Tuesday, September 12, 2006


The WSJ's "Heard on the Street" column discusses Avis Budget (CAR), saying that some debt investors are betting it may follow the road taken by rival Hertz. That co was bought out late last year by private-equity investors. But Avis says it isn't headed that way. Avis has a few traits buyout firms typically find appealing: The shares look inexpensive, the co doesn't carry much debt and the business generates steady cash flow. The shares have plunged 25% since the start of August. The co has paid down much of the former Cendant's old debt, potentially creating room to add debt to finance a buyout, an acquisition or a shareholder-friendly activity like share buybacks or new dividends. Added to the mix is the presence of billionaire financier Carl Icahn, known for pushing firms to improve returns for shareholders. He disclosed last month that his stake in the co more than doubled to about 0.6%, or nearly $100m worth of shares at the end of June. "Avis is ripe for a buyout," said Frank Lee, of CreditSights. He adds that he doesn't think Mr. Icahn would have bought the shares if the financier didn't envision a shakeup of some kind at Avis.

"Tracking the Numbers" column highlights Shanda Interactive (SNDA), which in Nov'05 dropped a bomb: It was changing the business model for its cash-cow "massive multiplayer online role-playing games" from collecting rev through hourly or monthly fees to a "free to play" system. Under the new model, users join for free but pay to enhance their online-game experience with special weapons and accessories, a little like luxury goods for the virtual world. It was slow to catch on, and in this year's Q1, Shanda's net income plunged 95%, with rev down 31%. But lately, that business model, borrowed from S-Korea's hypercompetitive games mkt, has fared far better than expected. Shanda's Q2 net income was 10x as high as that of the Q1. Online-game rev rose 21%. It turns out that Chinese game players weren't satisfied with just one basic virtual sword. Some spent as much as 1K yuan a day to dominate games. Shanda CEO Chen Tianqiao has lashed out at Wall St. analysts he says he believes don't understand the Chinese mkt. Western investors and analysts, Shanda says, didn't appreciate how Chinese Internet users would like upgrading their online lives. "Players have a greater time enjoying the interactive communication more than the game itself," says Shanda spokesman Zhuge Hui. It has worked in S-Korea, too, where 2/3 of the top 30 online role-playing games use a similar model. According to iResearch, annual gains in the number of online gamers in China will slow to 10% in 2010 from an estd 38% this year. William Bao Bean, of Deutsche Bank, was skeptical of the free-to-play business model and admits he still isn't sure why it is working. But last month, he upgraded Shanda stock to Buy from Hold, with price tgt of $19.

Barrons' "Insider Scoop" section highlights H-P (HPQ), suggesting that it may be time for investors to capture some profits considering heavy selling by the tech giant's top execs. Eight senior execs and one director grossed a total of nearly $45.8m by selling about 1.3m H-P shares nearly all acquired through options over the past 90 days. "H-P is a huge elephant outperforming the mkt almost like a nimble small cap," says Mark LoPresti, of Thomson Financial, pointing to momentum behind the stock despite investigations into the legality of the probe initiated by H-P Chmn Patricia Dunn. Strictly from an insider perspective, he says that "as an investor following insiders you may want to take their lead and maybe now is the time to trim your stake or start tightening the stops."

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