Mills seen at door of bankruptcy; Apple move sparks talk of mergers in cell phones; Scottish Re slides

By Ronda Fears

Memphis, Jan. 9 - Mega-mall developer The Mills Corp. said Tuesday that it has completed an internal investigation into accounting errors that will result in the restatement of financial statements for 2001 to 2004, as well as the first three quarters of 2005, and renewed statements to the effect that it could be filing bankruptcy.

Mills shares (NYSE: MLS) fell $4.12, or 21.75%, to $14.82 after coming off the day's low of $13.40. Traders said it was a run for the doors with 9 million shares traded versus the norm of 914,740.

However, that said, one trader said the decline in Mills' preferred shares, particularly the 6.75% perpetual convertible preferreds, "did not portray a filing just yet."

The 6.75% Series F preferreds (Pink Sheets: MLSFO) lost $35.50 cents, or 4%, on Tuesday to close at $865 versus a par of $1,000. Five other preferred series traded similarly lower.

Chevy Chase, Md.-based Mills said accounting errors might cost it as much as $352 million and if it can't meet its obligations on a $1.1 billion loan, it might seek bankruptcy protection. Mills said its fast growth and a complex financial structure exacerbated the errors, the full extent of which it would not be able to identify until results are audited by Ernst & Young LLP. The company also said it is continuing to cooperate with a Securities and Exchange Commission investigation into its accounting practices.

The company pointed out, however, that it has taken several steps to correct accounting problems, including a near-complete change of its management team. Mills' longtime chief executive officer, Laurence Siegel, resigned in September and was replaced by chief operating officer Mark Ordan. Mills' latest project, a shopping and entertainment destination in New Jersey, has gone over budget and the company has sold its interest in the project to investors and shed several other properties in an effort to pay down debt.

Apple to oranges intrigue

Apple Computer Inc., now renamed Apple Inc., zoomed Tuesday as it launched a long-awaited move into mobile phones with its iPhone, to be powered by AT&T Corp.'s Cingular Wireless LLC. That put pressure on other cell phone names, which were already feeling some pain because of a trio of profit warnings in the group lately. But, Apple's move is considered by some to provide a catalyst for increased mergers in the cell phone spectrum.

For its part, however, Apple shares (NYSE: AAPL) soared $7.10, or 8.31%, to $92.57, flirting with the 52-week high of $93.16.

"Though I do not expect the iPhone to sweep into the market top spot, I do expect that its introduction will force competition to innovate," said one equity trader. "The introduction of the iPhone is likely a product to change the dynamic of the current cell phone market."

This could be cause for the bulls in the sector to continue to run herd, another onlooker said.

While Apple chief executive Steve Jobs wowed spectators at the MacWorld 2007 event, Schaeffer Research analyst Joseph Hargett said investors are still weighing their options.

Hargett said there still was a good volatility play in the stocks, signalling that many investors think there is consolidation coming down the pike.

Even with AT&T's mega-mergers with SBC Communications and BellSouth, onlookers said there is more room for mergers in the sector, particularly when it comes to the smaller niche players like Research In Motion Ltd., maker of the popular BlackBerry device, and rival smart phone maker Palm Inc. Both those stocks took a hard hit on the Apple news.

Research In Motion shares (Nasdaq: RIMM) fell $11.16, or 7.85%, to $131.

Palm shares (Nasdaq: PALM) lost 84 cents, or 5.69%, to $13.92.

Larger wireless phone makers held their ground better, but were suffering from a trio of recent warnings from Sprint Nextel Corp., Motorola Inc. and Tellabs Inc., which were all lower along with European phone giants Nokia Corp. and LM Ericsson Telephone Co.

Scottish Re plunges on proxy

As expected, at least in a general way, the proxy statement from Scottish Re Group Ltd. regarding its agreement with MassMutual Capital Partners LLC and Cerberus Capital Management LP affiliates was filed late Tuesday, sending the stock further into negative territory.

The stock has been sliding due to resistance to the move by the company from the Chicago hedge fund Grace Brothers Ltd. But one trader said the deal would bring a much needed capital infusion and essentially eliminate all overhang in the stock.

Scottish Re shares (NYSE: SCT) on Tuesday lost 13 cents on the session, or 2.54%, to settle at $4.99 but in after-hours activity slipped by another 4 cents to $4.95.

After the close, Scottish Re filed its proxy statement on the MassMutual/Cerberus agreement, which was announced in November, under which MassMutual and Cerberus will invest $300 million each into Scottish Re to gain control of the Bermuda-based reinsurance firm.

Grace Brothers, however, a shareholder of Scottish Re, launched a campaign against the measure in mid-December, saying rather than suffer the dilution from such a transaction, the insurance firm should consider a rights offering. But the company held to its agreement with MassMutual and Cerberus.

"Cerberus and Mass Mutuals' capital infusion should be in place by April, per the management comment. Although Grace Brothers and some others are unhappy and are wanting a rights offer, that is not in the cards. In fact, they can buy in at these levels and get close to pricing," said a trader.

"All liquidity issues will be resolved once new capital comes in. The balance sheet will be in better shape and book value should be around $8.75. The company should earn 50 cents [per share] in 2007 and 70 cents in 2008. They will get upgraded by the rating agencies since they have new capital and have MassMutual's management and Cerberus' deep pockets. They will get new business.

"These folks are using this as a vehicle to become the dominant life re-insurer in the world. The stock has 100% upside this year and higher in years after."

Gap target $16: analyst

Clothing retailer Gap Inc. retreated Tuesday amid further skepticism about current valuations, following a 7% spike the day before on renewed speculation that the company was going on the auction block.

Gap shares (NYSE: GPS) dropped back by 7 cents on Tuesday to $20.19, following a gain of 7.25% on Monday.

Echoing a risk arb trader's remarks Monday, C.L. King & Associates analyst Mark Montagna said in a report Tuesday that he did not believe there would be a takeout of Gap at current prices, noting his target price on the stock is $16 with an underperform rating he established on the stock in May.

"The performance has worsened [since May], yet the share price has maintained itself on speculation of a takeover," Montagna said.

"We continue to believe a takeover is unlikely."

Moreover, he said the announced review of brand strategies for Old Navy and Gap is not likely to lead to improved execution or earnings.

"The review is likely to lead to an announced revision in strategy, but in today's hyper-competitive retail sector there is no guarantee of success," Montagna said in a report Tuesday.

Reports on Monday that Gap has hired Goldman Sachs to explore strategic alternatives, if true, he said, would be consistent with comments from the company last Thursday about its review of the Gap and Old Navy brand strategies. It would be positive for the stock, he said but, "however, we do not believe a

transaction will occur."

Transactions are never guaranteed and the negatives with Gap from a financial and strategic standpoint are quite "onerous," he said. Additionally, Gap does not have the store growth opportunities that other acquisitions in its sector had, such as Dress Barn, Talbot's and Chico's.

Gap takeover funding risky

In addition, Montagna said an acquisition of the largest market cap specialty apparel retailer is far greater a strategic investment than that which was completed by hedge fund investors in Wet Seal.

"While the investment in Wet Seal was far riskier since the company was on the edge of bankruptcy, it was a much smaller risk of capital than would be in an acquisition of Gap," the analyst said.

"There would be just enough EBITDA for funding a takeover."

If the company were taken over at yesterday's [Monday's] closing share price of $20.26, Montagna estimated it would equal a market cap of $16.4 billion. Gap has $2.4 billion of cash and equivalents with $513 million of debt, netted out to an enterprise value of $14.5 billion.

"If a consortium of private equity investors sought to acquire the company at an interest rate of 8% and put up the typical one third in cash, or $4.8 billion, the annual interest expense would be $776 million on the $9.7 billion of financing," he said.

"We project the year-end EBITDA for FY06 at $1.625 billion and FY07 at $1.551 billion. Both of these EBITDA projections are close the typical minimum 2.0x EBITDA-to-interest coverage sought in an acquisition."

But there would be little wiggle room following the deal.

Yet, Montagna said there was some light in the Gap story over the next year.

"Gap's financial condition is weakening, and we believe it will continue to slide in the next fiscal year, ending January 2008," he said. "On a positive note, the debt situation is very good. In 3Q07, the company is due to pay off $325 million of debt. This should leave it with $188 million of remaining debt."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.