Citi shares fall on stock sale talks; Parallel takes low bid; Genesis investor may nix offers

By Cristal Cody and Emily Trincal

Tupelo, Miss., Sept. 15 - Speculation that Citigroup, Inc. is in talks with the U.S. Treasury Department to urge the government to sell its 34% stake in the company sent shares down on Tuesday. One analyst said the move "puts a huge overhang on the stock."

Moving on to other transactions, Parallel Petroleum Corp.'s board said Tuesday it approved a buyout offer valued at $483 million, including the assumption of $351 million in debt, though one analyst told Prospect News the company sold out for too little.

Meanwhile, shares of Irish aircraft-leasing company Genesis Lease Ltd. moved up Tuesday after the company admitted a day earlier that it is in deal talks, but an analyst said that a major shareholder could nix a deal.

In other situations, a bidding war broke out for MSC.Software Corp., which accepted a revised bid of $8.15 a share in cash from an unnamed group of private equity investors.

Also on Tuesday, a market source said that Cadbury plc might be open to doing a deal with Kraft Foods Inc. after all.

On Wall Street, hopes that the recession is over sent stocks up for the day.

The Dow Jones Industrial Average added 56.61 points, or 0.59%, to close at 9,683.41.

The Standard & Poor's 500 index rose 3.29 points, or 0.31%, to 1,052.63, while the Nasdaq Composite index gained 10.86 points, or 0.52%, to end at 2,102.64.

Citi sale talks haunt investors

Shares of Citigroup fell 40 cents, or 8.85%, to close at $4.12 on Tuesday on rumors that the company wants the government to sell its stake so it can end its inclusion in the Troubled Assets Relief Program.

The Wall Street Journal, citing unnamed sources, said Citigroup wants the Treasury to sell its 34% holding in the company, which was given in exchange for $45 billion in bailout funds. In addition, to raise funds to pay back the government, the company is expected to sell up to $5 billion in new shares to the public.

New York-based Citigroup did not release a statement Tuesday on the report.

The U.S. government holds about 7.69 billion of the 22.88 billion outstanding shares of Citigroup.

Investors that hold reverse convertible notes are worried because the principal is at risk if Citigroup's stock falls by more than 35%.

"This is a big issue for the shares of Citi short-term. If Vikram Pandit [Citigroup's chief executive officer] wants to sell the 7.7 billion shares that the government held in Citi, it puts a huge overhang on the stock. I think they killed the stock yesterday," Dick Bove, a bank stock analyst at Rochdale Securities LLC, told Prospect News.

"We're talking of a third of the outstanding to be sold in the marketplace in three or six months or maybe a year," Bove said. "That's more than $30 billion. You're not going to unload $30 billion just like that."

However, Bove said he still holds a target price on the stock of $14.00 to $15.00 a share within one year because of the potential good in the bank split, with Citicorp for retail and investment banking and Citi Holdings for brokerage and asset management.

"And Citicorp is good," he said.

Leased aircraft consolidation possible

Shannon, Ireland-based Genesis acknowledged in a statement after the market closed Monday that it is talking to another party about a possible transaction after it noted unusual trading activity in the stock.

Genesis did not name the other party. Market rumors have cited Dutch rival AerCap Holdings NV as the potential bidder.

Scott Valentin, an analyst with FBR Capital Markets Corp., said Tuesday in a research note released to Prospect News that the firm believes that Genesis is the "seller."

"With a book value of $14.44, shares present considerable upside if a transaction should materialize," he said in the note.

Valentin estimates a target takeover price at $9.00 to $10.50 a share for Genesis.

The seven-year-old company has a diversified fleet of 54 aircraft leased to 34 airlines in 21 countries and has a "$1 billion secured credit facility maturing in April 2010 that can be termed out for two additional years," Valentin said. "Buyers may also be able to cut costs by moving the servicing contracts in-house (presently Gecas which spun out GLS in December 2006, services planes for GLS)."

The risks to the deal are that Gecas, or GE Commercial Aviation Services Ltd., which owns 11.6% of outstanding shares, could "make it hard for a competitor to buy GLS," Valentin said. "According to by-laws, each vote held by a competitor of Gecas will be reduced to one-fifth in value on a takeover."

Shares of Genesis closed up 55 cents, or 7.05%, at $8.35 on Tuesday. The stock has traded from $2.01 to $11.40 over the past year.

Shares of Amsterdam-based AerCap fell 29 cents, or 3.19%, to $8.81.

Parallel ends on low note

Apollo Global Management, LLC will acquire Parallel Petroleum in a tender offer for about $132 million, or $3.15 a share, in cash.

The bid represents a premium of 11% over the Midland, Texas-based oil and gas company's closing stock price on Monday.

The tender offer is expected to start by Sept. 24 and end 20 business days later.

"The board considered a range of potential alternatives, including continuing to operate as an independent entity, the returns and dilution associated with issuing additional equity in a public or private offering, the possibility of the sale of certain assets, and combinations with other merger partners," Parallel chairman Jeffrey Shrader said in a statement.

"After conducting an exhaustive evaluation of recapitalization and corporate sale alternatives, our board of directors unanimously concluded, after in-depth consideration, that this transaction with Apollo is in the best interests of our shareholders," he said.

But one market observer doesn't see it that way.

Richard Tullis, an analyst with Capital One Southcoast, Inc., said Tuesday in an interview that the offer should not be considered fair.

"It's toward the low end. I think shareholders could get a little bit better," said Tullis, who had a $4.00 price target on the stock. "This is a deal that doesn't have to be done in my view. There's no debt due for several years. They had cash at 2Q and will probably generate free cash flow in the second half of the year. From a balance sheet standpoint, they don't have to do a deal."

Parallel primarily operates in Texas, New Mexico, Utah and Colorado.

Apollo-managed funds have committed to provide $283.2 million of equity to complete the transaction, and Parallel will offer to repurchase all $150 million of its 10¼% senior notes due 2014 at 101% of face value.

Shares of Parallel added 29 cents, or 10.21%, to close at $3.13.

MSC attracts interest

MSC.Software said Tuesday it received a second, revised buyout offer of $8.15 a share from a consortium of private equity firms on Monday.

Symphony Technology Group LLC's subsidiary, Maximus Holdings Inc., had raised its offer to $8.00 a share to match the unnamed group's bid of $8.00 a share in cash made last week.

Santa Ana, Calif.-based MSC had agreed in July to a deal with Symphony for $7.63 a share. After the group made a rival bid, MSC gave Symphony until Tuesday to increase the offer.

Now, MSC said it plans to terminate the transaction with Palo Alto, Calif.-based Symphony after Sept. 21 unless a superior offer is made.

MSC's stock added 10 cents, or 1.23%, to end at $8.21 on Tuesday.

Cadbury ignites deal hopes

Although Cadbury reiterated its objection to Kraft's takeover proposal in a letter published Saturday, market observers aren't quite convinced.

"We believe that Cadbury's rejection has been crafted to avoid any signal that the Cadbury board is opening to Kraft, although we have the impression that this closure is driven by the board's concern that any opening could persuade Cadbury shareholders to give up too early in the process," a market source said Tuesday. "Cadbury's letter also helped us to firm our view that a recommendation could be struck in the 860p-a-share price range."

Northfield, Ill.-based Kraft's offer was valued at £10.2 billion, or 300p and 0.2589 of a share of Kraft for every share of Cadbury.

Other market observers speculate that Kraft may sell off some assets to help fund the acquisition of the candy maker.

Kraft owns brands that include Philadelphia cream cheese, Maxwell House coffee and Oscar Mayer sandwich meat.

Uxbridge, England-based Cadbury's brands include Dentyne and Trident gums.

Cadbury's stock rose 37 cents, or 0.71%, to close Tuesday at $52.53.

Kraft shares fell 3 cents, or 0.11%, to $26.08.

Mentioned in this article:

AerCap Holdings NV NYSE: AER

Cadbury plc NYSE: CBY

Citigroup, Inc. NYSE: C

Genesis Lease Ltd. NYSE: GLS

Kraft Foods Inc. NYSE: KFT

MSC.Software Corp. Nasdaq: MSCS

Parallel Petroleum Corp. Nasdaq: PLLL

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