MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JANUARY 26, 1998 (1)
Tuesday, January 27, 1998
Canadian stocks rose on speculation more banking mergers and acquisitions lie ahead. U.S. stocks were mixed as a crude oil rally spurred gains among producers
The Toronto Stock Exchange 300 composite index rose 92.15 points, or 1.4%, to 6583.14, with banks accounting for almost 60 points of the advance.
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The benchmark index has gained on four of the past 11 trading days.
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More than 137.3 million shares, valued at more than $2.8 billion, changed hands on the TSE, up from 132.6 million shares traded on Friday. Still, 56 companies touched 52-week lows compared with 24 companies that hit 52-week highs.
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Canada's Big Six banks powered the TSE's advance after Royal Bank of Canada said Friday it will acquire Bank of Montreal to create the country's largest financial institution.
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Royal Bank (RY/TSE) rose $2.25 to $78 while Bank of Montreal (BMO/TSE) climbed $2.50 to $70.20.
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Canadian Imperial Bank of Commerce (CM/TSE) rose $2.45 to $40.75 and Bank of Nova Scotia (BNS/TSE) gained $4.15 to $65.65.
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Norcen Energy Resources Inc. (NCN/TSE) was the most actively traded stock in Toronto after U.S.-based Union Pacific Resources Group Inc. said it will buy the petroleum company for $19.80 a share, or $3.5 billion in cash and assumed debt.
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Norcen gained $4.15 to $19.45 on volume of 20.1 million shares. The firm is 49.5% owned by Toronto-based Noranda Inc., which has agreed to sell its entire stake to Union Pacific. Noranda (NOR/TSE) gained 40› to $25.10.
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Nova Corp. was the second most active issue after Trans-Canada Pipelines Ltd. said it will buy the company for $7.12 billion, creating the fourth largest energy services company in North America. Nova (NVA/TSE) rose 20› to $15.05 on volume of 16.1 million shares while TransCanada (TRP/TSE) fell 5› to $30.30.
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Noranda and Rio Algom Ltd. (ROM/TSE), up $1.25 to $25.75, were also lifted by higher copper prices. Three-month forward copper on the New York Mercantile Exchange rose US$9 to US$1,757 a tonne as a weaker US$ made the base metal less expensive for buyers in foreign currencies.
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Avenor Inc. (AVR/TSE) gained $1.70 to $23.85, Abitibi-Consolidated Inc. (A/TSE) rose 70› to $19.95 and Donohue Inc. (DHCa/TSE) gained 75› to $26 to lead forest product stocks higher.
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Barrick Gold Corp. (ABX/TSE) gained 40› to $28.15 and Placer Dome Inc. (PDG/TSE) climbed 45› to $19.95 on concern a sex scandal may cripple U.S. President Bill Clinton's office.
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Investors bought gold stocks as a haven and abandoned some US$-denominated securities.
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Other Canadian markets closed higher.
The Montreal Exchange portfolio rose 62.08 points, or 1.9%, to 3394.78.
The Vancouver Stock Exchange rose 1.22 points, or 0.2%, to close at 591.02.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to:
quote.yahoo.com .
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The Dow Jones industrial average rose 12.21 points, or 0.2%, to 7712.94. The Standard & Poor's 500 index fell 0.64 of a point to 956.95 and the Nasdaq composite index dropped 14.47 points, or 0.9%, to 1561.46.
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Declining stocks outnumbered advancers on the New York Stock Exchange where about 559.7 million shares changed hands, compared with 649.5 million shares traded on Friday.
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Exxon Corp. (XON/NYSE) gained US$1 3/16 to US$601 1/84 and Chevron Corp. (CHV/NYSE) rose US$1 9/16 to US$75 9/16 as the price of crude oil climbed on reports the U.S. is considering a military strike against Iraq because of its refusal to co-operate with United Nations weapons inspectors.
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Major overseas markets closed mixed.
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London: British stocks closed near the day's peak after staging an afternoon rally prompted by a firm opening on Wall Street. The FT-SE 100 index ended at 5237.2, up 55.8 points or 1.1%.
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Frankfurt: German shares fell. The Dax index closed at 4224.78, down 12.53 points or 0.3%.
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Tokyo: Japanese stocks rose, with the main average closing above 17,000 points for the first time this year. The 225-share Nikkei average climbed to 17,073.33, up 284.22 points or 1.7%.
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Hong Kong: Stocks closed higher, spurred by gains in the futures market ahead of the expiry of the January Hang Seng index contract, but brokers said sentiment remained cautious. The Hang Seng index rose 53.66 points, or 0.6%, to 8973.86, after hitting a high of 9278.82
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Sydney: The stock market was closed for the Australia Day holiday. On Friday the all ordinaries index closed up 23.9 points at 2623.3.
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Market Eye
For sale signs go up on industry at large -- By WILLIAM HANLEY
Who's next? With Royal Bank of Canada "merging" with Bank of Montreal in a $40-billion deal, TransCanada PipeLines Ltd. and Nova Corp. teaming up for $14 billion, Compaq Computer Corp. paying US$9.6 billion for Digital Equipment Corp. and Union Pacific Resources Group Inc. spending $3.7 billion on Norcen Energy Resources Ltd., mergers and acquisitions mania is in the air. Or maybe it's something in the water.
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In 1997, the total dollar value of M&A activity in Canada topped $100 billion for the first time. And U.S.-led companies spent a record US$333 billion to acquire firms in other countries last year.
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Everything, it seems, is for sale at the right price, regulators and miffed finance ministers notwithstanding. Armies of merchant bankers are stalking corporate corridors in search of synergies (and fat fees) from the relentless restructuring and realignment of business worldwide.
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We caught up with David Mongeau, the personable, lanky lawyer who heads the CIBC Wood Gundy Securities Inc. global M&A team, last week before the Royal Bank-BMO bombshell hit the Street, proving no deal is too big.
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Mongeau was quietly relishing the success Wood Gundy had finally achieved in a much more modest assignment: Boliden Ltd.'s $520-million takeover of Westmin Resources Ltd., which Gundy led from start to finish.
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He is not about to tip his hand on other M&A&D (for divestitures) deals Gundy is pursuing. But he is willing to identify the trends and themes he and his team see emerging this year:
* Favorable economic conditions in Canada will prompt foreign bargain-hunting because the low C$ will help us look cheap.
* Activity will be spurred by low interest rates, a strong stock market and ample capital.
* Consolidation will accelerate as leading companies seize the opportunity to make large, strategic acquisitions to expand operations in the global economy.
* Real estate, financial services, forestry and mining will drive activity.
* Opportunities will arise for stronger-performing income trusts to acquire weaker ones.
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Mongeau says that M&A is now accepted in corporate cultures, such as Germany where it was once shunned. "People will not automatically say 'no' to a deal."
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He believes merger activity in the various sectors moves in cycles. Real estate and mining will present opportunities this year even though they are at different stages of their individual business cycles.
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Mongeau, who formerly worked in acquisitions for Four Seasons Hotels Inc., sees the hotel industry, which is recovering nicely, as possible fertile ground for good deals this year.
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In mining, for instance, he sees the Bre-X scandal and the resulting decline in available public markets capital for junior explorers triggering consolidations and asset shuffling that will favor low-cost producers.
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In the energy sector, Mongeau expects many international players to seek strategic positions in the rapidly expanding heavy oil sector. Meantime, the pressure to maintain growth of assets in the oilpatch will further speed the move toward consolidation.
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As for specific cases, Inco Ltd.'s poison pill would not likely be an impediment to a takeover, merely buying the company more time - not protection - from a hostile bid.
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And the Wood Gundy team expects Rogers Communications Inc. may have to sell assets and/or shares and/or restructure to improve share performance and cut its debts.
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Trying to divine the next takeover target can be a mug's game for investors. Obviously, the Royal Bank-BMO deal puts the financial services sector in the M&A spotlight. The feeling is that more deals will be unveiled in the next couple of months.
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Indeed, M&A has entered a bold new phase that puts a for sale sign on industry worldwide.
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HOT STOCKS - Financia Post - Jill Vardy
RIO ALGOM LTD. (ROM/TSE), up $1.25 to $25.75, on volume of 190,307 shares. The base-metal miner said it had purchased the remaining 50% of Crandon Mining Co. that it did not already own from Exxon Corp. for US$17.5 million. Crandon is a zinc-mine located in Wisconsin. ÿHowever, analysts said the deal was not big enough deal to move the stock. They speculate the driving force behind the rise is speculation that Noranda Inc. will purchase Rio Algom with proceeds from the sale of Norcen Energy Resources Ltd.
NORTHERN TELECOM LTD. (NTL/TSE), down $2.85 to $57.65, on volume of 527,421 shares. ÿThe telecommunication equipment maker's shares have slipped 14.5% this year. ÿThe company today is expected to report fourth-quarter 1997 earnings of US74› a share by a consensus of 34 analysts polled by First Call Inc., compared with US62› a share a year ago. The same analysts expect Nortel to post earnings of US$1.54 a share for 1997, up from $1.20 a share in 1996. ÿHowever, analysts expect the company's gross margins to dip to about 41%, compared to Lucent Technologies Inc.'s recently announced 48% margins.ÿMerrill Lynch & Co. analyst Joseph Bellace lowered his near-term rating on the stock to "neutral" from "accumulate", but still retains a long-term "buy" rating.
BANK OF MONTREAL (BMO/TSE), up $2.50 to $70.20, on volume of 5.2 million shares. Royal Bank of Canada (RY/TSE), up $2.25 to $78, on volume of 2.3 million shares. Bank of Nova Scotia (BNS/TSE), up $4.15 to $65.65, on volume of 1.7 million shares. Toronto Dominion Bank (TD/TSE), up $2.50 to $57.25, on volume of 2.2 million shares. ÿThe Toronto Stock Exchange financial services subindex rose another 319.43 points, or 4%, on continued reaction to Friday's news of the merger of Royal and B of M. Speculation is growing that there will be further consolidation in the sector.
MICROSOFT CORP. (MSFT/nasdaq), up US$3 1/2 to US$141 3/4, on heavy volume of 9.3 million shares. ÿThe software giant said it will split its stock for the seventh time since going public in 1986. ÿShareholders of record on Feb. 6 will be eligible for the two-for-one split, which will leave the firm with about 2.4 billion outstanding shares.
JDS FITEL (JDS/TSE), down $2.50 to $73.25, on volume of 81,815 shares. ÿThe Nepean, Ont-based manufacturer of communications equipment said its board had approved a three-for-one stock split. ÿThe split is still subject to shareholder approval and will be voted on at a special meeting March 30. ÿIf the split is approved the number of common shares outstanding will rise to 76.5 million from 25.5 million.
CALL-NET ENTERPRISES INC. (CN/TSE), up 50› to $20.25, on volume of 14,100 shares. ÿThe long-distance telephone provider was rated "outperform" by Morgan Stanley Dean Witter Discovery Co., who initiated coverage on the stock. ÿ"People are realizing there is still a lot of value in this company and it was way oversold," said Kaan Oran of First Marathon Securities Ltd. ÿOran said he is considering re-evaluating his "hold" rating, even though the company's earnings will be depressed in the near-term by its foray into the local telephone market.
BARRICK GOLD CORP. (ABX/TSE), up 40› to $28.15, on volume of 2.9 million shares. Placer Dome Inc. (PDG/TSE), up 45› to $19.95, on volume of 2.6 million shares. ÿThe shares of gold producers gained as bullion climbed to more than US$300 an ounce intraday. However, bullion fell back in the afternoon to close the session down US$3.10 at $296.80 an ounce. ÿThe TSE gold and precious mineral subindex rose 101.94 points, or 1.5%, to 6817.23. ÿAfter the market closed, Placer said it will write down by $247 million, or 99› a share after tax and minority interests, assets which have been hurt by the current low gold price.
ALI TECHNOLOGIES INC. (ALT/TSE), up 50› to $15.80, on volume of 19,650 shares. ÿThe shares climbed $2.30 to a 52-week intraday high of $17.60 before falling back. ÿShares of the Richmond, B.C.-based developer of filmless diagnostic imaging software have climbed steadily from a 52-week low of $4.50 a year ago.
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North America to provide shelter from Asian turmoil -- By SONITA HORVITCH
Toronto-based Indago Capital Management Inc. has modest expectations of the North American equity market, said John Vipond, partner Canadian equities.
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In light of events in Asia, he and colleague Diane Haflidson, partner foreign equities, who looks after the U.S. portfolios, are focusing on companies with a North American emphasis.
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Both money managers note that the full impact on North American economies from the turmoil in the Pacific Rim has yet to be felt.
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But it is likely, for the time being, to translate into lower or stable U.S. interest rates, said Haflidson. "This has helped to set the bond market on fire," she noted.
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Indago's asset allocation for an "average risk" pension fund portfolio is 5% in cash, 43% in bonds, 18% in foreign equities and 34% in Canadian equities, said Indago president Jock Fleming.
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Haflidson noted that her emphasis on domestic U.S. companies implies more of a mid-cap bias (US$3 billion to US$7 billion). Her stock picks include:
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* USA Waste Services Inc. (UW/NYSE), which closed recently at US$35 and has a 52-week trading range of US$44 1/8 to US$29 1/2. The Houston-based company provides solid waste management services in the U.S., Canada, Mexico and Puerto Rico. "This company has been on an aggressive takeover strategy but is sticking to its knitting," said Haflidson. It is conservatively expected to generate earnings growth of 20% to 25% a year. The stock is trading at around 17 times expected 1999 earnings per share, so it fits her strategy of looking for companies with "growth at a reasonable stock price." Her 12-month target price on the stock is US$45 to US$50.
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* Hasbro Inc. (HAS/amex) US$33 1/4 (US$36 1/2-US$22 7/8). ÿBased in Pawtucket, R.I., the company makes and sells toys. It is a restructuring story, she said. The company is focusing on its core products, reducing its labor costs and divesting itself of unprofitable businesses. It is also putting more money into interactive media products to better exploit its licensing agreements. This stock is a switch from Mattel Inc. (MAT/NYSE) US$39 7/8 (US$42 1/4- ÿUS$23 3/8), another toymaker and her selection in this column Dec. 14, 1996, at US$31 1/8. Hasbro is trading at 14 times expected 1999 earnings against a multiple of 17 for Mattel, so Hasbro could enjoy some multiple expansion, said Haflidson. ÿIn keeping with her concerns about major U.S. multinationals, Haflidson has sold Colgate Palmolive Co. (CL/NYSE) US$69 1/4 (US$78 5/8-US$46 5/8). "It was a great stock in 1997, but the valuations are now lofty and there will be a negative translation impact from the strong US$."
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In the Canadian equity portfolio, Vipond has been emphasizing pipeline stocks. His top picks are TransCanada PipeLines Ltd. (TRP/TSE) $30.35 ($33.05-$23.90), which yesterday announced plans to merge with Nova Corp. to create the fourth largest energy services company in North America, and Westcoast Energy Inc. (W/TSE) $33.60 ($34.15-$22.65). TransCanada and Westcoast have a high dividend yield and a high price-to-book ratio relative to the Toronto Stock Exchange 300 composite index.
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Looking among the beaten down cyclicals, Vipond sees an opportunity in Potash Corp.of Saskatchewan Inc. (POT/TSE) $115.50 ($122.20-$98.50). He argues that Asian countries will continue to buy fertilizer as they will want to maintain exports of food products. His earnings estimate for 1998 is US$7 a share, which means that the stock is trading around 11 times projected earnings. "It is a very well-managed company."
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Vipond continues to like consumer products producer CCL Industries Inc. (CCQ/TSE) $17.30 ($19-$14.50), his selection in this column Nov. 14 at $19. He also continues to champion long-standing favorite Laidlaw Inc. (LDM/TSE) $19.90 ($22.90-$17.70) with its bus and health-care transportation business.
ÿHis "sell" is methanol producer Methanex Corp. (MX/TSE) $11.20 ($14.40-$10.50). ÿAlthough the commodity price has held up well, it is unlikely to continue to do so, he said. ÿ"There is new capacity coming on stream that will not help the price of this commodity."
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