>Abraxis Bought Out

June 30, 2010

>Our San Francisco presenter spoke of a high likelihood of a buyout for Abraxis (NASDAQ: ABII, $74.20) at our SF idea forum in April. The announcement today confirmed his view. ABII is getting acquired by Celgene, with the deal expected to be finalized in Q4. The stock was trading at $51 at the time of the presentation.

>Tatum/Roulston Report

June 24, 2010

>The Tatum Survey is reflecting caution this month across the board. As last month showed general optimism across all areas from capital spending to employment and capital availability, this month showed relatively no change month to month in most of these categories reflecting some degree of pause and stability. This is reflective of what we hear in our research calls with companies. As optimistic as all the pundits are we must remember they are trying in most cases to get investors to act so general optimism prevails. In reality there is no visibility. Taxes, Health Care reform, and regulation is all we hear from executives who appear to like the improvement they see but are concerned with Europe all the government recent activity and even the impact of the recent oil spill in the Gulf creates a degree of uncertainty as a recent CEO stated how can oil prices not go up?

At Roulston we feel markets are reflecting general liquidity availability having improved. But the volatility that has returned reflects a lack of visibility and confidence in any time frame beyond that which can be seen right now on order books. That leads us to believe that any uncertainty like what we have seen in the BP disaster or European Sovereign debt issue can potentially create volatility and immediately. A dependence on government solutions in Europe shows can be troublesome. Why that is becoming more the norm in this country defies rational economic thought. As we look at increasing governmental debt now strangling cities and states, the federal government seems oblivious to what clearly is an issue everywhere else.

To read the full survey click here.

>A San Francisco presenter is encouraged by the recent data released by Abraxis Bioscience (NASDAQ: ABII, $51.17). The company’s chemo treatment Abraxane demonstrated a 31% improvement in the response rate over Taxol in a Phase 3 trial for first line non-small cell lung cancer. ABII’s chemo platform is also in a late stage trial for advanced melanoma. The presenter notes that Abraxane revenues can potentially increase 10-fold over the long term from $400 million currently. The company has hired Lazard and Goldman, looking at a potential sale, which in the presenter’s estimation can happen at $75-$85/share.

>BP Settlement?

June 16, 2010

>Both British Petroleum and the Obama administration have a problem. They need to extricate themselves from the relationship they have been forced into due to the Gulf oil spill. And they need to do it quickly.

The issue is simple. The administration views the cleanup and payment of economic damages as instruments of social and political policy. BP approaches the process from a point of view of balancing legal, financial, and public perception aspects.

Obama needs a solution that will stop some of the bleeding before the mid-term elections. BP needs a solution that will restore confidence among lenders and business partners. Who wants to do business with a company facing an open-ended liability? Lenders will balk, and governments and other oil companies will be reticent to enter into long-term deals with a company facing such an uncertain future.

For its part, the Obama administration relies on the technique of ruling by fiat, taking money from hapless taxpayers (and Chinese bond buyers) to fund largess for which it takes credit. It seems to be taking the same tack with BP, continually making bolder demands.
While the claims settlement process is basically an insurance operation, however, the administration is unhappy with the speed and frugality of BP’s process. In addition, the administration is demanding an escrow fund administered by an “independent” panel. Would the government demand such a thing from an insurance company? The government has also put a moratorium on deep drilling in the Gulf, and wants BP to pay for the costs resulting from it. BP is balking. The Obama administration is already running into Margaret Thacher’s admonition that the problem with using other people’s money is that you soon run out of it.

The issue of the responsibility for the moratorium is a dangerous one for the administration. If regulations were adequate and BP made a mistake, there is no reason for a moratorium, and BP should not be liable for the costs of it. If the regulation was inadequate and BP followed the rules, there is an argument that the government bears not only the responsibility for the moratorium but also the cost of part of the cleanup or broader damages. Remember that offshore leasing is a $13 billion annual revenue source for the government. Given that revenue stream, it would make sense for the government to have disaster recovery procedures in place, including dispersant and boom inventories. It is more efficient for the government to do this than the individual drillers. If individual drillers provided this backup, the redundant costs would lower their bids and reduce government revenues to a greater degree. Similarly, bills in Congress calling for unlimited liability would have the effect of lowering revenues dramatically as fewer companies would bid smaller amounts for leases.

For the administration and BP, the current claims settlement system is a no-win situation. If BP pays a satisfied claimant, the government gets no credit. Unhappy claimants, most likely the vast majority, will wonder why the government isn’t “doing something.” And the more the government tries to expand the definition of relief, the more BP will pull back.

There may be international issues too. The British might not be happy to see the US legal system destroy an iconic British company that pays over 10% of the dividends of a major British stock index.

What’s the solution? Why not have BP pay the US government a large sum of money, say $30-50 billion, in exchange for the government taking on the cleanup liability? The administration can quickly claim a win before the elections. It can then set up a claims process and get credit for the largess that flows from it. It can freely use the military to assist in the cleanup. Over the years this process will take, the political process will allow the government to move expenses around so that it can be seen to have made a very shrewd deal, while once again using the hapless taxpayer’s money to pay for the broad social policy embedded in the settlement process.

If there is no settlement, there is a real chance that BP would be forced to file for bankruptcy, throwing sand into the gears and ensuring plenty of voter, as well as shareholder disenchantment. A settlement would also allow BP shareholders to survive with a reasonable valuation and dividend.

Both sides win—the right basis for any deal.

>Dell was recommended near this same price about a year ago(14). The presenter still likes the cyclical recovery he sees in the box business and with $4/share of cash he likes where he thinks the cyclical improvement will take the stock price versus others in the space. Upside target still $20.

>A New York presenter still likes the short/long pair trade on Priceline and Expedia, but has taken some off the table. The Priceline (NASDAQ: PCLN, $185.11) leg of the trade is clearly a winner, with the stock dropping close to 30% since the presentation back in April. The valuation discrepancy has lessened, but is still severe based on projected EBITDA numbers. The presenter notes that while Expedia’s progress in Europe has been steady, the gains have been slower than he had originally anticipated.