Friday, December 12, 1997
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The Elves Get Some Options

It looks like the elves are going to get some options. After all, that big hollow tree may look like a cozy home, but inside, those elves have been toiling away for Keebler Foods Co. for quite some time. They deserve some equity! Flowers Industries (NYSE: FLO), a maker of baked foods, said last night that it reached a tentative deal to boost its ownership stake in Keebler Foods Co. to a majority interest of 51% (from its current stake of 39%) and then will spin-off Keebler shares to the public. Flowers is up $5/8 to $19 15/16 this morning, as investors jump on board to hopefully snap up shares of one of the strongest consumer brands in the cookie and cracker business. Keebler Foods filed a registration statement with the SEC for an initial public offering of Keebler common stock this morning. The shares that will be offered to the public will be sold by Artal Luxembourg S.A. and Bermore Ltd. As part of the terms of the offering, they have agreed to sell a portion of their shares to Flowers -- enough to boost Flowers' stake to 51%.

A now famous Penn State study covering the twenty-five year period ended 1988 found that stocks of spin-off companies outperformed the S&P 500 by about 10% per year in their first three years of independence. However, the attractiveness of this offering is not limited to a mechanical strategy of investing in spin-offs. Keebler produces 8 of the 25 best-selling cookie products and 10 of the 25 best-selling cracker products in the U.S. Keebler's brand can be fairly characterized as a consumer monopoly, where, thanks to aggressive national advertising campaigns, retailers (supermarkets) are almost universally expected to stock name brand products such as Chips Ahoy! cookies and Cheez-It crackers. Keebler makes it easy for its 30,000 retail clients by owning and operating its own national "DSD distribution system." Distribution system sales employees visit supermarkets an average of 2.8 times per week, which gives Keebler control over the availability and presentation of its products. See those Pecan Sandies jutting out prominently at the front of the aisle, it's all courtesy of Keebler employees monitoring shelf space and effectively executing in-store promotions.

Keebler is the second-largest cookie and cracker manufacturer in the U.S., behind Nabisco, which is owned by RJR Nabisco Holdings Corp. (NYSE: RN). The two have a combined market share of 58.4%, with Keebler accounting for roughly 25% of the total. Keebler generates over $1 billion in sales from its packaged food brands in an industry that had 1996 retail sales of $8.1 billion. Since 1992, U.S. annual supermarket sales of cookies and crackers have increased at an average rate of 1.5% per year. On top of this modest growth, Keebler has aggressively gone after non-supermarket channels. As a result of products and packaging tailored for the segment, retail sales to mass merchandisers increased 32% in the first 40 weeks of 1997 from the prior year period. The next step for investors taking a look at Keebler is to try and place a value on the company based upon the valuation of its peers. Going forward, Keebler's business strategy is designed to capitalize upon its 98% brand recognition in U.S. households and its DSD system.


Timber Lodge Steakhouse (Nasdaq: TBRL) gained $1 11/16 to $6 1/2 on announcing an agreement to be acquired by G.B. Foods Corp. (Nasdaq: GBFC), operator of Green Burrito fast-food restaurants. The terms of the deal call for Timber Lodge holders to receive a right to purchase 0.8276 shares of G.B. Foods worth $8.38 per share as of last night's close, subject to collars that value shares of Timber Lodge between $7.34 and $10.66 per share.

Spinal fusion cage company Spine-Tech Inc. (Nasdaq: SPYN) surged another $5 1/8 to $42 1/2 after an FDA panel yesterday voted to reject an application for approval of a similar device and procedure from competitor Sofamor Danek Group (NYSE: SDG), which lost $3 1/4 to $59 13/16 today.

Netscape Communications (Nasdaq: NSCP) jumped $1 3/8 to $27 5/8 after a federal judge issued an injunction barring Microsoft (Nasdaq: MSFT) from requiring PC original equipment manufacturers to include Microsoft's Internet Explorer on the desktop. Netscape says the ruling will give the company a good shot at taking some of Microsoft's share of pre-installed browser software in PCs, alleging anti-competitive practices have given Microsoft an unfair edge and have hurt Netscape.

Electronics distributor and manufacturer Kent Electronics (NYSE: KNT) gained $2 5/16 to $25 1/2 after the company announced last night that it expects to report Q3 EPS of $0.36, in line with analysts' estimates. The company also said revenues for the fourth quarter are expected to advance sequentially by up to 7.5%, but that it expects Q4 sequential revenue growth to be in the range of 5.9% to 11.8%. Yesterday, Merrill Lynch lowered its short-term rating on the company to "neutral" from "accumulate."

Forage and turfgrass seed company AgriBioTech Inc. (Nasdaq: ABTX) gained $1 5/16 to $14 13/16 after Salomon Smith Barney initiated coverage of the company with a "buy" rating. AgriBioTech has been on an acquisition drive and is ahead of its stated goal of reaching half a billion dollars in yearly revenues by the turn of the century. On a run-rate basis the company is in now in the big leagues behind industry leaders Pioneer Hi-Bred (NYSE: PHB) and DeKalb Genetics (NYSE: DKB) in terms of revenues, and it was becoming hard for the major bracket brokerage firms to not include it in analyst coverage.

Georgia-based bank holding company First State Corp. (Nasdaq: FSBT) gained $2 3/4 to $22 after announcing that it has signed a letter of intent to merge with Alabama-based Regions Financial Corp. (Nasdaq: RGBK). First State shareholders will received 0.56 shares of Regions for each share they hold, putting a $23.38 per share valuation in First State as of last night's close, which represents a 21% takeover premium.


Color print server company Electronics for Imaging (Nasdaq: EFII) was slammed for a $22 1/4 loss to $16 3/4 after announcing that it expects to report fourth quarter revenues of $60 million, down 44% from last quarter, and EPS of $0.06 (before acquisition-related charges), down 85% sequentially. The company said the shortfall is due to product transitions and customers working down inventories as well as weakness among Asian OEM customers. Splash Technology (Nasdaq: SPLH), a company that makes similar products, declined $3 1/4 to $21 1/4 .

Asyst Technologies (Nasdaq: ASYT) dropped $3 19/32 to $19 1/2 after Needham & Co. lowered its long-held "strong buy" rating on the maker of minienvironment systems for semiconductor fabrication facilities to "buy."

Littlefuse Inc. (Nasdaq: LFUS) fell $2 1/8 to $23 1/4 this morning after the maker of electronic, power, and automotive fuses said it expects to report Q4 EPS 10% below the current mean estimate of $0.27 due to economic problems in South Korea.

Cameco Corp. (NYSE: CCJ) cooled down $2 7/8 to $30 1/8 after the producer of uranium said talks with Russian officials have broken off and that reports hold that Russia will market is own "uranium derived from highly enriched uranium," decreasing Cameco's role in marketing the material.

Roper Industries (NYSE: ROP), an equipment supplier to a number of diverse industries such as oil and gas pumping and semiconductor manufacturing, lost $1 5/16 to $26 15/16 on reporting Q4 revenues of $87.6 million and EPS of $0.27, which fell short of the mean estimate of $0.29 and was down from last quarter's EPS of $0.37. Roper's semiconductor fabrication components units contributed to this quarter's revenue and earnings softness.

Cement and aggregates company Medusa Corp. (NYSE: MSA) lost $3 9/16 to $36 1/4 on announcing that it expects Q4 EPS (before charges) to fall from last year's $0.94 and miss the mean EPS estimate of $0.97.

Pennsylvania power concern PECO Energy (NYSE: PE) fell $1 3/8 to $22 3/8 this morning after its rate restructuring settlement was rejected by the Pennsylvania Public Utility Commission on Thursday. The commission's alternate plan allows for cuts on customers' bills to reach 15%, compared with 7-10% under the PECO plan. The proposal also limited the recovery of stranded costs to $5.024 billion over 8.5 years ($250 million and 1.5 years less than anticipated). Ironically, the move will delay retail competition, allowing PECO to recover its stranded costs through existing rates for a longer period.

Cisco Systems (Nasdaq: CSCO) slipped $4 3/16 to $78 1/2 after a number of insiders sold roughly 340,000 shares, which combined with the company's premium valuation in the networking space where competitors are struggling was enough to prompt non-insider shareholders to let go of a few of their shares.


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