Sprint Rises on Takeover Rumor; SK Telecom Denies Interest
Shares of Sprint Nextel shot up 16% before settling up 4.4% at $22.42 in AH trading Monday after a news article said South Korea's biggest mobile carrier, SK Telecom, was planning to bid for the company. SK Telecom's shares also rose 4.5%. SK Telecom has denied the report, which appeared in the Korea Economic Daily. "We have no idea where and how the rumor has started, but it is not true," said SK spokeswoman Cindy Kang. Analysts consider a full buyout by SK Telecom unlikely in any case, since its $18 billion market cap amounts to less than a third of Sprint Nextel's $62 billion. A minority investment is a possibility, however, in view of SK's desire to expand its growth beyond Korea, where four out of five people have a cell phone. The article cited several unidentified brokerage sources who claimed SK Telecom has been in touch with private equity firms to discuss a joint bid for Sprint. SK operates Helio, a money-losing wireless JV with Earthlink, as well as a mobile joint venture in Vietnam. It also bought $1 billion of convertible bonds in China Unicom last year in a bid to tap the surging Chinese cellular market.
Sources: Reuters, MarketWatch, Bloomberg I, II
Commentary: Sprint's Customer Treatment Can't Be Good For Business • Sprint Admits It Is "Unable Meet Your Current Wireless Needs" • Is Sprint Next In Line For A Buyout After Alltel?
Stocks/ETFs to watch: Sprint Nextel Corp. (S), SK Telecom Co., Ltd. [ADR] (SKM). Competitors: Verizon (VZ), AT&T (T), Qwest Communications (Q). ETFs: Wireless HOLDRs (WMH), Telecom HOLDRs (TTH), Vanguard Telecom Services ETF (VOX)
Earnings call transcripts: Sprint Nextel Q1 2007
Home Depot Lowers 2007 Earnings Guidance
Home Depot has reduced its 2007 earnings forecast due to continued housing weakness. It also announced a tender offer for 250 million shares at a price range of $39-44 per share, amounting to up to $11 billion. The tender will expire on August 16. The company is now forecasting 2007 EPS at $2.30-2.36, a drop of 15-18% from last year's $2.79, versus a prior forecast of a 15% decline. Total retail sales for 2007 are now projected to slip 1-2% against a previous forecast of flat to 2% growth. Same-store sales are projected to drop in the mid-single digits. The new guidance reflects the discontinuation of HD Supply, the company's contractor-supplies business, which the company says will reduce earnings by $0.18. That unit has been sold to a private equity group for $10.3 billion. Factoring out that sale, the company's new EPS forecast comes to $2.48-2.54, below prior analyst expectations of $2.59. "While we expect the housing market to remain challenging for the rest of 2007 and into 2008, we plan to continue our reinvestment plans for the long-term health of our business, understanding that it will put short-term pressure on earnings," said CFO Carol Tome. Last month, the Home Depot board authorized a $22.5 billion increase in a stock buyback program.
Sources: Press release, Reuters, MarketWatch, Bloomberg
Commentary: Home Depot is Cheap, Regardless of Upcoming Guidance • Home Depot: A Great Value for Dividend Investors • Home Depot: The Cure Is Worse Than the Illness
Stocks/ETFs to watch: The Home Depot, Inc. (HD). Competitors: Lowe's Companies Inc. (LOW). ETFs: Retail HOLDRs (RTH), Vanguard Consumer Discretionary ETF (VCR), PowerShares FTSE RAFI Consumer Services (PRFS)
Earnings call transcripts: F1Q07
Danone Offers $16.76 Billion for Numico
A week after agreeing to sell its biscuit business to Kraft Foods for €5.3 billion, Groupe Danone has inked a deal to buy Dutch baby formula and nutritional bar manufacturer Royal Numico NV for €12.3 billion (€55 per share, or $16.76 billion). The price represents a 38% premium to Numico's Friday close. Numico holds 40% of the European formula market. The purchase is viewed by some analysts as an attempt by Danone to reduce its cash on hand and thereby reduce its attraction to companies that might have viewed it as a takeover possibility following the biscuit sale. It also vaults Danone into the position of a global operator in baby food and clinical nutrition (foods designed for the elderly or sick). "Numico has all the characteristics we like: health orientation, extremely good research and development, market leadership and exposure to high-growth markets," said Danone CFO Antoine Giscard d'Estaing. Numico is forecasting 10-12% sales growth in 2007 and its clinical-nutrition business has been growing about 11% every year since 2003, according to the WSJ. The company expects the acquisition to boost EPS by 3-4% next year. The purchase follows Nestle's agreement in April to buy Novartis's Gerber brand for $5.5 billion, a deal that will give the food giant an 82% share of the U.S. baby formula market.
Sources: Wall Street Journal, Bloomberg, MarketWatch
Commentary: Kraft Offers $7.2 Billion for Danone Cookie Unit • 4 Dairy Stocks To Watch
Stocks/ETFs to watch: Groupe Danone [ADR] (OTC:GDNNY). ETFs: PowerShares Consumer Goods ETF (PRFG), Consumer Staples Select Sector SPDR (XLP), Ultra Consumer Goods ProShares (UGE)
TRANSPORT AND AEROSPACE
Icahn Raises Lear Bid to $2.9B
Lear Corp.'s Board of Directors approved an amendment to the merger agreement with Carl Icahn's American Real Estate Partners [AREP] for a revised bid of $37.25/share (+3.5%) in cash, up from $36.00 ($2.75b). The Board "strongly encourages" a vote in favor of amended proposal. Lear's annual shareholder meeting scheduled for July 12 has been rescheduled to the 16th. AREP is entitled to receive $12.5m in cash and 335,570 shares of Lear if it doesn't receive majority approval. "The Lear Board concluded unanimously that the original merger agreement with AREP was fair and in the best interests of Lear's stockholders. The increased price makes the transaction even more attractive," said Larry W. McCurdy, Lear's lead independent director. However, AREP's bid still faces opposition from Lear's second largest shareholder, Pzena Investment Management LLC (8.6% stake vs. Icahn's 16%) and various advisory firms. Richard Pzena, chief of Pzena commented, "It's nice that we get an extra dollar, but it's not enough for us to vote for it, and I don't think it will be enough to sway any of the long-term players."
Sources: Press release, Bloomberg, Wall Street Journal
Commentary: ACP: The Icahn Premium is Overdone - Barron's • Board Urges Lear Corp. Shareholders To Approve Icahn Buyout Offer
Stocks/ETFs to watch: Lear Corp. (LEA), American Real Estate Partners LP (ACP). Competitors: Johnson Controls (JCI), Delphi Corp. (OTC:DPHIQ), Visteon Corporation (VC)
ENERGY AND MATERIALS
BHP Seeks Blackstone's Help In Alcoa Bid -- Times of London
BHP Billiton is seeking private equity help in a possible $40 billion takeover bid for Alcoa, according to The Times of London. BHP's first choice is the Blackstone Group, which recently went public itself, and which announced the purchase of Hilton Hotels last week. BHP would like Blackstone to spin off Alcoa's large downstream operation, which makes aluminum packaging, wheels and panels for cars and aircraft, and is best known for Reynolds brand aluminum foil, so it can focus on production and refining. A major reason Blackstone is preferred by BHP is that its special adviser is Paul O’Neill, former U.S. Treasury Secretary and Alcoa CEO from 1987-1999. BHP has also expressed interest in making a possible takeover bid for Canadian aluminum giant Alcan.
Sources: The Times of London, Reuters, MiningMX
Commentary: Analysts Skeptical of BHP Bid for Alcoa, Alcan; Shares of All Three Rise • Rio Tinto Hires Advisors in Possible White Knight Bid for Alcan -- Telegraph • Speculation Takeover Continues For Alcan, Alcoa: BHP, Rio Tinto Front-Runners
Stocks/ETFs to watch: BHP Billiton Limited (BHP), Blackstone Group (BX), Alcoa (AA). Competitors: Alcan (AL), Rio Tinto plc (RTP), Anglo American plc ADR (AAUK), Companhia Vale do Rio Doce (RIO). ETFs: BLDRS Asia 50 ADR Index (ADRA), PowerShares FTSE RAFI Basic Materials (PRFM), Vanguard Materials (VAW)
Earnings call transcripts: Alcoa Q2 2007
Related: Wikipedia: Paul O'Neill
ConocoPhillips Gains On $15 Billion Buyback Announcement
Shares of ConocoPhillips climbed 3.7% Monday on news the company plans to buy up to $15 billion worth of its own shares through the end of 2008. The buyback amounts to roughly 11% of Friday's market cap of $133 billion. Of the $15 billion, $2 billion was already announced in a February buyback announcement. The plan is to buy $2-3 billion worth of shares in both the third and fourth quarters, with another roughly $10 billion left over for additional buybacks in 2008. ConocoPhillips already trades at a significant P/E discount to its peers, with a ratio of 8.9, vs. 12.7 for Exxon and 10.9 for Chevron. Conoco also announced a quarterly dividend of $0.41 per share, resulting in a dividend yield of 2%. Shares closed at $84.05, a new 52-week high, on heavy volume of 17.9 million shares.
Sources: Press Release, Wall Street Journal, TheStreet.com, Dow Jones Newswires, Reuters, MarketWatch
Commentary: ConocoPhillips Could Teach Home Depot A Lesson On Buybacks • Integrated Oil Producers: Opportunity in Eni S.p.A. and ConocoPhillips • ExxonMobil and ConocoPhillips: Adios, Venezuela
Stocks/ETFs to watch: ConocoPhillips (COP). Competitors: Exxon Mobil (XOM), Chevron (CVX), BP (BP). ETFs: SPDR Oil & Gas Exploration & Production ETF (XOP), iShares Dow Jones U.S. Oil & Gas Exploration/Production (IEO)
Earnings call transcripts: ConocoPhillips Q1 2007 Earnings Call Transcript
Alcoa Reports 3.9% Drop in Q2 Net Income
Alcoa Inc. reported late Monday that Q2 earnings fell while revenue grew on higher aluminum prices and volumes. The earnings slide was attributable to continuing weakness in the U.S. housing and auto markets, as well as curtailment costs at two smelters and expenses incurred during an ongoing hostile bid for rival Alcan. Net income for the quarter came in at $715 million ($0.81/share), down 3.9% from $744 million ($0.85) a year ago but in line with expectations. Revenue was up 3.5% to $8.1 billion, shy of analyst forecasts of $8.34 billion. The results reflected a $0.02/share gain from the completion of a JV with Norway's Sapa Group, but also a $0.02/share cost associated with the Alcan bid. Profit was further shaved by $0.04/share due to costs at a Tennessee smelter that was shut down in April by a severe electrical storm and the closure for refurbishment of an aluminum-making potline at a Rockdale, Texas smelter. Raw aluminum prices were up 5.5% from a year ago to an average $2,728 per metric ton, though they were down from last quarter. Production was up 2.2% from last year to 901,000 metric tons. Alcoa has extended the deadline for its $27 billion offer for Alcan from July 10 to August 10. Alcan has rejected the bid as inadequate.
Sources: Q2 2007 Earnings Call Transcript, MarketWatch, Dow Jones, Bloomberg
Commentary: Alcoa Reports: Typically Lower From Open To Close, Regardless of Whether It Beats • Alcan Refuses to Enter Formal Discussions With Alcoa • Analysts Skeptical of BHP Bid for Alcoa, Alcan; Shares of All Three Rise
Stocks/ETFs to watch: Alcoa Inc. (AA), Alcan, Inc. (AL). ETFs: PowerShares FTSE RAFI Basic Materials (PRFM), Materials Select Sector SPDR (XLB), iShares Dow Jones US Basic Materials (IYM)
Shareholders Approve $11.9B CME-CBOT Merger
In a press release, CBOT Holdings Inc. and Chicago Mercantile Exchange Holdings Inc. [CME], said preliminary results of a shareholder and member vote indicate approval of the proposed merger of the two Chicago derivatives exchanges. The results are expected to be officially certified in the next few days. Last Friday, CME raised its bid for CBOT for a third time -- valued at nearly $12b -- delivering a knockout blow to rival bidder IntercontinentalExchange Inc. [ICE]. The Wall Street Journal reports analysts now see ICE as a takeover target, with NYSE Euronext as a potential suitor given its desire to expand in derivatives trading. The merged entity of CME-CBOT will be called CME Group Inc., a CME/Chicago Board of Trade Company, and "will be the world’s largest and most diverse exchange, providing products in all major benchmark asset classes," according to the press release. Shares of CBOT fell 0.5% to $222.82 and CME lost 0.7% to $570.58, while ICE rose 0.4% to $156.78.
Sources: Press release, Bloomberg, MarketWatch, Wall Street Journal
Commentary: CME Boosts CBOT Bid Again; Merger Approval Expected in Monday Vote • ICE-CME Exchange Wars: A Mexican Standoff? • ICE-CME Exchange Wars Redux
Stocks/ETFs to watch: CBOT Holdings, Inc. (BOT), Chicago Mercantile Exchange Holdings Inc. (CME), IntercontinentalExchange, Inc. (ICE). Competitors: NYSE Euronext (NYX), NYMEX Holdings Inc. (NMX), International Securities Exchange Inc. (ISE)
Johnson & Johnson Approves $10 Billion Buyback
Pharmaceuticals giant Johnson & Johnson announced Monday that its board has approved a $10 billion stock buyback. The buyback has no time limit and will be conducted on the open market. The company had about 2.9 billion shares outstanding as of April 29. The buyback, which will be financed through a combination of available cash and debt, follows a $5 billion repurchase that was completed at the end of last year. Johnson & Johnson has seen a decline in profit growth as generics compete with its Duragesic pain patch and demand for its Procrit anemia drug and Cypher stent miss expectations. "Stock repurchases could help them bridge some of the earnings gap until they can get new products onto the market," suggested portfolio manager Kent Croft. "I'd rather them do it this way than make acquisitions simply for acquisitions' sake." The buybacks could boost earnings by $0.11 per share, but do not preclude the possibility of acquisitions, according to Morgan Stanley analyst Glenn Reicin. He pointed out that J&J bought Pfizer's consumer health-care products division for $16 billion after the earlier buyback came into effect. Moody's and Fitch affirmed J&J's credit ratings and called the company's outlook stable.
Sources: Johnson & Johnson press release (buyback), Fitch press release (credit rating), Dow Jones, MarketWatch, Reuters
Commentary: Johnson & Johnson: No More Worlds To Conquer [24/7 Wall Street] • Why Buffett Loves Johnson & Johnson • Johnson & Johnson: Keep Your Money Safe
Stocks/ETFs to watch: Johnson & Johnson (JNJ). Competitors: Merck & Co. Inc. (MRK), Novartis AG (NVS), Procter & Gamble Co. (PG). ETFs: Pharmaceutical HOLDRs (PPH), Health Care Select Sector SPDR (XLV), Vanguard Health Care ETF (VHT)
China's Trade Surplus Hits New Record
China's customs bureau reported a record trade surplus of $26.9 billion in June, an 87% y/y increase, driven by exporters rushing to beat cuts in export tax rebates. Economists had expected a surplus of $23.8b on average. The yuan strengthened against the dollar ahead of the data release, for its biggest gain in a month to 7.58. The trade gap with the U.S. accounted for more than half of China's surplus. A Hong Kong-based Goldman Sachs economist commented, "This level of trade surplus is unprecedented for China or any other major economy in the world. China needs to tackle the root cause of its bloating trade surplus: the significantly undervalued currency." June exports climbed 27% to a record $103.3b, while imports rose 14% to $76.4b, the slowest rate in four months. China's first-half surplus totals $112.5b (+85% y/y). In 2006 its full-year surplus was $177.5b.
Commentary: The Economist Says There's No Housing Bubble in China • Investing In China: A Quant Perspective • China Readies Overseas Investment Fund
Stocks/ETFs to watch: iShares Lehman 1-3 YR Treasury Bond (SHY), iShares Lehman 7-10 YR Treasury Bond (IEF), iShares Lehman 20+ YR Treasury Bond (TLT). Currency funds: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE), CurrencyShares Japanese Yen Trust (FXY). China funds: Morgan Stanley China A (CAF), iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ)
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