By Saul Sterman
04/01/2007
Do you recall marketing 101? Here’s a quick recap. Use the ‘cash cow’ to build the ‘rising star’. Not bad, a whole semester in one sentence!
The Yum cash cow is the U.S. operation. Yum expects to eek out 3 to 5 percent earnings growth in the U.S. in 2007. The real story is using the generated cash to grow aggressively overseas. That’s good news because the U.S. is in the midst of a slowdown while Asia is still growing at a fast clip.
By CrossProfit
04/01/2007
In 2006 utility M&A activity started in February with Keyspan Corp (KSE) being acquired by National Grid (NGG) @$41.50 cash. We anticipated this move and expected final regulatory approval to be slow in coming to fruition. What ensued for the remainder of the year was more in line with wishful thinking than reality. A number of acquisitions were announced only to be terminated in the beginning of 2007. Nonetheless, Utilities have continued to trade at above normal multiples.
By CrossProfit
04/01/2007
Though Yahoo! is not a verb it is definitely a household word. There is no question that Yahoo! was asleep at the helm allowing the social networking and online video trends to cruise by.
Yahoo! is still number one in display advertising revenue. Yahoo! holds second place after Google in online search yet is ahead of MSFT, TWX and IACI. Panama should increase revenue in both display and search categories. We don’t think that Panama is meant to restore search click status and essentially Yahoo! is content with second place in this category. Panama’s market penetration will be assessed in Q4 2007. By then we will know if Yahoo! has succeeded in reversing the decline in margins and earnings as well.
AT&T (T) and American Movi (AMX)l are offering almost $3.5 billion to take over two-thirds of the holding company that controls Italy’s largest phone company, Telecom Italia (TI).
AT&T is doing the smart thing. Its cell phone business in the US has been a major growth engine, but wireless handset penetration is high and price cutting is almost the only way to pick up market shares. Cable company’s have a much larger beach head in the TV business and can offer most of their customers the dreaded triple play of voice, TV, and broadband service. Dislodging cable from its position with consumers will be expensive, and may not work at all.
AT&T ’s stock is up almost 70% over the last two years, far out-pacing the shares of rival Verizon (VZ). With slower growth just over the horizon in the US, picking up telecom companies overseas makes sense. All the better to squeezed telecom equipment vendors for better prices.
Buying the Italian phone company may be enough to keep Wall St. interesting in AT&T for a little while longer.
Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.
Late word from Germany is that DaimlerChrysler (DCX) will not let just anyone buy its Chrysler auto unit. The Wall Street Journal speculates that Daimler management will want to share technology with its US unit in the event that a sale goes through. He needs the new buyer’s cooperation.
That probably isn’t the real reason. Daimler chief Dieter Zetsche has a bunch of labor members on his supervisory board. They think, and are almost certainly correct, that if a private equity operation like Cerberus Capital Management or Blackstone Group gets its hands on the company, they will break it into pieces. They might even close units that don’t make money.
Canadian car parts company, Magna International, is also considered a likely bidder. But, since it gets business from Ford (F) and GM (GM), it is very difficult to see how it could own Chrysler without conflicts of interest.
The dark horse among potential bidders still has to be GM. If it can cut a proper deal with the UAW to take some workers out of a merged company, the economies of scale would work in its favor. It would be, once again, the largest car company in the world, by far. GM could certainly share technology with Daimler, which would become a producer of high-end cars and trucks.
GM management says that it is more important to them to be profitable than to be bigger than Toyota (TM). But, the GM board has to know at some level that if the company keeps getting smaller, it will be neither.
Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.
By Ryan Barnes of 24/7 Wall St.
Second Institutional Holder of EGL Questions Buyout Motive
Federated Kauffman filed suit against EGL Inc. (EAGL) on behalf of their Small Cap Fund this weekend, the second large shareholder to publicly denounce the management-led buyout, spearheaded by CEO James Crane along with private equity groups Centerbridge Partners LP and Woodbridge Company.
Crane announced on March 19 that he and his backers would take the company private at $38 per share. This was after he had already presented the board with another $38/share offer with General Atlantic as his backer; that deal subsequently was taken off the table after an earnings warning on February 7th sent the parties away from the table.
News of Federated’s suit comes after Ramius Capital sent a public letter to EGL’s board on March 21st questioning the timing of the new offer from Crane, considering that the Apollo Management group was known to be putting a separate private equity offer together for EGL. The Ramius letter contends that EGL management violated their fiduciary duty by rushing the re-vamped Crane pass the board before allowing Apollo to submit a bid with the proper due diligence. The letter even contends that the board stonewalled Apollo’s attempts to get records to
Making matters worse is the fact that the CFO resigned a few weeks ago, before the resubmitted buyout offer became public.
Making things downright ugly are the provisions in the management-led bid that call for a $30 million windfall termination fee to be paid to Crane in the event that another offer is accepted, as well as $15 million in “transaction expenses”.
Somebody should bring Crane a calculator and help him realize that since he owns just under 18% of the outstanding shares, an offer with a 10% premium to his own $38 bid would be worth over $28 million to Crane personally.
EGL stated that a goal in going private was to “keep our senior management team intact”, shareholders must be asking why that is in any way important, as the company has lagged behind its index for some time.
You can almost hear the professor at Wharton starting his lecture next fall…”Today’s lesson is about how to NOT go about privatizing your company. One of the best examples we have is that of EGL group, which this spring tried to sidestep the market to protect a few jobs.”
Main competitor UTI Worldwide (UTIW) suffered a mass exodus in its stock on Thursday, when an earnings report filled with margin pressure sent shares down 20%. The company had been getting a premium valuation up to that point, and the company now trades at a similar valuation to EGL
General Motors (GM) has problems in the big pick-up end of its business and is looking at producing a minicar a the other end.
According to Reuters, GM (GM) and Ford (F) may both have double-digit losses in sales when they report March because everything from slow construction to high gas prices is eating into pick-up purchases. Even problems in sub-prime lending are causing more caution at banks, some of which are raising car loan rates.
The news is especially bad because pick-ups are among the most profitable products Detroit has.
While Ford is hanging onto Jaguar and other under-performing units, GM is at least working on designing more fuel efficient cars.
According to The Wall Street Journal, GM may introduce a minicar in the US. The vehicle would get 50 mpg. The BMW MiniCooper does well in the US, and sales of tiny cars may well improve if gas prices spike over $3 and stay there.
Detroit is not getting any breaks, so it will need to make more of its own. Toyota (TM) has come after the big pick-up truck market with its new Tundra, but its is offering incentives of $3,000 to get drivers into the vehicles. That may force the Big Three to drop prices on their pick-ups. It’s not a good cycle.
The US car companies have not come up with any authentic plan to get investors back in their stocks other than to say that they will "make better cars". That does not seem to resonate when their sales keep dropping so quickly.
Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.
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