NBR Complete Transcripts 06-21-2007
Thursday, June 21, 2007Blackstone IPO Anticipation Grows
SUSIE GHARIB: The New York Stock Exchange is gearing up tonight for the biggest initial public offering in several years. Blackstone Group, the giant private equity firm, will begin trading tomorrow under the ticker symbol BX. A short while ago, Blackstone's IPO priced at $31 a share, the high end of the expected range, valuing the offering at $4.75 billion. But this afternoon two key congressmen tried to block the stock offering. Representatives Henry Waxman and Dennis Kucinich asked the Securities and Exchange Commission to postpone the IPO, saying it posed quote new and undisclosed risks for investors. Suzanne Pratt takes a look at whether investors should own a piece of this rock.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: When the Blackstone IPO begins trading Friday morning, most small investors will probably not be buying it at the offering price. After all, the deal has created something of a feeding frenzy, being reportedly seven times oversubscribed. And as is usually the case with hot IPOs, the little people won't get the first taste. They will, however, be able to buy New York-based Blackstone in the after-market, albeit probably for a higher price. The question is whether Blackstone should be purchased at any price. IPO expert David Menlow says maybe.
DAVID MENLOW, PRESIDENT, IPOFINANCIAL.COM: The only place you don't want to be is in the way because the stock is going to work and it's going to continue to work mostly because Schwarzman and his crew know to press this formula to the Nth degree.
PRATT: Champions of the deal say it should offer a unique chance for all investors to own a stake in a premier private equity shop. In its two decades in business, led by Steven Schwarzman and cofounder Pete Peterson, Blackstone has returned an average of 30 percent a year on its private equity portfolio. While it's hard to argue with Blackstone's past performance, some experts are concerned about the IPOs price tag. Morningstar analyst Jeff Patak says he's skeptical.
JEFFREY PATAK, ANALYST, MORNINGSTAR: I think that people even have to look at the initial offering price and ask themselves whether that's a sane valuation, a sane multiple to put on this company. For all its merits, it can still be very overpriced at the offering.
PRATT: At 25 times earnings, Blackstone's valuation is more than double that of Goldman Sachs, which is a more diversified financial firm. And then there's what been happening on Capitol Hill. Legislation has recently been proposed that would vastly alter the tax treatment of private equity firms that go public. If approved, Blackstone could be paying a lot more to Uncle Sam in five years time.
MENLOW: It adds a bit of uncertainty in terms of how this will price and how it will perform tomorrow. But I still think that the company is going to be fine and whether the stock is fine or not is another matter. That's going depend on what you pay for it.
PRATT: One other major unknown for all interested buyers of the IPO is whether Blackstone is going public at the top of the market. But that's certainly a question that no one can answer. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
House Financial Services Committee Chairman Barney Frank Shares His Take on Blackstone
PAUL KANGAS: That Blackstone deal and hedge fund woes are high on the agenda in Washington these days. House Financial Services Committee Chairman Barney Frank is closely following the unwinding of those Bear Stearns hedge funds and their sub-prime portfolios. Washington bureau chief Darren Gersh talked with Frank today and began by asking if he's concerned by the news from Wall Street.
BARNEY FRANK, CHAIRMAN, FINANCIAL SERVICES COMMITTEE: I think frankly it strengthens the argument that many of us on our side have been making, some Republicans too, for legislating going forward to give some liability to the secondary market. If I can originate this loan and then sell it, I'm less worried about its long-term sustainability. On the other hand, the people who bought the loans have been saying I didn't make that loan. It's not my fault if there's a problem. And we've been saying that we wanted some liability to be attached. It had to be clearly defined so you don't kill the market to the purchase of this.
Now I think the Bear Stearns thing strengthens the argument that people said, well, if you put any liability on the purchases, you might kill that market. But that market's dying of its own right now. What I think strengthens this is an argument that if we set some reasonable rules for what has to be done before you can sell that stuff, that we may be strengthening the market, that we may be able to give the potential purchasers of these securities a degree of confidence that the Bear Stearns debacle was going to undermine.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: But the main concern you have is liability for predatory loans correct and how would you define that? So in other words if somebody sold a predatory loan to somebody and then a Wall Street bank or firm packaged it and sold it off, the Wall Street firm could be liable for that loan, correct?
FRANK: With much more specificity than your question implies, but that's exactly what I'm talking about. We are I hope we're going to be able to say that some liability will attached to the purchase of those loans. Not as much as the originator. We will be much more stringent in the rules we apply to the originator. But I do think it's important for us to say to the people who are going to be buying those loans, please don't think that you can buy anything that comes down the pike without any regard to how it was done and escape liability because that diminishes responsibility throughout the system.
GERSH: This gets to a different issue, which I've been told about, which is that when these pools of sub-prime loans are put together, packaged and sold off in financial market, that the people who buy them don't have a lot of transparency in terms of what's in the pool that they're buying, that they rely on credit rating agencies. They rely on investment bankers who tell them this is what's going on. Two questions, do you think there needs to be more transparency in that market when people buy these things and also are the credit rating agencies and investment bankers doing their job?
FRANK: We looked at the credit rating agencies and there's some concern that they may not have been aggressive enough. As to transparency, we're not talking here about poor widows and uneducated workers buying these things. They're bought by sophisticated people. I'm not on the whole (ph) in the business of trying to protect sophisticated people from other sophisticated people. I don't think we have the resources to do that. I think, as I said, that this strengthens our argument, the Bear Stearns situation, for putting some safeguards into this. That is, I would like it to be that when you buy a package of sub-prime loans or a package including some sub-prime loans a year from now, you will have some assurance that the packager of those loans did some things to make sure that those were not bad loans and that's what we want to do is to get them some obligation to vet those loans.
GERSH: Also today the Blackstone IPO priced. Some of your colleagues want to change the way that kind of partnership in the future would be taxed and the way that kind of a deal would be taxed. People argue that would really wreck the market for these kinds of IPOs and would send a chilling signal out into the IPO market. What do you think of that argument?
FRANK: That it's nonsense, it's self-serving nonsense. I'm all for changing the tax code. In the first place, the notion that they are doing society some great favor by taking private equity public, it's up to them, if they want to do it, fine. If they don't want to do it, also fine. The notion that there would be some great public benefit loss is quite minimal. Secondly, if you look at the enormous amount of money that people are making here, I do not think the additional taxation would deter it. They would still be making very large amounts of money and if diminishes some, well, maybe then the deals weren't so valuable.
GERSH: Congressman Frank, thank you for your time.
FRANK: You're welcome.
"State of Repair," -Dam Repair Costs
SUSIE GHARIB:If there's anything that marked the 20th Century, it was the building of what we now call the nation's infrastructure. But as those roads, bridges and other structures age and need replacing, who pays? As we wrap up our series "State of Repair," Jeff Yastine looks at some ways to continue building and rebuilding our country's infrastructure.
JEFF YASTINE NIGHTLY BUSINESS REPORT CORRESPONDENT: It is the largest man-made body of water east of the Mississippi River: Kentucky's Lake Cumberland. The structure that holds all that water back is the Wolf Creek dam. The U.S. Army Corps of Engineers recently put the dam on its list of structures at high risk of failure. That's because water from the lake seeps through the porous bedrock underneath the dam's concrete foundation and is slowly weakening it. Crews are working to stop the seepage. The project will cost more than $300 million and take seven years to complete. Barney Davis of the U.S. Army Corps of Engineers says the dam is nearly 60 years old and that plays a role in making repairs.
BARNEY DAVIS, CHIEF OF ENGINEERING-CONSTRUCTION, USACE-NASHVILLE: The engineering and construction standards that we had back in the '30s when these were designed, in the '40s when they were constructed, they thought it was perfectly adequate for the time. But now we're finding that for (INAUDIBLE) situations like this, that you can have problems over time that they didn't anticipate then.
YASTINE: Of the 79,000 dams in the United States, more than 10,000 are considered by the American Society of Civil Engineers to have a high-hazard risk of failure. Most of the dams in that group are privately owned and not operated by Federal agencies. But Larry Roth of the engineers group, says funding for dam maintenance is always a problem, regardless of ownership.
LARRY ROTH, DEPUTY EXEC. DIR., AMERICAN SOCIETY OF CIVIL ENGINEERS: Like many of our infrastructure systems, money that is required just to keep systems maintained is often diverted for other things. So for example, just in the last four or five years, maintenance money has been diverted to pay for improved security and this has been true at a lot of our nation's Federal dam sites. So if we're in fact diverting funds that should be used for maintenance, then our infrastructure systems, including hydroelectric dams, are going to suffer.
YASTINE: The patchwork approach to funding that characterizes much of the nation's infrastructure has led to calls for a national infrastructure czar or commission. It would set policy and recommend to Congress which projects are most vital to the national interest. Some people like Norbert Whitlock, vice chairman of the Inland Waterway Users Board, say that approach would balance transportation needs among roads, rails and rivers.
NORBERT WHITLOCK, VICE-CHAIRMAN, INLAND WATERWAYS USERS BOARD: It would play in comparison to the interstate highway system, that is in need of revitalization and added capacity being provided in many of the high- density corridors. Rail we hear about being congested and on the waterway, we have ample capacity to expand with a very relatively small capital investment.
YASTINE: Calls for privatization are also increasing, with a handful of roads and turnpikes already in private hands. Wastewater treatment agencies in some parts of the country are also being bought up by private investors. Transportation analysts like Robert Poole of the Reason Foundation, say other infrastructure assets could eventually be privatized as well.
ROBERT POOLE, DIR. TRANSPORTATION STUDIES, REASON FOUNDATION: Nobody's really worked out a mechanism for it, but that in principle, you could privatize the physical infrastructure of a major river for example, the locks dams and have -- but then the users would have to agree to user charges that would fully pay the cost of operating and maintaining all that.
YASTINE: It goes to the heart of the debate -- taxes or tolls. Project by project, that question is being answered as the nation fixes its current "State of Repair." Jeff Yastine, NIGHTLY BUSINESS REPORT, Jamestown, Kentucky.
"Commentary"-Misguided Guidance
GHARIB: In tonight's commentary, saying good riddance to quarterly earnings guidance. Here's Myron Kandel, president of the New Hampshire Initiative for Corporate Responsibility and Investor Protection.
MYRON KANDEL, PRES., NEW HAMPSHIRE INITIATIVE FOR CORPORATE RESPONSIBILITY: Corporate America and Wall Street have both been rightfully criticized for their obsession with short-term results at the expense of a company's long-term growth. Exacerbating this problem has been Wall Street's insistence -- and the corporate world's acquiescence -- on providing analysts and money managers with guidance on what a company's quarterly earnings are likely to be.
Missing such a figure by as little as a penny or two per share can often send a stock plunging. So executives are pressured to meet those short-term projections even if their actions are not in the company's best interests. And who benefits? No long-term holders of the stock, but traders in for a quick profit and executives who cash in on those results. But now a real movement to deal with these and other corporate problems has arisen, with the surprisingly diverse support of big business, big labor, giant pension funds and big-shot lawyers and accountants.
Under the aegis of the Aspen Institute, this group has issued a set of principles urging companies to do away with quarterly earnings guidance, to tie executive compensation to long-term growth and to force executives who benefited from performance targets that were later restated to give back their ill-gotten gains. Good work, you people. Now let's see if the Aspen Group's members can translate their recommendations into real results. I'm Myron Kandel.
"Last Word"-Out of this World Vacations
GHARIB: And finally tonight, are you looking for a trip that's out of this world? Well, European aerospace company Astrium says it wants to build a four-passenger jet to fly space tourists 60 miles above the earth. For three minutes, travelers can enjoy weightlessness while catching a rare view of the earth. The price tag is $268,000. That's a bargain though compared to the $20 million that Russia charges for a ride to the international space station. Paul, Astrium is now looking for partners and hopes to start its first space flights in the year 2012.
KANGAS: For $268,000 I assume those are first class tickets.
GHARIB: At least. That's quite a lot of money. We'll need a couple of years to raise that kind of money.
KANGAS: That's for sure.
Paul Kangas' Stocks in the News
PAUL KANGAS: Those hedge fund worries took Wall Street lower at the opening, with the Dow falling 40 points and the NASDAQ off 11. As oil prices eased in late morning, stocks bounced back into positive territory, but the selling resumed as bond yields moved higher, taking the Dow down 45 points at midday. Then, stocks made a solid comeback on growing optimism the Bear Stearns hedge fund problem won't cause any major market damage. So the Dow Industrial Average closed up 56.42 at 13,545.84. The NASDAQ Composite rose exactly 17 points to 2616.96. Standard & Poor's 500 Index gained 9.35 to close at 1522.19. Over in the bond market, the 10-year note fell 12/32 to 94 24/32, putting the yield at 5.19 percent.
KANGAS: The stock of the world's biggest oil company was among the most actively traded issues on the big board, Susie. And we'll see it as we look at our stocks in the news tonight.
Big board volume leader for the third straight session, General Electric (GE) today trading 19.4 million shares, edging a penny higher. The company and Pearson PLC have decided not to pursue a joint acquisition of Dow Jones. DJ stock fell $0.94. Kraft Foods (KFT) moving up $2.28. The "Wall Street Journal" reported activist investor Nelson Peltz, who owns 3 percent of Kraft, may be targeting the company to sell of its Post cereals and Maxwell House coffee divisions.
Then came Pfizer (PFE) $0.21 gain.
Adv Micro Devices (AMD) moved up $1.08. The Stiefel Nicholas brokerage upgraded it from "neutral" to "buy" with a $17 a share target.
And there you see the world's biggest oil company stock, ExxonMobil (XOM) up $1.48 on that news that a major tax on oil companies blocked by the Senate.
Micron Tech (MU) a $0.52 gainer.
Time Warner (TWX) $0.35 loss there.
Ford Motor (F) edged a nickel higher.
Motorola (MOT) $0.24 gain.
And then Home Depot (HD) losing $0.08. Home Depot kind of a contrasting thing here from two brokerages. Citigroup boosted its target from $37 to $45 a share for HP stock, but the Piper Jaffray brokerage downgraded it from "out perform" to "market perform" on valuation.
JPMorgan Chase (JPM) edging up $0.38. Keefe Bruyette upgraded it from "market perform" to "out perform" boosted its price target from $55 to $57 a share.
Then Nokia (NOK) a $0.29 loss. Goldman Sachs downgraded it from "buy" to "neutral" after the stock's recent gains.
American Greetings "A" (AM) up $1.86, had good earnings. First quarter operating earnings, $0.55, more than doubled $0.26 a year ago. Those earnings $0.21 above the Wall Street consensus.
Equity Inns (ENN) moved up $3.32. Whitehall Street Global Real Estate will acquire this firm for $23 a share in cash.
Lindsay Corp (LNN), which makes irrigation systems, up $5.25. Yesterday the company had good earnings out third quarter, $0.62 versus $0.55 and revenues jumped 24 percent.
Oakley Inc (OO) up $3.22. The eyewear maker will be acquired by another eyewear maker, Luxottica and the price is $29.30 a share. Luxottica stock moved up $3.18 to $38.02 a share.
Ameron Intl (AMN) which makes oil and water pipes, things like that, had second quarter earnings lower, $1.74 versus $2.11 last year, but those year ago results included $9 million in one-time gains and without that, those earnings would have been lower so this year's would have been better.
And then Esco Technologies (ESE) tumbling $9.83. The company says its 2008 outlook could be impacted by its client PG&E's decision to evaluate Esco's electric meter technology. Baird brokerage downgraded Esco stock from "out perform" to just a "neutral" rating.
NASDAQ's most active, Apple (AAPL) up $2.35.
Followed by Google (GOOG)
with a $4.14 gain.
Microsoft (MSFT) $0.21 advance.
Intel (INTC) rose $0.35.
And then Cisco Systems (CSCO) was up $0.12 a share.
Starbucks (SBUX) down $1.06. The company said the top end of its 2007 earnings forecast will be challenging to meet. That's $0.89 and the company said that's largely because of rising dairy costs.
Nvidia (NVDA) down $3.11. Lehman Brothers downgraded it, upgraded it I should say from "equal weight" to "over weight."
Research in Motion (RIMM) $2.37 gain there.
Amgen (AMGN) was down $0.43.
And then came Qualcomm (QCOM) with a $0.49 gain.
Those are the stocks in the news tonight.
