Carlyle Capital Corporation (OOTC: CARYF) received a $1.45 billion dollar loan from ING Group (NYSE:ING) in January according to a Dutch news site. The site found a reference to the loan in Carlyle Capital's annual report, but since the story has broke neither ING nor Carlyle have commented.

Carlyle Capital shares were suspended in trading on the Amsterdam Euronext stock exchange, where it is listed, on the news.

Carlyle Capital was floated from its parent, the private-equity firm Carlyle Group, just this last July. Washington, D.C.-based Carlyle Group has more than $74 billion in equity under its management. Founded in 1987, the firm became known for leveraged buyouts in the defense, automotive, and telecommunications sectors. Carlyle Capital was a branch designed to invest in mortgage backed securities using large amounts of leverage. Investing is such securities with leverage, combined with its distinction from Carlyle Group, meaning the parent is not responsible for its debts, immediately raised eyebrows.

It seems as though the fears have become reality as the subprime mortgage crisis has put Carlyle Capital on the brink. The only real financial connection Carlyle Group has to Carlyle Capital is a $150 million credit line, which presumably Carlyle Capital has already exhausted.

'The company believes these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital,' Carlyle Capital released in a statement. It looks like Carlyle Capital's coming debacle will have to serve as another stern reminder of the seriousness of the remaining mortgage fallout. Only time will tell who's next.

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Ambac Financial Group, Inc. (NYSE: ABK) shares dropped sharply today after the company announced that it would raise $1.5 billion by issuing stock in an effort to maintain its rating. The move will massively dilute existing shareholders by nearly tripling the number of shares while many analysts still question whether it will be enough for the bond insurer to stay alive. Meanwhile, investors sold off the stock again as questions intensify regarding Ambac’s ability to stay afloat. So, will this latest attempt be enough to pull the company out of the water?

Ambac initially ran into trouble when the subprime mortgage market collapsed. Many complex securities comprised of these mortgages and other assets (like CDOs) saw their values decline substantially- and these were insured by Ambac. Now, Ambac is responsible to paying out these claims that many estimate to be $100 billion for the entire financial sector. Many activist investors like Bill Ackman suggest that there simply is not enough money to go around and believes bond insurers will be forced to declare bankruptcy. Meanwhile, Buffett even pulled his offer to help amid worry.

That’s not the only problem: Bond insurers are also losing out on any new business. These companies rely heavily on ratings organizations to give them credibility, so the recent downgrade by Fitch from “AAA” to “AA” puts Ambac in some serious trouble. It is unlikely that the company will be able to attract any new business without a top “AAA” rating. Ambac’s latest attempt to raise $1.5 billion is designed to help it regain this “AAA” rating, but many analysts feel that it will still come up short. Fitch analyst Thomas Abruzzo said in an interview that the company still don’t have triple A levels of capital even with this raise. Instead, they need to effectively lower the downside risk on the structured finance CDOs that they have insured, which now amounts to around $32 billion.

Finally, the move also has shareholders outraged. The troubled bond insurer priced the shares at $6.75, which is 9% below Thursday’s closing price. Since the new shares will more than triple the number of shares outstanding, this effectively automatically lowered the stock price by ten percent without warning while also forcing existing shareholders to share much of any potential upside. Ambac said that it has already sold 14.1 million shares in a $95 million private placement while concurrently pricing a $250 million offering of five million equity units.

In the end, this is bad news for shareholders as they are not only diluted but still own a company with serious problems. Many analysts are unsure whether or not Ambac will be able to pull itself out of the water, and shares are likely to only continue their move downwards until everything gets sorted out. Combined, these factors make ABK a stock worth watching!

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Sprint Nextel Corporation (NYSE: S) shares rose sharply today after the rumor mill shifted into over-drive and suggested that the company may be interested in spinning off Nextel. The speculation stems from the fact that the telecom company will likely have to write-off most of the remaining $30.7 billion in non-cash goodwill value from its $35 billion ill-fated acquisition of Nextel and its affiliates. Indeed, the acquisition has proven to be nothing but problems as Sprint stock lost more than 60 percent of its value trying to integrate the two companies. So, does this rumor have any merit and what would it mean for shareholders?

The idea of a Nextel spin off should come as that much of a surprise. Activist investor Ralph Whitworth was appointed to the board in February and there has been much talk that he would push for drastic changes. Whitworth’s Relational Investors owns a 2% stake in the firm and has been critical of Sprint’s poor performance. In particular, he was very concerned about the company’s plan to spend $5 billion or more on its WiMax initiatives. Instead, the investor hinted that the company pursue other initiatives aimed at unlocking value instead of building expenses.

The Nextel acquisition itself was ill-fated from the very beginning. Sprint experienced a massive customer migration to competitors Verizon Wireless (NYSE: VZ) and AT&T Inc. (NYSE: T) shortly after the merger thanks to technical problems, unfocused marketing and difficulty in combining the two very different company cultures. Shareholders who are already stinging from a $29.7 billion write-down in the fourth quarter are surely ready to get rid of this dog before it attracts more fleas.The idea of a spin off is appealing because it could end up solving all of these problems.

The other big reason to spin off Nextel is to make Sprint a cheaper stock. Merrill Lynch analysts are suggesting that Deutsche Telekon, which owns T-Mobile, may be interested in acquiring Sprint in order to block a price war in the mobile phone industry. A spin off of Nextel would make Sprint a much cheaper purchase with far less of a burden and may increase the likelihood of such a deal. The only downside is that Sprint would be getting a bad price for the Nextel business given the poor market. In the end, this is definitely an interesting situation that is worth following!

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The Blackstone Group (NYSE: BX) has fallen sharply from its peak of $38/share all the way down to its current level of around $15/share over the last year. Analysts are now saying that the $100 billion private equity fund could earn less than half of what was expected during the fourth quarter thanks to increasing credit market turmoil. In fact, leveraged buyout plunged more than two-things in the second half of 2007 compared to the first half of the year. Much of this is due to banks pulling financing out of existing deals and refusing to finance new deals. The result has been an earnings outlook cut over 50 percent from late last year. So, what does this mean for Blackstone shareholders?

Just last year, private equity funds were in a “golden era” with spectacular deal sizes and record profits. Things quickly changed when deal financing from traditional banks dried up, putting private equity firms in a tough position. These firms make big profits through leveraging themselves and then milking a businesses cash flow, selling off non-core assets, and/or turning the businesses around to re-IPO. However, without any cheap money to go around, the process becomes much more difficult.

The solution? Blackstone announced that it is now workong on deals to bypass this reliance on traditional banks and instead get M&A financing from hedge funds and mutual funds directly. This could end up altering its fee results since these parties would likely charge more than banks, but may end up enabling it to obtain more attractive non-financial terms. The private equity giant also continues to raise money from the all-popular sovereign wealth funds, like China’s foreign reserve agency that recently bought a 10% stake.

Blackstone still faces a variety of problems before it can turn around. The private equity fund was sued by Alliance Data Systems last month for not being able to finish its $6.6 billion acquisition of the company, but that was recently dropped in hopes a new deal could be cut. Meanwhile, regulators are also pushing through changes to the taxation of fees charged by hedge funds and private equity funds. Currently, these firms enjoy paying only capital gains tax on their fee income, but this may soon change to the full corporate tax rate. This could mean a jump from around 15% to closer to 40% of net income going towards taxes. Many firms like Blackstone were grandfathered in, but will likely face higher taxes in a few years.

In the end, Blackstone looks like it is in a little trouble right now. A tight credit market has limited its access to leveraged capital while it is still working out the details for alternative financing. If the firm is able to identify alternative sources of financing, this stock could quickly move up. However, many analysts don’t believe the pain will be over until the credit markets improve. In the meantime, this could be a great time to load up on some cheap stock!

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Wal-Mart Stores, Inc. (NYSE: WMT) reported spectacular results this quarter despite disappointing results from its peer group. The world’s largest retailer posted same-store sales number up 2.6% as shoppers tighten their wallets and target the cheaper options. The trend may seem predictable to the average person, but many analysts were caught off-guard with their estimates. Wal-Mart also decided to hike its dividend from $0.88 to $0.95 per year. The move is likely designed to jump-start its multiple that has been trading below peers despite strong growth. So, is this mega-retailer a buy now?

Wal-Mart’s target demographic continues to grow larger as an increasing number of consumers make the switch from quality to value. This should translate into very real growth for the world’s largest retailer as many analysts are now expecting the stock to reach $70 per share if economic and stock market conditions improve within the next 12 to 18 months. Many were previously concerned that weakness in U.S. consumer spending may hurt growth, but it now appears that the company’s “value” image is actually leading to more shoppers purchasing its products.

Unfortunately, the tough environment for retailers may prevent Wal-Mart’s multiples from expanding too much despite strong growth. Decreased consumer spending hurt many players in the industry, including apparel stores like Gap Inc. (NYSE: GPS), Limited Brands, Inc. (NYSE: LTD) and J.C. Penney Co. (NYSE: JCP). Slowdowns in the industry may lead to a lower industry mutliple that so many investors rely on for valuing companies. However, a look at the true measure of valuation, PE to growth (PEG), suggests that Wal-Mart remains undervalued compared to its peers. But in the end, it will take an industry recovery for its multiple to expand and share price to jump.

In the end, this is all good news for Wal-Mart shareholders. Same-store sales have increased during an economic downturn while its profits were also up dramatically. However, it may take some time before the fruits of these improvements are picked on Wall Street thanks to a slowdown in the rest of the economy. If there is a broad recovery in the next year or two, look for Wal-Mart to hit and surpass $70 per share. Combined, these factors make WMT a stock worth watching!

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Motorola, Inc. (NYSE: MOT) warned shareholders today that it has not endorsed activist investor Carl Icahn’s nominees for its board as the troubled company’s annual meeting approaches. However, a growing number of dissident shareholders alongside a plummeting stock price has his odds of a successfully proxy campaign running pretty high. Motorola shares nearly halved since shareholders last rejected Icahn’s bid for board seats to under $10 per share. So, are shareholders ready for change and is Carl Icahn the right man to bring it?

Carl Icahn recently revealed a 6.3% stake in Motorola via a Schedule 13D/A filing, which may indicate that he believes in his odds this time around. The activist investor plans to continue pushing the company towards spinning off its handset division into a standalone company to be led by an outsider. Motorola’s attempt to shop the division have failed and now this appears to be the only option, but many analysts are concerned that a sale now would not obtain full value for its core division. Icahn’s planned spin-off may circumvent this problem by allowing the company to get rid of the division while still retaining a stake that could be held until a successful turnaround takes place.

The problem is that this turnaround could take some time. Motorola’s handset division continues to struggle with declining market share and lower earnings as it loses its dominant edge gained by record sales of the Razor. Now, many service providers are expanding their offerings to include other handset makers like Nokia which could further erode their market leadership. Meanwhile, this slow in growth combined with tight credit has led to no strategic or financial suitors for the division. As a result, investors who were looking for this quick fix are now realizing they may face a long road ahead and began selling off shares.

Carl Icahn now faces increased odds of successfully obtaining valuable board seats that he promises to use to aggressively pursue his agenda. A spin-off of the handset division would likely unlock at least some value in the company’s shares while the excess cash could be used to fund further share repurchases to boost earnings. Meanwhile, any meaningful turnaround in its growth could also expand its multiple and turn this stock into a big with for the activist investor. Whether or not he can pull it off remains to be seen, but this is a situation that is definitely worth watching closely over the next few months!

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Blockbuster Inc. (NYSE: BBI) shares fell sharply today despite announcing strong results proving that it can still compete against online video rental and streaming online video services. The movie rental chain announced in its latest 10-K annual report that its fourth quarter profits grew by 360 percent on the heels of aggressive cost-cutting and the repositioning of some of its subscription offerings. The stock price quickly jumped 3.4 percent in morning trading before investors began to realize that actual revenue increases amounted to just four percent growth year over year. So, can Blockbuster compete or will it eventually face reality?

The market for video rentals is a quickly changing one that many are struggling to grapple. DVD rentals themselves continue to grow as Americans spent some $7.5 billion in 2006, but growth flattened in 2007 thanks to the rise of online downloads and video-on-demand services offered by cable providers. Meanwhile, Netflix (NDAQ: NFLX) has proven to a more near-term threat that has also taken a large part of the company’s market share over the year. Combined, these revelations caused Blockbuster shares to halve last year to around $3 per share where it has remained until now.

Blockbuster does have a secret weapon, however, in the form of its subsidiary Movielink. The online movie download service was formed in 2002 by a group of major movie studios including MGM Studios, Paramount Pictures, Sony Pictures, Universal Studios, and Warner Bros who spent a reported $100 million building the service that has yet to hit the mainstream. Blockbuster purchased the chain for $6.6 million in cash and it positioned the company to leverage its existing infrastructure to promote a new service that is well connected in the sue-happy movie industry. The service provides the company with the infrastructure for digital downloads and provides it with the digital rights to more than 6,000 films.

Blockbuster has also taken action to improve its current operations. Recently, the company introduced its five-point distribution system that allows customers to rent movies in stores, by mail, via online downloads, in DVD kiosks, and through flash memory cards. Meanwhile, the company also managed to substantially cut its costs, which has directly helped increase its profits and bottom line. Combined, this has many analysts predicting that the company will likely perform well in FY2007 and guide fairly bullishly for 2008. As a result, this is definitely a stock that is worth watching at these cheap levels!

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The saga of Bain Capital LLC and China's Huawei Technologies attempt to purchase 3Com Corporation (NASDAQ: COMS) continues as the company postponed a shareholder meeting for the second time.

On February 20th, 3Com, Bain, and Huawei withdrew their application for approval of the deal by CFIUS. The Committee on Foreign Investment in the United States, an arm of the Treasury Department, had expressed national-security concerns about China's participation in the $2.2 billion deal through Huawei.

Specifically, 3Com provides some network security solutions to the U.S. Defense Department, and Huawei's strong ties to China's Communist government raised serious concerns. Many thought the withdrawal of approval meant the deal was as good as dead, but on February 29th it was announced that all three parties planned on reapplying for approval - supposedly with similar financial terms. The major change would be some measure to block Huawei's access to sensitive technologies that stymied the deal originally.

As a result of this announcement, 3Com postponed its shareholder meeting and rescheduled it for March 7, giving it more time to negotiate with Bain and Huawei; however, since no agreement has been reached, the meeting has been delayed another two weeks to March 21.

The real question becomes - with 3Com seemingly intent on a deal, is 3Com stock a bargain? The originally proposed $2.2 billion deal was worth more than $5 per share, and even a renegotiated deal, if it were to get regulatory approval, would almost certainly be no more than 15% lower than the first offer as 3Com's Defense Department contracts are not huge revenue or profit centers. With 3Com currently trading at $3.19 a share, there is more than $1 of upside potential if a deal that withstands regulatory scrutiny is reached - and that definitely makes 3Com a risky but potentially profitable opportunity right now.

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Spanish Broadcasting System, Inc. (NDAQ: SBSA) directors are starting to feel the heat after a large shareholder criticized the company’s stock performance and governance while promising to take action if things do not improve, according to a Schedule 13D filing with the SEC. Discovery Group, which owns a 9.8 percent stake, sent a letter to the board expressing grave concerns regarding the severe and steady erosion of shareholder value that has occurred since the company went public eight years ago. Management has also been unresponsible to these concerns and countless opportunities to reverse these trends. However, the activist hedge fund believes there is still hope as shares trade substantially lower than their intrinsic value. So, is this a good time to get in SBSA on the coattails of an activist hedge fund?

Spanish Broadcasting IPO’d in 1999 at $20 per share, but the stock now trades at just $1.60. Discovery Group attributes this dramatic decline to (1) weak operating performance as measured by essentially no growth in operating income, (2) significant sums of money spent on acquisitions that provided no incremental value to the company, and (3) the utter loss of management’s credibility with the investment community. In the end, the value of the company was about $1.5 billion when it IPO’d while today the market cap stands at just $500 million with $375 million in debt. Operating income also failed to increase, standing at $32 million when the company IPO’d compared to $38 million in 2007. And finally, the company spent $934 million on acquisitions while the company’s value dropped $1 billion.

Discovery Group met with Spanish Broadcasting officials several times during the past two years to discuss the decline in shareholder value and the challenges the company faces to restore a fair valuation given its small size, weak governance, disappointing operating results, unrestrained M&A spending, lack of credibility with institutional investors, and general proclivity towards running the company as if it were privately held. The activist hedge fund also met with several industry players who insist that the company’s premier properties, market leadership position, attractive geographic markets and promising media genre would make it a desirable and valuable target in the ongoing industry consolidation. However, it is generally understood in the industry that the company will not consider any transaction that requires him to relinquish any degree of control and questions its ability to cooperate with any partnership with strategic suitors or private investors.

Just how bad is it? Well, here’s a synopsis of one scenario presented by the Discovery Group in their letter:

We now know this claim to be justified because we have direct knowledge of an important public media company (“XYZ”) that is interested in a potential transaction that could yield a substantial premium to the current SBSA stock price, yet Mr. Alarcon refuses to engage in an evaluation of this opportunity. During a meeting with Mr. Alarcon in December 2007 members of our firm presented the rationale for a combination with XYZ, to which SBSA would bring great strategic value and substantial, immediate cost synergies. Mr. Alarcon concurred with the analysis and suggested that we get the reaction of XYZ’s management to the idea. Our team met in January 2008 with XYZ’s Chairman/Chief Executive Officer and its Chief Financial Officer. We communicated to Mr. Alarcon that the XYZ officials were very enthused about the possible combination and wish to engage in a further dialogue directly with Mr. Alarcon. Mr. Alarcon is also in possession of detailed materials prepared by Discovery that outline a proposed structure for this transaction which yields a premium in excess of 100% to SBSA shareholders. Suddenly and without explanation, Mr. Alarcon refuses to discuss this opportunity. While Mr. Alarcon’s change in posture is consistent with his industry reputation, it is surprising nonetheless. Mr. Alarcon’s resistance in this case cannot be attributed to valuation because the proposed structure gives him the option to either remain invested or liquidate his shares. Rather, it appears that Mr. Alarcon fears a loss of control. That fear is interfering with Mr. Alarcon’s ability to act in the interest of all shareholders.

The Discover Group is now increasing its pressure on Spanish Broadcasting to unlock value by threatening to replace board members if it does not immediately retain an investment bank to investigate three specific alternatives:

1. A Going-Private Transaction. “If Mr. Alarcon insists on retaining all voting control and all management authority, it seems rather obvious that there is no purpose to SBSA remaining public. Given the current stock price and the vast availability of private equity capital, we believe that a transaction can be structured that provides an acceptable premium to shareholders. Any qualified investment banking firm can introduce Mr. Alarcon to numerous private equity firms, many with media expertise. We have spoken to several of these potential financial partners that would be interested so long as Mr. Alarcon is willing to provide them with adequate financial oversight and controls. As testament to the feasibility of this option, Univision was taken private in April 2007 by a consortium of industry-leading private equity firms; Madison Dearborn Partners, Providence Equity Partners, Texas Pacific Group, Thomas H. Lee Partners, and Sabon Capital Group. Currently, Clear Channel Communications is close to completing a similar deal with Bain Capital Partners and Thomas H. Lee Partners. Cumulus Media is working on an announced going-private transaction with Merrill Lynch Global Private Equity.”
2. A Sale to a Strategic Party. “Industry consolidation is now seen as part of the solution to the long-term secular decline in radio advertising. By combining platforms, companies seek to gain competitive advantage and reduce costs. SBSA has a unique franchise in Hispanic radio that is a highly-desirable addition to any broad media platform. The asset values of SBSA licenses and stations far exceed the current share price. While the current management team has not been able to harvest the value of SBSA’s assets and industry position, a strategic suitor would reward shareholders immediately for the opportunity to maximize the potential of this business. As we have explained, we have direct knowledge of parties interested in a strategic combination with SBSA.”
3. Remain Public But Adopt Modern Corporate Governance Standards. “It is highly unlikely that a comprehensive evaluation of all alternatives would result in a decision to remain public, if measured in terms of the best interests of public shareholders. Regardless, while the Company is public, the Directors must find the courage to invoke the governance changes needed to reassure the capital markets that they takes their stewardship responsibilities seriously. The Board must dismantle the antiquated A/B common equity class structure, which only serves to entrench Mr. Alarcon and embolden his self-serving agenda. Importantly, the jointly held positions of Chairman and Chief Executive Officer must be split in order to bring more accountability to bear on the management team. Mr. Alarcon’s track record running SBSA since it became public makes abundantly clear the need for a change in operating management. Lastly, the Board must undertake a director search to add truly independent directors that will serve the interests of public shareholders.”

In the end, this is great news for shareholders and may be a situation worth watching for other investors as the Discovery Group continues to put on the pressure. It will be interesting to see how the company responds in the coming months…

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Dillard's, Inc. (NYSE: DDS) may soon be facing a board and management shake-up after a several large activist investors took their campaign for change a step further yesterday. Barington Capital and the Clinton Group revealed in a Schedule 13D/A filing with the SEC that they are now on the verge of launching a proxy battle to install their own candidates to the company's board of directors. The two activist hedge funds requested a list of shareholders and other documents that typically point to a proxy contest. Unfortunately, the company's poison pill gives the Dillard's family majority control (8 of 12 board seats), but many believe that the two funds will seek to put a minority slate of directors on the board to increase pressure. So, does this represent a catalyst that could make Dillard's a buy here?

Barington Capital originally contacted the company at the end of January, insisting that the vast vlaue potential of the company was not being realied. In their opinion, if the company were more effectively managed it would be worth substantially more than its current stock price. Furthrmore, the company's sizable asset base provides the company with a number of untapped options to create additional value for stockholders. More specifically, the activist hedge fund sees the following opportunities for improvement (in their own words):

1. Dillard's $7.5 billion revenue base offers significant margin leverage capable of producing sizable cash flow gains from any future operating improvements. The Company’s geographic concentration, especially in high-growth areas of the Southeast and Southwest United States, offers unique regional opportunities for its 331-store portfolio. Furthermore, the Dillard’s brand name is well-regarded in the department store sector and the Company has received above average scores in the area of customer loyalty according to a recently released survey by Brand Keys.Clearly, Dillard’s has the scale and brand recognition to be a successful retailer.

2. As Dillard’s trailing twelve month operating free cash flow margin is 2.4% versus 7.7% for its department store peer group, we believe that stockholders can realize enormous upside if margins can be improved to the levels achieved by the Company’s peers. We see a number of opportunities to immediately reduce the Company’s cost base, including by improving sourcing, rationalizing SG&A expenses and lowering capital expenditures. We also believe that there are a host of initiatives in inventory management and merchandising that can drive customer traffic and enhance margins. Among other things, we believe that Dillard’s needs to tighten its current assortment of offerings and vendors and consider a more regular promotional cadence, as its stores, in our opinion, are over-inventoried. In addition, we believe that Dillard’s needs to embark upon an aggressive re-merchandising effort that features new vendors (including exclusive offerings) and updated private label and in-house collections to differentiate its value proposition for customers. Furthermore, it is our belief that the Company needs to enhance its brand marketing by adding more image and lifestyle campaigns that communicate a revitalized message to the marketplace. We are convinced that each of these initiatives would add excitement and newness to the Dillard’s shopping experience and attract customers to its stores.

3. Dillard’s owns approximately 75% of its store portfolio, comprised of approximately 42 million square feet of retail real estate. Currently, the Company’s shares trade at only 0.5x its tangible book value of approximately $32.50 per share. This represents a significant discount to the Company’s peer group, which trades at an average tangible book value multiple of approximately 2.0x. We also believe that Dillard’s tangible book value is understated, since the current market value of the Company’s owned real estate far exceeds its depreciated book value. In fact, in a November 26, 2007 research report, Deutsche Bank estimated Dillard’s net asset value before taxes to be $59 per share. Deutsche Bank also notes that “actions taken to unlock the Company’s real estate value would be positive for the shares, as the NAV [net asset value] for Dillard’s [is] greater than the value based solely on operating fundamentals.” It is our belief that there are a number of measures that the Company can take to enhance the value of its real estate portfolio, including converting certain properties to higher and better use, closing underperforming stores and engaging in sale/leaseback transactions.

These are all classic activist arguments that really do have merit and should be considered by the board. Unfortunately, Barington was shunned by Dillard's and is now being forced to take more dramatic actions in order to unlock value. In the meantime, their investment (and that of other investors) is quickly deteriorating as the company repored slower same store sales, subpar operating performance, and a falling stock price. Many analysts estimate that Barington Capital and the Clinton Group could have around 12% support from institutions, which bodes well for their odds in getting at least one board seat. Combined, these factors make DDS a stock worth watching!

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