Financials lower as Fitch cuts FGIC; M&A deals under pressure; Feds parse 3Com deal's China link

By Paul A. Harris

St. Louis, Jan. 30 - Situations generating discussion among market sources on Wednesday were from the financial sector which, according to one market source, was responsible for dragging the entire market lower, and the M&A situations, a number of which are perceived to be headed for the dustbin, as sponsors and/or banks continue to appear to be wanting out.

A source told Prospect News on Wednesday afternoon that both situations, one way or another, reflect the continuing difficulties in the credit markets - difficulties which Wednesday's dramatic Fed rate cuts won't necessarily address.

Stock prices briefly rallied Wednesday afternoon on news that the Federal Reserve Bank's Federal Open Market Committee decreased the benchmark Fed Funds interest rate by 50 basis points.

Wednesday's 50 basis points cut - which passed on a nine to one vote, with Dallas Fed President Richard Fisher voting for no change - follows a 75 basis points cut on Jan. 22.

The combined 125 basis points of Fed Funds rate reduction over the course of eight days takes the benchmark down to 3%. That's reduced from 5¼% in September 2007.

However the markets failed to sustain the Wednesday afternoon rally which was sparked by the FOMC news, a source told Prospect News.

Among the major U.S. indexes the S&P 500 sustained the biggest percentage loss on the day, nearly half a point, ending the mid-week session down 6.49 to close at 1,355.81.

The Nasdaq closed 0.38% lower, down 9.06 to close at 2,349.0.

The Dow, meanwhile, was down three-tenths of a percent on the day, or 37.47 lower to close at 12,442.83.

The financials

With respect to the financials, the marquee news on Wednesday was that Fitch Ratings downgraded FGIC Corp.'s long-term issuer rating to A from AA, citing significant uncertainty regarding the company's franchise, business model and strategic direction, as well as uncertain capital markets, the company's future capital strategy, ultimate loss levels in its insured portfolio, and the challenges in the financial guaranty market overall.

Meanwhile, according to one investor, the buzz on the Street is that Ambac Financial Group, Inc. and MBIA Inc. (NYSE: MBI) may also be subjected to downgrades by Moody's Investors Service and Standard & Poor's.

On Wednesday shares of Ambac (NYSE: ABK) lost more than 16% of their value, down $2.08, to close at $10.85 per share.

Meanwhile MBIA shares (NYSE: MBI) gave up 12.64% of their value, closing the session at $13.96 per share, down $2.02.

However against this backdrop shares of Scottish Re Group Ltd. (NYSE: SCT) held in during the mid-week session, gaining eight cents (8.16%) to close at $1.06 per share.

Break-up scares

Elsewhere on Wednesday, expectations that sponsors and/or investment banks will ultimately bail on some of the LBO deals hatched during the halcyon days of 2006 and the first half of 2007 appeared to cause erosion in some share prices.

Shares of BCE Inc., which opened the session $34.77, tumbled throughout the morning, drooping as low as $33.48.

One source close to the LBO financing, which would have Teachers Private Capital, Providence Equity Partners and Madison Dearborn Partners acquire BCE in all-cash transaction valued at C$51.7 billion, remarked that the market has been hearing speculation for quite some time that the deal will fall through.

The source added that news earlier in the week that the Blackstone Group cited regulatory hurdles as it scuppered its $6.4 billion LBO of Alliance Data Systems Corp. likely drove home to investors the idea that equity sponsors, once seen as unblinking, may now be keeping their peeled for the exits.

Trailing Wednesday's Fed announcement, the price of BCE (NYSE: BCE) shares shot up to $34.87, only to decline with the rest of the market late in the day. BCE closed at $34.24, down $0.21, or 0.61%, on the session.

Meanwhile Alliance Data Systems (NYSE: ADS), which announced Wednesday that it is filing suit against Blackstone in order to compel the private equity firm to go through with the deal, dropped by $0.30, or 0.70%, to close at $42.70.

Elsewhere, another storied name on the list of endangered deals, Clear Channel Communications Inc. (NYSE: CCU) ended the session basically unchanged at $29.16 per share, dropping a penny, or 0.03%.

National Security worries on 3Com

Meanwhile the 3Com Corp. LBO deal is rocking in the choppy waters of Washington, D.C., according to one source, who said that the Bain Capital-led deal, now under scrutiny by the Committee on Foreign Investment in the United States, would give China-based Huawei Technologies a 16.5% stake in the data storage and technology services company.

The reason for the scrutiny is that some of 3Com's services have national security implications.

Further, according to the source, one of Huawei's founders was an officer in China's Peoples' Army.

Late last September 3Com announced that it had agreed to be acquired for approximately $2.2 billion in cash.

Under the terms of the agreement, shareholders will receive $5.30 in cash for each share of 3Com common stock they hold. This represents a premium of approximately 44% over 3Com's closing price of $3.68 on Sept. 27, 2007.

On Jan. 24 the board of directors of 3Com announced that it has unanimously approved a merger agreement, and scheduled a special meeting for Feb. 29, when shareholders will vote on the buyout.

The market source said that the merger agreement contains a reverse termination fee of $110 million, falling to $66 million if the financing is unavailable.

Shares of 3Com (Nasdaq: COMS) lost $0.12, or 2.86%, on Wednesday to close at $4.08.

Landrys lower

Shares of Landry's Restaurants Inc. (NYSE: LNY) fell on Wednesday trailing news earlier in the week that chairman, president and CEO Tilman Fertitta proposes to take the company private.

The deal would see Fertitta acquiring all of the company's outstanding stock.

Landry's shareholders would receive $23.50 per share in cash, an approximately 41% premium over the stock's closing price of $16.67 prior to announcement of the acquisition.

On Wednesday Landry's shares closed down a buck, or 5.08%, at $18.70 per share.

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