Lehman gyrates as KDB may take stake; Alpharma prescribes poison pill

By Paul Deckelman

New York, Sept. 2 - Lehman Brothers Holdings Inc.'s shares jumped nearly 9% on fresh news reports that the troubled Wall Street firm is in talks with Korea Development Bank, which could take as much as a 25% stake in Lehman worth $6 billion - but then Lehman gave back most of those early gains as other reports indicated that striking a deal might be more difficult than at first thought.

Also among the financials, Bank of America Corp. shares benefited after Goldman Sachs began touting them as a "buy," citing likely earnings increases by the second-largest U.S. lender - and downplaying the likelihood that it will have to issue additional shares in order to raise capital.

San Diego-based banking concern PacWest Bancorp, meantime, sold a 12% stake to a private-equity investor.

Alpharma Inc. decided that the best preventive medicine to head off an unwanted takeover try is a poison pill, and so swallowed one in hopes of discouraging King Pharmaceuticals Inc.

On the other hand, Sciele Pharma Inc. doesn't mind being swallowed up by Japan-based Shionogi & Co, which is offering a hefty premium to Sciele's Friday closing price in a deal expected to close in the fourth quarter.

On Wall Street, equities were unable to hold early gains fueled by the continued slide in oil prices. The Dow Jones industrial average dropped 26.63 points, or 0.23%, to end at 11,516.92. The Standard & Poor's 500 Index fell 5.26 points, or 0.41%, to close at 1,277.57. The Nasdaq Composite Index lost 18.28 points, or 0.77%, finishing at 2,349.24.

Lehman leap falls short

Lehman Brothers' stock initially shot up by 8.9% on fresh news reports that the troubled Number-Four U.S. investment bank was in talks with the state-run Korea Development Bank for the latter to take a large stake in the struggling Lehman. Those reports quoted KDB officials as confirming that talks were under way. However, most of those early gains evaporated, in line with a general stock downturn, as other news reports indicated that Lehman was not going to get any kind of a quick deal on favorable terms.

Over the weekend, Britain's Telegraph newspaper reported on its website that KDB might inject as much as $6 billion in fresh capital into Lehman's coffers, depleted by the nearly $3 billion of losses it reported in the fiscal second quarter, as well as the nearly $3 billion to $4 billion of losses which analysts expect in the fiscal third quarter, with the results due out around mid-month. The paper said that KDB could take a stake of up to 25% in Lehman.

The Telegraph said that Lehman hoped to conclude a deal this week with KDB. However, while the Korean bank's governor, Min Euoo-sung, confirmed that talks were under way, he added that KDB was also talking with other potential partners in a Lehman investment in order to "form a consortium with private banks as [we] believe it is more desirable to acquire Lehman Brothers jointly rather than alone." Korean regulators have also cautioned KDB against playing too large a role in any such transaction

Trying to get other partners on board could complicate matters, and the news reports gave no indication which partners KDB might be trying to recruit, how much of an individual stake any of them might take or even the size of the overall stake which the consortium might finally decide to buy. Other news reports also quoted the KDB governor as saying the Lehman talks were going slowly and encountering difficulty "because of differences over price."

As of Tuesday, South Korean regulatory authorities had not officially received an application from KDB seeking permission to invest in Lehman.

Should the Korean talks falter, the Telegraph said that Lehman had other potential backers in mind, including China's state-owned Citic Securities or cash-laden sovereign wealth funds from Abu Dhabi and Qatar. The report gave no clue how much any - or all - of those entities might invest in Lehman, nor the size of the stake they might take.

Lehman Brothers (NYSE:LEH) surrendered almost all most of its early gains to end up just 4 cents, or 0.25%, at $16.13, on volume of 51.6 million shares, a little less than the usual turnover.

Goldman gives BofA a boost

Another financial name which moved up was Bank of America, after a Goldman Sachs analyst gave a "buy" rating to the Charlotte, N.C.-based banking giant's shares, citing anticipated rising earnings and a decreased likelihood that it would have to dilute its existing shares by issuing any more common stock to raise capital.

Goldman analyst Richard Ramsden initiated coverage on BofA as a "buy" - previously, it was not rated - with a $40 target price and an earnings estimate of $2.50 per share for 2008.

Ramsden said in a research note that BofA's pre-provision earnings are growing - while those of its competitors are declining. The analyst acknowledged that the company's credit costs will remain high in the near term and its capital is thin, but he opined that BofA should be able to increase its Tier 1 capital ratio to 8% from 7.5% currently through earnings, issuing preferred shares and by monetizing its China Construction Bank stake, rather than by having to float more common equity.

BofA's earnings and margin outlook, he said, is "solid" versus those of its competitors. It "offers safety from a common equity raise (relative to Wachovia and Citigroup) and more compelling valuation" versus JPMorgan Chase & Co., Wells Fargo & Co. or U.S. Bancorp."'

He added that the bank's deposits "are benefiting from a flight to quality effect, while Bank of America is also likely to be presented with M&A opportunities."

Bank of America (NYSE:BAC) rose $1.49, or 4.78%, to $32.63. Volume of 70.6 million shares, however, was somewhat below the usual activity level.

Private-equity firm takes 12% PacWest stake

Pac West Bancorp's shares jumped after the California bank company announced that CapGen Financial, a private-equity company, had agreed to invest $100 million in PacWest, buying around a 12% stake in the lender at $26 per share, a 21% premium to the last five trading-day average closing price of PacWest common stock.

The company said that CapGen's principal will join PacWest Bancorp's board of directors upon completion of the investment. Besides a board seat, CapGen will be granted pre-emptive rights in future equity offerings to maintain its percentage ownership.

PacWest plans to use the additional capital for general corporate purposes, to fund debt retirement and, "most importantly," said PacWest chief executive officer Matt Wagner, "to take advantage of growth opportunities as they arise."

Friedman, Billings Ramsey & Co. analyst James Abbott said in a research note that having the additional capital puts PacWest "squarely in the driver's seat" when it comes to bidding on distressed financial assets.

He also noted the fact that CapGen recognized that PacWest "is undervalued relative to the intrinsic value of its deposit franchise and was willing to pay a significant premium to market pricing.

The analyst for Arlington, Va.-based FBR rates the stock as an "outperform."

Pac West Bancorp (NYSE: PACW) rose $3.78, or 16.67%, to $26.46. Volume of 854,000 shares was almost double the norm.

Alpharma swallows the poison pill

In the merger-and-acquisition arena, Alpharma continues if battle of wits with King Pharmaceuticals, as the Bridgewater, N.J.-based drug company attempts to fend off the latter's unsolicited - and already rejected - $33 per share takeover bid.

Alpharma said Tuesday that it had adopted a shareholders rights plan - a poison pill - in order to stop King's advances. The Bristol, Tenn.-based pharmaceutical firm had announced a $1.4 billion acquisition offer last month, but Alpharma dismissed it out of hand as inadequate.

Fearing that King may make good its threat to try and buy up a majority of Alpharma's shares, as outlined in a regulatory filing with the Federal Trade Commission, Alpharma adopted its limited-duration shareholder rights plan, which has the effect of making any effort of King - or any other suitor - to buy 15% or more of Alpharama's shares, prohibitively costly.

The rights plan will be in effect for a year, and would kick in should anyone acquire 15% or more of the class A common stock of or begin a tender offer that could result in that party owning 15% or more of the shares.

While Alpharma's chief executive, Dean Mitchell, said the company was adopting the plan "in light of King's unsolicited and aggressive actions," he also said that the plan would not "prevent a takeover of the company on terms that are fair."

Analyst Ian Sanderson of Cowen and Co. in Boston said in a research note that it appears that Alpharma is seeking a price in a $38 to $41 range, "which we believe is achievable." He said that while King's offer represents a 37% premium to the $24 closing price of Alpharma's shares before King made its announcement, it only estimates a net enterprise value for the company of $1.1 billion, or 1.4 times Cowen's current 2009 earnings projection - or, "a 22% discount to the current peer group trading multiple."

Sanderson further wrote that "other specialty and large-cap pharma companies with pain-management franchises," such as Johnson & Johnson, Abbott Laboratories and Cephalon Inc." may be interested in Alpharma's pipeline of abuse-resistant opioids."

The Cowwn analyst further said that "based on our sum-of-the-parts valuation analysis, we project that an auction process could yield an acquisition price of $38-41 per share for Alpharma, and possibly higher."

The market already believes that the eventual price will top King's $33 per share bid, since the stock is trading well above that level. Alpharma (NYSE:ALO) was unchanged Tuesday at $35.70. Volume of 1.5 million shares was about double the usual.

Sciele says 'yes' to Shionosi

A much more amicable pharmaceutical industry buyout announced Tuesday saw Sciele Pharma accept a buyout offer from Japanese drug maker Shionogi and Co. at a hefty premium.

Shionogi agreed to pay $1.4 billion, or $31 per share, for Atlanta-based Sciele - a premium of 57.1% over Friday's closing price. On Tuesday, Sciele (Nasdaq: SCRX) zoomed to its highest level in six years, up $11.40 or 59.16%, to $30.67. Volume of 28.9 million shares was 21 times the usual activity level.

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