Pending Home Sales Climb Unexpectedly
The National Association of Realtors' index of pending home sales climbed an unexpected 0.6%, the second month in a row the number has increased, it said Monday. The latest figure, which measures contracts signed in October, confounded economists' forecasts of a 1% drop. September's reading was revised up to a 1.4% increase as well. "We're not likely to see any further collapse at this point," said Richard DeKaser, chief economist at National City Corp, who had forecast a gain. "I'm not optimistic about the outlook for the housing market, but we're scraping bottom in the fourth quarter." On a year-to-year basis, the NAR index dropped 18.4%. Two out of four the regions, the Northeast and the West, showed an increase since last month. The NAR held its forecast for the number of homes sold in the U.S. steady at 5.67 million for 2007, but inched up its 2008 forecast to 5.7 million from 5.69 million. Lawrence Yun, NAR chief economist, said the worst part of the credit crunch may be over. "The unusual mortgage disruptions that peaked in August were clearly seen in lower home sales that were finalized in September and October, so the market was underperforming," Yun said. "Now that mortgage conditions have improved, some postponed activity should turn up in existing-home sales over the next couple of months, and I expect sales at fairly stable to slightly higher levels."
STMicro to Pay $336M Cash for Genesis Microchip
STMicroelectronics (STM) said Tuesday it has agreed to acquire Genesis Microchip (GNSS) for $336 million ($8.65/share), a 60% premium to Monday's close and 26% higher than the average price over the past two months. STM will finance the deal with balance sheet cash. Genesis's display-controller chips receive and process video signals for viewing on flat-panel displays. Its back-end technology will add to STM's existing portfolio of STB and front-end video technology. "STMicroelectronics is a leader in digital consumer technologies, with a strong position in set-top box compression and decompression technologies and 'front end' processing technologies in digital TV," STM's Philippe Lambinet said. "Genesis is a leader in 'back-end' image and video processing and digital interconnect technologies. The combined company will have the products, technology, IP and expertise to offer best-in-class integrated DTV processing solutions." Morgan Stanley (MS) advised STMicro on the deal. Citigroup analyst Paraag Amin commented that based on consensus forecasts, the deal implies a price/book value ratio of 1.1x. "The combined company will have the products, technology, IP and expertise to offer best-in-class integrated DTV processing solutions," he said. Separately, Texas Instruments (TXN) noted in a mid-quarter conference call late Monday that seasonal wireless sales were below normal as a result of the deceleration of its 3G contract with Ericsson (ERIC), which Natixis analyst Gilbert Soubie said in a note is a positive for STMicro, for which volumes on the contract "seem to be increasing as expected." STMicro shares were down 1.1% in Paris trading Tuesday morning.
Texas Instruments Jumps in AH on Revised Outlook
Shares of Texas Instruments (TXN) gained 5% to $34.30 in late trading Monday, following the company's revised Q4 outlook in which it raised the low-end of its guidance, with the high-end still exceeding analyst expectations. Texas Instruments now sees Q4 EPS of $0.50 to $0.54, versus $0.48 to $0.54 previously, on revenues between $3.5B to $3.66B, compared to its prior estimate of $3.4B to $3.68B. Analysts were expecting $0.51/share on sales of $3.56B. Texas Instruments shares fell 8% on Oct. 23 after the company beat Q3 EPS estimates, but lowered its Q4 guidance (full story). Regarding concerns over slowing mobile phone chip sales due to heightened competition and increased multi-sourcing among customers, V.P. Ron Slaymaker commented, "It's still weak compared to what you might seasonally expect, but at the same time, it's doing a little better than we had expected in October" (financial update call transcript). Texas Instruments rose 0.6% to $32.67 in normal trading. Its main competitors are QCOM, STM and BRCM. Texas Instruments is among the top-holdings of ETFs SMH and IGW.
Lam to Buy SEZ for $568M for Wet Clean Growth
After the close Monday, Lam Research (LRCX) announced a deal to acquire SEZ Group for $568 million in cash, about 40% higher than SEZ's closing price. The price represents about 45% of Lam's total cash balance, leaving it with about $725M. SEZ is the leading supplier of single-wafer wet clean tools, with about 40% market share, and about 60% market share for single wafer tools, its fastest growing segment. The deal is expected to close by Q108, and Lam sees it as neutral to slightly accretive in 2008, depending on synergies realized. "This transaction positions Lam Research and SEZ to revolutionize the increasingly important area of wafer cleaning, combining the world's largest single wafer installed base with Lam's emerging clean technologies, process integration capabilities and global scale," Lam CEO Steve Newberry said. Part of the microfabrication process involves cleaning wafers before each critical step, including wet processes in which chemicals remove contamination, particles and impurities. In a note to clients, Citigroup analyst Timothy Arcuri wrote, "While M&A in this sector has been more often unsuccessful, we believe this is a good deal longer-term as LRCX has proven it can do well in a price competitive product segment and should also allow LRCX to be more strategic with R&D spend — which has cut into margins recently. Additionally, it suggests LRCX does not see business getting materially worse. Near-term, however, we would not be surprised if the stock trades down on the news."
Additional Reading: Lam Research F1Q08 (Qtr End 9/23/07) Earnings Call Transcript
Microsoft Lands Exclusive Web-Ads Deal With CNBC.com
Microsoft (MSFT) will be the exclusive provider of display and contextual advertising for the CNBC.com website, the company announced Monday. Financial terms were not disclosed. Contextual ads will begin immediately and display ads in March. CNBC.com attracts 2.6 million unique visitors per month, an audience Microsoft characterizes as "high-quality." "Inventory from the two sites (CNBC and Microsoft) will get aggregated together into a larger network for advertisers," said Jon Tinter, general manager of online strategy and business development at Microsoft. "We look at Microsoft as giving us the ability to come up with creative advertising solutions," said a CNBC representative. Microsoft has similar deals in place with Digg.com and Facebook. Ad syndication deals give Microsoft an opportunity to provide advertisers with a wider range of Internet sites for ad delivery and strengthen its position in the $40 billion web-ad market, where it competes with Google (GOOG) and Yahoo (YHOO). CNBC is a unit of General Electric (GE). Separately, Microsoft announced Monday its has begun placing ads on the U.S. version of MSN Mobile, a web portal for cellphone browsers. Microsoft already provides mobile ads in Japan and some European markets. Yahoo (YHOO) began selling mobile ads in the U.S. in late 2006 and overseas in February. Microsoft said the mobile ad service was a mix of its own efforts and those of $6B acquisition aQuantive and mobile-ad group ScreenTonic SA, which it bought for an undisclosed amount. Viacom's (VIA) Paramount Pictures and Jaguar cars will be among the first to use the system. MSN Mobile users will see either small graphics or text ads, depending on the size and quality of their screens.
Bankrate Soars on Acquisitions, Upgrade
Shares of Bankrate Inc. (RATE) soared almost 22% Monday after the bank-rate information aggregator announced two strategic acquisitions, and a Citigroup analyst upgraded the stock. Bankrate said Monday it is acquiring Nationwide Card Services, which markets a line of consumer and business cards via the internet, for $26.4 million. "NCS's affiliate network and strong platform, combined with our organic traffic, should provide the foundation for significant revenue growth in our credit card channel and a much better credit card offering to our consumers," Bankrate CEO Thomas R. Evans said. It also announced it acquired Savingforcollege.com, an internet portal for objective information about 529 college savings plans, for $2.25 million. "Our acquisition of Savingforcollege.com adds a wealth of great content and another source of organic Internet traffic to Bankrate," Evans said. "The valuable content of Savingforcollege.com will attract consumers to Bankrate's college financing area and enable us to leverage this new addition with our advertisers." Also Monday, Citigroup analyst Mark Mahaney upgraded the shares to Buy from Hold, despite advising caution in buying anything to do with mortgage/financial services. Mahaney said that in checks with Bankrate advertisers, they indicated continued commitment to spending, and noted new growth initiatives could be material in the coming year. He also appreciates that the firm has diversified away from mortgages, and said the shares are attractive at 10x 2008 Ebitda [earnings before interest, taxes, depreciation and amortization], noting the company holds $7.20/share in cash.
Overstock Plunges on Margin Concerns
Shares of online closeout discounter Overstock.com (OSTK) plunged more than 21% Monday after the company issued a press release subsequent to CEO Patrick Byrne's remarks during a CNBC interview Friday in which he warned Q4 gross margins would be lower than expected due to heavy discounting. "We are having a pretty nice Christmas," Byrne said in the interview, noting gross bookings were up 10% year-over-year during Q4 due to an increase in average transaction size. But Byrne also suggested Overstock's gross margins "would be lower than they have been in recent quarters due to aggressive sales promotions and discounting." The company expects net income of -1% to +1% of revenue, and Ebitda [earnings before interest, taxes, depreciation and amortization] of $5 to $10 million. In a note to clients Monday, CIBC analyst Davies raised her Q4 sales estimate to $325.7 million from $311.7 million, but cut her Ebitda estimate to $7 million from $13.2 million, and said she now expects a quarterly loss of $2 million instead of a profit of $4.2 million.
Focus Media Buys In-Store Advertiser CGEN
Chinese media company Focus Media Holding (FMCN) said Monday it will buy in-store digital ad company CGEN Digital Media for $168.4 million in cash. CGEN could earn an additional $181.6 million in cash and newly issued stock if certain targets are met in the two years after the deal closes. Focus's purchase will allow the company to expand its digital ads to large chain stores across China. CGEN's network of digital flat-panel displays are carried at about 534 stores across 65 cites in China; it has an estimated target audience of about 80 million shoppers. Shares of Focus increased 3.7% to $57.00 in Monday's session. CGEN was to have gone public in the U.S. this week, and planned to raise about $91.9 million in an IPO of 9.2 million American Depositary Receipts to be traded on the Nasdaq. It would have been the third Chinese digital advertising company to IPO in the U.S. over the last two months, following AirMedia Group (AMCN) and VisionChina Media (VISN).
Additional Reading: Lunch With Jason Jiang, CEO of Focus Media
Universal Music, Imeem.com Sign Streaming Media Deal
Vivendi's (OTCPK:VIVEF) Universal Music Group has reached an agreement with Imeem.com to offer free streaming of its catalog of music and videos through Imeem's popular (19M monthly users) media-focused social networking site. Universal is the last of the four major music labels to agree to such a deal with Imeem. However, Universal has a pending copyright infringement lawsuit against News Corp.'s MySpace related to its users' posting of copyrighted materials without permission. The difference appears to be Imeem's "ensuring that [our] artists are fairly compensated for the use of their works," according to a statement by Universal Chairman Doug Morris. The Wall Street Journal cites a source who said the Universal-Imeem deal has a guaranteed payment feature for Universal worth a fraction of a cent per song, in addition to revenue sharing from web advertising. Universal's E.V.P. Rio D. Caraeff said the deal is the company's largest deal to-date. "We're embracing the ad-supported business model. These are our crown jewels: on-demand, full-length tracks." Imeem's CEO said the company is "definitely not a music store," although it does link out to Apple's iTunes and Amazon, and said the deal provides labels "a revenue stream they've never seen before." Ordinary shares of Vivendi were last up 0.6% to €32.12 in Paris.
Additional Reading: Universal's Free Music: A Good Idea • For Media Companies, Consolidation Is a Matter of Survival
CompUSA Closure May Impact Other Electronics Vendors
Investors scrambled to understand the ramifications of CompUSA's announcement that it will close its final 100 stores by year end. According to the Wall Street Journal, Boston-based retail store liquidator Gordon Brothers Group will manage the closure of the stores and negotiate the sale of its real estate and other assets; two law firms have already been appointed to represent creditors. Syntax-Brillian (BRLC), whose Olevia flat panel monitors and TVs were carried by CompUSA, said in a press release Monday it has "no outstanding accounts receivables from this vendor as inventory shipped to CompUSA for the holiday selling season was paid for prior to shipping." It also said new retail partnerships with Target (TGT) would mitigate the loss of distribution via CompUSA. CompUSA is an authorized reseller of Apple (AAPL) products. Apple has not commented on any potential impact. A fire-sale of CompUSA inventory could theoretically impact sales at other consumer electronics vendors and retailers -- including Best Buy (BBY), Circuit City (CC), Costco (COST), Dell (DELL), and Wal-Mart (WMT) -- during the critical holiday selling season. However, a source cited by Consumerist predicted that CompUSA inventory would go on sale starting Wednesday with initial discounts of only 10%. Consumerist also claimed that previous CompUSA liquidation sales "sucked." In the longer term, the closure of CompUSA may be a net positive for the other consumer electronics retailers to whom its customers will migrate, although the closure may also raise questions about the viability of second tier pure-play electronics retailers such as Circuit City. Mexican retail and telephone magnate Carlos Slim lost about $2 billion on his CompUSA investment.
Bank of America Shutters $33B Enhanced Cash Fund
Bank of America's (BAC) Columbia asset management unit will shut down a large enhanced cash fund for institutional clients because of losses connected to the subprime collapse, the bank announced Monday. "Because of market conditions, we thought it best for the fund and its investors to unwind this particular investment vehicle over time," said Columbia spokesman Jon Goldstein. This is the largest enhanced cash fund -- meaning a fund that offers a higher yield than a money market fund by taking on more risk -- to fold so far during the crisis. Funds of this kind hold a collective $850 billion in assets. BAC's fund, called the Columbia Strategic Cash Portfolio, held $33 billion in assets at the end of November. $21 billion has been set aside for investors who have said they want out, and the remaining $12 billion will be wound down. "This could be the death of enhanced cash funds," said Peter Crane, founder of Crane Data. "It is not going to affect you or me, but certainly in the enhanced cash space this likely signals the beginning of the end." Some investors will receive their money at the fund's current NAV, which is $0.994 on the dollar. Others might receive certain assets. Assets in money-market funds hit a record $3.083 trillion last week as investors fled to safety. BofA shares closed up 2.9% at $46.67.
Additional Reading: Let's Get Some Perspective on Subprime
MBIA Sells $1B Stake to Warburg Pincus, Sees Further Writedowns
Shares of MBIA (MBI) surged 25% before closing up 13% at $33.95 Monday after the monoline bond insurer announced it will sell a $1 billion stake to buyout firm Warburg Pincus. The company also said it will take an additional writedown on its securities portfolio that is "significantly greater" than the $352.4 million writedown taken in Q3. The sale to Warburg will consist of $500 million of common stock and $500 million in a rights offering to be held next quarter. Last Wednesday, Moody's said MBIA was "somewhat likely" to experience a capital shortfall, a scenario that could lead to a downgrade (full story). The loss of MBIA's AAA rating would threaten the $652 billion of state, municipal and structured finance bonds it insures. The capital infusion from Warburg will avert that threat, at least in the short term. "[W]hether it is enough is the big unknown at this time," said Jim Ryan of Morningstar. Jonathan Weil of Bloomberg believes MBIA is no longer entitled to its AAA rating. "If MBIA is a AAA credit, then Britney Spears is fit to rejoin the Mousketeers," he said. "This horse isn't just out of the barn. It crossed the county line last Christmas and got itself killed trying to dodge traffic." Shares of fellow monoline insurer Ambac Financial (ABK), which is also under review for downgrade, rose 9.6% to close at $29.42.
Additional Reading: Despite Warburg Pincus' Investment, MBIA Needs More Capital Infusion
Freddie, Fannie to Cut Back on Delinquent Loan Purchases
Freddie Mac (FRE) said Monday that in order to preserve capital, it will cut the number of delinquent home loans it buys from pools underlying mortgage-backed securities. Fannie Mae (FNM) followed suit later in the day. Freddie Mac will purchase loans that are 120 days or more past due when they have been modified, a foreclosure sale takes place, or borrowers fail to catch up within 24 months. This is a change from prior policy of buying such loans soon after they reach 120 days past due. "This change will reduce the pace at which loans are purchased from pools and therefore reduce the amount of losses that Freddie Mac will be required to realize in the near term," said Citigroup bond analyst Brett Rose. Freddie Mac posted a record $2 billion loss in Q3 that cut its capital to just $600 million above a government-mandated minimum, forcing the company to sell $6 billion in stock and halve its dividend (full story). In related news, the Fed is planning to propose new regulations on lending practices that are expected to include a ban on prepayment penalties for certain subprime mortgages and a requirement that borrowers include money for taxes and property insurance in their monthly payments. Also, last week, Fannie Mae imposed a 0.25% fee on all new mortgage loans it purchases or guarantees "to ensure that what we charge aligns with the risk we bear."
Goldman Eyes UK Subprime Lender – London Times
Goldman Sachs (GS) is in talks to purchase UK subprime mortgage-lender Kensington from the South African investment bank Investec, The Times of London reported on its website. The newspaper said the talks were in the early stages, but could intensify in early 2008. Investec purchased Kensington in May of this year for $575 million to gain exposure to the UK subprime business. The timing of the move could not have been much worse, as the markets were subsequently hit by a global credit crunch, and Investec was forced to cut overhead and tighten its lending standards in order to stay in business. Investec issued a statement Monday denying any talks were taking place. The Times said Goldman is "eyeing a number of sub-prime lenders in the U.S." and UK. Also Monday, Goldman completed its acquisition of residential mortgage asset investor Litton Loan Servicing from C-Bass; terms were not disclosed, although when the deal was announced last month, a C-Bass owner said the Litton unit was being sold for about $468 million. In September, Goldman CFO David Viniar said the firm was hunting for "distressed assets." Goldman shares closed up 2.9%.
Additional Reading: An Analysis of Ben Stein's Beef with Goldman Sachs • Goldman Sachs F3Q07 (Qtr End 8/31/07) Earnings Call Transcript
Medarex Plunges On Disappointing Ipilimumab Trial
Biotech company Medarex (MEDX) and partner Bristol-Myers Squibb (BMY) announced Monday that one of three studies evaluating the cancer drug ipilimumab as a secondary treatment for melanoma failed to meet its primary endpoint. Medarex shares plummeted 19.5% to $10.75 in AH trading. The missed endpoint was to rule out a "best objective response rate of less than 10%," meaning the total or partial shrinking of tumors in at least 10% of the trial's subjects. Overall, the three trials indicated "a clear dose response effect" and objective response rates in the "mid-single digit to mid-teen range." The three trials involved 487 patients with advanced stage III or stage IV metastatic melanoma at centers around the world. Medarex and Bristol-Myers said the results were consistent with those of earlier studies. They are meeting with the FDA soon and plan to file for regulatory approval in H1 2008.
Reckitt Pays 37% Premium for Adams Respiratory
Reckitt Benckiser plc said Monday it will purchase Adams Respiratory Therapeutics (ARXT) for $2.3 billion in cash. Reckitt, maker of Strepsils throat lozenges, will pay $60 for each share of Adams, a 37% premium over Friday's close. Adams is a specialty pharmaceutical firm which focuses on late-stage development of pharmaceuticals for the treatment of respiratory disorders. Martin Deboo, an analyst at Investec Securities said, "They are paying quite a premium" for Adams, "it will be a challenge to unlock value." For the steep price, Reckitt, the word's largest maker of household cleaners, will add to its healthcare division and enter the U.S. market for over-the-counter drugs. Bart Becht, Chief Executive Officer of Reckitt Benckiser said, "The growth potential of the business, the importance of gaining an entry in the USA healthcare market, and the synergies available make Adams a very attractive addition to our portfolio." The deal will probably add to Reckitt's profits right away, it said excluding the $60 million in reorganization costs. Shares of Adams Respiratory Therapeutics closed up 35.8% to $59.30.
China's Inflation Hits 11-Year High, Trade Surplus Widens
The latest data from China show November inflation reached an 11-year high at 6.9% (vs. 6.5% in Oct.), topping expectations of a rise of around 6.5%, as the nation's trade surplus from the same month climbed 14.6% to $26.3 billion -- now at a record $238B year-to-date. Food prices, which make up a third of CPI, continued a shortage-induced double-digit rise, climbing 18.2%. Further monetary tightening is all but guaranteed. Societe Generale's Hong Kong-based chief Asia economist says, "Liquidity from the trade surplus will continue to cause the economy to overheat in 2008." He predicts the "yuan will need to appreciate at a firmer pace, interest rates will rise and the reserve requirement for banks will go to 17% by the end of next year." The yuan rose intra-day to its highest level against the dollar (7.3770), since the end of its peg in July 2005. Meanwhile, China's Nov. trade surplus was its third-highest ever and its surplus with the U.S. increased $15.2B to $149.2B YTD. Exports climbed 22.8% and imports rose 25.3%. Separately, in Japan consumer confidence fell to a four-year low in November, with subindices surveying overall livelihood and willingness to buy durable goods falling to 6-year and decade lows, respectively. Stocks closed higher across Asia including in Shanghai and Tokyo (see market summary). ETFs FXI, GXC and PGJ, as well as closed-end fund CAF, all offer U.S. investors broad exposure to Chinese equities. ETF EWJ and closed-end fund JOF are the most actively traded Japan funds, offering large-cap exposure in the former and featuring smaller-caps in the latter.
Additional Reading: Talk of China 'Overheating' Continues to Be Wrong • China Triples Foreign Investment Cap; Bumps Up Reserve Ratio • Chinese Investors' Casino Mentality May Make Sense Given the Alternatives
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