Cheniere hot as Paulson ups stake; regional banks rise on federal cash; CenturyTel off on Embarq merger

By Paul Deckelman

New York, Oct. 27 - Cheniere Energy Inc.'s shares were really cookin' on Monday, up nearly 50% as one of the Houston-based natural gas operator's major shareholders disclosed a big addition to its existing stake in a regulatory filing.

Another big gainer was Dillard's Inc., as two large shareholders called for the ouster of the underperforming department store company's chief executive officer.

Regional banks like Regions Financial Corp., First Horizon International Corp. and Huntington Bancshares were seen having pushed solidly higher on the news that they were some of the lucky financial institutions that will be given big parcels of government cash to help stabilize their balance sheets - on the expectations that they will then lend it out, to help unfreeze the currently stalled credit system, or use the money to acquire weaker, less efficiently run banks in the interest of creating a stronger banking industry.

CenturyTel Inc. and Embarq Corp. announced plans to merge in an all-stock deal totaling over $11 billion - but CenturyTel holders think the Monroe, La.-based rural telecommunications provider's planned deal is a wrong number, since their holdings will be diluted and holders of the considerably larger Embarq will be dominant in the combined company.

All of this was going on against a backdrop of yet another volatile session on Wall Street, which saw stocks gain from an early dip but eventually give in to persistent investor angst late in the session, leaving the bellwether Dow Jones Industrial Average - up by as much as 220 points earlier in the session - ending down 203.18 points, or 2.42%, at 8,175.77. During the volatile session, the Dow zig-zagged between positive and negative territory some 60 times. Broader market indexes were also thrown for a loss, with the Standard & Poor's 500 index ending down 27.85 points, or 3.18%, to finish at 848.92, while the Nasdaq composite index slid by 46.13 points, or 2.97%, down to 1,505.90.

Cheniere is chief charmer

That downturn made upsiders all that more notable, chief among them Cheniere Energy. Its American Stock Exchange-traded shares (AMEX: LNG) shot up by 53 cents, or 45.30% to end at its day's peak level of $1.70. Volume of 1.3 million shares was about 1½ times the norm.

There seemed to be no fresh news on the wires that might explain the big boost, before word began to circulate late in the day that Paulson & Co. Inc. - which already held a sizable stake in the energy company - had upped its holdings and was now the biggest institutional investor.

In an SC 13D filing with the Securities and Exchange Commission, the New York-based hedge fund disclosed that it had lifted its stake in Cheniere to 14.6% from 9.27% as of June 30, with the purchase of about 2.7 million additional shares, for a total of about 7.397 million, up from 4.7 million as of June 30.

Dillard's dominates as Dillard is dissed

A move by a pair of activist investors to oust William Dillard II from his post as chief executive officer of the eponymous company his father founded 70 years ago found strong support on Wall Street, as the Little Rock, Ark.-based retailer's New York Stock Exchange-traded shares (NYSE: DDS) jumped as much as 40% in intraday dealings before settling up $1.18, or 35.33%, at $4.52. Volume of 4.6 million shares was over twice the norm.

Barington Capital LP and an affiliate, Clinton Group Inc., together controlling 5.3% of the shares, fired off a fiery letter to the company's board of directors demanding that Dillard II and his management team - which includes other Dillard family members - be shown the door.

In it, Barington and Clinton - which have been actively pressing the company to improve shareholder returns since the summer of 2007 - called Dillard, his siblings in management and other members of the management team "overpaid and under-qualified," and opined that "in our opinion, a management team with a comparable record of poor performance at any other company would have been fired long ago."

They cited a report by an independent advisory service that compared the salaries of key Dillard executives with their counterparts at industry peer companies, and found that the average salaries over the past three years - $5.3 million for CEO William Dillard II, $4.9 million for company president Alex Dillard and $2.9 million for executive vice president Mike Dillard - were far above retailing industry averages.

The two hedge funds further noted the fact that sales have slid for six straight quarters, and charged that since the younger Dillard assumed his father's old job in 1998 the company's market value has "plummeted" by some 95%, to less than $246 million from more than $4.36 billion 10 years ago.

But deposing the Dillards may be easier said than done. Under an ownership structure set up by company founder William Dillard, father of the current CEO, in 1969, when Dillard's went public, voting control of the company is vested in its class B stock, which is 99% owned by a family-controlled entity, allowing the Dillards to control two-thirds of the company's board. Barington has urged that the company repurchase the class B shares to simplify the equity structure into just one class of stock - but the two hedge funds said they had recently been informed that no such sale of the class B shares by family members would take place.

S&P analyst Jason Asaeda said in a research note Monday that it is unlikely that the Dillard family will give up control of the company without a fight. He warned that the retailer is almost certain to suffer much deeper losses for fiscal 2009 and fiscal 2010 - 83 cents a share in 2009, more than double earlier projections of 40 cents of red ink, and a 65-cent-per share 2010 loss, versus earlier estimates of 25 cents per share.

The analyst also cut his 12-month target price by $2 to $5 - but also upped his assessment of the stock to a "hold" from a "sell" previously, asserting that at current prices, the shares are fairly valued.

Banks boom on government buy news

News that the federal government will inject billions of additional dollars into the banking system by taking stakes in large regional banks - this in addition to the estimated $125 billion that Washington is pumping into such big banks as JP Morgan Chase & Co. and Citigroup Inc. - pushed the regional banking sector higher Monday, in some cases, sharply so.

Among the large gainers were Regions Financial (NYSE: RF), up $1.01, or 11.30%, to $9.95, on volume of 13.5 million shares; First Horizon International (NYSE: FHN), up 94 cents, or 10.88%, to $9.58, on volume of 8.1 million shares and Huntington Bancshares (Nasdaq: HBAN), up $1.17, or 14.63%, to $91.17, on volume of 11.1 million shares.

A trader said that the institutions getting the federal cash "are the strong guys. Wait a couple of days, and everybody else who applied who finds they didn't get it, will see a National City-like takeunder," referring to the deal announced on Friday between PNC Financial Services Inc. - which got some $7.7 billion of aid from the feds, the largest amount of any of the regionals, and which is using that money to buy the faltering National City Corp., consolidating the two regional lenders into the fourth-largest U.S. banking company by number of branches and the fifth-biggest in terms of total deposits. "Those guys will have to go to the ones with the capital, and you'll see mergers - I'll bet you'll see a lot of mergers announced within the next week."

He explained that "the Treasury wants to get rid of all of these weak sisters." He said that the banks getting the cash are seen by Washington as having "smarter management that can better-run their banks. They don't want to give the money to guys who have made mistakes - they would just use it to shore up their reserves and would never be able to lend again, because they would just keep the money. They want to give the money to guys who can lend - and if you buy somebody, write down the [distressed] stuff, take the hits before you buy it and then you have a bigger organization you can lend through. There's no reason to prop up somebody who has done a bad job."

He noted recent changes in the banking laws which would facilitate such transactions, including the PNC-National City deal. "If you have a bank that's profitable and you then buy one of these guys with the bad loan book, the losses that you take go instantly against your earnings - it used to be that there were restrictions, but the new IRS rules" now permit the acquiring bank to begin reaping the tax benefits from the losses it is taking on sooner rather than later. Those changes also made possible Wells Fargo & Co.'s recent decision to buy the faltering Wachovia Corp. "It's a monster plus."

Asked about potential buyout targets, he said it was "hard to say," although he suggested that the troubled BankUnited Financial Corp. - whose shares currently trade in the 50-cent region - was one possibility and Colonial Bancgroup Inc. - a $3 stock - could be another.

"If someone is really weak - odds are they are not going to get [the federal money] it."

CenturyTel holders displeased with deal

While the strong banks are rolling up the weaker ones, a new wave of consolidation may also be coming to the rural telecom sector, with Monday's announcement of CenturyTel's planned acquisition of Embarq the first act.

CenturyTel said it planned to acquire the larger, Overland Park, Kan.-based Embarq - a former Sprint Nextel Corp. division - for $5.8 billion in its own stock and will assume another $5.8 billion of Embarq debt. Embarq holders will get 1.37 shares of CenturyTel for each of their Embarq shares. Based on CenturyTel's close on Friday at $29.50, that's equivalent to $40.42 worth of CenturyTel stock for each Embarq share owned.

Analyst Dave Novosel of the Gimme Credit investment advisory service pointed out in a research note that while CenturyTel "as been acquisitive over the past decade ... most transactions have been far smaller than this deal." In fact, he added, "CenturyTel is swallowing a much larger company, with revenue more than two times greater than its annual sales."

While CenturyTel CEO Glen Post will lead the new company and while CenturyTel will appoint eight of the 15 board members, that's scant consolation for its shareholders, who see a massive dilution of their holdings, since Embarq shareholders will have two-thirds of the stock in the newly combined entity. They voted with their feet on Monday, as CenturyTel (NYSE: CTEL) fell by as much as 16.4% before finally ending down $3.88, or 13.15%, at $25.62, on volume of 3.9 million shares, almost triple the norm. On the other hand, Embarq (NYSE: EQ) rose 64 cents, or 2.15%, to $30.38. Volume of 6.3 million shares was over three times the usual turnover.

Observers noted that the big difference between what CenturyTel is offered and what Embarq shares are trading for is a sign that investors have their doubts that the deal will go though.

But the analysts were mostly positive. Novosel predicted "significant cost savings because of the redundancy of many functions" of the two companies. Analyst Christopher King of Stifel Nicolaus said that CenturyTel "is choosing an opportune time to make an acquisition."

BCE: Day by day

Elsewhere on Monday BCE, Inc. reiterated in a press release that the acquisition of the company by Teachers Private Capital, Providence Equity Partners and Madison Dearborn Partners, is scheduled to close by Dec, 11.

That reiteration came in a statement in which the Montreal-based telecom stated that the litigation brought on behalf of common shareholders seeking, among other things, the payment of second and third quarter common dividends, damages and an injunction to halt the going-private transaction until the dividends are paid, is completely without merit and will be vigorously defended in court.

Late last Friday news reports began circulating that the debt financing for the C$51.7 billion LBO, including $11.3 billion equivalent of bonds and C$23.05 billion of bank debt, could begin this week.

That's not likely, sources close to the deal told Prospect News on Monday.

"It's a big deal that is going to take a lot of preparation," a banker said.

"The markets are up and down so it's difficult to prepare for anything.

"We're waiting for the markets to get better, and so far they haven't."

This source conceded that the dealers remain in conversations with investors, including hedge funds.

However, the banker added, it is premature to say that the deal is going to launch next week or the week after.

"It's day-by-day," the banker said.

"If and when the market gets better we'll do the deal."

-Paul A. Harris contributed to this report

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