Daily Archives: September 23, 2007

Dell’s Huge China Deal

Dell (DELL) may have made its biggest move since the return of Michael Dell to demonstrate that it is serious to turn itself around. According to The Wall Street Journal, Dell has set up an agreement with Gome Group, China’s largest electronics retailer, to offer the PC companies products in its stores. It has 1,000 of them in 168 cities.

China is the world’s second largest PC market, and its is growing much faster than the US and Europe.

Dell still has a great deal to prove to investors. Its direct-to-customer model turned out to have limitations, and companies like HP (HPQ) are well ahead in terms of global retail networks. So far this year, Dell’s shares are up a bit over 10%, but HP’s have gained almost 25%. There has also been a question about whether more aggressive competition from Lenovo and Acer would  further cut Dell’s market shares.

Hewlett-Packard saw its notebook shipments jump by 77 percent, year over year, during the second quarter while Acer saw its growth jump by 74 percent, according to DisplaySearch. Dell’s shipments moved up only 10% over the same period.

Douglas A. McIntyre

Posted on: September 23, 2007 – 7:49 pm in China, ,

China Shenhua Energy: A $9 Billion IPO

According to Bloomberg, China Shenhua Energy, the nation’s largest coal producer, plans to raise $8.9 billion to fund expansion in what would be the largest IPO in the world this year. The company is already listed in Hong Kong. The new shares will be sold in Shanghai where they can be purchased by the Chinese.

Coal sales at Shenhua, which has reserves second only to Peabody Energy Corp., the world’s biggest publicly traded coal producer, climbed 21 percent to 97.8 million tons in the first six months, Bloomberg writes.

The deal is probably only possible because the Shanghai market is up over 200% in the last year.

Large Chinese companies should raise money as quickly as they can. This won’t go on forever.

Douglas A. McIntyre

Posted on: September 23, 2007 – 4:21 pm in China

Which Private Equity Deal Fails Next: Tribune, Acxiom, Penn Gaming?

Now that Goldman Sachs (GS) and KKR have walked away from Harman (HAR), the question is which private equity deal will fail next.

Here is a short list of the deals that 24/7 Wall St. still think could be in trouble. These deals could be killed or, at least, be renegotiated to a lower price.

Sallie Mae (SLM), which originates and holds student loans is an obvious candidate. Against an offer price of $60, the shares now trade at $48. The New York Times has written that private equity firm J.C. Flowers & Co. plans to seek a lower price. Congress has sent the President a bill which could cut about $20 billion in government subsidies to banks that make student loans, according to the AP. Flowers and its banks could cansider that a "material adverse effect."

Acxiom (ACXM) The database management company has an offer from Silver Lake and ValueAct Capital in which the firms would pay Acxiom shareholders $27.10 a share to take the company private. The shares trade at $22. The company announced an 88% decrease in income from operations last quarter. Earlier this month, the company cut 265 people.

PHH (PHH) Blackstone (BX) said it is working with investment banks in an effort to seek more debt funding for the buyout. But, the deal is in trouble since banks sent revised terms for the takeover. The stock is trading at under $25. When the deal was announced, it hit $31.52.

The Tribune Company (TRB) Sam Zell, the leader of this buy-out, keeps insisting that the deal will close. But, the company’s revenue keeps falling and was off over 5% in August. The buyout, for $8.2 billion, will leave the company awash in debt, even though it is selling non-core assets like the Chicago Cubs to improve the balance sheet. The shares trade at $28, after hitting $34.28 when the purchase plan was announced.

Myers (MYE)  The rubber and plastic manufacturer recently said its $1.1 billion acquisition by a private equity arm of investment bank Goldman Sachs will likely be delayed until the fourth quarter. Income from operations dropped in the June quarter from $7.1 million last year to $2.5 million in 2007. Shares trade at $19.75 against a post-deal announcement high of $22.73.

Reddy Ice (FRZ) Shares now trading at $26.50 after hitting $32.31 on buyout news. The AP wrote that Reddy Ice planned $1.1 billion buyout by GSO Capital Partners LP encountered turbulence, when Morgan Stanley objected to amendments to the deal saying they violated conditions of the bank’s loans.The Fool wrote that the company’s recent weak results, coupled with the tightening credit markets, led GSO to renegotiate parts of the transaction already.

Penn National Gaming (PENN) The racetrack and casino operator agreed in June to a $67-a-share buyout by Fortress. The Wall Street Journal recently pointed out that shares of several buyout targets are also reflecting an increased degree of caution, including Penn. Net income and EPS at the company both fell in the June quarter. With the stock at $59, investors are not indicating much confidence in an offer that is $8 higher.

United Rental (URI) The equipment rental company agreed to to sell itself to affiliates of private equity firm Cerberus Capital Management for $4 billion. But, the SEC is investigating the company over accounting issues. Operating income rose 12% in the June quarter, but the SEC issue could allow Cerberus a way out. Shares trade at $31.45 against a post buy-out high of $35.56.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: September 23, 2007 – 2:26 pm in Mergers and Buy Outs, , , , , , , , , ,

US Hedge Funds To Take Over Trouble Mortage Firm Northern Rock?

Three US hedge funds apparently have targeted beleaguered British mortgage bank Northern Rock. They plan to buy it and break it into pieces, leaving the company’s stock holders with almost northing, according to The Sunday Telegraph. "The proposed deal would see the funds divide up Northern Rock’s mortgage book, worth more than £100bn."

The deal may be able to get done because none of the large UK banks are willing to take the risk of buying Norther Rock due to the turmoil in the mortgage markets. But, "the hedge funds believe they could acquire Northern Rock’s mortgages at below face value and make huge profits by holding them until they mature."

The three fund involved are one controlled by Chris Flowers, the former Goldman Sachs banker, Cerberus, and Citadel.

Douglas A. McIntyre

Posted on: September 23, 2007 – 8:34 am in Financial Stocks

McDonald’s: Management Matters

McDonald’s was in pretty bad shape in late 2003, as a recent AP article points out. The stock is up from $12 then to $55 today.

The AP attributes the improvement to better menus, better marketing, and "deft" management. What this analysis misses is that management accounts for product selection and marketing.

The improvements at McDonald’s are the by-product of management, plain and simple.

The story is even more extraordinary when one considers how many CEOs the company has had recently. Jim Cantalupo was CEO until he died of a heart attach and was replaced by Charlie Bell in 2004. Bell was diagnosed with fatal cancer shortly thereafter. Jim Skinner took over as CEO in lat 2004. At the time he took over McDonald’s shares had already doubled from their $12. Now, they have doubled again.

Management made the decision to expand overseas and to improve menus and coffee selections in the US, talking on Starbucks (SBUX) at the high end of the java market. Management also made the decision to increase the company’s dividend and buy-back shares.

There is nothing magic about the McDonald’s turnaround. A smart board kept the right people in the top job, and it worked.

Douglas A. McIntyre

Posted on: September 23, 2007 – 8:24 am in Management Change, ,