AIG slides amid rescue talks, Fed nix on loan; Electronic Arts walks from Take-Two; Longs mulls bids

By Paul Deckelman

New York, Sept. 15 - With Merrill Lynch & Co.'s future already assured - even if only as a unit of Bank of America Corp. rather than an independent entity any more - and with Lehman Brothers Holdings Inc. now under the protection of the courts after its Chapter 11 filing, Wall Street's attention turned on Monday to the fate of the third member of the Trembling Trio, American International Group Inc., whose shares got hammered down even as the largest U.S. insurance company tried to bang together some kind of a bailout program.

Apart from those fascinating financials, which monopolized much of the attention in the stock and bond markets and accounted for much of the volume traded there - one participant said it was "as if they sucked all of the oxygen out of the room" - participants were also watching one acquisition scenario gone bad, as Electronic Arts Inc. dropped its efforts to acquire Take-Two Interactive Inc., sending the latter's shares tumbling.

They also watched another M&A situation which suddenly got a lot more interesting, with the emergence of a third party, as investors mulled Walgreen Co.'s late-Friday entrance to the previously agreed-upon deal between Walgreen rival CVS Caremark Corp. and regional pharmacy operator Longs Drugstores Corp.

And things got uncomfortably chilly for holders of Reddy Ice Holdings Inc., which suspended its dividend and which in effect did the same thing to one of its top executives in the wake of an internal company probe of allegedly improper actions.

With Lehman leading the way downward in response to its bankruptcy filing - its shares (NYSE: LEH) collapsed by $3.44, or 94.25%, to just 21 cents, on volume of 464.7 million, or over 6 times the norm - Wall Street had one of its worst days ever, as the Dow Jones Industrial Average nosedived 504.48 points, or 4.42% - the sixth-biggest one-day point drop ever and the biggest since the 684 point nosedive on Sept. 17, 2001, the first day the market reopened after the 9/11 attacks nearly a week earlier. The bellwether market index finished at 10,917.51, its first time under the psychologically significant 11,000 mark since mid-July. In percentage terms, the 4.42% loss was the steepest decline since July 19, 2002.

Broader stock indicators followed the Dow down, with the Standard & Poor's 500 index off an even 59 points, or 4.71%, to 1,192.70 - also its biggest drop since 9/11 - and the Nasdaq composite index down 81.36 points, or 3.60%, to 2,179.91.

Frightening financials hold center stage

Apart from its various issues of preferred and capital trust securities, Lehman's plain-vanilla common stock was easily the biggest percentage loser Monday on Wall Street, on one of the heaviest volumes, following the news that weekend talks aimed at crafting a rescue for the venerable New York-based investment bank had ended in failure and then a bankruptcy filing; the federal government's steadfast refusal to offer the same kind of loss protection to would-be buyers like B of A that it extended to JP Morgan Chase & Co. when the latter gobbled up Bear Stearns Cos. earlier this year was the apparent deal-breaker.

But the feds, as well as New York State regulators and numerous bankers, were still actively involved in trying to put together some kind of a plan to save AIG - the financial institution seen most likely to fail, now that Merrill Lynch has been saved for the moment and Lehman has already gone belly up. That was reflected in its share price (NYSE: AIG), which swooned by $7.38, or 60.79%, down to $4.76, on volume of 740.1 million - heaviest of any issue - almost 15 times the usual turnover.

An attempted afternoon rally fizzled when word came down that the Federal Reserve had turned down a request for a $40 billion short-term loan from the central bank to the troubled insurer, instead encouraging AIG to seek a bridge loan from a syndicate of banks led by Goldman Sachs Group Inc. and J.P. Morgan. The two investment banks are working with AIG to try and determine how much the global insurer needs to tide it over; some published reports said the loan might be as big as $75 billion.

A market source who watches AIG said that at the end of the day he didn't think that central bank and the other institutions would let AIG slide into bankruptcy the way Lehman did.

"Lehman they could let go," he opined. "But I don't think that AIG could be [let go] - although the Fed seems to be saying that it [could], I think the ramifications [of an AIG insolvency] would be a lot more than Lehman, and around the world too - AIG is everywhere, from China to Europe."

While it awaits the outcome of those negotiations with the Fed, Goldman, JP Morgan and other banks, AIG was granted a $20 billion lifeline of sorts by New York state insurance regulators, who agreed to ease restrictions on tapping assets ring-fenced within AIG's insurance operations, allowing the firm in effect to provide itself with bridge financing.

While there were reports that AIG had been in talks with Warren Buffett's Berkshire Hathaway Inc., the source doubted very much that anything would come of such negotiations.

"They had talks this morning, but they ended."

He suggested that the canny Omaha billionaire may have been "just trying to buy the auto insurance business from them on the cheap, or the aircraft leasing business." The latter unit, he said is "a really good property, the biggest one in the world, a monster piece of business." However, he said that a sale of the aircraft leasing unit might be difficult to craft due to the potential loss of tax benefits on such a transfer.

Another man of means whose name has been mentioned but who has not taken any part in the AIG rescue talks - though not for lack of trying on his part - is the company's former chairman and chief executive officer, Maurice R. "Hank" Greenberg, who left AIG abruptly in 2005 amid allegations that Greenberg and several other top executives had supposedly conducted an extended series of transactions expressly engineered to siphon money away from the company and into private affiliates they controlled, including C.V. Starr & Co. Those dealings were the subject of a lawsuit brought against AIG and against Greenberg and the other executives by a pension fund AIG shareholder. The source noted that just last week, Greenburg paid $29 million of an overall $115 million settlement of the suit "probably having in mind that he needed to do something" to clear the way for a possible return to the company that he led for so many years and helped to build into a worldwide insurance giant.

Besides still being AIG's largest holder, with about 12% of the shares that he either owns individually or through Starr, and thus having a vested financial interest in seeing AIG work its way out of its current jam, the source theorized that because of Greenberg's "ego and nature, he would definitely want to do something. [He would say] 'look at all of these other people who are running [AIG], look what they've done to it - I'll take charge'."

So far, though, while Greenberg has offered to do anything he could to help AIG, a company spokesman said that he has not been called upon.

"I think they're trying to keep him out, but I would have to think that he'd want to do something to salvage it," the source said.

He said that AIG and those who are trying to rescue it still have some time to get it done - but the clock is definitely ticking. "I hear Wednesday is the latest they feel they can go on" without having a plan in place.

Take-Two takes a tumble

It's now time for Plan B at Take-Two Interactive, after rival video game maker Electronic Arts elected to walk away from its negotiations with the New York-based maker of the popular "Grand Theft Auto" game series.

Redwood City, Calif.-based Electronic Arts had offered $25.74 in a hostile takeover bid directly to the shareholders earlier this summer after having been rejected by Take-Two's management, only to pull that offer and enter into voluntary talks with Take-Two. The latter had hoped that such talks would result in a higher offer, and made a detailed presentation to its would-be suitor to convince it to sweeten its deal. Instead, Electronic Arts said that after evaluating confidential data supplied by Take-Two as part of a due diligence process, it has decided not to make any kind of offer, ending the negotiations process.

Take-Two said in response to Electronic Arts' move that it is "actively engaged" in talks with other parties to consider possible strategic options, it did not name the parties. And while other game makers may be interested in getting hold of the lucrative Grand Theft Auto franchise, none has yet made a rival offer for Take-Two - whose shares (NASDAQ: TTWO) tanked on Monday on the news. They slid $5.32, or 24.30%, to $16.57 - well below Electronic Arts' original offer-on volume of 13.5 million, about nine times more than usual.

Analyst Arvind Bhatia of Sterne Agee & Leach Inc in Birmingham, Ala., said in a research note that Take-Two had made "a strategic mistake" by not striking a deal with Electronic Arts when it could have. He cut his target price on the stock to $18 from $26 previously.

Walgreen longs to acquire Longs

While Take-Two shareholders watched the possibility of a deal for their company fade - at least for the moment - holders of Longs Drug Stores have reason to believe they may get more for their shares than initially thought, with the emergence of Walgreen as a player in the drama that up until now has involved only Longs and CVS Caremark. Longs said Monday it was evaluating Walgreen's $3 billion, $75 per share acquisition offer.

Longs and CVS had recently agreed that Woonsocket, R.I.-based CVS Caremark, the nation's second-largest pharmacy operator, would acquire Walnut Creek, Calif.-based Longs, which operates about 500 drugstores in the western United States, for $2.9 billion, or $71.50 per share. Some Longs shareholders have balked at that offer, saying it undervalues Longs real estate holdings, and claim that management has not given them enough information about those holdings so they can make an informed judgment about the CVS Caremark offer.

However, analyst David Magee of Suntrust Robinson Humphrey in Atlanta said that the task of figuring out what the company's real estate might be worth "is not as straightforward as it might seem - the exact store locations are not disclosed, the ones that they own versus the ones they lease, but it's roughly about one-third of the base.

"In some cases, they own the store but not the ground [under it] or vice versa. The probability is they are paying no rent in those stores, and if someone were to try to monetize that, they would incur a tax liability and they would end up having to pay a higher rent if they did a sale-leaseback - in some cases, a significantly higher rent. So I don't think [monetizing the real estate assets] is a course of events that the Longs' management team had even contemplated seriously."

He indicated that management itself may not even be aware of the value of the real estate. "I don't think the management team has done a really detailed high-confidence valuation of those holdings in some time, because I don't believe that strategically, they thought it made much sense to try to monetize those."

Magee told Prospect News that while some of the more activist holders who have termed the CVS offer inadequate and have criticized management for being too eager to sign such a deal "have their own analysis and think about what the real estate might be worth - but my sense is that most of the other shareholders would be happy with the $75 price put forward by Walgreen.

"Don't forget both the CVS and Walgreen bids are both significantly higher than where the stock was trading five weeks ago. If you look at the valuations for either bid, they're roughly about 10 times EBITDA, which is very consistent with the norm in this space over a long period of time."

Magee said that if CVS had its druthers, "obviously" it would rather not raise its bid - and he doesn't think the company is going to immediately come back with a higher bid to top Deerfield, Ill.-based Walgreen, the Number One U.S. drugstore operator.

"I think they may drag their feet and see what kind of regulatory issues might be triggered with the Walgreen bid because there's considerably more overlap with Walgreen and Longs than is the case with CVS. My guess is they'll try to determine how that plays out, but if need be, I wouldn't be surprised if CVS came back with a higher bid."

He suggested that in that event, "they would try to structure a deal that would still be accretive, though less accretive than their initial bid of $71.50, so we have said that maybe they could go as high as $80, plus or minus." CVS "certainly can afford it and they've got very strong cash flow, and I think that at the end of the day, it just makes a lot of sense for them to go about their expansion in this way, [rather than] laboriously open stores over a multi-year time frame."

He also dismissed the notion put forth by some of the dissident shareholders that Longs' management rushed into the CVS deal without really evaluating it, contending that "my sense is the Longs management team has been diligent since day one about trying to maximize shareholder value."

He said the company's recent regulatory filing on the deal reveals that before CVS' offer, "they had in fact been courted over the past year by another party - presumably Walgreen - who was interested in trying to do a deal at a lower price, which still would have been a nice premium, even at that lower price range. It seems longs felt they deserved a higher price than what Walgreen, or whoever Party A was, interested in paying so that first deal never came to be."

Although the Walgreen offer seems superior, Magee cautioned that "as Walgreen is allowed to due their due diligence, which they haven't really had yet, and as we get further down this path and if it looks like it might be a regulatory issue, or the necessity of closing stores would be a larger hurdle than first thought, then maybe the CVS deal as it stands today would be the best deal."

Longs (NYSE: LDG) rose $4.09, or 5.71%, to $75.75, on 2.6 million shares, more than twice the average daily handle

Reddy puts key exec on ice

Outside M&A-oriented developments, Reddy Ice Holdings' shares (NYSE: FRZ) slipped $1.09, or 13.90%, to $6.75, on volume of 220,000, about 1½ times the usual, after the Dallas-based maker of packaged ice announced that it had suspended its dividend, and had placed its executive vice president of sales and marketing, Ben D. Key, on a paid leave of absence after having relieved him of his duties.

The company said it took those steps in response to his "likely" violation of company policies and involvement with possible antitrust violations, although it added that it is not clear whether any illegal conduct actually occurred. The company's internal investigation continues, parallel to ongoing probes by the Justice Department, 19 attorneys general and the attorney general of the District of Columbia. The company said it is cooperating with the investigators.

Analyst Jonathan Feeney of Wachovia Capital Markets in New York said in a research note that while estimated 2008 free-cash-flow is on track to be roughly $36 million, and while the stock trades at an EV/EBITDA multiple of 7.5 times, "we think the substantial risk profile is appropriately priced, and recommend sitting this out until there's more available information on the investigation and efforts to reverse declining operating trends."

He said that the announcement about Key "raises the risk profile of this stock further."

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