Friday, March 23, 2007

Paperstand (C, HRB, VLO, BCS)

The WSJ’s ”Heard on the Street” column reprots that a faction within Citigroup (C) is pushing Chmn and CEO Charles Prince to bid for ABN Amro (ABN). The Dutch banking giant announced earlier this week that it is in exclusive talks about being taken over by Barclays. An offer by Citigroup could assuage some of the problems that have plagued the world's largest bank. But it would be difficult: Since ABN's negotiations with Barclays are exclusive, any move by Citigroup would have to be unsolicited, and might be considered hostile. Still, Citigroup has been studying how well ABN would fit as a possible acquisition tgt. The 2 banks have complementary businesses in the US and Latin America, and a deal would give Citigroup a stronger foothold in continental Europe. There also is the possibility that Citigroup could push for part of ABN's assets, such as LaSalle Bank or Banco ABN Amro Real. Hostile takeover bids in the banking industry are difficult to win, and hostile deals of all stripes are particularly tough in the Netherlands, where co’s enjoy many defenses that aren't allowed elsewhere. The Dutch central bank has already said it would frown on such a situation.

“Ahead of the Tape” highlights H&R Block (HRB), whose CEO Mark Ernst, has said repeatedly the co will announce whether it has reached a deal to sell Option One Mortgage by the end of March. But it may have to lower its $1.3bn asking price on the unit, which deals in risky subprime mortgages, if it wants to cut a deal by then. In regulatory filings, H&R Block said Option One's delinquency rate in its F3Q rose to 11.2% from 5.6% last year. B/c of a jump in defaults, the lender recorded loan-loss provisions of $111.1m, a nearly 750% increase from $13.1m a year ago. Of those delinquencies, 84% were on loans written during previous qrtrs, indicating that H&R Block had sharply underestimated the increase in defaults, and raising questions about whether loan-loss provisions will have to be raised again, diminishing the value of the co. "There are likely to be more provisions in the future, and you would think an astute buyer would know that," said Donn Vickrey, of Gradient Analytics. Pressure is building as the unit drags on H&R Block's stock, down 12% since the end of Jan. Last week, S&P's said it may downgrade its credit rating on H&R Block's ability to meet certain financial obligations due to the impact of Option One's mortgage operations. That puts greater pressure on H&R Block to unload Option One, as a downgrade could pinch other parts of the H&R empire, according to UBS. Tick tock, tick tock.

Barron’s Online out saying that shares of US oil refiners have pumped out high-octane returns in recent years. But the biggest among them, Valero (VLO), could still produce a refined performance in the coming year. In N-America, Valero is bigger than Exxon or BP in its capacity to turn crude oil into gasoline, diesel and other fuels. At 18 refineries, many on the Gulf of Mexico coast, it can produce 3.3m barrels of refined product daily. With cumulative stock returns of nearly 400% over 5 years, it's reasonable to ask if Valero's run is over. While triple-digit returns may not continue, the stock has fallen about 13% from its all-time high reached last April, and dividends are on the rise. Refining demand is strong going into the summer-driving season, capacity is tight, and interruptions - for repairs or to crude supplies - would boost the prices Valero can charge customers. That scenario should last for several more years, given the industry's limited ability to expand. "This is a perfect storm, when everything goes right for the refineries," says Fadel Gheit, of Oppenheimer.

“Inside Scoop” section reports that longtime Bear Sterns (BSC) director Paul Novelly is making a bullish call on the financial-services giant as the stock pulled back from its record high. In the two previous trading days, Novelly doled out $6.67m to purchase 45K shares on the open mkt. Novelly now directly holds 170K shares of the co plus another 2,900 restricted shares. Ben Silverman, of, says Novelly's purchase is notable considering that he "is someone who is self-made, who understands how to create wealth and manage it… through the good times and the bad."

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