Sobering News for Traders Banking on Deal Mania
When NCR Corp. and MCA Inc. both received $6-billion takeover offers earlier this month, some investors began wondering whether deal mania was about to revive in a big way.
Thursday, Los Angeles-based Castle & Cooke Inc. answered that question. In pulling its prized Dole Food unit off the market, Castle acknowledged that it couldn’t find a suitor willing to pay what Castle would consider a fair price.
Chalk up another victory for tight-fisted buyers and lenders. Most potential buyers either see no reason to rush into deals now or find themselves shut out of financing. So if buyers can’t get their targets dirt cheap today, they’ll wait--because they expect to be in control of the market for a long time to come.
The Castle news is a sobering wake-up call for traders who in recent weeks have jumped into stocks such as Hilton Hotels, Caesars World, First Interstate and others, expecting that takeover bids are imminent for those long-rumored targets. Maybe those bids will come. But the odds increasingly are against it.
Castle, after all, wasn’t trying to sell a piece of junk. Dole is among the world’s lowest-cost producers of fresh fruit and vegetables, and the business is booming. Castle Chairman David Murdock said “several major international food companies expressed interest in acquiring Dole.” But no one offered Murdock the price he wanted.
Murdock specifically acknowledged that one problem was that “over the past several months, the market for . . . acquisition financing has deteriorated.”
True, a company the size of AT&T; still can come up with $6 billion in financing for a takeover, as its current offer for NCR indicates. But there aren’t many AT&Ts; in the world. Most potential corporate buyers can’t do billion-dollar deals anymore because banks and brokerages have turned off the money spigot. The latest tent-folder is Security Pacific Corp., which this week decided to disband much of its once-sprawling investment banking department.
“Price is a function of financing,” notes Chriss Street at L.A.-based Reorganized Securities Group, a banking group that works with troubled companies. Despite a few high-profile bids, such as those for NCR and MCA, the reality is that financing isn’t getting any easier for most buyers or sellers, Street says. So asset prices won’t improve, either. Move over, David Murdock.
“There are a lot more investment bankers out there who are knowledgeable about how to structure highly leveraged transactions than there are banks willing to participate in those transactions,” Street says.
The credit crunch isn’t over. In fact, Street says, “The realization that we’re in for something that’s going to last for years and years is just starting to sink in.”
Pacific Horizon Exits Junk: The La Jolla-based Pacific Horizon mutual fund group has found a way out of the junk bond fund debacle: Give the fund to someone else, and let it be their headache.
The company is asking shareholders of the Pacific Horizon High Yield fund to approve a merger into T. Rowe Price Associates’ High Yield fund. The vote will take place in February.
T. Rowe Price would pay nothing for the fund. Shareholders would simply receive a prorated number of shares in the T. Rowe Price fund worth the same as their investment in the Pacific Horizon fund. The deal would be tax-free.
This type of solution to the sad saga of junk bond funds could become far more commonplace. Many fund companies, especially those with the smallest junk fund dogs, may decide it isn’t worth the pain of staying in the junk business--especially given the probability that the recovery of corporate junk bond values could be years away.
The Pacific Horizon fund has had an abysmal record, owing to a particularly unlucky choice of junk bonds. Through Dec. 6, the fund’s total return this year was -20.9%, ranking it 1,619th of 1,712 bond and stock funds whose performance is tracked in Lipper Analytical Services’ weekly fund report. Total return measures interest income plus or minus the bonds’ change in price.
Shareholders who have been in the fund for the past three years have lost 16% of their money. That is far worse than most junk funds.
The fund has dwindled to $9 million in assets, which has hurt its investment performance even more: As a fund shrinks, the cost of operating it rises as a percentage of total assets. That eats up more of remaining shareholders’ potential return.
The Pacific Horizon fund’s manager, Tom Nugent, declined to comment on the proposed dissolution.
For Baltimore-based T. Rowe Price, the deal offers the opportunity to pick up a few new shareholders, says spokesman Steve Norwitz. T. Rowe Price’s High Yield fund has $490 million in assets and has fared far better than Pacific Horizon’s fund. The Price fund is off 11.5% year to date and up 4.3% over three years.
The Pacific Horizon fund family includes eight funds besides the junk fund. Total assets are $5 billion. The fund company is owned by Security Pacific Corp.
One more junk note: Shareholders of Fidelity Investments’ High Income junk fund this week approved a name change to Fidelity Capital Income--and a change in the fund’s investment philosophy, to allow it to stress capital appreciation rather than high yield. The upshot is that Fidelity will market the $800-million fund more like a stock fund than a bond fund, trying to encourage investors to take a long-term view of the value of the portfolio’s junk bonds. Of the 55% of shareholders who voted, 89% approved the change in philosophy.
JUNK: THE BETTER AND WORSE All junk bond mutual funds aren’t managed equally--not by a long shot. A look at five of the best and five of the worst so far this year, and their three-year track records:
Total investment return Fund Year-to-date 3 years Plymouth High Yield +6.3% +31.5% Mid-America High Yield +1.9% +29.0% Phoenix High Yield -1.6% +12.4% Oppenheimer High Yield -3.3% +13.3% Financial Bond High Yield -5.5% +12.6% AIM High Yield -16.5% -13.1% Eaton Vance High Income -17.4% -2.1% Pacific Horizon High Yield -20.9% -15.7% Keystone Amer. High Yield -24.5% -15.4% Dean Witter High Yield -32.7% -35.4% Avg. fixed-income fund +3.5% +23.2% Avg. stock fund -7.1% +45.9%
All data through Dec. 6.
Source: Lipper Analytical Services
