MoneyGram 'shoots itself'; money on Delta-Northwest deal; Kellwood ready to fight; Ocwen going private?

By Evan Weinberger

New York, Jan. 15 - MoneyGram International Inc. lost a bundle on bad subprime mortgage and collateralized debt obligations, or CDOs. Enter Thomas H. Lee Partners, which is in negotiations to take over 60% to 65% of MoneyGram's operations, the company said in its announcement.

The Minneapolis-based money transfer firm announced Tuesday morning that it lost $570 million between the end of September and the end of November last year. That brought the total losses in their investment portfolio to $860 million through the end of November 2007.

MoneyGram warned that it's still going through the books and any further losses would appear in its December accounting. MoneyGram expects to see losses in excess of the $570 million between the end of September and the end of November.

The company also announced that it sold $1.3 billion in securities so far this month, resulting in a $200 million loss.

Private equity shop Thomas H. Lee Partners is in negotiations with MoneyGram to take over 60% to 65% of the company. MoneyGram expects Thomas H. Lee to pump between $750 million and $850 million in a private placement of convertible preferred stock. Third-party lenders would inject another $550 million to $750 million in debt financing as part of the proposed structure, which will all be in addition to MoneyGram's existing $350 million credit agreement.

The proceeds from the investments will be used to move MoneyGram away from the bad investments of the past and into the safer realm of government, government agency and municipal securities. MoneyGram said in the statement that it expects the lower yields on those securities to dampen its profits.

MoneyGram expects to come to an agreement with Thomas H. Lee, whose ownership stake will depend on how much money is invested and MoneyGram's losses. They expect financing to be concluded in February.

MoneyGram is still allowed to talk with Euronet Worldwide, Inc., a competitor that had been pressuring MoneyGram to put itself up for sale.

A market watcher could only laugh ruefully when asked what happened to MoneyGram. "They shot themselves in the foot," he said. "I don't know how much more to say than that. That's what blows my mind. And it's in a business that's going to continue to make money."

He added that any slowdown in MoneyGram's business is not due to the heated debate about immigration in Washington. Instead, any slowdowns are driven by the wider economic slowdown. Many immigrants work in construction and other sectors hammered by falling home prices, mortgage foreclosures and weakening consumer spending; so, they're sending less money home.

However, given MoneyGram's existing network, the source said the company will still be profitable once it clears out the bad debt and secures more financing. "It's high margin, low maintenance," he said.

MoneyGram said in its statement that it had enough cash on hand to cover day-to-day expenses. It's not clear whether investors bought that, as the company's stock (NYSE: MGI) got cut in half Tuesday, losing $6.02, or 49.47%, to close at $6.15.

Citigroup, poor retail numbers smash markets

Citigroup's $9.8 billion fourth-quarter loss and declining December retail sales in the retail sector set off a market stampede Tuesday.

The Dow Jones Industrial Average tumbled 277.04 points, or 2.17%, to close at 12,501.11.

The Nasdaq crumbled 60.71 points, or 2.45%, for a 2,417.59 close.

And the Standard & Poor's 500 handed back 35.30 points, or 2.49%, to close at 1,380.95.

Delta betting on Northwest?

It appears that Delta Air Lines Inc.'s CEO Richard H. Anderson has received permission from his board of directors to enter into merger talks with other airlines.

Reports surfaced Tuesday morning that those talks have begun with Minneapolis-based Northwest Airlines Corp. and Atlanta-based UAL Corp., the parent company of United Airlines. Some media reports said Delta wanted to complete a deal within two weeks.

Combined with falling oil prices, word of the merger talks sent airline stocks higher, with one analyst remarking that the only green he saw on his screen was in the airline sector.

Market watchers appear to be putting their money on Dallas-based Delta merging with Northwest.

"If I had to bet, I would say Northwest," the analyst said. "If you're going to combine and take out capacity, that's one reason to merge. But it would seem to make more sense to build one bigger surviving network and crush the opponents."

The analyst said that the two companies' routes were more compatible with each other, allowing for increased flight coverage.

A second market watcher said that the strengths of the two companies match up very well. Delta has few, if any, routes on the West Coast or in Asia, Northwest's major advantages. And Northwest has little, if any, East Coast exposure.

United has strong routes throughout the east and west and has good connections with other airlines, meaning there would be a lot of redundancy if Delta and United merged, the market watcher said.

"[Delta and Northwest] complement each other," he said. "On the surface, it seems like regulatory risk."

Plus, both analysts said, United is coming out of financial trouble while Northwest was still struggling. Northwest needs a deal more, the analysts said.

Investors seemed to be putting more of their money on a Delta-Northwest deal than a deal with United.

Northwest stock (NYSE: NWA) rose $1.37, or 8.56%, to $17.38.

UAL stock (Nasdaq: UAUA) was up $1.64, or 4.98%, to $34.57.

Delta stock (NYSE: DAL) gained 68 cents, or 4.44%, to close at $15.98.

Kellwood going down with a fight?

On Tuesday morning, Sun Capital Securities Group, LLC announced that one of its affiliates had launched a hostile takeover bid of St. Louis-based clothing manufacturer Kellwood Co.

Cardinal Integrated, LLC is offering Kellwood stockholders $21 per share, valuing Kellwood at $762 million. The deal represents a 38% premium over Kellwood's closing stock price on Sept. 18, 2007, when the takeover bid was made to Kellwood's board of directors, and a 27% premium on Kellwood's close Monday, a statement from Sun Capital said.

Sun Capital owns 9.9% of Kellwood and intends to nominate its own slate of directors at the company's 2008 annual meeting.

"We are disappointed that Kellwood's board is unwilling to enter into a constructive dialogue with us regarding what we believe is a very compelling transaction for Kellwood's stockholders," Sun Capital vice president Jason Bernzweig said in the statement. "This refusal to discuss a potential transaction has forced us to take our offer directly to Kellwood's stockholders - enabling them to choose for themselves between the value certainty of our offer and trusting management to successfully execute Kellwood's highly speculative strategic plan."

A trader said that Kellwood is fighting back. "[Kellwood] has not simply rebuffed Sun Capital, but they've embarked on a buyback of their straight corporate debt," he said, adding that the company has authorized a $60 million bond tender offer. Sun Capital said it will lower its price to $19.50 per share if Kellwood doesn't rescind its bond tender offer.

The trader said that a takeover requires approval by 75% of the outstanding shares, so buying back 17% to 18% of them would make getting the supermajority that much harder. "They're playing hardball in a climate that's not the best for their business, retail," he said.

Kellwood stock (NYSE: KWD) rose $1.61, or 9.75%, to $18.12 on word of the takeover attempt and the company fighting back.

Ocwen receives private bid

William C. Erbey, chairman and CEO of West Palm Beach, Fla.-based Ocwen Financial Corp., is leading a group of investors in an effort to take the business outsourcing firm private.

In a letter to the company's board of directors dated Jan. 14, Erbey offered $7 for each share of Ocwen common stock. Funds managed by Oaktree Capital Management LP and Angelo, Gordon & Co. LP are also a part of the bid.

"I would participate by making a significant investment in the transaction, and I expect that we would provide members of the company's senior management team with the opportunity to participate in the transaction as well," Erbey wrote. "I would continue as chairman and CEO following the transaction and would expect that our senior leadership team would continue to lead the company into the future with me."

In the letter, Erbey said that the financing will come from equity from the investment funds, Erbey and other members of senior management who are in on the deal. Erbey also proposed issuing up to $150 million in debt or other financing to repurchase some of Ocwen's outstanding debt.

If debt financing doesn't come through, Erbey said the Oaktree and Angelo, Gordon funds would be willing to fund any debt repurchases. "We expect that the company will not have more debt, and will more likely have less debt, than it currently has as a result of the transaction," Erbey said.

Erbey added that a special committee of Ocwen independent directors authorized to get outside legal and financial advice will receive a full merger proposal soon.

The committee has already retained Evercore Group for financial advice and Shearman & Sterling LP as its legal adviser.

"The board of directors cautions the company's stockholders and others considering trading in its securities that no decisions have been made by the board with respect to the company's response to the proposal," a company statement said. "There can be no assurance that any definitive offer will be made, that any agreement will be executed or that any transaction will be approved or consummated."

Ocwen stock (NYSE: OCN) surged on Erbey's proposal, gaining $2.11, or 53.02%, to close at $6.09.

Warburg Pincus buys Lifecore

Private equity shop Warburg Pincus agreed to a $239 million takeover of Lifecore Biomedical Inc., the Chaska, Minn.-based medical device maker announced Tuesday.

Warburg Pincus will pay Lifecore's stockholders $17 per share, representing an approximately 30% premium on the volume-weighted average price of Lifecore's stock over the last 30 days.

The deal is expected to close by the end of the first quarter.

"In addition to our shareholders, who we believe will receive fair value for their Lifecore shares, we believe that this transaction with Warburg Pincus is positive for our employees and our customers," Dennis J. Allingham, Lifecore's president and CEO, said in a statement announcing the deal. "The transaction will allow us to continue to provide exceptional products to our customers. As a private company, Lifecore will have greater flexibility to focus on its long-term strategic direction."

Lifecore Biomedical stock (Nasdaq: LCBM) jumped $3.92, or 30.53%, to $16.76 on the news.

The deal is subject to regulatory approvals but not to any financing condition. While this technically means that the deal will go through whether Warburg Pincus can get funding or not, one market source said that he's seen this game before. "Almost all the deals over the last year, in theory," were not subject to financing conditions, he said. That includes several that did not go through because of financing problems.

The market source said the prime example is the collapse of Cerberus Capital Management's takeover of United Rentals.

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