Back on May 21st, the $34.1 billion buyout deal for BCE (NYSE: BCE) looked bleak. A Quebec court ruled that the process had to stop -- so as to evaluate the impact on bondholders. As a result, BCE's stock price plunged from $37.83 to $33.10.
Of course, the decision was immediately appealed to Canada's Supreme Court. And, it was a savvy move. Today, the high court agreed to allow the BCE deal to move forward (this is according to a report in the Wall Street Journal, which is a paid publication). In fact, there was no rationale provided (instead, this will be provided at a later date).
However, there are still headwinds on the buyout. Simply put, the credit crunch is still lingering and making it extremely difficult to pull off mega financings. The banks on the deal include Citigroup (NYSE: C), Deutsche Bank (NYSE: DB), Royal Bank of Scotland, and Toronto-Dominion Bank. Of course, they don't want to sustain any more losses on their balance sheets.
Then again, this does not mean the deal will fall apart. Rather, there will likely be pressure to renegotiate the price tag on the transaction. After all, this is what happened with the buyout of Clear Channel.
If we needed another sign that private equity is passe, we need go no further than to look at the current issue of Fortune, which shares a parent, Time Warner Inc. (NYSE: TWX), with BloggingStocks. To be fair, Fortune added an update to its web site about the tottering deal. It's a shame because the Fortune article paints such a glowing portrait of Providence Equity Partner's CEO Jonathan Nelson and praises him for doing the biggest deal ever -- the $51 billion takeover of Bell Canada parent BCE (NYSE: BCE) whose stock is down 5.7% this morning.
Regrettably for Nelson and Fortune, the New York Times reports this morning that the deal looks to be imperiled. It quotes one executive who read the revised bank terms: "It's patently obvious that the banks have no intention of closing the deal." These banks -- led by Citigroup Inc. (NYSE: C), Deutsche Bank, and the Royal Bank of Scotland -- sent revised terms to the consortium of buyers. which included higher interest rates, tighter loan restrictions and stronger protections for the banks, far exceeding the original terms.
Fortune has a photo of Nelson sitting in a comfortable chair with his hands in a position that communicates "I am smarter than you." It will be interesting to see whether he can use those smarts to close this $51 billion deal. If he does, then he will certainly deserve the encomiums that Fortune heaps on him. Fifteen months ago I appeared on CNBC to discuss whether private equity had peaked. I think Fortune's Private Money 2008 package answers that question in the affirmative -- with the cover story jinx.
According to people familiar with American International Group Inc's (NYSE: AIG) board, some directors feel that another big loss in the current quarter could prompt them to re-evaluate their support for CEO Martin Sullivan. The sources said a decision on Sullivan's fate isn't likely to be made until the company sees results over the next several months, the Wall Street Journal reported.
The Boeing Company (NYSE: BA) closed a helicopter production line for several hours yesterday due to possible irregularities found in two military helicopters, the Seattle Times reported. The company did not disclose exactly why it shut down the production of the H-47 Chinooks.
WEB SITES:
According to Mac Rumors, citing French LeMatin.ch, a source in Swisscom AG (OTC: SCMWY) said Switzerland will be getting the iPhone device from Apple Inc (NASDAQ: AAPL) this summer, and it will feature GPS, Video Conferencing and Mobile TV.
The Royal Bank of Scotland will apparently eliminate about 7,000 jobs, following the acquisition of ABN Amro and due to credit market losses, Bloomberg News reported Monday, citing people familiar with the situation.
RBS (NYSE: RBS), the United Kingdom's second-largest bank, said the move is consistent with earlier stated intentions to cut costs as it merged its two wholesale banking businesses and also is warranted "in light of current conditions in some parts of the global credit markets."
Shares of RBS gained 12 cents to $7.19 on the news in midday Monday trading.
Thinning the ranks
Independent stock analyst C. Leonard Bauer told BloggingStocks Monday investors / traders should not be overly alarmed by RBS's likely upcoming staff adjustment. "I interpret this as more deal-related than credit markets-related," Bauer said. "RBS added considerable positions during the strong years for investment banking, and the bank wasn't understaffed at the start of the boom in 2003, so some job cuts were expected on those grounds. The ABN Amro deal simply meant that there would be more wholesale banking positions to consolidate." Bauer added that he does not have a rating on, nor own, RBS's shares.
Further, Bauer said the likely RBS cuts does not change his outlook on the credit market / bond market recovery.The worst of the mortgage and related asset-backed write-offs are over, he argued, and he expects the size and frequency of investment bank write-off announcements to taper in Q3 and Q4 2008.
According to the New York Post, IAC/InterActiveCorp. (NASDAQ: IACI) Chairman Barry Diller is expected to meet with his board this week to restart the process of breaking up his company into five separate pieces, sources said. At the same time, Diller and Liberty Media Corporation (NASDAQ: LMDIA) Chairman John Malone are continuing to talk about a deal that would trade one or more of IAC's assets for Liberty's ownership stake in IAC.
The UK Times has learned that Numis Securities, the stockbroking group headed by Michael Spencer, is in "advanced talks" to buy the UK equities business of The Bear Stearns Companies Inc (NYSE: BSC). Numis may look to hire a team of 25 from Bear.
Yahoo! Inc (NASDAQ: YHOO) is going to let outside developers create applications across its network of sites, the New York Times contended. The search engine is also going to combine its online services under the social profile concept in an attempt to allow its users to replicate the social experience that social networks like News Corporation's (NYSE: NWS) MySpace and Facebook have made so popular.
WEB SITES:
Research In Motion Limited (NASDAQ: RIMM) will reportedly delay the launch of its new hotly anticipated 3G BlackBerry phone, Fortune reported, which the company is developing for AT&T Inc (NYSE: T). The phone, originally supposed to be launched in June, may not be released until as late as August, inside sources said.
Royal Bank of Scotland said it will sell 12 billion pounds or $23.9 billion worth of new shares to boost capital, Bloomberg News reported Tuesday.
RBS (NYSE: RBS) has suffered from capital depletion following loan and related credit mark-downs, and as a result of its $114 billion purchase with Banco Santander (NYSE: SAN) and Fortis of ABN Amro.
Shares of RBS fell 30 cents to $7.19 on the news in Tuesday morning trading. Shares have declined more than 45% since October 2007.
RBS said it expects a large increase in the expected losses it faces on its portfolio of poorly performing loans and assets, including U.S. subprime mortgages and leveraged loans to private equity deals, The Financial Times reported Tuesday. The bank said these additional writedowns would reach about $11.8 billion -- three times the losses the bank has already recorded.
Private equity firm Corsair Capital and several of the banks bigger shareholders are expected to inject over $6B into Cleveland regional bank National City Corporation (NYSE: NCC), the Wall Street Journal reported.
According to sources, the Financial Times reported that Bank of America Corporation (NYSE: BAC) is planning to sell a portion of its 9% stake in China Construction Bank in order to raise capital. However, Bank of America will offset some of the share sales by exercising options it holds to buy additional stakes in the bank at levels that are now well below market rates.
The UK Telegraph reported that the BBC is talking to private equity firms to join in a bid for Virgin Media Inc's (NASDAQ: VMED) Virgin Media Television, which owns a percentage of the UKTV content business that the BBC doesn't already own.
The Wall Street Journal reported that New York state's attorney general, Andrew Cuomo, has launched an investigation into auction-rate securities and is seeking information from some of Wall Street's biggest institutions including UBS AG (NYSE: UBS), Citigroup Incorporated (NYSE: C) and Merrill Lynch & Co Inc (NYSE: MER), a person familiar with the matter said.
According to the Financial Times, Deutsche Bank AG (NYSE: DB) and other investment banks are working on plans to develop a clearing house for the credit derivatives markets. In an attempt to reduce counterparty risk, the banks are trying to develop a system that would only allow institutions with strong capital bases and credible trading histories to clear trades in the credit default swap markets with a central counterparty.
OTHER PAPERS:
The news that The Royal Bank of Scotland Group Plc (NYSE: RBS) is planning a rights issue of between GBP5B and GBP12B received mixed reviews from British analysts and investors, the Telegraph reported. The analysts expect the bank to cut its dividend.
For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.
In referring to her conservative favorite for 2008 she explains, "While the big ships of the financial industry struggled to weather a storm of their own creation in the credit markets, a solidly built craft sailed full speed ahead undeterred by the turbulence, proudly flying the Spanish flag into new and old markets.
"Banco Santander, which trades as an ADR in the US, apparently managed to tack clear of the siren call of easy subprime money in America. Instead, following in the tradition of the conquistadors, it went in search of new riches in the old world and the new.
"With branches in Europe, Africa, and the Americas, Grupo Santander has grown to become the largest bank in Europe by market capitalization, even as its competitors see their market cap wither during difficult times.
Marketwatchreported this morning on the Royal Bank of Scotland (NYSE: RBS)'s earnings event. Shares surged upwards to the tune of 7.3% on news that the U.K.'s second-largest bank expects operating profit and earnings per share to be "well ahead" of the market consensus.
I wrote yesterday about the U.K.'s real fear that the subprime meltdown that the U.S. is experiencing may rear its ugly head in the U.K. throughout 2008. RBS' relatively cheery (actually, just not as bad as everyone was predicting) forecast relieved some of the stress on the financial industry this morning.
In the same article, Marketwatch reported that RBS said "Credit market troubles in the second half of the year are expected to result in write-downs of 950 million pounds ($1.96 billion) on its exposure to subprime mortgages, which was lower than many analysts had forecast." This news drove up the shares of Barclays (NYSE: BCS), UBS (NYSE: UBS), and CSFB (NYSE: CS) -- three other banks pushed down by the overhang of a massive mortgage rate reset.
Zack Miller is Managing Editor of IsraelNewsletter.com. Disclosure: Author has no position in any stock mentioned as of 12/04/07.
MOST NOTEWORTHY: Longtop Financial, Royal Bank of Scotland and W-H Energy Services were today's noteworthy initiations:
Jefferies initiated Longtop Financial (NYSE:LFT) with a Buy rating and $29 target, as they expect strong earnings growth over the next several years from an acceleration in P&L performance and the company's attractive secular demand backdrop.
Morgan Stanley resumed coverage of Royal Bank of Scotland (NYSE:RBS) with an Underweight rating, as they believe investors will begin to question the sustainability of the company's dividend as earnings fall.
Oppenheimer views the outlook for W-H Energy Services (NYSE:WHQ) as compelling given its geographic expansion, international growth prospects, technological focus, and strong balance sheet. The firm started shares with a Buy rating and $73 target..
OTHER INITIATIONS:
HSBC initiated Diageo (NYSE:DEO) with an Overweight rating.
Banc of America resumed coverage of the softlines retailing sector, starting shares of Urban Outfitters (NASDAQ:URBN) and Pacific Sunwear (NADAQ:PSUN) with Buy ratings and a $32 target and $20 target, and Aeropostale (NYSE:ARO) with a Neutral rating.
MOST NOTEWORTHY: Athenahealth, Brocade Communications Systems, Royal Bank of Scotland and Human Genome were today's noteworthy initiations:
Caris initiated shares of Athenahealth (NASDAQ: ATHN) with an Average rating and $26 target, as they believe an unachievable growth rate is priced into shares at current levels.
Back on May 21st, the $34.1 billion buyout deal for BCE (NYSE: BCE) looked bleak. A Quebec court ruled that the process had to stop -- so as to evaluate the impact on bondholders. As a result, BCE's stock price plunged from $37.83 to $33.10.
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