Daily Archives: April 6, 2008

An AMR (AMR) Bankruptcy: The Perversion Of The Airline Industry

In all industries staying out of Chapter 11 is a badge of honor. The sole exception to that is the airline business where bankruptcy is embedded in the culture like ticks are on the hide of a deer.

One of the few large US airlines which stayed out of a significant financial mess over the last decade is AMR (NYSE: AMR), the parent of American Airlines. In the most perverse sort of way, a Chapter 11 filing four or five years ago might have spared AMR from its current perilous state.

One advantage that Northwest (NYSE: NWA), Delta (NYSE: DAL), and United (NASDAQ: UAUA) have in the present difficult economic environment is that they used their trips through the Chapter 11 process to tear away debt as well as employees which they deemed to be redundant. By several accounts, NWA has saved over $2 billion a year because it went through bankruptcy.

All of the large US airlines are at great financial risk now. Ditto for many of their overseas brethren like Alitalia. Fuel costs are up sharply and passenger revenue and revenue miles are likely to fall as the economy keeps people off commercial carriers The very rich can continue to operate their own fleets of private jets.

The present financial trouble does not strike each large US airline equally. Largely because of an advantage of Chapter 11, NWA has $6 billion in debt to its $3 billion in cash. At AMR, long-term debt totals $15.6 billion compared to its $4.6 billion in cash. Last year, AMR’s EBITDA was only about two times it interest expenses. By paying all of its bills, AMR has been placed at a great disadvantage.

AMR had very modest operating income of $965 million last year compared to its $22.9 billion in revenue. The market has figured out the problem. While shares in other national carriers are off about 50% in the last six months, AMR is off 60%. That is a significant negative premium, a vote saying AMR is in a different bucket than its competitors are.

Aloha Air, ATA, and SkyBus all went out of business in the last two weeks. Several carriers reported falling traffic for March. At AMR, domestic traffic fell 5.9% for the month.

At some point soon, the dropping revenue effect and rising expenses cross where interest payments matter.

That will be soon at AMR and it puts the company at great peril.

Douglas A. McIntyre

Posted on: April 6, 2008 – 6:22 pm in Airlines, , , ,

24/7 Wall St. Audience Increases 77% In March

According to audience measurement firm Compete, 24/7 Wall St’s audience moved up 77% to 150,000 visitors. Over the last year, the websites visitors are up 228%.

We appreciate the support from all of our readers.

Jon Ogg and Douglas A. McIntyre, Editor

Posted on: April 6, 2008 – 5:21 pm in Media

Why No One Wants Delphi?

When Appaloosa Management pulled out a $2.55 billion equity deal to support Delphi in its exit from Chapter 11 the reason given was that an increasing investment by GM (GM) would give the car company too much management over a company which is used to own. The entire Delphi financing package was for $6.1 billion. That would have let the auto parts company to exit bankruptcy and re-list on the NYSE.

Appaloosa’s comments about why it walked away were simply a dodge for avoiding comment on what a bad business Delphi is now.

Delphi is still losing a lot of money. With the US car industry getting into more trouble with each passing month, the auto parts company’s prospects also declining.

In the fourth quarter of 2007, Delphi lost $542 million on $5.3 billion in revenue. At the end of the year, the firm had $1 billion in cash and $1.2 billion in a debt facility. That is not much dry powder for company which could easily eat though that capital in a year.

There has been a great deal of talk about putting together a new package for getting Delphi back onto it feet and traded on the NYSE. That is not going to happen. It is not at all hard to imagine that the company’s revenue could fall well below the $22.3 billion it hit in 2007 and that its operating loss could grow.

Delphi’s future will be one of cutting more people, more plants, and seeking short-term capital with very high interest rates. That’s hardly what it looked liked just a few weeks ago.

Douglas A. McIntyre

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Posted on: April 6, 2008 – 3:59 pm in Autos,

Nvidia (NVDA) Falls Off The Map

Over the last three months, shares of Nvidia (NASDAQ: NVDA) have dropped almost 40%. Chipmakers AMD (NYSE: AMD) and Intel (NASDAQ: INTC) have traded fairly flat over the same period.

AMD has been heavily punished over the last two years, so it makes some sense that its shares are not falling, but Nvidia’s business has a history of has doing well because it operates in the highly profitable graphics chip segment of the market. Slowing PC sales have undermined all of the industry’s suppliers, but the fall in NVDA shares is breathtaking.

According to the AP,  over the last quarter Nvidia’s shares were the most volatile in the S&P 500 information technology sector, 70% more volatile than the average stock in the segment.

Nvidia was hit by an old truck know as expenses. While net income was up 57% in its last quarter and sales moved up above expectations, according to MarketWatch expenses rose 16%. The company forecast another jump in costs in the current quarter.  No one was surprised when the CFO left the company.

The economy is bad enough now that companies with any increase in costs above expectations are likely to be torn down by Wall St. even those going through incredible growth spurts.

If Nvidia does not show a marked improvement in cost control in the next quarter, it will be a very long one for its shareholders.

Douglas A. McIntyre

Posted on: April 6, 2008 – 3:31 pm in Semiconductor, , ,

How Bad Could Yahoo!’s (YHOO) Quarter Be?

Jerry Yang and other Yahoo! (NASDAQ: YHOO) management have said that the portal company will make its forecasts for Q1 08. But, those numbers fall within a range and are not based on a single set of figures.

Wall St.’s consensus forecast, based on 27 analysts polled by First Call, is a figure of $1.33 billion (excluding traffic acquisition) in revenue, up from $1.18 billion in the same quarter a year ago, But, the low estimate among the group is $1.29 billion. The EPS consensus from the group is $.11 compared to $.10 in the 2007 quarter. The low estimate from the analysts is a mere $.07.

Yahoo!’s own forecast for Q1 is for revenue (excluding traffic acquisition) to be in a range of $1.28 billion to $1.38 billion. If EPS is calculated on the same basis as in Q4 07, using 1.395 billion shares, at the low end of Yahoo! revenue forecast, EPS could certainly be well under $.10. Yahoo! did not issue an EPS estimate for either Q1 or the full-year of 2008.

Yahoo!’s numbers could fall within the range of its own forecast, and Wall St.’s, and still be a disaster.

Douglas A. McIntyre

Posted on: April 6, 2008 – 7:34 am in Earnings,

Take-Two’s (TTWO) “Grand Theft Auto IV” Sales May Take Stock Above Electronics Arts (ERTS) Bid

Electronic Arts (NASDAQ: ERTS) has been trying to get investors in Take-Two Interactive NASDAQ:(TTWO) to view its takeover bid of $26 a share as the best deal in town. TTWO is making the case that the offer is much too low. Sales of its newest game "Grand Theft Auto IV"  could considerably buttress it argument that the company has a value well above the ERTS bid.

According to The New York Post, "Gaming analyst Mike Hickey, after reviewing pre-sales of the game, anticipated shipments and other data, predicted "GTA4" would sell 5.8 million units in the first seven days after its April 29 release – which would nearly double the current record set by "Halo 3" last year."

If that assessment is correct, the Take-Two board will have made an clever decision to fight off Electronic Arts. Take-Two trades at $25.61 now. If sales reports for the first few weeks show that the new game is a blockbuster, it is not hard to imagine that the stock could move above $29 where it traded in mid-2005.

If the shares do take a run of that magnitude, Electronic Arts may have to improve its bid to $32 or more, and TTWO shareholders will do 23% better than they would have if their board had taken the first offer.

Douglas A. McIntyre

Posted on: April 6, 2008 – 7:01 am in Mergers and Buy Outs, ,

Russia/Eurasia Fund IPO Withdrawn, After More Than 10 Years (BEN, TRF, TDF)

Late Friday there was an interesting form "RW" filed with the SEC for a "withdrawn securities registration."  There was an original filing to bring Templeton Russia/Eurasia Fund public via an initial public offering in what was probably a closed-end mutual fund.

What is odd is not the withdrawal of a closed-end fund.  It is the date: originally filed with the Commission on October 6, 1997.  As per the filing:

  • The Registrant believes that withdrawal of the Registration Statement would be consistent with the public interest and the protection of investors  because: 1) the filing was prepared in connection with a proposed initial public offering of the  Registrant’s shares which is no longer  contemplated;  2) no securities were sold in connection  with the  offering;  and 3) the  filing did not become effective.

Before this was filed, Templeton had already brought its Templeton Russia and East European Fund Inc. (NYSE: TRF) public in 1995 and that may have been the first investment vehicle that gave liquid trading possibilities for U.S. investors to invest in Russia (and Eastern Europe).  It had also brought its Templeton Dragon Fund Inc. (NYSE: TDF) public in 1994 as one of the first vehicles that allowed U.S. investors a chance to invest in Chinese companies. 

All of these closed-end funds are run by Franklin Resources, Inc. (NYSE: BEN), which now operates as Franklin Templeton Investments.  These funds also fall under the umbrella of Mark Mobius, who is considered one of the modern fathers of emerging market investing and who was given credit for saying, "invest when there is blood in the streets."

This other fund looks like it was probably filed on the heels of the successful launch of these other two investment vehicles.  There may have been worries that there would be too much overlap in the structure or allocation of these funds.  Or it could have been the other classic reasoning: the paperwork got lost or forgotten about.

You can join our open email distribution list to hear about other mergers, private equity, secondaries, IPO’s and more.

Jon C. Ogg
April 6, 2008

Jon Ogg produces the Special Situation Investing Newsletter and he can be reached via email at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: April 6, 2008 – 6:44 am in China, IPOs, Mutual Funds, , ,

SPAC IPO FILING: CR Acquisition Corp.

CR Acquisition Corp. is another special purpose acquisition company, or SPAC, that has filed on Friday after the market close to come public via an initial public offering of $150,000,000 via the sale of 15,000,000 Units.  Each unit will consist of one common share and a warrant to purchase one share of common stock with a $7.00 strike price. 

Its units will be listed on the American Stock Exchange, although no ticker has been applied for.  As far as underwriters, Deutsche Bank Securities is the lead book-runner with co-managers listed as Jefferies & Company as well as Cowen and Company.

CR Acquisition Corp. is a blank check company recently formed for the purpose of acquiring one or more domestic or international operating businesses or assets through a merger, capital stock exchange, asset or stock acquisition, exchangeable transaction or via a similar business combination.  It intends to initially identify prospective business combinations in the global retail and consumer products and services industries.  Like all SPAC’s, that is the initial target operation and the ultimate business can be in virtually any sector.

The manager of this offering is Prentice Capital Management, and it will be run by Michael Zimmerman as Chairman and Mario Ciampi as CEO & President.  Prentice typically invests in the retail and consumer products industries with a  focus on companies with market capitalizations of between $500 million and $2 billion.  The stated goal of this operation is a business combination involving the acquisition of a controlling interest in a private company with an enterprise value of between $120,000,000.00 and $600,000,000.00.

You can join our open email distribution list to hear about other mergers, private equity, secondaries, IPO’s and more.

Jon C. Ogg
April 6, 2008

Jon Ogg produces the Special Situation Investing Newsletter and he can be reached by email at jonogg@247wallst.com; he does not own securities in the companies he covers.

Posted on: April 6, 2008 – 6:05 am in IPOs

OPEC: No Meeting Before Septemeber

If the US government is counting on help from OPEC, the can forget it. The current Administration has gone to the desert on hand and knee and begged for an increase in production is the hope of pushing prices below $100 a barrel. High gas costs are helping fuel a sharp economic downturn.

According to Bloomberg "OPEC has no plans to hold an extraordinary meeting before September because oil supplies are sufficient,the group’s secretary general said in Tehran."

The member nations of the cartel are making hundreds of billion of extra dollars on the amount which the price of crude has increased over the last year. They may be reluctant to give up that extra cash.

A friend in need is a friend indeed.

Douglas A. McIntyre

Posted on: April 6, 2008 – 6:04 am in Oil & Gas

Greenspan, Behind The Times, Sees 50%+ Risk Of Recession

If Alan Greenspan was a visionary at any point in his life, those days are behind him. According to Reuters, the aging former Fed chairman says there is more than a 50% chance that the US is in recession.

The fact that the economy has been failing for several months has escaped him.

Douglas A. McIntyre

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Posted on: April 6, 2008 – 5:44 am in Economy