- Kinetic to be sold for $6.3B. A consortium comprising Apax Partners and pension funds has agreed to buy Kinetic Concepts (KCI) in a deal worth $6.3B, including outstanding debt. The $68.50/share offer is above the medical device company's close yesterday of $64.49. Kinetic has been the subject of takeover speculation this month, with Blackstone (BX) reportedly having been in talks to buy the company for $5B in a leveraged buyout.
- European banks strengthening defenses. European banks are reining in cross-border lending to Spanish and Italian companies and depositing more money with the ECB as they shore up their defenses against the debt crisis. Markets calmed down yesterday over Italy but got renewed jitters after Moody's became the first ratings agency to downgrade Ireland to junk, saying it will probably need another bailout. The EU leaders will reportedly meet again on Friday to discuss Greece, with the roadmap now a plan from the powerful Institute of International Finance to buy back the country's debt at a discount and exchange its bonds to reduce its debt-servicing burden.
- Draghi: Italian banks to pass stress tests. Italian bank shares may have taken a pounding this week over their exposure to their country's debt, but incoming ECB President Mario Draghi says they will easily pass EU stress tests, the results of which are due on Friday. Following capital increases, the estimated core Tier 1 ratio at the five biggest banks had risen to 8.6% from 7.4% at the end of 2010 vs. a pass mark of 5%. Six Spanish banks have reportedly failed the tests, although the failures appear to be technical.
- Validus offers $3.5B for Transatlantic. Reinsurer Validus Holdings (VR) has bid $3.5B to buy Transatlantic Holdings (TRH) in cash and shares, topping a $3.2B offer from Allied World Assurance (AWH). Validus' proposal of $55.95 is also 14% higher than Transatlantic's $49.02 closing price yesterday. Any transaction would add to the trend of consolidation among smaller reinsurers as they look to diversify and gain scale, with clients and investors preferring carriers with larger capital bases.
- Capital One Q2 profit jumps, to sell shares. Capital One's (COF) Q2 net income surged 50% to $911M and easily beat expectations, while revenue climbed 2.2% to $3.99B and provisions for bad loans halved. COF also said it would sell $2B in shares to help it pay for its acquisition of ING Direct (ING).
- NY AG looks into $8.5B BofA pact. Bank of America's (BAC) $8.5B settlement over losses on mortgage bonds, which some investors object to, has come under further pressure. New York AG Eric Schneiderman has sent letters to 20 investors asking whether public agencies or state-affiliated pension funds were included in the pact. This indicates he may challenge it in court. Separately, U.S. House Democrat Brad Miller has suggested the agreement could be too low and unfair to taxpayers, as Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) "suffered substantial losses" on securities covered by the settlement.
- Bernanke due before Congress with Fed divided. Ben Bernanke is expected to warn Congress in two-day testimony starting today against steep near-term spending cuts because of the tepid economy, as well as against not raising the debt ceiling. However, his appearance comes as minutes from the last FOMC meeting show the Fed divided over whether it may need to increase easing or withdraw it sooner than expected because of inflation, and with the bank's toolkit looking increasingly bare.
- Senator calls for U.S. inquiries into News Corp. Jay Rockefeller, a Democratic Senate committee chairman, last night became the first senior politician to call for U.S. investigations into the phone-hacking scandal at News Corp. (NWS). The allegations "raise serious questions about whether the company has broken U.S. law," he said. Any probes would add to those in Britain, where MPs have coalesced around a bill, albeit non-binding, calling on News Corp. to drop its bid for BSkyB (OTCQX:BSYBY). As a sop to investors taking fright over affair, News Corp. is increasing a share buyback to $5B from $1.8B.
- China's strong GDP suggests tightening may not be over. China's Q2 GDP fell to 9.5% from 9.7% in Q1 but beat expectations as the economy maintained its strong growth despite a series of rate hikes to control inflation. In addition, June industrial output unexpectedly rose 15.1% and retail sales 17.7%. Economists had thought that China's rate increase earlier this month would be its last for the year, but with Premier Wen Jiabao's reiteration yesterday that slowing down inflation is the top priority, the strong data places doubt on this forecast.
- EA to buy PopCap for up to $1.3B. Electronic Arts (ERTS) has agreed to buy PopCap Games, the provider of "Bejeweled" and "Plants vs. Zombies," for up to $1.3B in cash and shares. The deal will widen EA's portfolio into social and casual video games and help it to better compete with Zynga. EA's shares closed -0.9% as investors showed concern about the strategy and the high price, although one said that Zynga's upcoming IPO would change opinion. EA also offered mixed earnings guidance, raising its revenue estimates and narrowing its FQ1 loss forecast, but predicting an unexpected FQ2 loss.
- RIM's co-CEOs have six months. RIM's (RIMM) co-CEOs and Chairmen have six months to 'prove' the management structure works or face the reintroduction of a measure to split the roles. Northwest & Ethical Investments gave the warning, having dropped a proposal for a vote on the issue at yesterday's AGM after RIM agreed to study it. RIM may be having a tough time but it's getting support from carriers, which are beginning to feel increasingly threatened by the growing prominence of Apple (AAPL) and Google (GOOG).
- Still no progress. Democrats and Republicans will meet again for a fourth straight day as the deadline for raising the debt ceiling looms closer. President Obama played to the emotions yesterday with a warning the government might miss payments to the elderly, veterans and disabled, while John Boehner again changed his mind and indicated an openness to a $4T grand bargain. However, a proposal from Republican Mitch McConnell to let Obama raise the limit by $2.4T in three installments and so take the political flack for doing so looks fairly unlikely.
Earnings: Wednesday Before Open
- ADTRAN (ADTN): Q2 EPS of $0.56 beats by $0.02. Revenue of $184.2 (+22.5% Y/Y) in-line by $B. Shares (PR)
- ASML (ASML): Q2 EPS of €1.00 beats by €0.06. Revenue of €1.53B (+5.3% Y/Y). Shares -0.5% premarket. (PR)
- Capital One (COF): Q2 EPS of $1.97 beats by $0.20. Revenue of $3.99B (+2.3% Y/Y). (PR)
- In Asia, Japan +0.4% to 9963. Hong Kong +1.2% to 21927. China +1.5% to 2795. India +1.0% to 18596.
- In Europe, at midday, London flat. Paris +0.1%. Frankfurt +0.3%.
- Futures at 7:00: Dow +0.4%. S&P +0.6%. Nasdaq +0.6%. Crude flat at $97.40. Gold +0.75% to $1574.00.
Wednesday's Economic Calendar
- 7:00 MBA Mortgage Applications
8:30 Import/Export Prices
9:00 Ceridian-UCLA Pulse of Commerce Index
9:10 Fed's Rosengren: 'Collaboration and Leadership in Smaller Industrial Cities'
10:00 House Hearing: Monetary Policy (Bernanke)
10:30 EIA Petroleum Inventories
1:00 PM Results of $21B, 10-Year Note Auction
1:20 PM Fed's Fisher: Economic Outlook
2:00 PM Treasury Budget
2:45 PM SIFMA Conference: Dodd-Frank Impact Analysis
- Notable earnings before Wednesday's open: ADTN, ASML, COF
- Notable earnings after Wednesday's close: MAR, YUM
The Market Currents team contributed to this post.
Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.