Financials socked; deals constantly in question; Fertitta waits for Landry's Restaurants board

By Aaron Hochman-Zimmerman

New York, Oct. 7 - The markets took another drubbing on Tuesday as financials were particularly damaged by a continuing lack of liquidity.

Federal Reserve chairman Ben Bernanke piled on to confusion over the details of the bailout plan by warning investors that there may be more bad news over the horizon.

Bernanke's speech also sparked new talk of an interest rate cut, which would not leave one market watcher "half surprised," he said.

Deals seemed to fall apart and regroup by the hour. Rumors of a cancellation hit share prices of Morgan Stanley, which came off the lows when it insisted its deal with Mitsubishi UFJ Financial Group, Inc. still has the green light.

Landry's Restaurants, Inc. shares were going sour as word was served up that it may lose its deal to be bought by its boss Tilman Fertitta over financing issues.

Another deal that remained unofficially in flux was the prizefight for Wachovia Corp. between Citigroup Inc. and the heavily favored challenger Wells Fargo & Co.

The Fed ordered the two fighters to take a rest until Wednesday, but rumors continued to fly that the two may find a way to divide and conquer Wachovia.

Also, Bank of America Corp. and Merrill Lynch & Co., Inc. shares fell after Bank of America announced that its $10 billion capital raise should have the companies' deal closed by the end of 2008.

Meanwhile, in the rest of the market, the Dow Jones Industrial Average ended down by 508.39, or 5.11%, at 9,447.11, while the Nasdaq Composite Index bled 108.08, or 5.80%, to finish at 1,754.88.

The S&P 500 snuck below the 1,000-mark as it gave up 60.66, or 5.74%, to close at 996.23.

Mitsubishi-Morgan Stanley still on

Morgan Stanley was pounded during the session on rumors that Mitsubishi UFJ Financial Group was pulling out of their deal, a trader said.

However, the trader never heard that the price was being renegotiated downward.

On Monday, the Federal Reserve blessed Mitsubishi's $9 billion injection into Morgan Stanley in return for a 21% stake.

The source later said simply, "Morgan Stanley said the deal with Mitsubishi is still on," although it may have been too late for Morgan Stanley's shares.

Shares of Morgan Stanley (NYSE: MS) were rocked for $5.85, or 24.89%, to close at $17.65.

Shares of Mitsubishi (NYSE: MTU) slipped just $0.07, or 0.89%, to finish at $7.77.

Fed breaks it up

Citigroup and Wells Fargo were sent to their corners by the Fed after a frenzied first round slugfest in the Wachovia title fight.

Most favor Wells Fargo's $7.00-per-share offer for the entirety of Wachovia over Citigroup's $1.00-per-share offer for only the banking operations.

"Regarding Wachovia, Citigroup cannot compete with the price Wells Fargo can pay," a trader said.

"Their price valuation gives them much more leeway," he said about Wells Fargo.

Still, Citigroup claimed, in the form of a $60 billion lawsuit, that it is entitled for something for the trouble of stepping up to the plate to rescue Wachovia.

The fight resumes on Wednesday, and the New York Times reported that some are hoping for peace to break out before the end of the week.

Shares of Wachovia (NYSE: WB) dropped $0.53, or 9.17%, to $5.25.

Shares of Wells Fargo (NYSE: WFC) fell $3.04, or 9.04%, to $30.60.

Shares of Citigroup (NYSE: C) sank by $2.26, or 12.98%, to $15.15.

Over by Christmas?

Bank of America reported during its earnings call that its $10 billion capital raise in the form of a common stock offering will suffice to wrap up the Merrill Lynch deal by the end of 2008, a market source said.

Shares of Bank of America (NYSE: BAC) were blasted by $8.45, or 26.23%, to end at $23.77.

Shares of Merrill Lynch (NYSE: MER) gave back $6.20, or 25.62%, to finish at $18.00.

Landry's deal 'in jeopardy'

Tilman Fertitta, Landry's Restaurants' chairman, president and chief executive officer, told the board that the current offer price of $21.00 is too high in light of recent events.

The shocks to the credit market as well as the closures of Landry's Kemah and Galveston properties due to Hurricane Ike have put the deal's financing and therefore the deal itself "in jeopardy," a press release said.

Fertitta is in contact with Jefferies & Co. to secure financing for a deal at a lower offer price.

Neither Fertitta nor Landry's board guaranteed the two sides will reach a new deal.

At this point "it's difficult to handicap," said CL King & Associates analyst Michael Gallo.

In the deal's current form, there are still four major questions that hang over the future of a successful deal, he said:

• "One, will the financing be available?;

• "Two, at what point does the company not want to sell?;

• "Three, can they force him to honor the existing arrangement?; and

• "Four, what happens if he walks away?" Gallo asked about Fertitta.

If Fertitta does walk away, he is still left with 39% of the company. "He's kind of playing chicken with himself," he said.

There is also the issue of time.

The market will know more once the board responds to Fertitta's new proposal, likely "in the next few days," Gallo said.

The original deal was set for a vote on Nov. 3.

Shares of Landry's (NYSE: LNY) were 86ed by $2.35, or 17.93%, to close at $10.76.

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