Friday, June 08, 2007

Paperstand (TAXI, CMCSA)

The WSJ reports that a number of recent high-profile LBO deals are already showing signs of strain. Among them: the $1.3bn purchase of Linens 'n Things by a group led by Apollo Management; Avista Capital Partners' $530m buyout of the Star Tribune; and the $17.6bn deal for Freescale. Apollo's $6.7bn purchase of Realogy also is raising questions among some investors. For now, those deals are the exceptions, most of the recent buyouts have held up nicely or are at stages where it is too early to judge them. "I think these are one-off problems and not a signal of problems to come," says Victor Consoli, of Bear Stearns. "The economy is still fairly strong, the dollar is weak, [which] makes our exports more attractive, and the consumer is employed and still spending." But others are more cautious, noting that recent LBOs have included heavy dollops of debt, potentially causing problems as bond yields climb and the US economy runs into new obstacles. Co’s that have gone private in buyouts are generating cash that exceeds their debt interest payments by just 1.7x, vs 2.4x last year and 3.4x in ‘04. Still, it is striking how quickly a few of the deals have run into problems. The stumbles from LBO firms with impressive track records are a reminder that these deals can be challenging, especially when they take place in cyclical or struggling industries where cash flows aren't very stable. "Our concern is if there is more of a slowdown in the economy in the 2H," more co’s that have been taken private will run into trouble b/c of the significant debt they have taken on as part of the deals, says Jeffrey Rosenberg, of BofA.

“Heard on the Street” column out saying that small-bank investors who hope to snare big profits from a wave of takeovers in the industry may want to put their money elsewhere. That is b/c sellers, stung by a difficult operating environment that is bedeviling the industry, appear more willing than ever to hand over the keys to the vault without holding out for a big price. Such was the case yesterday when Yardenville National Bancorp agreed to be acquired by PNC Financial for $403m. Yardville has $3bn in assets compared with PNC's $123bn. The deal valued Yardville at $35 a share, making it a rare "takeunder" in which the acquisition price represents a discount to the target's trading price. "The sellers had been demanding a lot higher prices than the buyers wanted to pay, but with the continuing tough rev outlook, it's almost inevitable that you will see takeunders," says Jefferson Harralson, of Keefe, Bruyette & Woods.

Barron’s Online highlights Medallion Financial (TAXI), saying that recently, the price of a NYC medallion, which is affixed on the hoods of cabs, hit a record $600K. Medallion Financial will continue to benefit from the appreciating value of these licenses. The co, which owns 300 medallions itself, is also expanding its lending operations in several US cities. The co is also building a commercial lending business in lucrative niche mkts such as boats and RVs. All this expansion bodes well for Medallion's stock, which has been under pressure in the past year due to higher interest rates and development-related expenses. But, the shares are poised to outperform the mkt as Medallion starts partnering with medallion owners to take advantage of price appreciation, and as higher leverage boosts its lending capabilities and ROE in other niche loans. In addition, Medallion's 6.6% dividend yield offers a downside buffer as the co ramps up for a strong ‘08.

“Inside Scoop” section reports that Stephen Burke, Comcast's (CMCSA) COO and the president of the co's cable operations, sold $6.4m in Comcast shares on Mon. Burke's transaction included the sale of 208K class A common shares and 27K class A special common shares. The sale represented 88% of his class A common stake. Burke's sales follow on the heels of selling by Comcast's Chmn, CEO and President Brian Roberts. The CEO sold $9.4m, or 350K shares, of class A special stock. Ben Silverman, of, says that both the size of Burke's and Roberts' sales and Comcast insider history make the transactions hard to ignore. Comcast insiders have not been frequent buyers or sellers of co stock, according to Silverman. But, he adds, "When the insiders at the co have done so, they've done it wisely."

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