Investors who bought Starbucks stock this year are likely eager to kiss 2007 goodbye, as shares of the world's largest coffee shop chain have tumbled over 40 percent since January on concerns about slowing U.S. customer traffic, rising dairy costs and competition from fast-food rivals, such as McDonald's.

But 2008 could bring the Seattle company a new headache, according to one analyst -- a knock on the door from shareholder activists.

In a research note on Starbucks on Thursday, Friedman Billings Ramsey analyst Howard Penney warned that "the dramatic downturn in the company's fundamental performance is likely to create issues that it has never faced before as a public company -- shareholder activism."

Penney cited recent investments by activist shareholders in restaurant chains Panera Bread and The Cheesecake Factory for his view.

"It is only a matter of time before one appears and starts to put some pressure on Starbucks," he wrote.

Finally, Penney channeled the Christmas spirit to list his "key points" on Starbucks:

On the twelfth day of Christmas, Starbucks gave to me...
12 - Signs of traffic humming
11 - Improved new unit volumes
10 - Speedier baristas
9 - More transparency
8 - Product inn-o-vation
7 - More global growing
6 - Rising ROIC
5 - Slowed U-S growth!
4 - Four-wall initiatives
3 - Three new desserts
2 - Two new board members
1 - And a change in U-S strat-e-gy!

Diversified industrial manufacturer Eaton Corp said it would buy two companies in Europe and Asia to expand its electrical systems business outside the United States: The Moeller Group, a German electrical components maker, for 1.55 billion euros ($2.23 billion) and Taiwan-based Phoenixtec Power, which makes uninterruptible power supply systems, at NT$50 per share ($1.54 per share), which it said would make the net purchase price $565 million. There is a private equity element here — Eaton is buying Moeller from UK-based buyout firm Doughty Hanson, which is getting three times more than it paid for its investment — but the deal underscores the relative health of strategic activity.  Eaton bought a business from French electrical engineering group Schneider Electric in August and said in October it would spend up to $300 million on acquisitions in 2008.  
    
Italy is looking for better bids for Alitalia. Sporting 1.2 billion euros of debt and losing more than one million euros a day, the Italian national carrier would seem to have little to offer aside from its dominant position on the lucrative route from Milan to Rome. It’s been on the block for a year. At around 0.78 euros per share it has a market value of about 1.08 billion euros. The two bids out there are quite a bit more modest. Suitor Air France-KLM has bid 0.35 euros per share for Alitalia, offered to buy all of the airline’s convertible bonds and said it would cut up to 1,700 jobs. Air One, smaller than Alitalia but backed by Italy’s leading retail bank, has offered 1 euro cent per share, total investments of 5.3 billion euros and 3,700 job cuts. “What would seem useful to me is to work within the offers to improve them,” Transport Minister Alessandro Bianchi told Il Sole 24 Ore in an interview published in its Thursday issue.

David Rubenstein, a co-founder of buyout giant Carlyle Group, chalked up another deal on Tuesday. This time, it wasn’t Carlyle purchasing Dunkin’ Brands, or Manor Care, or an under-performing industrial asset.

Rubenstein bought a copy of the Magna Carta. Yes, the Magna Carta. A rare 710-year-old copy of the document was sold to Rubenstein on Tuesday at Sotheby’s for $21.3 million. That ought to go over really well with the SEIU and other union and activist groups accusing Rubenstein and his buyout brethren of making too much money.

Rubenstein said that he bought the document because he wanted it to stay in the United States. As a former member of the Carter administration, Rubenstein said he viewed the purchase as a sort of favor to the U.S. government, which has been generous to him.

If you follow private equity’s tax structure, indeed, the U.S. government has been kind to Rubenstein and his peers. Debate rages on about the pros and cons of carried interest, but the bottom line is that buyout firms are charged 15 percent for their profits, as opposed to the 35 percent ordinary income rate.

So even if you think Rubenstein’s tax bill is unfair, you can’t say he’s unpatriotic.

(Photo. David Rubenstein, Reuters file)

Pershing Square has taken it on the chin with its Target stake. The retailer’s announcement on Wednesday that it’s suspending its credit card auction is yet another upper cut.
  
Mind you, Pershing founder William Ackman is one of the best known activist investors out there, having made a boat load of money shorting bond insurers and shaking up companies like Wendy’s. And he is said to be approaching his Target investment with a long-term view. (What exactly long-term means to an activist hedge fund is anyone’s guess? Two years, three years? Twelve months?)   
    
But so far, his stake in Target has turned out to be a dog, long-term view or not.      
    
For starters, Ackman started scooping up shares when they were around $59 per share. They’re at around $51 now. 
    
Second, Ackman wanted Target to sell it’s credit card portfolio, which the company really wanted to keep. The business was a cash cow, and had generated big profits for the company.  Ackman wanted greater focus on the capital structure.
    
In a bow to the activist at their doorstep, Target agreed to put its card business on the auction block in September, two months after disclosure of Ackman’s stake.
    
Tough timing.
    
The credit crunch sunk its teeth into the markets by late July, and by the time Target put the business up for sale, private equity buyers were out of the deal picture, thanks in part to the division’s $7 billion price tag.
    
The thought among some private equity investors was that no matter what price they offered, even in the best of times, GE would likely outbid it. Indeed, GE has a deep history in buying up credit card portfolios. But it apparently isn’t interested in Target.
    
So Target has decided to keep its card business for now, promising to revisit the issue in the first quarter.
    
Ackman, no stranger to publicly condemning companies not doing enough for their shareholders, spoke highly of Target’s management and strategy at a recent hedge fund conference. Huh? Wasn’t he at all ticked at the lagging sale process? The stock price?
    
Perhaps Ackman has come to realize that sometimes, you have to pick your battles. The consumer is not in good shape right now, the large-cap private equity M&A market is dead, and at this point it’s not even clear if selling the card business is the right thing for the company. Plus, he’s in attack mode right now on the bond insurers, mainly MBIA.
    
“We are not surprised by the news,” said Joseph Feldman, a retail analyst with Telsey Advisory Group, of the delay. “I think if it were not for Bill Ackman, they probably never would be considering (the sale) as publicly as they are.”
    
Red Gillen, senior analyst with Celent, a Boston-based financial research and consulting firm had the following take: “Given the current business environment of increased consumer credit write-offs and delinquencies, Target suitors may be few and far between.”
    
Morgan Stanley M&A banker Rob Kindler said in March that you can’t beat an activist. Invite them in, pull up a chair. Don’t fight them. Kindler said that in April, when if an activist told a company to sell something, there were a dozen private equity firms ready and willing to buy it. Times have changed.
    
So while Ackman may be inclined to hold onto Target for the long haul, his stake has hardly emulated the quick and profitable action by his previous, ahem, targets.

(Photo. William Ackman)

Chemical company Chemtura has hired Merrill Lynch to advise on its sale — again. 

Reuters was first to report in October on a quiet Merrill-run auction for Chemtura, which failed to find a buyer despite reported interest from private equity firms like Apollo. 

Will the Connecticut-based company, which has since streamlined through job cuts, plant closings and assets sales, be more appealing this time? Buyout firms have been largely sidelined by credit markets, but Chemtura is also considering selling select businesses. The company, with a market cap of about $1.7 billion, makes specialty chemicals for the agriculture, pool, construction and packaging industries.

Merrill should hope things go well – with activist investor Nelson Peltz a shareholder and his firm’s co-founder on Chemtura’s board, patience with the process may run out.

(Photo credit: Chemtura cleaning products)

Who do you turn to when you’ve got to write down $9.4 billion in mortgage-related assets? China, naturally. Morgan Stanley said it was getting a $5 billion investment from China Investment Corp, the same Chinese sovereign wealth fund that bought a 10 percent stake in Blackstone for $3 billion in May. Morgan is coughing up a yield of 9 percent for the funds - which, like  Abu Dhabi’s 11 percent return on its investment in Citigroup, is a mandatory convertible.
    
    The future of dead deals past is being hashed out in courts around the country. In Georgetown, Delaware, the three-day trial of United Rentals v. Cerberus is underway. Cerberus’ Chief Executive Stephen Feinberg made a rare appearance to draw his line in the sand: his firm’s liability is limited to the $100 million break-up fee, and his firm cannot be forced to complete the deal, which Time ranked at 5th on its “Worst Deals of the Year” list.  

    In New York and Tennnessee, the UBS, Genesco, Finish Line suits are being heard. UBS wants to rid itself of $1.5 billion in funding for the merger of hat retailer Genesco and shoe store Finish Line. UBS says Finish Line could not attest to the financial solvency of the merged company and that the merged company would be insolvent. In Tennessee, closing arguments have been heard from Genesco in its suit against Finish Line and UBS, in which it is attempting to force the completion of the deal.  
     
   

So much for a Cerberus/United Rentals settlement.

A day after United Rental’s shares popped on hopes of a kiss-and-make-up with Cerberus, the firm’s legendary founder and CEO pretty much quashed such speculation. (Though Day One is likely to end without much punch, the idea of the ’secretive,’ ‘reclusive’ Stephen Feinberg appearing in public offered some nice excitement).

First off, just by appearing in court at the allotted time, Feinberg signaled to the market that a press release with “settlement” in the headline was hardly imminent. The judge on Monday allowed the court proceedings to wait a day on the assumption that some sort of new agreement was getting hashed out. Not to be.

Second, Feinberg reiterated the firm’s stance that they’re on the hook for a $100 million big ones and that’s it. Underscoring the lack of understanding between the two sides, Feinberg had the following response when asked by URI attorney Richard Bernstein whether he knew RAM had to ’specifically perform.’

Feinberg replied: “I’m not sure of the legal definition of specific performance.”

That response is symbolic of how messy the agreement has become, and points to how much worse it could get. 
Specific performance is the part of the agreement that says:

“The parties have agreed that they shall be entitled to seek an injunction to prevent breaches of the merger agreement and to be able to enforce specifically the terms and provisions of the merger agreement, in addition to any other remedy to which such party is entitled at law or in equity, including the covenants of Parent or Merger Sub that require Parent or Merger Sub” to and so on and so on.

In short, specific performance is what URI sees as its ace in the hole, as far as getting Cerberus to go through with the deal is concerned. According to URI, the clause says that not only does Cerberus not have the right to terminate the deal, but that URI can force the firm to complete it.

On debt financing for the deal, the fair-haired, moustachioed Feinberg said on Tuesday: “The banks were giving us a hard time and they weren’t happy with funding it. There were a number of issues and conditions that were there. They were nervous in this tough financial environment.”

(Image credit. Alison Smith)

It’s a day later, and still no word of a deal between United Rentals and Cerberus to avoid a courtroom battle over the planned $4 billion buyout of the equipment rental company. Hopes that a trial could be avoided, after the two sides agreed to an extra day of talks, drove United Rental’s share 6 percent higher on Monday. Cerberus withdrew its $34.50-per-share takeover offer for United Rentals in November. United Rentals sued Cerberus in a bid to force the buyout firm to complete deal.
    Manor Care said it received key regulatory approval from the Pennsylvania Department of Health for its proposed $6.3 billion sale to private equity firm Carlyle Group. It is now seeking regulatory approval from just West Virginia, which refused Manor Care’s request for immediate approval of the buyout on Friday. Medtronic agreed to buy a 15 percent stake in China’s Shandong Weigao Group Medical Polymer for $221 million. The acquisition is part of a joint venture agreement to market Medtronic’s spinal products and Weigao’s orthopedic products in China. 
    Two of France Telecom’s domestic rivals look set to join forces and share investment costs, jeopardizing 9 years of European Commission efforts to push member states into liberalizing telecoms markets to boost competition. Neuf Cegetel said it had asked for its shares to be suspended, just 14 months after it floated on the Paris market, pending talks on its future between its two main owners, mobile operator SFR and trading house Louis Dreyfus. Africa’s top media group, Naspers, said it would buy UK Internet auction firm Tradus for 946 million pounds ($1.90 billion) to extend its reach into central and eastern Europe.

Its no secret that the M&A market has been tough the last few months. It’s also no surprise that M&A bankers and lawyers are predicting a drop in the market from the heady heights of 2007. How much of a decline to expect is up for debate.

Prominent lawyer Martin Lipton says in a research note he’s not optimistic, as he predicts a decline of more than 25 percent. That’s not inconsistent with the rest of the market though.

But its not all bad. Several of the factors that boosted M&A in 2007 will continue in 2008, Lipton thinks, such as the desire of some countries to create “national champions” in basic industries; the dismantling of defenses against hostile takeovers and the arrival of mergers and LBOs in countries that until now have had little such activity.

Merger Mondays have also returned to some degree the past few weeks, with a number of big deals announced today as people try and get deals done before the holidays. M&A may be down, but its not yet out.

Though Sigmund Freud said “sometimes a cigar is just a cigar,” maybe sometimes a cigar could be deal inspiration?

A desire to grab a piece of the growing cigar industry could prompt Reynolds American Inc. to acquire Swisher International Inc., a private tobacco company and leader in machine-made cigars, Citi Investment Research analyst Bonnie Herzog said in a research report.

“We assign a 75 percent probability that the deal could happen within the next 6-12 months,” Herzog said in a research report. Citi analysts conducted a survey of their industry trade contacts to gauge their thoughts and found that 88 percent of respondents believed that Reynolds would be the next major tobacco company to enter the cigar sector, and 73 percent viewed a deal between Reynolds and Swisher as the next likely deal in the U.S. tobacco market.

Herzog estimated that Reynolds could pay as much as $4.2 billion to $4.8 billion for Swisher, based on the multiple of 6-times sales that Altria Group Inc. recently agreed to pay for cigar maker John Middleton Inc. Herzog estimated that Swisher generates about $700 million to $800 million in annual revenues. Altria announced the $2.9 billion deal for Middleton last month.

“An acquisition of Swisher, a private tobacco company and a market leader in machine made cigars, would offer several benefits to Reynolds including: (1) a quick market share grab of the growing cigar industry, (2) substantial cost savings and synergies with Conwood and Lane, (3) an opportunity to truly become a “total” tobacco company, and (4) to become a bigger player in the growing U.S. cigar category than PM USA (Philip Morris USA),” Herzog said in the report.

“Should Reynolds acquire Swisher, we would view this as a positive (obviously depending on the price tag). However, historically large scale acquisitions tend to drag down the acquirers stock, at least initially, so we are waiting on the sidelines for now,” Herzog said.

Reynolds declined to comment. Swisher could not be immediately reached for comment.