Idea of Altria smokeless tobacco deal lights investors' fire; Saks sale seen less likely; Fannie, Freddie dive

By Paul Deckelman

New York, Sept. 5 - Investors were trying to read the smoke signals on Friday, as market buzz swirled around whether cigarette giant Altria Group Inc. will make a play for smokeless tobacco products producer UST Inc. Talk of such a deal - which The New York Times said could be announced as soon as Monday - gave UST's shares a big boost. Altria, however, continued to coyly insist late Friday that all of this was mere "speculation."

Take-Two Interactive Software Inc. says that private negotiations with would-be suitor Electronic Arts Inc. are continuing - but the New York-based video game maker also says that it is continuing formal discussions on a possible tie-up with other parties as well.

The deal that nobody wants - at least, nobody who holds any shares of Fannie Mae and Freddie Mac - just won't go away, and may be closer than originally thought. The prospect of a federal bailout that will render those shares essentially worthless resurfaced late in the session and hammered both GSE companies down in after-hours trading.

There was also some market discussion about a potential deal that probably won't get done, for retailer Saks Inc., which is now seen less likely to get any kind of a buyout offer from the Bauger group, at least for the remainder of this year, owing to the company's reduced earnings outlook and the continued weakness in the credit markets.

Wall Street was generally spooked early on by the worse-than-expected August employment statistics - but battled back from its initial decline later on as investors moved into financial issues that had taken a pounding during Thursday's session. The Dow Jones Industrial Average came back from a 150 point deficit and ended up 32.73 points, or 0.29%, to 11,220.96. The broader stock market ended mixed, with the Standard & Poor's 500 index rose 5.48 points, or 0.44%, to 1,242.31, and the Nasdaq composite index fell 3.16 points, or 0.14%, to 2,255.88.

UST on fire on takeover talk

They say that where there's smoke, there's fire - and there was an awful lot of smoke, but precious little actual fire on Friday as investors in UST bet heavily that newspaper reports indicating that top U.S. cigarette manufacturer Altria, would make an offer for the Stamford, Conn.-based producer of smokeless tobacco products, like the Copenhagen and Skoal lines of chewing tobacco, were correct.

The New York Times reported that Richmond, Va.-based Altria, best known for Marlboro and other popular cigarette brands, was in discussions to buy UST for more than $10 billion. The paper said that an official announcement could come as early as Monday.

However, as late as Friday afternoon, Altria was still dismissing such talk as "pure speculation," and declining comment, in line with company policy.

"It looks like a good deal," one anonymous market source opined, noting Altria's "no comment," reaction.

He theorized that assuming Altria announces a deal on Monday or soon after, "it will come in at under $70 per share," with Goldman Sachs having named that figure as the likely deal price. "It seems like a pretty hefty premium to me, considering that [UST] already trades at a premium to its peers and now you add a premium on top of that."

Assuming a deal gets done around that price, he said, "it looks like it could work for them."

The source said that some people in the market believe that such a combination would not present any kind of anti-trust problems, since UST and Altria basically operate in two separate areas of the tobacco industry, Altria as a producer of cigarettes and UST in smokeless tobacco.

However, he said that "you've got to figure that there could be some anti-trust issues, when you would have one operator enjoying the lion's share of both the smoked tobacco and smokeless tobacco markets. The other school of thought is they're two different areas. Most people think [such a deal] would fly right through."

He said that any such deal that emerges will have been "a long time in the making," and "everyone seems pretty happy about the deal - anyone who follows either company."

Analyst Marc Greenberg of Deutsche Bank Securities agreed in a research note that with UST as the dominant player in the increasingly lucrative smokeless segment of the overall tobacco market that Altria covets - it has tried to enter the field by selling its own smokeless products under its iconic Marlboro brand name, but with only limited success - "from a strategic point of view, [the] logic of a deal looks indisputable."

UST shareholders apparently think so as well; UST (NYSE: UST) jumped $13.55, or 25.09%, to end at $67.55. Volume of 34 million shares was 20 times the norm. Altria Group (NYSE:MO) was up 29 cents, or 1.40%, to end at $20.95. Volume of 18 million shares was a little heavier than usual.

Take-Two, Electronic Arts continue talks

On the other hand, a deal which is by no means considered in the bag is the potential linkup between video game producers Take-Two Interactive and Electronic Arts.

The two companies recently signed a non-disclosure agreement under which Take-Two agreed to share its financial projections and other pertinent non-public information with Electronic Arts in order to convince the latter company to up its proposed $25.74 per share/$2 billion total buyout offer for Take-Two, which has consistently rejected the offer as inadequate.

Under the terms of the agreement, the two companies are prohibited from publicly discussing their talks, other than noting that those private negotiations are continuing. However, on its conference call on Thursday afternoon following the release of third-quarter results, Take-Two executives, while acknowledging that the talks with Electronic Arts were continuing, also said that it was continuing talks with other potentially interested parties as well, without elaborating.

Meanwhile, according to analyst Douglas Creutz at Cowen & Co., there was "some chatter going around" during the week that that the deal "might be in trouble" due to Electronic Arts losing interest. However, he dismissed this as "purely rumors, nothing factual."

In fact, if anything, Redwood City, Calif.-based Electronic Arts may be more eager than ever to get a deal done with its East Coast rival, producer of the hot-selling "Grand Theft Auto" game series. Spurred on by the runaway success of the very dark and ultra-violent Grand Theft Auto IV, Take-Two reported that net income in the fiscal third quarter swung to a net profit of $51.8 million, or 67 cents, versus last year's loss of $58.6 million, or 81 cents a share. Excluding non-recurring special items, earnings grew to $71.5 million, or 93 cents a share, from a year-earlier loss of $44.9 million, or 62 cents a share, as sales more than doubled to $433.8 million from $206.4 million.

The company projected that year-end earnings are now expected in a range of $2.08 to $2.12 a share - well above consensus analysts' estimates in the low $1.80s. Sales guidance was upped to between $1.50 billion and $1.55 billion.

Take Two (Nasdaq: TTWO) , whose shares had fallen Thursday on fears that Electronic Arts was losing interest, rebounded on Friday by 38 cents, or 1.64%, to $23.61 on volume of 1.8 million shares, somewhat above the norm. Electronic Arts (Nasdaq: ERTS) ended up 46 cents, or 1.04%, at $46.48, on volume of 4.7 million shares, about the usual turnover.

Saks buyout seems less likely

A buyout which is seen as increasingly less likely to happen is the rumored deal for Saks Inc., which had caught the interest of Iceland's Bauger Group Hf. as far back as last October, according to regulatory filings. The New York-based operator of the famous Saks Fifth Avenue and other store chains got a boost last month when 8% owner Bauger said that it was still interested, despite the difficult U.S. retailing environment.

However, the New York Post reported Friday that a deal is now less likely to happen - and may not happen at all during the rest of this year.

The paper quoted an unidentified source close to Bauger as saying that the current tight credit markets and a tough economic outlook make financing such an acquisition difficult at current prices. The source cited Saks' recent cut in its projections for EBITDA as a key off-putting factor on a deal.

Saks recently lowered guidance in a number of areas, including full-year operating margins, excluding certain items, which are expected to decline from 2007 levels. It also forecast that same-store sales, the key retailing industry metric, will be anywhere from unchanged to down by low-single digits on a percentage basis for the second half of the year.

Saks (NYSE:SKS) sell 8 cents, or 0.71%, to $11.19. Volume of 4.3 million shares was almost a third above normal levels

Fannie Freddie fall after-hours

Late-afternoon news reports indicating that the U.S. Treasury was close to an agreement to bail out the struggling government-sponsored enterprise mortgage buyers Fannie Mae and Freddie Mac sent the shares of the two quasi-government agencies nose-diving in after-hours trading on Friday.

The Wall Street Journal said on its website that Washington may soon step in to provide a financial boost to the two companies, which have booked billions of dollars of losses as a result of the ongoing credit crunch. Between them, the two companies own or guarantee about $5 trillion of the $12 trillion in U.S. home loan debt.

The Journal said that the plan could be announced as early as the weekend, with details still being hammered out. Among other things, these are expected to include executive changes at both companies.

The idea of a bailout got a heavyweight endorsement on Friday, as Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co., called for the Treasury to "open their wallet" to keep the companies solvent.

Most such plans envision wiping out existing common shareholders, and many would also decimate preferred stockholders.

While the two agencies' shares had recently strengthened smartly on indications that a federal bailout and companion stockholder wipeout would be needed, the latest news knocked them back down again, and badly.

Fannie Mae (NYSE:FNM) rose 62 cents, or 9.66%, to $7.04 during regular trading hours. However, in after-hours dealings those shares plunged $1.54, or 21.88%, to $5.50

Freddie Mac (NYSE:FRE) rose 15 cents, or 3.03%, to $5.10 during the regular session. However, in after-hours dealings it sank by $1.06, or 20.78%, to $4.04.

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