Wall Street Breakfast: Must-Know News

• TeliaSonera snubs France Telecom's $42B bid. France Telecom (FTE) is in talks to acquire Swedish peer TeliaSonera for cash and stock worth $42B, a 39% premium. A deal would create Europe's largest telecom carrier by revenue and serve 237M customers. TeliaSonera rejected the initial offer, saying it significantly undervalues the company's potential.
• Inflation, expectations worry Fed. Fed chief Ben Bernanke said yesterday inflation is "significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s." He said molding people's perceptions about inflation -- that it's not here to stay -- is as important as actual inflationary behavior.
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• Verizon/Alltel deal imminent. Verizon (VZ) is in advanced talks to acquire Alltel for $27B, just about the same amount TPG and Goldman Capital Partners (GS) took it private for last year. A deal would create the number-one U.S. mobile provider (followed by T, S and DT), and could happen as soon as today. It is in part driven by GS and several of the original financing banks (C, BCS, RBS), who were unable to sell their debt. A purchase would be financed entirely through debt, sources say, in order to placate Verizon Mobile parter Vodafone (VOD) by not diluting its stake. Vodafone confirmed the talks.
• Costco continues to outperform. May same-store sales at Costco (COST) jumped 9%, well ahead of consensus (+6.9%). U.S comps rose 7%; international sales gained 15%.
• One Bear to live on. Bear Stearns Merchant Banking, the fallen bank's private equity unit, will spin off into a separate unit, sources say. JPMorgan (JPM) will become its largest investor, assuming $1B in its assets and commitments. BSMB targets smaller companies than many buyout firms; it manages about $5B.
• Bear market kills Ted. United Airlines (UAUA) is discontinuing Ted -- its no-frills unit -- in an effort to shave costs and downsize. It is also grounding 100 planes (up from a previous 30) and will lay off another 1,100 workers (on top of a previous 500). +7%
• Icahn, Yahoo trade punches. Carl Icahn sent an open letter to Yahoo's (YHOO) board, stating his intent to replace it with a slate of his own. "I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft (MSFT)," he said. Yahoo Chairman Roy Bostock responded by calling Icahn's impression that Microsoft is still interested puzzling. "Their message to us and to the markets has been and remains that they are not interested in pursuing a full acquisition of Yahoo." Yahoo yesterday announced it is joining CBS Audience Network (CBS), and inked a deal to sell Wal-Mart's (WMT) ads through its AMP system.
• Ambac, MBIA poised to accept downgrade. Moody's said it is likely to reduce financial strength ratings on bond insurers MBIA (MBI) and Ambac (ABK) to AA, or even A for MBIA. MBIA and Ambac said they will not raise more capital in response, having already taken on a combined $4.1B; they believe Moody's is erring to the side of caution. Some analysts see the acceptance as "liberating," allowing the companies to assess their futures without the constant pressure of raising more capital.
• Arthritis treatments cancerous? The FDA is investigating whether four drugs used to treat arthritis and other immune-system diseases increase the risk of cancer in children. The culprits: Enbrel (AMGN, WYE), Remicade (JNJ, SGP), Humira (ABT) and UBC's Cimzia.
• Unhealthy mint. Health activists are lobbying Congress to include menthol among FDA-banned cigarette flavors. As it stands now, new legislation bans fruit, candy and spice flavorings used to lure children, but exempts menthol, which is highly-popular among black teenagers. Loews' (LTR) Lorillard makes Newport, the #1 menthol brand. Altria's (MO) Marlboro Menthol is #2.
• Lehman gains on positive vibes. S&P comments on Lehman (LEH): "While a capital raise would dilute shareholdings significantly at these depressed prices, we think it would help soothe investors' nerves and improve Lehman's leverage position. We don't see a major liquidity crisis, considering Lehman's unencumbered collateral and the availability of the Fed discount window." Shares of the highly-watched bank rose 2.6% yesterday after Merrill raised Lehman to Buy from Underperform, saying concerns of a Bear-like collapse are unfounded; a source said Lehman has been deleveraging and will report healthier net leverage ratios (12.5x vs. 15.4x) in Q2; and widely followed bond fund manager Loomis Sayles said it has been buying up Lehman debt, calling its shares 'dirt cheap.'
• Explosion ignites oil worries. Oil rose in overnight trading on reports of an explosion in Kuwait, OPEC's #4 producer. At 6:45, oil is up 1.05% to $122.50. Yesterday, crude inventories fell a surprising 4.8M barrels (vs. +0.4M consensus), while gas and distillate stockpiles both grew faster than expected.
• ISM non-manufacturing index fell to 51.7% from 52%, but remained above the 50% contractionary level. Economists expected it to drop to 50%. ADP said the private sector added 40K jobs in April, pegging Friday's non-farm payrolls, which includes government jobs, at 60K -- vs. economist consensus of a 50K drop. ADP has overshot in recent months. Q1 productivity grew 2.6%, revised up from a previous 2.3%. Unit labor cost growth was revised down to 2.2% from 2.3%
• Steady in Europe. The BoE left its key rate unchanged at 5%, as expected. Steady. The ECB is also expected to hold rates steady today.
• U.K. home prices plunged 3.8% in May, the worst drop in 15 years. "The decline in prices is at risk of turning into a rout," one economist said.

Today's Markets

• Asia on Thursday: Nikkei -0.65% to 14,341. Hang Seng +0.55% to 24,255. Shanghai -0.54% to 3,352. BSE Sensex +1.64% to 15,770.
• Europe at midday: London -0.38%. Paris +0.02%. Frankfurt -0.01%.
• U.S. futures at 7:10 AM: Dow +0.23%. S&P +0.3%. Nasdaq +0.3%. Crude -0.07% to $122.20. Gold -1.13% to $870.

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Comments

[Prognostic]

Give me a break! Someone farts in Kuwait and oil prices are up 1.25%! The traders are running out of logic for keeping oil rally going! I see bad things to come -- really bad things to come for oil bulls. Oil below $100 a barrell in 6 months!

[JCCIII]

The Fed's inflation problem is much deeper than what they generally acknowledge. The credibility of the core inflation numbers they appear to target is seriously suspect.

[RightinSanFrancisco]

It certainly looks as if the cards played by the Fed have prevented a serious recession in the real economy (that's ex-banking and housing) - factory orders up; productivity up; new jobless claims down; stock market OK; etc. But the second part of the mandate, dealing with inflation, will be much more difficult in that its roots lie in the balance of trade, US over-consumption, the declining dollar, and things which would call for people cutting back at a time when we are moving toward healthcare for all, more money for education, significant environmental controls, etc. Can anybody say "Jimmy Carter?"
RightinSanFrancisco. com

[WAKEUP]

RE Icahn, Yahoo trade punches: Icahn is senile.