Thursday, August 16, 2007

Paperstand (KFT, CHRT, BZH, EMC, VMW, C, CFC)

According to the WSJ, Kraft (KFT) is in the early stages of finding a buyer for its Post cereals business, the No. 3 US cereal maker by sales after Kellogg and General Mills. A logical bidder would be PepsiCo (PEP). Post may fetch as much as $3bn. Kraft has sent financial information on the unit to potential bidders and if the unit is successfully auctioned, a deal could be signed later this year.

According to the WSJ, Charter Comm.'s (CHRT) controlling shareholder, Paul Allen, is considering a wide range of options for the co, including a privatization and sale. Mr. Allen, who controls a 51.7% stake in Charter and 91% of the voting power, said in a regulatory filing that he may pursue a privatization in which he would acquire all of the stock he doesn't own. At Charter's current stock price, that would amount to about $1bn. The filing also said he may look at a recapitalization or restructuring to reduce Charter's leverage. In addition, it said he may consider "other extraordinary corporate transactions, such as mergers or reorganization or sales of material assets."

"Heard on the Street" section discusses Beazer Homes (BZH), whose shares have been on a wild ride this summer as investors tussle over the outlook for the co. Those betting against Beazer now might have the upper hand. Its recent disclosure of accounting irregularities is expected to accelerate a months-long govt inquiry that began in May. Late last week, Beazer said its former chief accounting officer improperly recorded "reserves and other accrued liabilities." The disclosure is expected to bolster an investigation by the SEC related to whether Beazer violated securities laws. While home-builder stocks have been hurt by the turmoil in the housing and credit markets, Beazer's share price has been hurt more than most. In addition to the investigations, the co has been beset with rumors that it was going to file for bankruptcy-court protection. Beazer has called the rumors "scurrilous" and "unfounded." One possible focus of the SEC's inquiry is whether Beazer was properly disclosing its mortgage practices to investors. Accounting irregularities in the co's books, however, can be easier for investigators to pursue. "So far, everything suggests the mortgage issues were a local problem," says Robert Curran, of Fitch Ratings, "whereas the accounting issue appears to be a corporatewide problem." He said the disclosure raises the possibility Beazer may have to restate prior earnings or take a charge when an eroding housing mkt has already battered the builder's profits.

Barron's Online out saying that investors buying EMC (EMC) on the dip could get a cool 40% discount to VMware's (VMW) hot shares, effectively buying VMware's 84c per share in earnings next year at a P/E multiple of just 42x vs the 67x multiple the mkt is paying for VMware shares outright. EMC owns 86% of VMWare. Throw in the prospect of 17% earnings growth for the rest of EMC, excluding VMware, and there could be 20% or more upside to EMC stock over the next 12 mo's. "We bought more EMC yesterday; we couldn't believe it sold off," says Christopher Baggini, of Gartmore Funds.

"Inside Scoop" section reports that hedge fund manager Eddie Lampert boosted his stake in Citigroup (C) amid mounting credit woes that have taken the floor out from beneath the financial sector. By the end of the 2Q, Lampert's hedge fund, ESL Investments, raised its stake in Citigroup to 24.8m shares from the 15.2m held as of March 31. Lampert started buying Citigroup shares through an affiliated fund called RBS Partners in early '06 and has accumulated 10.9m shares by the end of the year. Ben Silverman, of, says Lampert apparently "sees value to be unlocked in that name over the long term."

NY Post reports that the mortgage industry meltdown may be about to claim its biggest victim yet. Countrywide Financial (CFC), the nation's No. 1 mortgage lender, appears headed for a financial crisis as speculation swirled on Wall St. yesterday that the co is having trouble finding buyers for the ultra-short-term corporate debt it uses to fund its daily lending operations. Adding to the mkt's jitters about Countrywide's liquidity, a Merrill Lynch analyst yesterday cut his rating on the co's shares from Buy to Sell, warning the co could be headed for bankruptcy if the cracks in the mortgage industry continue to deepen. "If enough financial pressure is placed on Countrywide or if the mkt loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency," Kenneth Bruce, the Merrill analyst, wrote in the report urging investors to dump their shares. Only 3 days ago, Bruce told investors they should consider buying the shares. "We have quickly re-assessed our position . . . b/c the financial mkt situation appears to be getting worse at an accelerating pace," Bruce said yesterday.

Hedge-fund managers have no shame at all...

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