Monday, February 27, 2006

Hit #82

The rumored KeySpan (KSE) deal came through today, with National Grid coughing up $7.3 billion in an all-cash deal!

The offer, of $42/share, is a 28.3% premium over my average cost of $32.73/share, including reinvested dividends.

I will be looking to recycle the cash into Teco Energy (TE) or CMS Energy (CMS) if they still remain attractive at the time I get cash for my shares.

Previous hit - Raindance (#81)

Saturday, February 25, 2006

Another reading update

Last month, I mentioned a few books on my reading list.

Practical Speculation by Niederhoffer is a great read. It is all about chance, change, correlation, causation and conclusions. Most of the material here is original. One for the personal library.

Inside the FDA could have been more interesting by leaving out some of the politics and details on personal appearances. Borrow, don't buy.

My life as a quant and Fisher Black ... are enjoyable reads if you can borrow them. My life ..., though it had too many typos for a final book, is an extremely humble autobiography. The last handful of chapters on modeling options, especially the exotic variety, and other derivatives, stand out.

All about dividend investing is turning out to be a no-nonsense book on growing your investments surely and steadily. Even though the basic principle of the compounding effect of dividend reinvesting is well known, it is still stunning when one sees the actual final numbers made possible by compounding. Buy it and read it every 2 years!

Odds and ends

A few brief notes that don't deserve their own posts.
  • The latest issue of Economist talks about the buyout boom in Europe. It does look like the boom there is in an advanced stage, and will be over in a year or two. This is Europe's first big merger boom that had private-quity groups playing such a prominent part. While the US has seen larger booms before, the current boom seems to be still in an early stage.
  • Forbes also carried a cover story on private-equity groups, but not a completely positive piece. It does note the callous attitude in some of the deals, ranging from pushing pension liabilities onto PBGC (and hence to tax-payers) and the practice of taking out dividends by adding debt to the acquired companies' balance sheets.
  • The efforts to block Dubai Ports' takeover of some US port operations (via P&O) is unfortunate. As a country that has preached and forced others to become market-friendly, US should be taking a more pragmatic approach. Requiring additional security guidelines is not a harsh requirement, but asking that all the US operations be divested sounds irrational. This is more so when the operator is an extremely professional entity, and the country it is from is a moderate and friendly Arab nation. How will the US react if KKR's activity in Europe is restricted or Icahn gets restrained in Korea ? The security concerns seem misplaced. And what about other countries' rights to retaliate in a similar manner ? After all, haven't US banana companies and telecoms played dirty tricks in Central/South America ? Both Republicans and Democrats are playing the populist card - it is unfortunate that they can still get away with it.
  • Europe also seems to have problems with cross-border takeovers. They have excuses other than national security! Too many people have already opened their mouths in the current Mittal/Arcelor saga, with some of the French comments carrying racist undercurrents. Similarly a German bid for Spain's Endesa has drawn out patriots!
We need less politics and patriotism and more business and enlightenment.

Thursday, February 23, 2006

KeySpan on the block

Last week KeySpan (KSE), an electicity/gas utility serving customers in NYC, Long Island, Massachusetts, announced that it is putting itself up for sale. Reports just in indicate that National Grid, a UK utility, may win the bid with an all-cash offer of $7.3 billion, which translates to $42/share.

I expect more, higher competing bids from other US utilities. The utilities sector has essentially been in a freeze since the depression. Now that the Public Utility Holding Company Act (PUHCA) is finally history, we are set for a wave of mergers in this sector.

Unfortunately, utilities' stocks are not cheap. Investors fleeing from the crashing tech sector found a safe haven in dividend paying utilities along with a few other defensive sectors, resulting in them being fairly priced now or even overvalued in many cases.

Picking utilities right now is risky. I would like to see strong recent insider buying activity to buy any of them.

My average cost for KeySpan is around $35.5/share, including reinvested dividends. I will wait for a winning bid before I mark this as a hit.

I also own a few shares of NiSource (NI), AES Corp (AES) and Mirant (MIR), all attractive targets.

Two more utilities that I am looking at seriously now are CMS Energy (CMS), a Michigan utility and Teco Energy (TE).

Wednesday, February 22, 2006

The urge to diverge

Even as we are in the midst of a M&A boom, we are seeing an increasing urge to divest non-core businesses via spinoffs. These two used to happen in different cycles, but it now seems like both trends are in full play.

Investing in spinoffs, as well as the parents, has been a very succcessful strategy. A good book to read on various ways to profit from this trend is Greenblatt's You too can be a stock market genius, about which I posted earlier.

Among the recent spinoffs that are worth investing in for the long term are Treehouse foods (THS), Acco Brands (ABD), CBS Corp (CBS), Clear Channel Outdoor (CCO), Expedia (EXPE) and Discovery Channel (DISC).

Companies that have announced, but that have not yet executed on their intentions, include Cendant (CD), First Data (FDC) and Tyco (TYC). Cendant and Tyco look attractive by various sum-of-parts valuation methods.

A number of spinoffs end up as takeover targets themselves down the road, usually at a premium following a runup in price.

A few other empires are under tremendous pressure to divest. While Icahn may have given up his efforts to split Time Warner, I expect Time Warner to do so on its own eventually, with America Online and other online properties as an independent entity.

Another oft-mentioned breakup candidate is McGraw Hill (MHP). A spinoff of S&P is desirable, with Dun & Bradstreet's spinoff of Moody's serving as the benchmark.

And a top indicator when the spinoff cycle has run its course - GE spinning off its medical, finance, construction/leasing and real estate businesses. That should unlock some value!

Saturday, February 18, 2006

Another reason to shy away

If Sarbannes-Oxley wasn't enough, new SEC regulations on executive compensation disclosure is likely going to make companies think harder about going private. Executive compensation has definitely been disconnected from performance, with non-independent directors voting with their eyes covered and large fund holders not bothering to put up a fight. Whichever way you look at it, either as unpaid dividends or aborted capital expenditure to fuel growth, the outrageous compensation has come out of shareholders' pockets.

Some have suggested that there be a executive compensation cap based on a multiple of the lowest paid worker's earnings. Such a cap would be arbitrary and would not suit a truly capitalist economy. Others have suggested that shareholders approve executive compensation. An ideal middle ground would be a majority shareholder approval needed for any compensation that is above a preset multiple of the lowest paid worker's earnings. Accountability, finally!

Executive compensation has reached such egregious levels that it is hard to find an exception today. They now go beyond standard cash/stock payments to various perks and retirement benefits. All the while, lower rung workers are being pressured into the negotiating table to accept pay cuts and pension cuts, with bankruptcy being offered as the choice if they do not cave in.

Going private in this case is advantageous only if the transaction is a management-led buyout. Any private-equity buyout or a buyout from a larger company will make it harder for these executives to retain their ability to milk the company.

Now all you need to do to pick the targets is to find companies where the top personnel are being overcompensated. That will be hard - not!

M&A makes it to the front pages - again

The last 2 weeks have seen a large front-page coverage of M&A and the related investment potential, including stories in Business Week, Smart Money and Red Herring.

The Business Week piece is mostly on private equity activity and the hundreds of billions waiting to be put into action.

The Red Herring piece was on technology companies, now having matured, becoming targets for private equity groups. Something that I have noted in the past here.

The Smart Money piece was investing in M&A advisors. I posted on the same topic this past week as an update to an earlier post. The magazine feature boils down to exactly what I had to say in those two notes.

Sunday, February 12, 2006

More M&A advisors

Early in 2005 I had published a post on investing in M&A advisors as a way to benefit from the M&A as well as breakup/spinoff surge.

Most of the firms mentioned there, except for Greenhill, were not pure-plays. Since then however two other, largely M&A and restructuring, advisors have gone public and both are still good investments to ride the coming wave. These are a) Lazard (LAZ), which seems to show up in every deal and b) Thomas Weisel Partners (TWPG), which also has a private-equity wing.

I did open a small position in Lazard following the IPO, and the shares have risen considerably since then, with the recent earnings turning up better than expectations.

The Greenhill shares I bought, around the time I made the earlier post, have since gained 200%.

Shouldn't that be Bubble 2.0 ?

The resurgence of exuberance in the net sector has reached mini-bubble levels, with Web 2.0 being used to describe the second-generation/mature companies and technologies. The 2.0 seems to be just an attempt to forget the ugly first episode!

A recent target of $2000 placed on Google is the best indicator of a top. Ebay's expensive purchase of Skype, as I noted here, was another indicator.

Barron's ran a bearish piece on Google today. My only complaint is that it wasn't bearing enough. With all the major internet players, Yahoo, Microsoft, Ebay, Interactive Corp, Amazon and Google, increasingly encroaching on each other's turf, and fighting for the same search-generated ad dollars, margins will be very slim.

There is no questioning the utility of various online services, but with the audience used to getting most of these for free, will there really be consistent and large growth in earnings ? The only way for these companies to make money is by resorting to serial secondary offerings at inflated prices, as long as they last. That doesn't help common shareholders, and won't keep the share prices levitated for too long.

Call me a heretic, but I will wait for a 90% discount to Google's current price!

Around the time Google founders interviewed with Playboy just before the public offering, I had posted recommending that Playboy (PLA) was the better buy. That recommendation still stands. Hugh Heffner has been regularly buying back shares, and a going-private transaction may be around the corner. Even if it doesn't go private, there is definitely growth now that Playboy is entering the Indian market, with (sigh!) adjustments for local cultural sentiments, and the Indonesian market, where opposition to the plan is growing (sigh again!).

Para la venta

Univision has put itself up for sale, hopefully leading to a bidding war among the majors. The shares are now going for around $35/share. Buying now is risky, but I expect the eventual takeout price to be around $42-$45. As the largest independent Spanish media outlet in the US, Univision is coveted by every network.

I had made a post on television channel owners when Crown Media, which owns the Hallmark Channel, announced that it was looking for a buyer. Crown's attempt to sell itself has apparently not been much of a success.

I have been buying Univision shares regularly, with the average cost now being around $27/share. I will not be buying more at current prices, but will be holding on to my shares till the buyout.

Other targets I mentioned in the earlier post were ValueVision (VVTV), Crown Media (CRWN), Discovery Channel (DISC), Outdoor Channel (OUTD). I own shares of ValueVision, Crown and Discovery, the last being the result of a spinoff from Liberty stock I own. Valuevision remains a buy as a takeover target. The rest still look like value buys, but with no major catalysts to move the prices in the near term.

More generally, the entire TV broadcasting sector looks cheap relative to the overall market. Companies like Hearst-Argyle Television, Nextstar and Sinclair, will also likely be looking to go private or sell themselves.

Another speculative bet here would be National Lampoon (NLN) with its attractive content library. I have not opened a position yet, but will be considering doing so.

Monday, February 06, 2006

Portugal Telecom gets some interest

In a post on Millicom just 2 weeks ago, I had mentioned Portugal Telecom (PT) as another of my takeover bets. I did not expect things to move this fast, but today Portuguese congolmerate Sonae, a company that is just a quarter of PT's, made a stunning takeover bid.

The transaction may not go through given the hostile nature of the bid, but PT's stock is trading above the offer price indicating an expectation of higher bids.

The offer, as it stands today, is around a 14% premium to my average cost, but I can definitely wait longer for a sweetened bid!

Hit #81

Just a week after giving me Hit #79, Intrado, West Corp is also responsible for #81, with the announcement today that it is acquiring Raindance Communications (RNDC).

The takeover, an all-cash deal, offers Raindance shareholders $2.7/share, a 20% premium over my average cost of $2.25/share.

With Centra (Hit #64), Placeware and a few other players swallowed earlier, only the largest player, WebEx (WEBX), is left standing. The real question is - for how long ?

I bought into WebEx during the 2002 slump and will be holding onto it till the eventual takeover.

Previous hit - J. Jill (#80)

Hit #80

J. Jill (JILL) is being acquired by Talbots for $517 million in an all-cash deal. The offer, of $24.05/share is a premium of 91.6% over my average cost of $12.55/share.
One can only hope that J Jill clothes don't start looking as drab as Talbots'!

I had posted earlier about Jill, when Liz Claiborne had shown interest.

Having lost out on this, Liz has announced that it is still looking to make acquisitions. May I suggest Bebe ? Bebe has appreciated considerably in recent weeks after bottoming out at around $12, when I was considering opening a position, but it is still a good takeover bet. Takeover or not, the world will definitely be a better place if more members of the fairer sex switched to wearing Bebe!

Talbots, even having overpaid for J Jill, comes out stronger from this deal, as long as the 2 brands are operated independently given that they address two different, dare I say completely different, clientele. I would have gladly settled for a stock swap, since Talbots' stock is relatively cheap and pays a 1.8% dividend too.

Like Liz Claiborne, Ann Taylor must also be contemplating an acquisition to challenge this new combine.

Previous hit - Intrado (#79)