Ambac plunges on funding plan; shareholder re-revolt re-lifts Mercer; Quebecor dives on financing failure

By Paul A. Harris

St. Louis, Jan. 16 - News from the monoline sector remained negative on Wednesday as Ambac Financial Group, Inc. announced a capitalization plan which includes a $1 billion minimum preferred deal. However a source on the Street heard that Berkshire Hathaway is going to invest in the preferred.

Meanwhile a minority stakeholder in Mercer International Inc. relaunched a revolt that was initially undertaken in mid-December. As was the case in December, the Mercer share price got a boost.

And Quebecor World shares continued to plummet on news that the Canadian printer failed to come up with new bank financing - putting it on track for bankruptcy in the view of many in the market. However in after-hours trading the company was heard to have agreed to rescue financing, and the stock was up a little.

Markets remain volatile

The major stock indexes got another bumpy ride on Wednesday, as the Labor Department reported that consumer prices rose in 2007 at the fastest pace in 17 years: 4.1%, up from 2006's 2.5%. Energy and food prices saw their biggest increases since 1990.

The Dow Jones Industrial Average lost 34.95, down 0.28%, to close at 12,466. The Nasdaq fell by 23.00, down 0.95%, to close at 2,395. And the S&P 500 was down 7.75, 0.56%, to close at 1,373.

Ambac hit on fund raising

In a move that was seen as highly dilutive to shareholders, Ambac (NYSE: ABK) announced a capitalization strategy that includes a $1 billion minimum preferred deal and a truncated quarterly dividend.

In a press release the bond insurer announced that its board approved issuance of at least $1 billion of equity and equity-linked securities, including possible additional capital from reinsurance or issuance of debt securities.

Ambac said that it is committed to maintaining its triple-A ratings, adding that it will reduce its quarterly dividend to $0.07 from $0.21 per share.

The company also estimated that it lost a pre-tax amount of $5.4 billion for the quarter that ended on Dec. 31, 2007. Approximately $1.1 billion of that amount represents estimated credit impairment related to collateralized debt obligations (CDOs) based on asset-backed securities transactions. These transactions are backed primarily by mezzanine level subprime residential mortgage-backed securities that have been internally downgraded to below investment grade.

Ambac also expects to report a loss of $143 million, pre-tax, relating primarily to its underperforming home equity line of credit and closed-end second lien RMBS securitizations.

As a result of the losses, Ambac expects to report a net loss per share of up to $32.83 for the fourth quarter of 2007. Ambac expects to report operating losses per share of up to $5.80 for the fourth quarter primarily as a result of the losses on CDOs and home equity line of credit transactions.

One market source told Prospect News that Ambac's capitalization strategy is "highly dilutive," with respect to shareholders, but added that the system can't tolerate a downgrade of the monolines, such as MBIA and Ambac.

An analyst who covers financials agreed.

This source reported hearing rumors that Berkshire Hathaway going to invest in the Ambac preferred.

Ambac shares fell $8.17 on Wednesday, down 38.65%, to close at $12.87.

Meanwhile shares of bond insurer MBIA Inc. dropped $2.65, or 16.51%, to close at $13.40.

Revolt revives at Mercer

Elsewhere on Wednesday Hong Kong-based Mass Financial Corp., a minority stakeholder in Mercer International (Nasdaq: MERC), re-launched a shareholder revolt which an analyst in the pulp and paper sector described as basically a rejuvenation of a revolt that Mass Financial launched back in mid-December.

The results, in terms of Mercer's share price, were similar in both instances. On Wednesday the common shares closed at $8.03, up $0.60 (8.08%), on volume of 444,218 versus average volume of 229,000.

On Dec. 19, trailing the initial Mass Financial-led revolt, the stock rose $0.65 (9.1%) on the day to close at $7.77, on volume of 528,400.

In its Wednesday press release, the Mass Financial-led Mercer Shareholders Committee announced that its mandate will be to unlock the value of the Mercer's common shares by requesting drastic corporate changes within Mercer, and to either have the company sold or create a joint venture with a strategic investor to realize the highest value for the shareholders.

Based on published reports, the committee continued, several investment bankers believe that Mercer is worth between $11.50 and $13.50 a share.

Mercer's present management and board of directors have little or no investment in the company, and therefore no real incentive to achieve maximum shareholder value, the press release added.

Mercer's mill at Stendal, Germany, has a 29.42% minority shareholder that is a private equity firm which has stated that it just wants to sell its shares. This mill produces approximately 45% of Mercer's entire production, and Mercer's chairman stated that the company does not wish to purchase this shareholding. The committee said it believes this position should be acquired, and some of its members are willing to discuss financing the project.

The committee is requesting that Mercer hire an independent, qualified investment banking firm to complete this action - not RBC Dominion Securities Inc., which the committee believes is conflicted - and if Mercer chooses not to do so, the committee will.

"With pulp now selling at a 12-year high, it is time for action," the committee asserted.

In a document which Mercer filed on Dec. 18, following the first letter from Mass Financial, the company wrote: "Your letter states Mass owns 700,000 shares of Mercer. We expect this position was acquired sometime after October 2006 from a wholly owned subsidiary of KHD Humboldt Wedag International Ltd. ... These shares were initially issued by Mercer to an MFC affiliate in consideration for purchasing its 7% interest in the Stendal pulp mill in Germany (the "Stendal Minority Acquisition") in late 2006. We expect such MFC affiliate has now somehow subsequently transferred the same to Mass. In any event, the Stendal Minority Acquisition was negotiated and settled directly with you and I am surprised that you now choose to voice concerns regarding Mercer's capital structure, given that you were fully aware of the same at the time that all relevant investment decisions were made and that you are the senior executive, director and chairman of both MFC and Mass."

The analyst from the pulp and paper space who spoke with Prospect News on Wednesday said that Mass Financial holds 2% of Mercer's stock.

The analyst declined to take issue with the shareholder committee's assertion that financial analysts value Mercer stock at between $11.50 and $13.50 a share.

"I sort of thought the stock was cheap for a while. But it doesn't necessarily mean that the company isn't doing the right things," the analyst said. "The markets are fickle.

"And I think the perception on the Street is that this is a pretty good company.

"Investors I've talked to haven't been concerned about management at all. Management is pretty solid.

"Concerns among investors have to do with Mercer being a one-trick pony, it's a commodity business and it's cyclical.

"So things could get worse.

"The grade of pulp they make has been extremely strong for the past two years. And the thing that has shareholders upset is that the stock has not outperformed given the strength of the grade of commodity they produce.

"But their costs have gone up substantially. One of the reasons the selling price has risen so much is that costs are pushing that price up.

"They are not earning massively bigger margins.

"I don't think management has done a terrible job."

This analyst said that the shareholder committee's initiative could conceivably represent good news for Mercer's bondholders, adding that the bonds, now trading in the 80s, failed to move along with Mercer's shares on Wednesday.

"The bonds have a change of control provision at par," the analyst said, relating that at least one Mercer bondholder made a call on Wednesday to cheer on the revolt.

"Will a change of control happen because of this small shareholder revolt?" the analyst asked, rhetorically.

"I don't think so. But it doesn't hurt that there is someone out there making this noise."

Quebecor falls on bankruptcy fears

Meanwhile Quebecor shares continued their free fall on Wednesday, trailing news that the Canadian commercial printing giant, whose products include Marvel and DC comics, failed to meet a key Tuesday night deadline to come up with $125 million of new financing.

Quebecor's shares fell $0.32 on the day to close at $0.19, down 62.75%, on volume of 9.96 million shares, versus an average volume of 649,000 shares.

A market source, pointing out that the sell-off is a reflection of shareholder fears that its banks might force Quebecor to seek protection from its creditors in bankruptcy court, commented that the company has been hurt by the fall of the U.S. dollar versus the Canadian dollar.

Meanwhile, well after Wednesday's close, several blogs were reporting that Quebecor World accepted C$400 million of "rescue financing" from Quebecor Inc. and Tricap Partners Ltd. The company subsequently reported that it has negotiated more time to wrap up the financing.

Just before 8 p.m. ET the stock was up $0.03, at $0.22 per share in after hours trading.

BEA up on 'acquisition' news

Shares of BEA Systems, Inc. (Nasdaq: BEAS) rose 18.49% Wednesday on news that Oracle Corp. (Nasdaq: ORCL) and BEA have entered into a definitive agreement under which Oracle will acquire all outstanding shares of BEA for $19.375 per share in cash.

The offer is valued at approximately $8.5 billion, or $7.2 billion net of BEA's cash on hand of $1.3 billion.

"We expect this deal to be accretive to Oracle's earnings by at least one to two cents on a non-GAAP basis in its first full year after closing," Oracle president and CFO Safra Catz stated in a Wednesday press release.

The board of directors of BEA has unanimously approved the transaction which is expected to close by mid-2008, subject to BEA stockholder approval, regulatory approvals and customary closing conditions.

BEA shares closed Wednesday at $18.46, up $2.88 on the day, on volume of 198.85 million shares, versus average volume of 7.23 million shares.

Meanwhile Oracle stock closed at $21.92 per share, up $0.61 (2.85%) on volume of 76,869,356 shares, versus average volume of 38,914,000.

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