Cadbury Schweppes postpones deal; Blackstone IPO sinks; Medtronic makes a deal; worst spreads in 5 years

By Evan Weinberger

New York, July 27 - Just a day after WCI Communities, Inc. announced that it was unable to secure definitive takeover bids, a second proposed corporate sale was temporarily pulled from the market Friday, as Cadbury Schweppes plc delayed the sale of its U.S. soft drink arm.

At the same time, the sale of bonds meant to finance private equity firm Kohlberg Kravis & Roberts Co.'s takeover of British apparel retailer Alliance Boots plc was delayed until at least next week by a consortium of banks.

In another sign of the troubles afflicting the leveraged buyout industry, Blackstone Group's highly-touted initial public offering from earlier in the year was ranked the worst performing IPO of the year by Bloomberg News after the stock lost over 20% of its value since it was issued in June. And a growing chorus in the press began to discuss whether KKR should pull its planned IPO before it, too, gets smacked around.

One market source said investors haven't "seen anything like this in a long time."

Credit spreads, which normally had been widening by a basis point or so a day, the source continued, have been widening 20 to 30 basis points in recent days.

"Where credit spreads are trading, they're going out farther out than they have in five years," he said. "These credit spreads are just looking terrible."

Even the news that gross domestic product had risen 3.4% in the second quarter - the strongest growth in a year - was not enough to tame concerns about corporate credit, private mortgage lending and just general unease. A day after losing 31150 points, or 2.26%, the Dow Jones Industrial Average dropped 208.10 points, or 1.54%, to close at 13,265.47. The Dow close included a 100-point nosedive in the last 20 to 30 minutes of trading.

The Nasdaq closed at 2,562.24 points, a drop of 37.10 points, or 1.43%.

Nonetheless, Medtronic, Inc. showed that new deals could get done Friday when it announced that it had agreed with Kyphon Inc. on a $71 per-share merger agreement that totals about $3.9 billion.

But the good news from Medtronic couldn't alleviate the concerns of people looking for big corporate deals.

"Everybody thought they were going to get a lot more money for companies and the finances they needed," the market source said. "Now people are going to get a lot less and they want to know how much they're going to pay."

But, he added, that the markets would soon find a level where people were comfortable, if only for a little while.

Cadbury Schweppes closes the cap - for now

British candy and soft drink maker Cadbury Schweppes announced Friday that it was postponing the sale of its U.S. soft drink division because of unfavorable corporate lending conditions. The London-based firm announced in March that it would either spin off the division that produces Snapple and other beverages in an IPO or sell it. In June Cadbury Schweppes that it would sell the division outright.

The sale remains on the table because interest "remains strong," the company said in a statement on its web site.

"However, the leveraged debt markets have experienced extreme volatility in recent days," the statement continued. "As a result, a decision has been taken to extend the sale timetable to allow bidders to complete their proposals against a more stable debt financing market."

The Cadbury Schweppes announcement came just a day after Bonita Springs, Fla.-based homebuilder WCI Industries announced that it could find no takers after announcing that it was searching for strategic alternatives. Activist investor Carl Icahn offered $22 per share for WCI Communities in March. The company, which is struggling through a housing slump and a mortgage crisis, deemed that offer too low.

WCI Communities stock (NYSE: WCI) finished up 15 cents, or 1.52%, at $10.02 Friday. Cadbury Schweppes (NYSE: CSG) also closed higher Friday, gaining 30 cents, or 0.62%, at $48.74.

Down days for private equity firms

When The Blackstone Group launched its IPO in June, the move garnered somewhat fawning headlines about the future of private equity and the future of business in general.

The articles speculated on the value of the company and the money shareholders and company officers were going to make on the deal.

The coverage seems to have jumped the gun a bit.

A Bloomberg News article Friday said that the New York-based alternative asset firm has been the worst performing IPO so far this year. According to the article, The Blackstone Group's stock (NYSE: BX) has lost 21% of its value since it began trading June 22.

"That's just people looking back," one market source said. "Now people don't want any part of it, though."

Widening credit spreads and banks' increasing concerns about financing major takeovers have put a crimp into Blackstone's shares, and the perception of private equity firms in general.

A growing chorus is now advising Kohlberg Kravis & Roberts to hold off issuing its IPO. The buyout firm filed its initial papers with the Securities and Exchange Commission on July 3.

Just a few days removed from banks being unable to find investors for a $12 billion loan package to finance Cerberus Capital Management's LBO of the Chrysler arm of DaimlerChrysler AG, Deutsche Bank, J.P. Morgan Chase & Co. and six other banks announced Friday that they were delaying the sale of around $3.6 billion of loans linked to Alliance Boots plc, a British apparel retailer KKR is angling to buy.

Shares of Fortress Investment Group LLC, the first of the big alternative investment firms to go public, fell below their IPO Friday before rallying. The stock (NYSE: FIG) dropped as low as $18.42 Friday. The IPO price was $18.50 Feb. 9. The stock finished the day up 19 cents, or 0.98%, to close at $19.50 Friday.

Blackstone Group shares continued to fall Friday, losing $1.40, or 5.45%, to close at $24.30.

Mergers aren't dead

A bright spot in the corporate merger market Friday was Medtronic's announcement that it had reached a $3.9 billion deal to merge with Kyphon.

The $71 per share agreement is a 32% premium over Kyphon's closing stock price Thursday of $53.68, according to a statement released by the two companies.

The deal is expected to close in the first quarter of 2008.

Sunnyvale, Calif.-based Kyphon produces medical devices that repair spinal column injuries. Medtronic is a medical device maker headquartered in Minneapolis. Medtronic is trying to expand its reach in the spinal column repair sector.

Kyphon stock soared in the face of Wall Street's losses Friday. The stock (Nasdaq: KYPH) gained 24.07%, or $12.92, to close at $66.60.

Medtronic stock (NYSE: MDT) lost 11 cents, or 0.2%, to close at $50.81.

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