The Wall Street Journal-20080118-Deal Journal - Breaking Insight From WSJ-com
Return to: The_Wall_Street_Journal-20080118
Deal Journal / Breaking Insight From WSJ.com
Alliance Data:
Doomsday Deal?
---
Should Share-Price Decline
Be a Self-Fulfilling Prophecy,
Arb Investors May Feel Sting
'I've never seen anything like it" is how one hedge-fund investor described it.
This person was talking about Alliance Data Systems, the transaction processor Blackstone Group agreed to buy for roughly $6 billion. The closing of the transaction, expected by the end of last year, is hung up in Washington. That has pushed arb investors -- who buy stocks of companies in mergers that have yet to close and already are antsy over a series of broken deals -- into panic mode. (The biggest arbs in the stock at around the beginning of December were affiliates of hedge funds Farallon Capital Management and SAC Capital.)
ADS shares have been on a downward march and yesterday fell another $10.34, or 16%, to $52.82 in 4 p.m. composite trading on the New York Stock Exchange. That pales in comparison with the $81.75-a-share acquisition price.
After the market closed, Alliance Data said Blackstone and the company "are continuing to work together to close the deal as quickly as possible." It also said business prospects haven't diminished. That helped erase a portion of the stock's loss in regular-hours trading. It rose 6% to $56 in after-hours trading.
Still, the decline in the stock has us wondering whether it could become a self-fulfilling prophecy. The stock is well below the roughly $63 it traded at in May, when Blackstone agreed to the deal, and probably would be even lower but for its tenuous tether to the deal price. That means Blackstone is on the hook to pay a lot more for the company than the market thinks it is worth. Wonder what Blackstone's limited-partner investors think about that?
Amid all the uncertainty, one thing is clear: there will be a lot of very unhappy -- and potentially unemployed -- arb investors should the stock decline indeed be a self-fulfilling prophecy that kills the deal.
-- Dana Cimilluca
---
Rio Tinto, Rules
And Black Cows
The late basketball coach Jim Valvano used to say that you never instruct players on what not to do. If you tell them not to think about black cows, he said, you can be sure that the first image going through their minds is of a black cow.
This image came to our mind with the news that Rio Tinto will raise prices for iron ore. Now Rio Tinto, trying to fend off a $142 billion takeover bid from rival BHP Billiton, is considering an array of options, including asset sales and moves to increase shareholder value. Certainly raising prices -- and thus boosting earnings -- would help increase shareholder value. Still, the move may have at least an unintended benefit -- and, at most, an ulterior motive.
That is because any BHP-Rio Tinto deal would get a close look from antitrust regulators around the world, as the combined company would have operations on six continents and a leading market share in iron ore, copper, aluminum and other vital natural resources. With such sweeping reach would come increased pricing power.
Officials and executives from China, among the largest consumer of many key minerals, already have expressed concerns about the prospect of higher prices. And BHP Chief Executive Marius Kloppers has been working to reassure corporate buyers and government officials, arguing that a merged company would be able to deliver 10% more ore to China, and that the increased supply would help moderate prices.
The Rio Tinto pricing move isn't that broad, affecting just 10% of the iron ore it supplies to long-term customers. Still, we have a feeling Rio Tinto's move just might have regulators thinking about some price-hiking black cows.
-- Gregory J. Corcoran
