Fire Sales and Shotgun Weddings

lehman2.jpgThe specter of Bear Stearns has never loomed so large outside the offices of Lehman Brothers. The embattled investment bank made a tough call deciding to auction a crown jewel in a market convinced the bank is close to a going-out-of-business sale.  With its stock price crashing, its credit rating shaken and murmurs up and down Wall Street about its counterparty risk, analysts are increasingly convinced that the Fed’s liquidity window – opened to investment banks after Bear’s collapse – will not be enough to save the house.

Chief Executive Dick Fuld implied on Wednesday that he was open to selling the firm, but who would buy now if they could buy later at a cheaper price? And if Lehman is the bride in a shotgun wedding officiated by the Fed’s Ben Bernanke, who would be the groom? Goldman Sachs’ share price fell 2 percent in early trading, and Morgan Stanley is just across the street… a couple doors down 7th avenue from a strip club, in case anyone wanted to throw a batchelor party. 

Other deals of the day:

* Japanese dairy goods maker Meiji Dairies will take over chocolate producer Meiji Seika in a stock deal worth about $1.8 billion, creating the country’s fifth-biggest food company.

* CCMP Capital has joined a group led by Japan’s Unison Capital that aims to buy out Daito Trust Construction, filling gaps left by other funds which have reduced their involvement, financial sources said.

* South African IT company Datatec said it has bought a 50.01 percent stake in Inflow Technologies Private, an Indian ICT distribution business, for an undisclosed amount.

Lehman’s long march

Staff member displays Chinese yuan notes to media at currency exchange booth at Songshan airport in TaipeiAsia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.

West Coast Care

CVS CaremarkCVS Caremark Corp is bolstering its position on the West Coast with its acquisition of rival Longs Drugs Stores Corp. The deal, announced on Tuesday, is worth $2.54 billion and will allow CVS to expand in states like California and broaden the reach of its prescription services. The acquisition of Longs’ 521 stores will also give CVS a leading position in Hawaii, where it doesn’t operate. CVS will pay $71.50 per share for Longs, including its Rx America subsidiary, a prescription benefits management services company with over 8 million members. Longs shares closed at $54.04 before the news on Tuesday, but surged nearly 30 percent in extended trading on the deal. Shares in CVS fell nearly 7 percent on the news.
GM chief Rick Wagoner says there’s significant interest in the auto maker’s planned sale of up to $4 billion of assets as it battles record losses and falling sales, but no deals are expected soon. General Motors Corp is struggling against an accelerating downturn in its home market and high oil prices that have hammered sales of its trucks and SUVs, triggering a $15.5 billion quarterly loss, the third-largest in its 100-year history. Earlier this month, sources told Reuters GM was in talks with India’s Mahindra & Mahindara Ltd and automakers in Russia and China about selling its Hummer brand.

A consortium led by Goldman Sachs Group Inc has agreed to pay about $1.5 billion for a number of ABN AMRO’s private equity assets, the Wall Street Journal said Wednesday. On Monday, Belgian-Dutch financial services group Fortis said that together with Britain’s Royal Bank of Scotland Group and Spain’s Banco Santander, it had sold a number of ABN AMRO private equity assets to a Goldman Sachs-led consortium. The Journal said Goldman’s investment comprised 32 European companies as well as roughly $450 million in capital to be invested in future deals.
Other deals of the day:

* Australia’s CSL Ltd, the world’s top maker of blood plasma products, is buying smaller U.S. rival Talecris Biotherapeutics Holdings Corp for $3.1 billion, to boost its presence in the fast-growing biopharmaceutical industry.

Bubbling biotech

A general view shows the headquarter of Swiss drugmaker Roche Holding AG in BaselWhile credit problems plague private equity buyouts and other corners of the M&A world, we’ve seen plenty of strategic deals going through and the Biotech sector is starting to look downright buoyant. Roche‘s $43.7 billion bid to buy out the remainder of Genentech is set to be the largest biotechnology acquisition ever and comes on the heels of a spate of big-ticket purchases. Industry analysts expect more to follow. “Just about every major drug company you talk to says they are devoting a much higher proportion of their own research and investment in stuff they are buying to biotech,” said Paul Diggle, an analyst at Nomura Code. “I suspect Amgen and Genzyme will be the two companies people think about next.” Big biotech deals over the recent past include Takeda Pharmaceutical‘s agreement to buy Millennium Pharmaceuticals for $8.8 billion, AstraZeneca’s purchase of MedImmune last year for $15.6 billion, Novartis‘s purchase of Speedel for about $880 million and GlaxoSmithKline’s record $3.3 billion insomnia drug licensing deal with Actelion.

Senior Goldman Sachs investment banker Ken Wilson will take a leave of absence to advise U.S. Treasury Secretary Henry Paulson on the nation’s banking crisis, people familiar with the matter said, while The Deal hinted the position may be less temporary. Wilson is a vice chairman of investment banking and chairman of financial institutions business at Goldman, where Paulson was CEO until 2006. Wilson has played a key role advising banks on capital raising and reorganizations. He is expected to help address the crisis gripping banks, Wall Street firms and mortgage lenders, the sources said. He is expected to serve without pay through January, when President George Bush’s second term ends.

Other deals of the day:

* British fund manager F&C Asset Management announced a tie-up that will create a UK-owned business with 8.5 billion pounds ($17 billion) of property assets under management.

Cloaked in transparency

harry-potter.jpgSovereign wealth funds meet this week to uncloak any political motivations that might lurk behind their rich capital infusions. The talks are focused on devising a code of ethics to allay Western fears and could help create transparency. Alas, most of substance is being debated behind closed doors. It is being held in Singapore, so perhaps we shouldn’t be surprised that transparency is not a particularly high priority. The funds, controlling an estimated $3 trillion in assets, are owned by national governments and often armed with cash piles from soaring oil prices and trade. They have sunk billions into Citigroup and UBS, which were reeling from the collapse of the U.S. subprime mortgage market. Goldman Sachs estimates U.S. and European banks may need a further capital infusion of more than $200 billion.

It’s a good thing for Anheuser-Busch that Bud Light is so popular. If Belgian-Brazilian brewer InBev manages to take over the company, it will probably put it on a serious diet as it aims to trim up to $1.4 billion of costs. Employees and union officials at InBev describe the tightest of budget controls: mobile phones taken back and returned only to employees who justified a need for one; new pens given out only in return for used ones; and an elevator at the global headquarters closed for several months. The elevator is back in use now, although signs in the lobby read: “Why not take the stairs?” InBev says many such measures, and notably larger water and energy conservation efforts, also serve sustainability targets and that its cost-saving push is simply one pillar of an overall strategy also focused on boosting beer volumes.

Shares in British retailer Marks & Spencer are up on market talk of possible bid interest in the retailer. Rival department stores owner Philip Green, who was linked with a stakebuild in M&S in January, was again mentioned as a possible suitor, traders said, but some attributed the bounce to expectations for upbeat news from an upcoming M&S annual general meeting. Boss Stuart Rose, lauded for reviving the landmark British retailer just a year ago, is battling to save his job after a big profit warning and bungled management changes.

Herd on the Street

Men herd cows and calves belonging to the Hogan family after branding near BoulderOnce upon a time, bank analysts were uniformly upbeat on investment banks. “Sell” ratings were nearly unheard of, and potholes in balance sheets were never as big as the huge, routine earnings beats. Now, with Goldman Sachs’s sector u-turn perhaps at the apex, there is plenty of mud to go around. Today’s hit list includes Barclays, the recipient of 4.5 billion pounds in balance-sheet aid this week. Citigroup says Britain’s third-biggest bank may need to raise a further 9 billion pounds and could take more significant write-downs. Lehman Brothers analyst Roger Freeman took aim at Merrill Lynch, saying the big broker will probably see $5.4 billion of write-downs in the second quarter, mainly from its exposure to monolines. Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts.

Merger activity in the United States dropped 29 percent in the second quarter, faring better than the 40 percent global slump, as corporations filled the void left by buyout firms and targeted big consumer brands such as Anheuser-Busch and Wrigley. “Strategic buyers see an opportunity here due to the absence of the financial buyers. For the last 24 months, prior to the downturn, strategic buyers were getting outbid by financial buyers. That’s not happening now,” said Bob Filek, a partner with PricewaterhouseCoopers’ transaction services. During the first half of the year, private equity deal volume dropped 85 percent in the U.S. and 76 percent globally, according to Thomson Reuters data.

A couple more European banks have increased their China exposure. Deutsche Bank signed a deal with Shanxi Securities to set up an investment banking venture, a source with knowledge of the deal said on Friday. Deutsche planned to take 33 percent of the envisioned Beijing venture, the most allowed. Beijing this year re-opened its coveted but shuttered securities industry to foreign firms after a hiatus of more than a year to let local players merge and strengthen. Several banks, including BNP Paribas, have since expressed an interest in setting up local ventures. Chinese stock markets have shed nearly half their value this year, but foreign banks remain keen on securing a foothold there with an eye on the longer term. Royal Bank of Scotland has won approval from Chinese regulators to buy a nearly 20 percent stake in Suzhou Trust as it expands in corporate banking and wealth management services in China, sources with direct knowledge of the situation said. Suzhou Trust is a mid-sized trust and investment firm.

Did we say “overweight”?

080623_sp_financials2.gifWhat a difference seven weeks makes.

Goldman Sachs made a rather large U-turn on Monday, reversing its May recommendation to overweight the S&P 500′s consumer stocks and take a neutral position in the index’s financial stocks.

It was costly advice for those clients who took it : financial stocks are down 18 percent since Goldman’s initial call, and consumer stocks have dipped 7 percent, while the overall index has slipped a mere 5 percent.

“Obviously that forecast hasn’t turned out too well,” Goldman analysts led by David Kostin wrote in a note, providing a contender for understatement of the year. “Our thesis was clearly wrong in hindsight.”