Wednesday, August 23, 2006


The WSJ's "Long&Short" column discusses provate equity latest actions. Lately bunches of companies are experiencing every teenager's nightmare: They're holding parties that no one attends. Last week, Jones Apparel (JNY) took itself off the block when private-equity firms wouldn't meet its price. This month has seen a spate of similarly failed auctions, big-screener Imax (IMAX), biotech ImClone (IMCL), auto-parts retailer Pep Boys (PBY) and fitness-club chain Bally Total Fitness (BFT). After the relentless drumbeat about how much cash the deal-happy private-equity world is sitting on, why are so many of these public auctions stumbling? "There's a little bit of hype about taking companies private. I heard the other day that someone wants to take Microsoft private, which is absurd," says Barry Ritholtz, who runs his own investing-strategy boutique. But the spate of failed deals "makes you wonder, what are these things really worth?" So why do co's put themselves out there? It's like including the phrase "Date me, I'm desperate" in your entry.

According to the WSJ's "Heard on the Street" column, in today's energy-stock sector, investors might want to borrow a credo from Watergate-era reporters: Follow the money. Thanks to soaring energy prices, the world's biggest oil and natural-gas co's are sitting on mountains of cash. Exxon Mobile (XOM) had more than $32bn in its coffers at the end of June. At the same time, Royal Dutch Shell,Chevron (CVX) and BP (BP) had a total of more than $26bn in cash. So, where will that money go? While shareholders likely will benefit from higher dividends and share repurchases, a big chunk of the cash will go toward building infrastructure projects required to get the next generation of oil and gas out of the ground, refined and brought to mkt. That is good news for engineering co's such as Jacobs Engineering Group (JEC), Foster Wheeler (FWLT), Chicago Bridge&Iron (CBI) and McDermott (MDR), which are seeing a buildup in backlogs of multiyear projects. "We're going to have to spend more capital to increase energy supplies," says John Segner, manager of the $1.5bn AIM Energy Fund. "And I think we're in the very early innings of doing that." This thesis led him to add Chicago Bridge stock to his fund's portfolio last fall.

According to the WSJ's "Tracking the Numbers" column, Sovereign Bancorp's (SOV) stock has been stuck in neutral all summer but could soon slip into reverse. The reason: Banco Santander Central Hispano (STD) is poised to stop its daily purchases of hundreds of thousands of the bank's shares. In early June, Sovereign sold a nearly 20% stake in itself to Santander for $27 a share, about 27% above where the stock was trading at the time. The sale was part of an investment agreement that allows the Spanish bank to keep buying Sovereign shares until its stake hits 24.99%. Since then, Santander has been snapping up millions of dollars in shares, sometimes more than 600K in a single day. These purchases, made in the open mkt, routinely account for 30% or more of the daily trading volume in Sovereign shares. That buying has put a floor under Sovereign's stock price, which has hovered between $20 and $21, despite some analysts' doubts about the strength of the bank's business. The Spanish support is about to come to an end, if it hasn't already: As of Friday, the last day Santander disclosed its buying activities, the bank's Sovereign stake had climbed above 24.8%. Assuming the same buying pace, Santander is about to hit the 24.99% or has already done so, according to BofA analyst Kenneth Usdin. When Santander stops buying, Sovereign's shares could come under pressure, or at least trade in line with other banks. "I think it could weigh on the stock in the short term," Joseph Fenech, an analyst for Sandler O'Neill, said of the end of Santander's share purchases. "The stock really hasn't gone up, even though Santander has been aggressively buying. I wouldn't be surprised to see some weakness heading into September."

Barron's Online discusses favorably BP (BP), whose shares have fallen 3% since the co announced Aug. 6 it would cut production in Alaska's Prudhoe Bay to patch a leak and fix corrosion. BP's largest competitors, save ConocoPhillips, are up about 2% in the same period. The Alaska shutdown was the latest in a list of recent setbacks, from a deadly Texas refinery fire to deepwater-rig damage. But those factors are already in the stock, the worst performer among Big Oil shares in the past 12 months. In fact, investors may well have overreacted, alarmed by the drop in oil and natural-gas prices during the past 2 weeks. Now BP shares look reasonably priced, especially considering Alaska is less than 3% of BP's expanding global production. "BP has been caught napping at the wheel," says Fadel Gheit, of Oppenheimer, of the Alaska situation. "But the investor will put [the shutdown] aside because it will not have a meaningful impact on earnings. It is a hiccup."

According to the Barron's Online, Saks' (SKS) Chmn has sold nearly 2.3m shares of the operator of dept-store chains for a total of $34.4m following a disappointing Q2 report. Saks was identified as a potential tgt for a private-equity offer after Bon-Ton Stores agreed to acquire Saks' Northern dept-store division for $1.1bn last Oct. But Jonathan Moreland, director of research at, says that Chmn's selling seems to signal that a buyout is not on the horizon. "The idea of a private-equity firm scooping [Saks] up for much more than it's trading for, given the chmn's transactions, is just not likely," Moreland says.

No comments: