

And there's more. Ahead of all that, at least in strict credit priority, is another $20 billion-odd, including accrued interest, that AIG still owes the New York Fed under a credit facility. The insurer might at some point be able to refinance that. But put the pieces together, and taxpayers could wait a long time before enough shares in enough different companies are sold for them to be made whole.

posted by Rob Cox on Sep 28

Wal-Mart <WMT.N> has finally sounded the vuvuzela on African expansion. After months of speculation about how it would try to capitalize on the continent's growth, the U.S. retailer is offering $4.2 billion to acquire South Africa's Massmart Holdings <MSMJ.J>. The price could grate on shareholders' ears. But the deal gives Wal-Mart a local vehicle -- and local knowledge -- to help it gain access to a market with a profile that should suit it well.

If the deal is accepted by Massmart, Wal-Mart will be paying close to 13 times the Johannesburg-based retailer's EBITDA. For a company that trades at closer to 7 times, that's a big premium, albeit a drop in the bucket against Wal-Mart's nearly $200 billion market capitalization.

But Wal-Mart will get a foothold in what should be a bright spot in the world's growth map. South Africa, where Massmart operates 232 stores from Limpopo in the northeast to the Western Cape, is one of the CIVETS economies (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) widely hailed as the next sizable emerging markets.

The International Monetary Fund estimates sub-Saharan output will grow nearly 6 percent per annum from 2011. Capitalizing on this would be a stretch for Wal-Mart from its Bentonville, Arkansas headquarters. Sure, the retailer has become a smart international operator and broadly understands poorer shoppers, something Africa has in unfortunate abundance. But Wal-Mart would lack local knowledge in a new market.

Piggybacking on Massmart's business makes African expansion a much less risky proposition for the U.S. giant. From its home market where it operates a variety of retail formats, the South African group has been rolling out its Game mass-discount stores in Botswana, Ghana, Malawi, Mozambique, Namibia, Zambia and elsewhere.

Moreover, buying Massmart should boost margins in Wal-Mart's international business, which accounts for around a quarter of its revenue. While Wal-Mart International's operating margins were around 3.8 percent in the first half of this year, Massmart's stood at closer to 5 percent. Apply Wal-Mart's massive purchasing power, and profitability could increase further.

This entry ticket to a CIVETS lair doesn't come cheap. But with growth elusive at home, it should be a price Wal-Mart shareholders are happy to pay.

posted by Eric Martyn on Sep 27

American International Group and the U.S. government are moving closer to a deal on how the Treasury Department would exit its investment in the bailed-out insurer, sources said. *View article *View Bloomberg article

Southwest Airlines will purchase AirTran Holdings for $1.04 billion in cash and stock in a deal that will allow Southwest to expand its presence in major East Coast markets. The move by Southwest puts pressure on all major rivals, who are trying to strengthen their eastern markets to leverage more premium-paying business travel. *View article

Consumer goods group Unilever will buy hair and skin care company Alberto Culver for $3.7 billion in the latest move to rebalance its portfolio toward higher growth lines. Analysts said the price of the deal looked high, but could be justified by cost savings and by skewing Unilever’s business to more high growth, high margin categories. *View article

Wal-Mart is in talks to buy South Africa’s Massmart, a $4 billion deal that would give the U.S. retailer a big presence in fast-growing Africa and bolster its emerging markets strategy. *View article

Sanofi-Aventis has not changed its offer of $69 per share for drugmaker Genzyme, a Sanofi spokesman said, declining to comment on a report it may be lining up more funding for a raised bid. *View article *View WSJ article