Kraft offers antitrust remedies; Sprint Nextel deal unlikely; investors doubt Talbots' plans

By Cristal Cody

Tupelo, Miss., Dec. 9 - Kraft Foods Inc. has given European Commission regulators more to think about in its hostile takeover attempt of British candy maker Cadbury plc.

The commission reported on Wednesday that Kraft has offered proposals to remedy any competition concerns. An analyst told Prospect News that the regulatory process could help Kraft overcome Cadbury shareholders' hesitation to tender in its offer.

In other situations on Wednesday, some hullabaloo erupted around the chance of a combination of Sprint Nextel Corp. with Deutsche Telekom AG after Citigroup upgraded the No. 3 mobile service company's stock to a "buy" rating over a potential transaction, but other market observers give the deal little chance.

Also on Wednesday, an analyst said that investors seem unsure of the plans by Talbots, Inc. to acquire shell company BPW Acquisition Corp. and buy out the specialty women's retailer's majority stock and debt holder.

Meanwhile Wednesday, stocks reversed some of Tuesday's losses.

The Dow Jones Industrial Average added 51.08 points, or 0.50%, to close at 10,337.05.

The Standard & Poor's 500 index rose 4.01 points, or 0.37%, to 1,095.95. The Nasdaq Composite index closed up 10.74 points, or 0.49%, at 2,183.73 on Wednesday.

Kraft provides remedies

Kraft formally made its $16.3 billion takeover offer on Friday for Cadbury, which is expected to issue its official response to the bid on Monday.

The European Commission is expected to release its decision on Jan. 6 to approve Kraft's offer or request an in-depth review of its proposal.

In the interim, the food manufacturer offered some deal concessions to European regulators.

Kraft spokesman Michael Mitchell told Prospect News on Wednesday that the combination is highly complementary and no material divestments are expected to be required.

"As you would expect, we are cooperating with the commission and working through the approval process," Mitchell said. "As part of that confidential process, we have submitted remedies in a few affected markets. We are confident we will find a solution that is acceptable to all parties. This is all part of the normal approval process you'd expect for any transaction of this magnitude."

Kraft has offered Cadbury shareholders 300p a share in cash and 0.2589 of a share of Kraft, which values Cadbury shares at about 713p each.

Cadbury shares have traded up on the potential for a rival bid from other companies, including Hershey, Pa.-based Hershey Co. and private Italy chocolate maker Ferrero International SA.

Hershey and Ferrero said in November the companies were considering making bids for Cadbury.

An analyst told Prospect News that Kraft is biding its time in a steady race for the win.

As more time passes in the regulatory framework, it lets the shareholders realize another bid is not coming, the source said. "This is the only one."

Cadbury's stock rose 0.06% to 785.5p.

Kraft shares moved up 5 cents, or 0.19%, to $26.71 on Wednesday.

Hershey shares slipped 25 cents, or 0.70%, to $35.33.

Telecom deal given little chance

Shares in Sprint Nextel traded up on Wednesday after Citigroup upgraded the company over a potential combination with Deutsche Telekom, which owns the No. 4 U.S. mobile service provider, T-Mobile USA.

But Walter Piecyk, an analyst with Pali Capital Inc., gives such a deal little chance.

"We believe there is a 2% chance DT buys Sprint," Piecyk said Wednesday in a research note.

"In fact, we think it's more likely that DT structures a transaction with the cable companies to use their spectrum to build out a nationwide network in a new joint venture which would provide a healthy alternative to the existing relationship the cable companies have with Sprint today, without requiring the ownership of a network," Piecyk said. "To be clear, we put a low probability on that scenario as well, but much higher than a Sprint/DT deal."

Also, Overland Park, Kan.-based Sprint Nextel and German telecommunications giant Deutsche Telekom have different operating technologies that would be difficult to mesh, he said.

In addition, a combination between the two would face heavy antitrust reviews.

"We believe the FCC would not approve a Sprint/DT merger based on our visit to the FCC because they view the market as Verizon [Communications Inc.] and AT&T [Inc.] servicing one market and DT and Sprint serving a lower-end market and would view a DT/Sprint merger as anti-competitive," Piecyk said.

Sprint Nextel shares climbed 22 cents, or 5.63%, to $4.13 on Wednesday.

Deutsche Telekom's U.S.-listed shares picked up 9 cents, or 0.61%, to close at $14.94.

Shares of New York-based Verizon lost 9 cents, or 0.27%, to end at $33.30.

Dallas-based AT&T's stock shed 9 cents, or 0.34%, to close at $26.51.

Investors unsure of Talbots' turnaround

Talbots on Tuesday announced its turnaround plan, which involves three transactions including the acquisition of BPW at a range of 0.9000 to 1.3235 shares of Talbots for each BPW share.

Talbots plans to use BPW's $350 million in cash to help pay off $491 million in debt held by its majority stockholder, Aeon (U.S.A.), Inc., and other debt holders.

As the third part of the turnaround strategy, Talbots said it has a commitment for a new $200 million senior secured revolving credit facility from GE Capital to use to fund the transactions and ongoing working capital needs.

Adrienne Tennant, an analyst with FBR Capital Markets & Co., said that Talbots' new plan is a "game changer," but investors are slow to catch on.

"Interestingly, the company's pro forma enterprise value today, after all the good news, was actually lower than the prior day's enterprise value," Tennant said in a research note on Wednesday.

"We believe this disparity in valuation will resolve itself as more investors understand what a positive deal TLB has struck and the magnitude of EPS upside potential over the next couple of years. However, given the deal moves to a BPW shareholder vote, the risk remains that the deal may not get done if TLB's stock trades at or below $7.53," Tennant said.

Shareholders of BPW, a special-purpose acquisition company based in Stamford, Conn., are expected to vote by mid-February.

Hingham, Mass.-based Talbots also reported a third-quarter return to profitability on Tuesday.

"Oddly, even after the company's recap, which cleans up the balance sheet, upside surprise in the fundamental business improvement and an accretive income statement impact from the deal, on a pro forma basis, TLB shares were trading below the prior day's pre-release enterprise value," Tennant said.

"We believe that, perhaps, the complication of the deal and uncertainty about the execution of SPAC deals may be the reasons," she said. "However, we believe this affords new investors to the story the time to investigate the merits of an investment in shares of TLB."

All three transactions are expected to close in the first quarter.

Shares of Talbots increased 24 cents, or 2.92%, to $8.47 on Wednesday.

BPW's stock rose 13 cents, or 1.26%, to $10.45.

Mentioned in this article:

AT&T, Inc. NYSE: T

BPW Acquisition Corp. AMEX: BPW

Cadbury plc London: CBRY

Deutsche Telekom AG NYSE: DT

Hershey Co. NYSE: HSY

Kraft Foods Inc. NYSE: KFT

Sprint Nextel Corp. NYSE: S

Talbots, Inc. NYSE: TLB

Verizon Communications Inc. NYSE: VZ

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