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.

In a letter to shareholders, Wendy's International Inc. spent a lot of space saying nothing about the ongoing auction of the fast-food chain. The letter, which was contained in a filing with the U.S. Securities and Exchange Commission on Monday, defiantly explained why the company can't and won't provide any insight into its strategic review and any takeover bids it has received.

"Many of you have expressed disappointment that management hasn’t been able to offer more information about the process. However, public companies rarely comment on the status of strategic reviews until decisions have been made," the company said.

Wendy's insists it is playing by SEC and New York Stock Exchange rules governing public statements, but maybe Wendy's isn't talking because it has nothing to say?

The auction of Wendy's, which has a market capitalization of about $2.4 billion, has been a dud.

"The Special Committee process is complicated for several reasons. The stock market has fluctuated widely since the committee was formed. There have been reports in the media about complex financing transactions and potential bidders that include Wendy’s franchisees, private equity firms and one entity that owns a competing concept in the quick-service restaurant industry. In addition, the sub-prime mortgage problems have rocked the world’s credit markets and greatly curtailed merger and acquisition activity," Wendy's said in the SEC filing.

In November, Triarc Cos Inc., the restaurant chain led by activist investor Nelson Peltz, said it made an offer to buy Wendy's, but the bid was lower than the price it touted in July. Triarc had previously said it would be prepared to offer $37 to $41 a share for Wendy's, but its actual bid came in below that. Wendy's stock closed on Tuesday at $27.07, down about 15 percent since it put itself up for sale in April.

In reality, Peltz's lower-than-expected offer may be Wendy's only viable bid. Media reports said that a group that includes former Carl's Jr. and Hardee's Chairman William Foley and buyout firms Ares Management, Oaktree Capital Management and TH Lee decided against submitting an offer.

Yet, Wendy's has failed to hold meaningful talks with Triarc, sources familiar with the situation said. "How do you hold an auction and then not talk to the bidders?" one source asked.

Wendy's and Triarc could not be immediately reached for comment.

Peltz has pushed for a shake-up at Wendy's since last year. Peltz's Trian Fund Management has a 9.8 percent stake in Wendy's, according to a recent SEC filing. Peltz is chief executive of Trian and chairman of Triarc.

If Wendy's fails to accept a takeover bid, Peltz could continue to agitate for change by starting a proxy battle to nominate new board members or launch a hostile takeover bid, sources have said. But there's no time pressure, given Wendy's glacial pace of change. It started its review of strategic options in April -- nine months ago. That's a slow-cooked burger.

(Additional reporting by Nichola Groom and Megan Davies)

Restoration Hardware is on Eddie Lampert's shopping list this holiday season.

Sears Holdings Corp., the retailer controlled by the hedge fund manager, acquired a 13.7-percent stake in Restoration Hardware Inc., which analysts said could signal a new acquisition phase for Sears.

That could set it on a collision course with a buyout group that sealed a a deal recently to purchase the company.

Earlier this month, specialty retailer Restoration Hardware agreed to a management-led buyout with Catterton Partners. Restoration Hardware, which had rejected an initial overture from Sears in October, had 35 days to solicit better offers.  Sears' purchase of Restoration was disclosed in a filing on Monday.

In an email to employees that Restoration Hardware Chairman Gary Friedman signed "Carpe Diem," the specialty retailer confirmed that Sears signed a confidentiality agreement to review the boutique retailer's books and evaluate the possibilty of making a rival takeover bid.

Sears acquired the stake after the Catterton buyout announcement, "indicating a more agressive approach," Credit Suisse said.

"It is that 'make a deal' potential that continues to support the stock as results continue to deteriorate. Ahead of what should be an ugly Q3 report next week, perhpas we are entering the next phase of the Sears Holdings story," Credit Suisse analysts said.

Restoration Hardware hawks sheets, furniture and gifts to affluent, well educated 35 to 60 year old customers, according to its SEC filings. That might be an odd fit for the more populist Sears. But Credit Suisse analysts said Sears might be trying to fill its home goods void once its partnership with Martha Stewart ends.

Home Depot Inc.’s auction of HD Supply seemed troubled from the start. Now the deal may be renegotiated as the private equity buyers balk at the $10.3 billion price tag amid the floundering housing market and tight credit conditions.  

“This clearly is not a near term positive to (Home Depot) nor to a market nervous over credit,” said Credit Suisse analyst Gary Balter.  “The deal was not contingent on financing, though the material adverse change (MAC) clause may be broad enough to push for renegotiation.”

Balter said it was likely that HD Supply, which sells building materials, waste water and utility products to municipalities and contractors, would be sold for “materially less” than the current agreement.

“We would not be surprised if (Home Depot) ends up with a piece of the equity similar to Daimlers retained interest in Chryslermaybe up to 20 percent as that would create a better equity floor for the debt financing. Over time, this would not be the worst thing for HD as we believe there is value in HD Supply.”

Shares of Home Depot shed $1.71, or 4.5 percent, in midday trading after it said it may reprice the HD Supply deal and cut the price of a planned share buyback. 

“This is clearly a negative near-term for (Home Depot) … and may have broader implications for other pending capital markets transactions.”

Revlon Inc. needs to be spruced up by an outside investor, according to one analyst.

Ronald Perelman, the financier who controls Revlon, should tap outside strategic investors to broaden the cosmetic maker’s international distribution, improve its skin care research and development and give it access to low-cost financing, Credit Suisse analysts said.

“Why is Ron Perelman not talking to strategic investors? We continue to  believe that a strategic investor such as Beiersdorf would be REV’s best option to return to market share growth,” Credit Suisse analysts said in an Aug. 2 research report.

But will Perelman, who wrested control of Revlon in 1985, be open to an outside investor? 

Revlon declined to comment. Beiersdorf AG, a German cosmetics company which makes Nivea skin care products, could not be immediately reached for comment.

Revlon is scheduled to report second-quarter earnings on August 8, and analysts said they would like to see signs that its marketshare losses had slowed or stopped. 

Revlon also has $167 million in senior subordinatd debt due in February, 2008, Credit Suisse said. Given the tightening of the credit markets, will Revlon struggle to refinance that debt?  

In addition to dry details about interest rates, Credit Suisse also wants the company to provide some color about the initial sales of Revlon 3D Extreme Mascara and Almay Pure Blend Mineral Make-up.  The market also is keen for details on other new product introductions for the second half of 2007, as well as a preview for 2008,  which Credit Suisse sees as critical for Revlon. 

The skittish debt markets may take some of the fizz out of Cadbury Schweppes Plc’s auction of its North American beverage unit, according to sources familiar with the situation.

Cadbury remains in active talks with two groups of private equity firms, but final bids may fall short of recently tempered expectations. Bids, which are due later this week, may hover around 7 billion pounds, sources said.

Reuters reported earlier this month that price tag had softened to around 7.5 billion pounds, down from 8.0 billion, as tighter credit conditions made it more costly for private equity firms to borrow money. Now, the price could fall even lower as the debt market continues to swoon. 

Bankers on Wednesday postponed a $12 billion syndicated loan to finance the sale of Chrysler Group, while Alliance Boots delayed syndication of $10.4 billion in debt backing its buyout.  

Despite the credit crunch, Cadbury’s North American beverage business, which includes Dr Pepper, 7UP, Snapple and Canada Dry ginger ale, is “still a coveted business and hard to duplicate,” said one source.

A team including Blackstone Group, Kohlberg Kravis Roberts & Co. and Lion Capital remains viewed as the front-runner with the most interest and financing in place, sources said. The Blackstone group bought Cadbury’s European beverage unit last year.

The second bidding group includes Bain Capital Partners, Thomas H. Lee Partners and TPG, sources said. Blackstone, Cadbury, KKR, Thomas H. Lee and TPG declined to comment. Bain, Lion Capital, could not be immediately reached for comment. 

So, the auction isn’t drying up. It just might have less fizz.

Pancake house IHOP Corp. ordered up a large feast on Monday when it announced its $1.9 billion acquisition of bar-and-grill chain Applebee’s International Inc.  –  a company nearly twice its size. 

IHOP, which has a market capitalization of about $980.6 million, will use securitized debt backed mostly by Applebee’s restaurant and real estate assets to fund the purchase of the much larger company, whose market value is $1.82 billion.

IHOP, which franchises 99 percent of its 1,319 restaurants, plans to revamp Applebee’s business model away from owning and operating its own restaurants to becoming predominantly a franchisor. Applebee’s has nearly 2,000 restaurants, of which 508 were company-owned. 

“The value is in the restaurants and the real estate. You’ve seen this play in Sears-Kmart, Toys R Us and elsewhere. The companies may have problems, but the land they are sitting on still has value and the brand names still have value that can be leveraged,” said one consumer investment banker who declined to be named.

Applebee’s, which has been under shareholder pressure to improve its stock price, said earlier this year it was reviewing its options. The company has struggled amid weak consumer spending, higher gas prices that siphon away consumers’ disposable income, as well as stiff competition from rivals and grocery stores that are selling more prepared meals.

“While the sale price (of Applebee’s) is somewhat less than we expected, it does illustrate value of franchised businesses with tools such as securitized lending, refranchising and G&A (general and administrative) reductions that are available,” said UBS Equity Research analyst David Palmer. 

“Importantly, the 9-tmes forward EBITDA (earnings before interest, taxes, depreciation and amortization) price highlights the value of a franchised business with owned real estateeven one with long-term issues like (Applebee’s),” Palmer said.

Other companies such as pizza-delivery chain Dominos Pizza Inc. have recapitalized on their own. Palmer suggested that Brinker International, which owns Chili’s Grill & Bar, could help its stock price by following IHOP’s plans for Applebee’s.
 
(Photo credit: IHOP website)  

A plan by antitrust regulators to sue to block Whole Foods Market Inc.’s purchase of Wild Oats Markets could put a chill on the retail merger scene, and cool the takeover hopes of book-store chain Borders Group Inc.

Goldman Sachs on Wednesday downgraded Borders to “sell” from “neutral,” saying it expects the bookseller’s stock to fall due to the reality of rigorous antitrust regulation of retail deals.

Shares of Borders, long-rumored to be a takeover target, have risen about 10 percent in the past year in hopes it could be acquired by rival Barnes & Noble Inc. or private equity firms. A possibility previously discussed here by Reuters.

Borders’ stock shed 98 cents, or 4.5 percent, to $20.80 in early trading on Wednesday in the wake of the Goldman downgrade. The stock hit a 52-week high of $24.19 in November. The book store has a market capitalization of about $1.3 billion.

Regulatory opposition to the merger of Whole foods and Wild Oats makes a deal less likely for Borders, Goldman said. Shares of Borders, the second-largest U.S. bookseller, are overvalued on a purely fundamental basis, Goldman said.

The Federal Trade Commission on Tuesday it would challenge the Whole Foods-Wild Oats deal in federal court because it would eliminate competition between “two uniquely close competitors” in many local markets around the United States.

Even if a deal with Barnes and Noble seems unlikely, private equity firms could still have an appetite for Borders. Last month, Reuters reported that private equity firm Pacific Equity Partners had expressed interest in buying the 24-store Australian unit of Borders.