Lehman, WaMu stutter along; King tenders for Alpharma; Longs holders shun CVS as Walgreen steps in

By Paul Deckelman

New York, Sept. 12 - Special-situations players continued to keenly watch the goings on Friday in the troubled trio of faltering financials - Lehman Brothers Holdings Inc., Washington Mutual Inc. and, now, insurer American International Group. Lehman was reported to be in talks with potential buyers or investors in a desperate effort to save itself and restore market confidence. No deals had been struck by the closing bell, but some reports said a transaction could be announced as early as the weekend.

WaMu has likewise suffered a loss of investor confidence and is trying to right the ship; there were reports Friday that JP Morgan Chase might be interested in acquiring the top U.S. thrift institution - but other reports said no.

New York-based AIG, the nation's largest insurer, was the disaster of the day on Wall Street, its shares nosediving some 30% in heavy trading.

King Pharmaceuticals Inc. made good on its threat to go over the heads of Alpharma Inc.'s management and appeal directly to shareholders with its now-sweetened $37 per share takeover effort, commencing a tender offer at the higher price. However, Alpharma shares have pushed even beyond that, leading analysts to believe that the two sides are likely to negotiate a still better deal.

CVS Caremark Corp.'s $71.50 per share offer to acquire smaller rival Longs Drug Stores Corp. has aroused a growing rebellion among some of its shareholders, some of them announcing that they will not tender their shares at that price - and their opposition apparently proved to be prescient, as news surfaced well after the close that larger CVS rival Walgreen Co. is willing to buy the Walnut Creek, Calif.-based regional pharmacy chain operator for $75 per share.

Lehman losses mount, as fire-sale seen possible

Friday was another rough day for shareholders of Lehman Brothers, whose price has been pounded down repeatedly on market concerns about the investment bank's inability to attract investors who can pump in big doses of fresh capital.

Long-running talks with Korea Development Bank, which had been rumored willing to invest as much as $6 billion in Lehman, broke off this week with nothing having been agreed upon. Market unease with Lehman intensified at mid-week as the company announced nearly $4 billion of quarterly losses and unveiled a package of "key strategic initiatives" to raise capital and cut risk that market players felt was simply too little, too late - leading to speculation that Lehman would have to sell itself to some larger, better capitalized firm to avoid a total collapse. The Treasury and The Federal Reserve were reported helping out as matchmakers - but insisting that there would be no government guarantee against investor losses, as there had been when Bear Stearns & Co. was practically given away to J.P. Morgan Chase this spring for pennies on the dollar.

An analyst said that "people are saying there might be a deal [for Lehman] this weekend - but it's likely to be under $1 per share," or less than one-third of even the very low price to which Lehman has been hammered down to over the past week.

He said that he could not see how Lehman shareholders might get any more than that, given the extreme loss of market confidence in the once-robust fourth-biggest U.S. investment bank - and the precedent set in March when the equally venerable and once-formidable Bear Stearns & Co. came crashing down. "Look at Bear Stearns - the Friday before, it was trading at $30 per share, and Sunday night, they did a deal for $2 - 1/15 of the price. Figure 1/15 of $3.50 or wherever Lehman is today."

The name most often bandied about as a likely buyer for Lehman is Bank of America Corp., although spokesmen at Lehman and Bank of America declined to comment on a Wall Street Journal story Friday saying B of A had the inside track. The Financial Times reported that B of A, J.C. Flowers, and the Chinese sovereign wealth fund China Investment Co. are mulling a joint bid for Lehman, the Financial Times reported on its Web site Friday.

Lehman (NYSE:LEH) was viciously hammered down over the past week, particularly on Tuesday, when it lost nearly half of what value it had, and then again on Thursday when it swooned another 41%. On Friday, it dropped an additional 57 cents, or 13.51%, to $3.65, on volume of 307.1 million shares, over four times the usual turnover.

WaMu watch continues

Also getting decimated this past week was Seattle-based Washington Mutual, the largest savings-and-loan institution in the U.S. - which, like the big banks, has wracked up several billion of losses on bad mortgages and other sour loans. That led to the ouster this week of long-time CEO Kerry Killinger and his replacement by mortgage industry veteran Alan Fishman. WaMu announced plans to set aside some $4.5 billion in the third quarter as a provision against bad loans - somewhat less than the second-quarter provision, but it still raised the total bad-loan provision for the year to over $10 billion.

Despite WaMu's claims of being adequately capitalized, with some $50 billion of available reserves, the company's shares and bonds have plunged all week, and there was media speculation that it too might have to sell itself to save itself. A market source sees JP Morgan as the best fit, noting that the New York-based banking giant "has always wanted to expand its retail deposit base." He said that B of A is over the regulatory percentage limit, so is not a likely buyer, and Citigroup "is not in a position to do anything."

He said that for years, JP Morgan boss Jaime Diamon "liked the franchise, and always wanted to buy it, on terms similar to Bear Stearns. Well, here we are."

There was no official confirmation that anything was going on, and in fact, while the American Banker industry trade paper said that talks between WaMu and JPM were advanced, others, including CNBC, said that no talks were going on.

However, the market source - while praising new WaMu chief Fishman and "a smart guy", said that he had been hired "way too late" and would not "have the time" to save WaMu from itself. He suggested that "the only way WaMu can stand on its own" is if David Bonderman - WaMu's largest direct holder, with some 1.2 million shares as of June 30 - "if he doubles down and [his Texas Pacific Group] puts in another $7 or $10 billion." Without such an infusion, he opined, "it's going to just spiral down."

He suggested that WaMu shareholders probably would not get much, or even any kind of premium in a takeover of the company - "you'll probably get a tiny amount of J.P. Morgan shares and hope it goes higher over time." However, he said that bondholders and preferred holders should do OK.

WaMu (NYSE: WM) fell 10 cents, or 3.53% Friday, to $2.73, on volume of 301.4 million shares, or more than triple the usual activity level.

AIG is awful

But that fall paled in comparison with the $5.41, or 30.83%, plunge by American International's NYSE-traded shares, to $12.84. Volume of 320.6 million was almost 8 times the average turnover.

The insurance giant, besides being hurt by the negative sentiment about Lehman and WaMu, had to cope with questions about its own capital adequacy.

King moves to enhance kingdom

King Pharmaceuticals, as promised, officially began its tender offer for Alpharma shares on Friday, bypassing the Bridgewater, N.J.-based drugmaker's reluctant management and taking its case for an acquisition directly to the latter company's shareholders. King is hoping to win them over with a takeout offer which has now been sweetened to $37 per share, a 12% increase from its original $33 per share offer unveiled last month and instantly rejected by Alpharma as inadequate. Total value of the offer was raised to $1.6 billion from $1.4 billion originally. Besides offering to buy the Alpharma shares directly from their holders in an offer that expires on Oct. 10, King held out the not-so-veiled threat of a consent solicitation to gain shareholder approval for removal of Alpharma's current board and its replacement with a more pliant sent of directors.

While Alpharma quickly nixed the original $33 bid, the company this time around is playing it more cautiously, leading analysts to believe it may seek to come to an agreement with King, though for more money. It advised its shareholders not to take any action on the new offer, pending a board recommendation it plans to make within 10 business days after consulting with its financial and legal advisers.

Analyst Scott Henry of Roth Capital Partners of Newport Beach, Calif., told Prospect News that

with King having upped its bid, the more likely scenario is that a negotiated deal gets done, with $40 per share the most likely price. Roth, who rates Alpharma as a "hold" and who reiterated that rating in the face of the latest developments, sees about a 50% chance that this is how the situation will play out.

He said that while it is possible that King might stick to its guns and proceed with its hostile tender offer at its current level and actually get slightly above 50% support, "it's hard to tell" definitively - and adds that the company has "a fluid base of shareholders" that toughens the task of calculating the odds on such a scenario.

"We can't rule it out - but we believe that chances [of doing a deal] increase as the price nears $40 per share or higher," which he said seems like "a relatively modest increase" from the newly sweetened $37 per share bid - about 8%, actually.

Henry says that other, less likely scenarios, include a greatly improved offer arising out of a bidding war, should another suitor emerge - although he opined that King believes that no other bids are forthcoming. Less likely still, in his view, is Alpharma settling for the $37 offer, and on the downside, no deal all emerging, or, in a worst-case scenario, Alpharma making "a rash strategic move making it less likely to be acquired" -which he warned would have the impact of knocking its shares down to a near-term target price of $20.

On Thursday, when King officially announced its increased offer and reiterated its intentions to go directly to the shareholders if Alpharma management chose not to go along, Alpharma (NYSE:ALO) pushed as high as $37.70 - actually over the new offer for those shares - before going home having risen $1.65, or 4.6%, to $37.38.

They continued to rise on Friday, gaining 37 cents, or just under 1%, to finish at $37.75 - a signal that the market expects King, or someone else, to come back with yet a better offer - on volume of 3.9 million shares, almost triple the norm.

Shares of Bristol, Tenn.-based King (NYSE: KG), which on Thursday had fallen 48 cents, or 4.3% on the upsized bid, to $10.77, dipped another 3 cents, or 0.28%, on Friday to $10.74, on volume of 6.9 million, about 2½ times the usual.

CVS bid for Longs challenged

CVS Caremark's attempt to bulk up to more equally compete with bigger rival Walgreen by acquiring the 510-store West Coast regional drugstore operator Longs was falling apart on Friday, as 9% holder Advisory Research, Long's biggest shareholder, joined fellow 9% holder Pershing Square Capital in warning CVS that it will not tender at that price,, which the two investment companies believe does not fully take into consideration the value of Longs' real estate assets.

On top of that, RiskMetrics Group advised its institutional investor clients not to support the $2.9 billion offer, charging that Longs was too quick to accept the CVS offer.

"It does not appear that Longs made any attempt to play suitor against suitor," RiskMetrics wrote in a research report Friday. Longs, it said "appeared to place a priority on speed and certainty of closing," and did not give its shareholders adequate information about the value of its real estate assets. Critics of the Longs deal have stated that the CVS offer undervalues those assets.

CVS has up till now said that it will not increase its offer - its chief executive officer, Tom Ryan, reiterated on Friday that "we think we are paying a full and fair price. . . We're not moving. We're done."

An analyst said that the Woonsocket, R.I.-based Number-Two U.S. drugstore chain operator, behind top player Walgreen of Deerfield, Ill., had a game plan of dealing with the opposition by continuing to repeatedly extend its offer, in hopes that the balky activist investors like Pershing Square Capital "don't want to wait around for a year - they want to take their premium and just go."

He said "now that you have more people speaking out against the $71.50 per share, you could see a bump in the price" - particularly with RiskMetrics also weighing in against the offer. "Think of the 'Mom and Pop [small] holders out there who have no clue of what to do - they look to people like RiskMetrics" to give them guidance.

Even before the news of the rival, better, bid from Walgreen surfaced late Friday night, he predicted that with opposition to the deal approaching a critical mass state, he didn't think there was "any chance" CVS would get the two-thirds approval required by its tender offer by the initial deadline of Monday.

In formally announcing its opposition to the deal Friday, Pershing Square said that it knew of at least four other possible buyers for the company, including two strategic buyers, a REIT and a real estate private equity investor.

Then, late Friday, hours after the markets had closed for the week, Walgreen announced that it has offered to acquire Longs in a $75 per share in a cash transaction - which it pointed out, was superior by $3.50 per share to the CVS bid. The $3 billion deal would include debt assumption, and would be subject to regulatory review and completion of due diligence.

As of press time on Friday night, there was no immediate response from either CVS Caremark or Longs.

Longs (NYSE: LDG) lost 7 cents, or 0.10% Friday to end at $71.66, on volume of 1.6 million shares, about one-third above normal.

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