Energy East-Iberdrola deal spooks regulators; GMH Communities surges on merger news

By Paul A. Harris

St. Louis, Feb. 12 - Shares of Energy East Corp. held in on Tuesday despite news that lawyers for the New York Public Service Commission petitioned an administrative law judge to indefinitely postpone the proposed acquisition of Energy East by Spanish utility Iberdrola SA.

"There is some worry that Iberdrola, itself, may be the subject of a hostile takeover bid from some of the larger European utilities," an equities analyst told Prospect News.

"That has the Public Service Commission spooked, so they're asking for the deal to be halted.

"It's very undetermined at this point."

Notwithstanding the skittish regulators, Energy East (NYSE: EAS) shares were up 1.02% to close $0.26 higher at $25.75 on the session.

The move on the part of the New York regulators comes more than two month after the Federal Energy Regulatory Commission (FERC)'s approval of the acquisition, which, according to FERC, "does not present vertical or horizontal market power issues...and will not harm competition."

In June 2006 the boards of Energy East and Iberdrola approved the merger agreement under which Iberdrola would acquire 100% of Energy East shares for $28.50 in cash, which represented a 20.2% premium over the Maine-based utilities average closing stock price for the 30 day period ending June 22, 2007.

The transaction was valued at $8.6 billion equivalent.

In a Tuesday press release the PSC announced that it will hold public hearings around the state from Feb. 19 through Feb. 22, seeking comment on the merger.

Iberdrola's shares were flat in Tuesday trading, closing €0.08 (0.77%) higher at €10.41.

GMH Communities surges

Meanwhile, in the "specialty housing" REIT space, GMH Communities Trust shares gained 55.10% as the company announced that it will sell its military housing division, following which it will merge with American Campus Communities, Inc.

GMH's military housing division will be sold to a U.S. subsidiary of Balfour Beatty plc for $350 million in cash, in a transaction anticipated to result in net distributions to shareholders and to the unitholders of GMH Communities of approximately $4.08 per share.

When that transaction is completed GMH will merge with American Campus Communities, Inc.

The combined deal is valued at approximately $9.61 per share, a 72% premium to Monday's closing price.

John Coumarianos, equity analyst for Morningstar, Inc., told Prospect News that the merger makes sense for American Campus Communities because it is in line the Austin, Tex.-based REIT's core business.

"We have GMH fair value of $7.50 per share, which is a pretty conservative valuation, given that they had been rather poor operators in the past," Coumarianos said.

"So although the price is certainly higher than $7.50, I think it can make sense for [American Campus Communities] which is likely to extract more profit from those properties."

GMH Communities (NYSE: GCT) shares gained $3.08 in Monday trading to close at $8.67 on volume of 6.36 million shares, versus average volume of 384,000 shares.

American Campus Communities (NYSE: ACC) fell $0.38 (1.34%) on Monday to close at $28.05.

AIG losses 'not material'

In the face of negative actions from the ratings agencies, shares of American International Group, Inc. traded higher on Tuesday, after falling almost 12% on Monday, as the company assured its shareholders that loss risk associated with the super senior CDS portfolio of AIG Financial Products Corp. will not be material to AIG, based on the company's most current analysis.

The ratings agencies, however, chose to wave yellow flags.

Moody's changed its outlook on AIG's Aa2 senior unsecured debt to negative from stable, based on the company's sizable exposure to the U.S. subprime mortgage market, where credit quality and liquidity remain under pressure.

The potential for loss within this mortgage portfolio is significant because of the company's recent trend toward a more aggressive capital structure, with operating leverage and financial leverage rising over the past few years, Moody's said.

Meanwhile Standard & Poor's revised the outlook on AIG and its core insurance operating subsidiaries to negative from stable. The AA counterparty credit ratings and AA+ counterparty credit ratings on core subsidiaries were affirmed.

S&P commented that the outlook change follows an 8-K filing that clarified methodology for determining fair values on the super senior credit default swap portfolio covering multi-sector collateralized debt obligations.

The company also reported that PricewaterhouseCoopers, its external auditor, has concluded that AIG has a material weakness in internal controls over the valuation of these securities, according to the agency.

Although in the balance it would appear to have been bad news, Tuesday, for AIG (NYSE: AIG), its stock closed $1.40 (3.13%) higher on the day to close at $46.14.

An analyst who focuses on the financial sector said that the ratings watches were just another case of accountants protecting their backsides, and being "most negative when things are down.

"You never heard a word from these folks when valuations were at their peaks!" the source asserted.

"I do strongly feel that AIG and the financials have taken their hits, raised a ton of new capital and will get back on track to earn real dollars on a steep yield curve.

"And higher stock prices will follow."

With respect to the financials, the marquee monoline names Ambac Financial Group, Inc. and MBIA Inc. both tumbled by more than 15% in Tuesday trading.

Ambac (NYSE: ABK) lost $1.58 per share to close at $8.90.

MBIA (NYSE: MBI) ended the day $2.08 lower to close at $11.50.

Genesco: a complex little squabble

The $1.5 billion acquisition of Genesco, Inc. by Finish Line, Inc. is turning into a Mexican standoff, with the third party being Finish Line's lender, UBS, according to an equities analyst.

"They are arguing now whether some of the claims should be heard in the New York court or the Tennessee court," the analyst said.

"It's a very complex little squabble.

"There are three different sides. And it's not as though Finish Line is on UBS's side or on Genesco's side.

"All three are arguing for different things to variously be heard in New York or Tennessee," said the analyst who added that the eventual outcome will likely come down to decisions from "a bunch of judges.

"It's quite possible that New York and Tennessee will end up disagreeing with one another, in which case it will become an even more complex problem," the analyst added.

To recap, on Dec. 28, 2007 the Tennessee Chancery Court ruled that Finish Line breached its merger agreement with Genesco. UBS, Finish Line's lender, had agreed to fund the acquisition. However, when Genesco's second- and third-quarter earnings indicated that 2007 would be one of Genesco's worst years in the past 10, UBS put pressure on Finish Line either to renegotiate the price of the deal or declare that a MAC had occurred.

The court found that that Genesco's predicted 2007 earnings did demonstrate a measurable change.

However Finish Line did not prevail because the court held that even though a MAC had occurred, Genesco was protected by a carve-out in the MAC clause exempting adverse effects resulting from changes in general economic conditions.

On Tuesday the equities analyst surmised that, based on Genesco's (NYSE: GCO) share price investors don't seem to be taking a view on the outcomes of the various court cases. The stock was up $0.61 (1.95%) to close at $31.68.

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