Realogy to be Bought by Apollo Group
Real estate franchisor Realogy Corp., which owns Coldwell Banker, Sotheby's International and Century 21, will be acquired by private investor firm Apollo Group for about $6.6 billion or $30 per share, an 18% premium to Friday's closing price. The deal follows the recent acquisition of Equity Office Properties Trust by the Blackstone Group and others for $36 billion, the biggest buyout in history. Realogy is involved in a quarter of all U.S. home sales annually and has almost triple the number of agents employed by Re/Max, its closest competitor. Its earnings are declining, however, because of the housing slowdown and increased competition from online brokerages and discount houses. Still, its $500 million in annual cash flow, relatively low level of debt, strong brand names and longevity in the industry made it an attractive acquisition candidate.
• Sources: Wall Street Journal, New York Times, Reuters, Forbes
• Related commentary: Realogy: Why The Shorts Are Wrong, Zillow to Realtors: Really, We're Not Going to Eat Your Lunch, Faced With Growing Wall Street Scrutiny, Realogy Considers Going Private
• Potentially impacted stocks and ETFs: Realogy Corp. (H), streetTRACKS DJ Wilshire Mid Cap Growth (EMG), Rydex S&P Equal Weight (RSP)
TECHNOLOGY AND INTERNET
Google Q4 Earnings Will Take a Hit -- WSJ
WSJ has a bearish piece on Google Inc. (GOOG) this morning, saying "it may soon hit a speed bump:" The interest income it makes off its more than $10b in cash won't likely grow at the same rate as last year. In the first nine months of 2006 Google reported $290.3m in interest income, more than 5x 2005 and 4x Q4-2005. This increase contributed $0.20 to Q3 earnings per share of $2.36. Without the increase in interest income, says data provider Thomson Financial, EPS would have been 63.8% and not 78.8%. Such y/y comparisons will be tough to match in the current quarter: In Q4-2005 interest income was already $68.3 million. In this Q4 interest income could be around $115 million, a y/y increase of about 68%, but, "a far cry from the quadrupling just three months earlier." Interest growth this year was better than many expected, largely because of Google's second big stock offering in April, raising an additional $2.06b, and because the Fed kept raising short-term interest rates. But this means that interest income growth will fall again in Q2-2007. Barring another big stock offering quarterly interest income shouldn't go far from where it is now, meaning interest growth will keep shrinking, and the potential effect on overall growth will keep increasing. A Google spokesman said the company doesn't give earnings guidance and wouldn't comment on future interest income, but said Google's "practice has been to utilize our cash for business opportunities, not to generate interest." But he noted that Google has asked regulators for permission to put its cash in higher-yielding investments, which would increase interest income.
• Sources: WSJ
• Related commentary: I Think Yahoo Will Surpass Google In 2007: Here's Why, Gooptions: A Bearish Signal For Google Stock?, Google's 'Nowhere Near a Bubble' - Bear Stearns, When Google Crashes, The Web 2.0 Bubble Bursts, Google: Watch Out Down Below! -- Barron's, Barron's Sends Google Down $20 - Is It Right?. Conference call transcript: Google Q3 2006
• Potentially impacted stocks and ETFs: Google Inc. (GOOG). Competitors: Yahoo! Inc. (YHOO). ETFs: Internet HOLDRS (HHH), First Trust DJ Internet Index ETF (FDN), First Trust IPOX-100 Index (FPX)
Satellite Consolidation Continues Apace as Loral Acquires BCE's Telesat
In keeping with the growing consolidation of the satellite sector, the Telesat satellite unit of Canada's BCE Inc. will be acquired by Loral Space & Communications and a Canadian pension fund for about $2.8 billion. Loral's existing satellites will combine with Telesat's to form a new fleet, based in Canada, that will constitute the fourth-largest commercial fixed-satellite operator in the world. Customers use in-orbit satellites to transmit video and data to televisions and over the Internet. The new company will have a lease backlog of $5 billion (Canadian). The union, which joins Telesat's North American coverage with Loral's international business, is designed to compete with global satellite companies Intelsat and SES Global. It will also enable BCE to leave the satellite business and focus more exclusively on its core phone business. Telesat was an attractive acquisition target because its satellite fleet has been generating a steadily rising amount of cash in an area with little competition. One surprising feature of this acquisition was the amount of interest Telesat received from private equity players rather than competitors. Telesat is expected to post sales of $489 million in 2007 and generate EBITDA of $293 million.
• Sources: Wall Street Journal, The Globe and Mail
• Related commentary: Why I Am Now Considering BCE, BCE's Strong Performance Not Dependent on Income Trust Conversion
• Potentially impacted stocks and ETFs: BCE Inc. (BCE), Loral Space & Communications Ltd. (LORL) Competitors: Gilat Satellite Networks Inc. (GILT), Boeing Co. (BA), Orbital Sciences Corp. (ORB) ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA), Vanguard Industrials ETF (VIS)
Sony to Challenge Apple -- Will PSP Video Downloads Bear Fruit?
The Financial Times (FT.com) reports Sony will launch a video download service for its PlayStation Portable [PSP], likely in the first quarter next year. Business press coverage of the story suggests the service could challenge Apple's iTunes. iTunes meanwhile, has been part of a heated debate whether its sales are slowing. Sony's new service developed by Sony Pictures, which has not been confirmed by the firm itself, only works with the PSP (for now). First, a video has to be downloaded to a PC and then transferred to the device on a memory stick. Current PSP owners don't need any hardware upgrades, but may need to purchase a larger memory stick. To date, Sony has sold more than 20m PSPs globally, and is reportedly negotiating with download services such as Amazon, Movielink and CinemaNow. However, sales of disc-based movies formatted specifically to play on the PSP have not exactly been popular. Strategic Analytics, a technology research firm, estimates global sales of video downloads will total $298m this year, jump to $1.5b next year, and reach $5.9b by 2010.
• Sources: Financial Times
• Related commentary: Apple's P-to-P Movie Downloads To Eclipse Wal-Mart and BitTorrent, The Apple iTunes Debate Rages On, Wal-Mart To Launch Movie Downloads in 2007, Blockbuster Considering Downloads; Cuban: PCs Not HD-Ready, Microsoft's HD Movie Downloads: Not Yet Ready For Prime Time. Conference call transcripts: Sony F2Q06, Apple F4Q06
• Potentially impacted stocks and ETFs: Sony (SNE), Amazon (AMZN), Netflix (NFLX), Movie Gallery (MOVI), Blockbuster (BBI). Competitors: Apple (AAPL)
Warner to Buy Hard Rock Label Roadrunner
Warner Music has announced that it will purchase 73.5% of heavy metal label Roadrunner for $73.5 million. The Dutch label was founded in 1981 and has been distributed by Vivendi SA's Universal Music Group since 2001. With popular artists such as Slipknot and Nickleback, Roadrunner is the third-leading heavy metal label in the U.S. by sales volume and has been thriving as other labels have faced a decline in the past six years. Managing Director Cees Wessels is expected to remain with Roadrunner which will be joined with Warner's Atlantic Records Group in the U.S. and with Warner Music International overseas.
• Sources: New York Times, Wall Street Journal
• Related commentary: Warner Music Partners With Apple on DVD Albums; Stock Implications, Warner Music on Publishing Acquisitions, YouTube's Warner Music Group Deal , Warner Music Discusses its Digital Milestone. Conference call transcripts: Warner Music Group F4Q06
• Potentially impacted stocks and ETFs: Warner Music (WMG). Competitors: Sony (SNE)
Media Giants to Form YouTube Rival
Leading media companies including News Corp., NBC, CBS and Viacom are on the verge of announcing the creation of a website which will feature well-known television programs and other clips and is designed to compete with YouTube. While many media outlets initially dismissed YouTube as a passing fad of dubious legality, Google's $1.6 billion acquisition of the popular website in October spurred this unprecedented collaboration. The site is expected to generate revenues from advertising, will feature clips provided by the companies, and will encourage viewers to contribute their own videos. There is some doubt whether the deal will go through because of conflict of interest faced by MySpace parent News Corp. and by CBS because of its advertising agreement with Google. The announcement may be made by the end of the week; none of the executives involved wished to comment on the progress of the negotiations.
• Sources: New York Times, International Herald Tribune, Newsday, Motley Fool
• Related commentary: CBS Has the Right Idea: Network Television on YouTube, Here's Why News Corp. Won't Sue Google, User Generated Video to Grow to 4.6 billion views in 2007, YouTube versus MySpace Growth: No Contest.
• Potentially impacted stocks and ETFs: News Corp. (NWS), Viacom (VIA), CBS (CBS), General Electric (GE). Competitors: Google (GOOG)
Harrah's Receives Yet Another (Better) Buyout Offer
Harrah's Entertainment has received a new leveraged buyout offer from a combination of Apollo Management LP and Texas Pacific Group valuing the international casino operator at $90 a share - a 13% premium over the current price of $79.50 a share. The deal could be approved as early as today, although several media sources are reporting the deal as currently stalled over "unknown stumbling blocks." According to the NY Times, "'Some of the points are deal breakers,' one person said. 'but I think we’ll eventually get over them.'" Earnings for Harrah's last year came in at just $236.4 million on revenue of $7.1 billion, including nearly $11 billion in debt which means the full value of the takeover is really more than $27 billion. The deal would mean executives from Apollo and Texas Pacific would have to undergo a lengthy casino-licensure process in every jurisdiction where Harrah's operates casinos, delaying the full transfer of Harrah's properties by 12 to 18 months (if the deal failed to be completed by then, the prospective buyers would face penalty payments). The bid comes on the back of an $87-a-share cash-and-stock offer from regional casino operator Penn National Gaming Inc.
• Sources: Bloomberg, NY Times, Wall Street Journal, MarketWatch
• Related commentary: Who Will Acquire Harrah's This Time?, Penn National Bids For Much Larger Casino Peer Harrah's , Valuing the Casino Industry: Are There More Harrah's Out There?
• Potentially impacted stocks and ETFs: Harrah's Entertainment, Inc. (HET), Penn National Gaming Inc. (PENN). Competitors: Wynn Resorts (WYNN), Boyd Gaming Corporation (BYD), MGM MIRAGE (MGM), Las Vegas Sands Corp. (LVS), Trump Entertainment Resorts (TRMP).
ENERGY AND MATERIALS
Statoil to Acquire Norsk Hydro's Energy Business
Norway's state-controlled oil company, Statoil ASA, announced a plan to buy Norsk Hydro ASA's energy business for about $28 billion. When the dust settles, Statoil will control 70% of Norway's oil production placing in line to compete with other major European oil producers such as BP Plc, Royal Dutch Shell Plc and OAO Gazprom for reserves. The combined entity would have oil and gas production of as much as 1.9 million barrels a day in 2007. Norsk Hydyo shares traded up by as much as 26% in Oslo today.
• Sources: Press Release, Bloomberg, Reuters, Business Week
• Related commentary: Statoil: Norwegian Energy Bargain,Norsk Hydro: Commodity Price Beneficiary, Norsk Hydro: Unlucky or Just Plain Dumb?
• Potentially impacted stocks and ETFs: Statoil ASA (STO), Norsk Hydro (NHY). Competitors: BP Plc (BP), Royal Dutch Shell Plc (RDS.A), Total S.A. (TOT)
Japan to Partially Cash Out of Sakhalin-2
Reuters reports two of Japan's largest trading firms, Mitsubishi and Mitsui, are looking to cash in some of their combined 45% stake in the Sakhalin-2 natural gas project, according to sources close to the talks. The total project is reportedly valued at $22b. Concurrently, Royal Dutch Shell and both Mitsubishi and Mitsui are in negotiations with Gazprom to cede control of the project to the latter. It appears the Japanese trading companies are not seeking an exchange of shares for assets in projects in Russia. However, a separate source says Japan still expects to receive gas shipments from Russia. The Sakhalin-2 project has been surrounded by controversy due, among other things, to rising costs.
• Sources: Reuters
• Related commentary: Exxon's Sakhalin-1 Reaches Preliminary Deal with China Oil Giant, Royal Dutch Shell Resolves Environmental Snag at Sakhalin-2, Gazprom Ends Talks With West, Highlighting Rift
• Potentially impacted stocks and ETFs: Mitsui & Co (OTCPK:MITSY), Mitsubishi (Tokyo: 8058), Royal Dutch Shell (RDS.A), Exxon (XOM)
Express Scripts Undercuts CVS in Brazen Bid For Rival Caremark Rx
In a brazen attempt to undercut an already approved takeover bid by pharmacy chain CVS for pharmacy benefit services company Caremark Rx, rival Express Scripts has made a hostile $26 billion bid for the company - offering a premium of 20% more per-share than CVS' bid. Acceptance of the bid would mean a rescinding of CVS' offer, which Caremark's board has already accepted. CVS' bid came in at 1% less than Caremark's then stock price of $49 and failed to offer shareholders the goodwill premium usually associated with buyout offers, opening the door for the much smaller Express Scripts' much better counter-offer. Now Caremark (chart pictured) shareholders stand to receive $58.50, through a combined cash and stock offer (the CVS offer was for stock only). A clause at the time of the CVS-Caremark deal allowed Caremark to negotiate with anyone offering it a better deal mean its done-deal with CVS is reversible. If approved, an Express-Caremark merger would create the largest drug benefit services company by market cap in the world. Caremark shares rose 9.4% to 42 Euros ($55.02) in Germany today, after closing at $50.30 on the NYSE Friday.
• Sources: Press Release, New York Times, Forbes, Reuters, Bloomberg
• Related commentary: How the CVS-Caremark Merger Might Work (Or Not), CVS + Caremark = Un-Analyzable Company, CVS-Caremark Deal Would Create Pharmacy Powerhouse, Is CVS the Prescription Fix for Caremark?
• Potentially impacted stocks and ETFs: Express Scripts (ESRX), Caremark RX (CMX), CVS (CVS). Competitors: Medco Health Solutions (MHS), Wellpoint, Inc. (WLP). ETFs: iShares Dow Jones US Health Care (IHF)
Eli Lilly Accused of Promoting Off-Label Prescribing of Zyprexa
Eli Lilly has been accused by state and federal regulators of marketing Zyprexa, by far its bestselling product, to patients for whom it is inappropriate and possibly dangerous. Lilly is suspected of trying to offset a drop in sales that might have resulted from Zyprexa's side effects (weight gain and possibly diabetes) by promoting the writing of prescriptions to a wider spectrum of patients. Internal documents indicate that sales reps were encouraged to conceal the drug's side effects and to suggest that the drug, which is approved for use only for schizophrenic and bipolar patients, ought to be prescribed for elderly patients with dementia as well -- despite the fact that the F.D.A. warns that Zyprexa increases the risk of death among older patients suffering from that condition. Lilly also appears to have encouraged the prescribing of Zyprexa to patients suffering from depression, another condition for which it was not originally intended. Federal law forbids drug manufacturers from encouraging doctors to prescribe drugs to patients for whom their use has not been approved by the F.D.A., a practice known as "off-label prescribing." Illegal or not, the campaign appears to have been effective: Zyprexa sales doubled to $3 billion between 1999 and 2002, and last year, Lilly sold $4.2 billion worth of Zyprexa to over 2 million people worldwide.
• Sources: New York Times, Newsday
• Related commentary: Wall Street Unhappy With Eli Lilly's Forecast for 2007, Searching for Value Investments in the Drug Stock Universe
• Potentially impacted stocks and ETFs: Eli Lilly& Co. (LLY), Competitors: GlaxoSmithKline plc (GSK), Pfizer Inc. (PFE) ETFs: Pharmaceutical HOLDRs (PPH), iShares Dow Jones US Pharmaceuticals (IHE), SPDR Pharmaceuticals (XPH), Vanguard Health Care ETF (VHT)
Japan's Small Cap Weakness a Warning Sign for Global Small Caps?
Japanese smaller caps stocks have yet to fully recover from massive selling that started early in the year, induced by a securities fraud scandal involving one of Japan's most widely traded stocks. A Bloomberg journalist thinks this "may be a harbinger of what lies ahead for stock markets worldwide." 2007 is increasingly seen as the year of large caps, given slowing economic growth in Japan and the U.S., and also due to the continued out-performance of smaller caps, which makes large caps look more attractive, especially when considering their strong earnings growth. Another reason for small caps lacking popularity in Japan, even of late as the Nikkei has been rallying, is due to the weakening yen, which in most cases boosts earnings of the large cap exporters. Year-to-date, the Nikkei 225 Stock Average has gained 5%, while the Topix Small Cap Index has lost 12%. The Russell 2000 Index is up 18%, beating the S&P 500 by 4%. In Europe, the Dow Jones Stoxx Small Index is crushing the Large Index 30% vs. 16%.
• Sources: Bloomberg
• Related commentary: Seeking Alpha in Small Cap Japanese Stocks, Small Cap Stocks on SeekingAlpha
• Potentially impacted stocks and ETFs: Japan small cap funds: WisdomTree Japan SmallCap Dividend (DFJ), Japan Smaller Cap Fund (JOF), streetTRACKS Russell/Nomura Small Cap Japan (JSC). U.S. small and micro cap offerings by PowerShares: (PZI), (PZJ), (PWT), (PWY), iShares Morningstar: (JKJ), (JKK), (JKL), iShares Russell: (IWC), (IWM), iShares S&P: (IJR), (IJS), (IJT), streetTRACKS DJ Wilshire: (DSG), (DSV), Vanguard: (VB), (VBK), (VBR), WisdomTree: (DES)
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, excerpted from Seeking Alpha's One-Page Barron's Summary
- Barron's bullish cover story on ConocoPhillips (COP) calls it, "one of the biggest bargains in the energy sector and, indeed, among all of the world's largest publicly traded corporations, even though some analysts haven't yet awoken to the fact." Its 7x P/E ratio is the lowest among all the DJ Global Titans, making it "too cheap to ignore." Investors are currently paying only $9/barrel for its 10 billion barrels of reserves. Despite its massive $120b market cap Barron's still considers it a possible takeover target. It has received little credit for its growing oil-sands holdings which could hit 10x its present production (50k-500k barrels/day) by 2015. Shares closed Friday at $72.5, while its assets have an estimated value of $95/share.
- Jeff Everett, CIO of Templeton Global Equity Group, looks for unnoticed, undervalued stocks, to replace stocks with overambitious expectations. He replaced BHP Billiton Limited (BHP) with News Corp. (NWS) and Suez (SZE) with GlaxoSmithKline plc (GSK) because of its low valuation and vast resources. He also likes: sanofi-aventis (SNY) -- citing Rimonabant, its promising weight-loss drug. Media: News Corp, DirecTV Group Inc. (DTV) and Comcast Corp. (CMCSA). Financial: Merrill Lynch & Co. Inc. (MER), JPMorgan & Chase Co. (JPM). (4) Telecom: France Telecom (FTE), Mobile Telesystems OJSC (MBT), and Telenor ASA (TELN).
- Despite 18x revenue increases from 2001-2005 TurboChef (OVEN) continues to be the fodder of short sellers. They may be overlooking its potential -- its speedy ovens garner rave reviews and are in demand by commercial retailers like Dunkin Donuts, Subway and Starbucks. A high-priced residential model scheduled for March '07 could boost sales. And its small ($418m) market cap makes it a tasty dish for companies like General Electric Co. (GE) or Miele. Shares could climb another 40% this coming year.
- GPS chipmaker SiRF Technology Holdings Inc. (SIRF) took a dive last week after a Jeffries analyst said it lost its near-monopoly in supplying the two dominant GPS makers, Garmin (GRMN) and TomTom. But with 50% annual market growth, even amidst falling unit prices, SiRF bulls have a good case. And cellular operators will soon begin integrating GPS that will require chips.
- Wall Street seems to have missed the fact that Newfield Exploration Co. (NFX) has moved operations away from the Gulf of Mexico and into the American heartland, in the process boosting expected production 20-25%. Successful horizontal drilling in southeast Oklahoma should ensure stable onshore growth for years to come. Trading at a 15% discount to its peers and at a multiple of 4.5x expected 2007 cash flow, "this is a cheap stock."
- Like many regional banks, New York Community Bancorp Inc. (NYB) has been struggling with unfavorable interest rates and a housing slowdown. Its countermove has been to acquire a number of small banks that give it access to high-margin commercial lending. The strategy may not work for income investors, as its $1 dividend may need to be cut in the near future, but for speculators it may be worth a bet on the chance of a takeover, given the consolidation occurring among smaller commercial banks.
- Additional Barron's takes: (1) At 33x earnings Heelys Inc. (HLYS) looks toppy. If it rallies on Christmas sales, take profits. (2) The Brink's Company (BCO) is the latest activist hedge fund target; they want Brink's to sell part or all of itself. Late last week, Stanley Works (SWK) bought security-alarm monitoring company HSM Electronic for $545m, causing traders to re-evaluate Brink's, which has a market cap of nearly $3b. Lehman Brothers analyst Jeffrey Kessler raised his price target to $70 from $65, and said the sum of Brink's parts may warrant a price tag as high as $80. (3) MasterCard (MA) is pricey. Shares have surged 108% since their debut, compared with 14% American Express (AXP) over the same period. (4) Two of Jacob Internet stock fund's largest holdings are Napster Inc. (NAPS) and InfoSpace Inc. (INSP). Ryan Jacob likes InfoSpace's $400m+ cash, and says Napster's stellar brand and valuable customer base could be attractive to a larger online company or media concern. Other big bets: Google Inc. (GOOG), Yahoo! Inc. (YHOO), News Corp. (NWS.A). He has ditched holdings of Amazon.com Inc. (AMZN) and eBay Inc. (EBAY), calling e-commerce margins "too thin."
U.S. Markets: Bulls Take Note: 2007 May Not Be An Easy Year
Housing: How Far Will Housing Drag Down The Economy?
Long Idea: Week Three: The Dogs Of The Dow
Short Idea: The Ice May Be Melting For IntercontinentalExchange
Internet: Top 10 Tech Storylines of 2006
Telecom: Nokia-Siemens Telecom JV Delayed, But Not Dead
Hardware: Dell's Giving Investors Little Hard Data To Work With
Software: This Week's Trading Plan for Adobe
Consumer Electronics: Apple's Got the World in Its Pocket: The iPhone and Other Paraphanalia
Media: AOL May Give Top Executives the Boot
Healthcare: Encysive Stock Sinks After New of 'Incomplete' Response to FDA
Retail: Heelys Is Skating Downhill
Transport: Transports Fail to Join the Dow in its New Highs - A Worrisome Sign Indeed
Gold: One Is Silver and the Other Gold: Modern Day Alchemy of the US Dollar
Energy: Size Really Does Matter: In the Case of Uranium Stocks, Smaller May Be Better
Financial: A Quick Guide to the Highest Yielding Bank Stocks
Asia: China Medical Technologies Is On a Path For Success
ETFs: ETFs: What's Hot and What's Not?
Small-Caps: Avoca Declares a 'Disappointing' $720 Dividend for 2006
IPO Analysis: This Week's IPOs: Dayton Superior Corp, Claymont Steel, Fuwei Film, Melco PBL Entertainment, Oculus Sciences
Sound Money Tips: Weekend Roundup: From Comparison Shopping Sites to Eco-Friendly Lights
Jim Cramer: Latest stock picks
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