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Deal Could Value Shell's Interest in Formation at More Than $1 Billion

Blackstone Group BX +1.07% LP is nearing a deal to acquire Royal Dutch Shell RDSA.LN -0.98% PLC's half-stake in a huge Louisiana gas field, according to people familiar with the matter, as private-equity firms continue to gobble up oil companies' shale castoffs.

The deal could value Shell's stake in the asset at more than $1 billion, the people said, though they cautioned that negotiations were ongoing and terms remained fluid.

The deal includes Shell's half-stake in a joint venture that owns more than 350,000 acres within the Haynesville Shale, a gas-filled rock formation buried deep in northern Louisiana and east Texas.

Private-equity firms, which for years have counted energy as one of their most lucrative investing sectors, have been actively snapping up oil-and-gas reserves in recent months. In May, TPG bought Encana Corp.'s ECA.T +2.37% Wyoming natural-gas properties. In June, Apollo Global Management APO -1.01% LLC said it would buy Encana's natural-gas properties in Alberta.

The purchases from oil companies come as they have honed their focus and as low natural gas prices have made it difficult to justify drilling in some regions.

Shell Chief Executive Ben van Beurden said in March that the Dutch-Anglo oil major was seeking to reduce its exposure to North American shale as "we strive to improve our financial performance." It has since been making deals to reshape its U.S. shale portfolio. In May, Shell agreed to sell a big south Texas shale field to Sanchez Energy Corp. SN +2.13%

Shell arrived early to Haynesville, striking an agreement to explore the area with Encana in 2007.

The combination of horizontal drilling done miles beneath the surface with a rock-cracking process called hydraulic fracturing enabled oil-and-gas producers to unleash vast amounts of natural gas from Haynesville, beginning in mid-2008.

Output from shale broadly helped flood the domestic market for natural gas, reversing years of short supply and depressed prices. Natural gas for September delivery closed up 2.3%, or 9 cents, at $3.96 per million British thermal units Friday on New York Mercantile Exchange. That is well off the $13/MMBtu range where U.S. gas traded around the time of the first big Haynesville discoveries in 2008.

Drilling activity plummeted in Haynesville along with the prices. As of Friday there were 44 rigs drilling in the basin, down from as many as 160 in 2011, according to oil-field-services firm Baker Hughes Inc. BHI +1.09%

Another big Blackstone investment in Louisiana could help create demand for gas in the region. The New York-based firm in 2012 invested $2 billion in Cheniere Energy Partners CQP +1.70% LP, which is building what is expected to become the first facility to export gas from the continental U.S. The cash infusion helped Cheniere begin construction on the facility, which was the first to receive government approval to export gas from the Gulf Coast.

The facility, which is designed to chill gas to minus-256-degrees Fahrenheit so that it becomes a shippable liquid, is expect to make its first deliveries late next year. Natural gas trades in international markets, such as Europe and Asia, at a significant premium to U.S. prices.

Shell once planned a multibillion-dollar plant in Louisiana to convert natural gas to diesel fuel. But Shell shelved those plans late last year amid uncertainty over rising project costs and commodity prices.

U.S. companies have rarely looked so trim. Which is to say they have rarely looked so much like targets.

In the aftermath of the financial crisis, businesses launched a yearslong slimming effort. They were reluctant to rehire workers they fired and slow to replace equipment. As a result, an ever greater share of sales flowed to profits, and from there into corporate coffers. Companies also took advantage of low interest rates, issuing bonds to refinance debt and buy back stock.

As the economy gathers strength, companies lately have shed some of their caution. They do so with balance sheets which rarely have looked so healthy.

With their ample cash, companies' liquidity positions suggest they can easily handle any bumps. Federal Reserve figures show the quick ratio for nonfinancial firms—current assets, including cash, marketable securities and accounts receivable, divided by current liabilities—has risen to its highest level since the early 1960s.

And just as homeowners have refinanced mortgages at lower rates to cut payments, companies have engaged in a large-scale refinancing effort that has lowered their interest costs significantly. At nonfinancial firms, interest payments now eat up 14.4% of cash flow against 17% at the recession's start in 2007, according to Moody's Economics.

Moreover, many companies have locked in low rates for years to come, helping insulate them from when rates turn higher. Corporate bonds issued last year had an average maturity of 13.6 years, according to the Securities Industry and Financial Markets Association, way up from the eight-year average of a decade earlier.

Companies also have busily bought back stock. Fed figures show that net equity issuance by nonfinancial firms has been deeply negative even as debt issuance has exceeded capital spending. That is an indication that firms have been selling bonds not so much to build up their business, but to shrink their share counts.

One aim of buybacks is to boost earnings per share, but they also concentrate a company's ownership into fewer hands. Combined with low levels of balance-sheet risk, that makes for a favorable takeover environment. That is particularly so given the cash, rich stock valuations and easy credit many would-be acquirers have at their disposal.

So there has been a flurry of deals and takeover attempts lately, including last week's announcements that Dollar Tree DLTR +1.10% will buy Family Dollar and Scientific Games will acquire Bally Technologies. Meanwhile, 21st Century Fox just withdrew an $80 billion bid for Time Warner TWX +1.62% and Sprint S -3.57% abandoned an anticipated offer to buy the T-Mobile US. TMUS +0.27%

The hot deal environment should continue—which could be good news for investors in takeout candidates.

Management at those companies, though, may not be so enthusiastic: Chief executives like having their name on the door, after all. Which raises an interesting possibility: That more companies make moves aimed at making themselves a little less of a target in the months to come.

One way is to step up spending with the promise of growth. The other is to turn predator and make some acquisitions of their own. Either way, investors could no longer count on companies maintaining their slim profile.

The phone industry has turned into something so mortally boring people don’t even notice how all the excitement has leaked out…until you compare it to the car industry, which is now in the same exact spot where the phone sector was in 2007.

The original iPhone changed what a phone was. The role of the display morphed from vehicle of passive viewing to actual control mechanism, far more intuitive than a keypad could ever be. That sort of fundamental shift of how a product can be used can only happen once in a decade or two. Now Tesla is changing the car in an equally fundamental manner: this new vehicle is totally silent, free refueling stations enable you to drive from California to New York without paying a cent in fuel costs, etc. It’s not reasonable to expect that the smartphone can undergo a similar transformation of its essence so soon after 2007. Maybe the next quantum leap will happen in 2019 or 2025 or 2031. Until then, fiddling with thinness, display size and camera quality is what we have to deal with.

Back in 2007, it was Apple bursting into the scene with the revolutionary concept of a large touchscreen that proved devastating for industry giants Nokia and Motorola. Right now, Tesla is getting ready to gut GM and Ford with its car range that is about to expand radically. Just as with Apple, the narrow early distribution of a groundbreaking new product is giving the established players a deceptive period of grace. It will take a couple of years for the real impact to become clear.

But we clearly are now entering an interesting period as Tesla prepares to roll out an SUV called Model X in 2015 and a budget car Model 3 in 2017. Both change the scope of Tesla’s consumer reach, because though Model X is going to cost more than $70,000, it will offer far more value for the money than the current Model S.

An ecstatic new Morgan Stanley research note claims that “we’d be disappointed if the Model X did not sweep every major Car of the Year award on offer by the automotive media.” Tesla is not trying to whip up enthusiasm for Model X but is actively trying to discourage early excitement and funnel people into buying the currently available Model S.

But there is a palpable sense of frenzy building in the automotive press and financial media. The design of the Model X is unusually bold and exotic for an SUV — the gull wing doors in particular are a gutsy move.

The Model X is small potatoes compared to Model 3, though. This car is expected to retail at $30,000, less than half of the price of the current Model S. It will represent a direct attack on the smaller German quality cars of BMW, Audi and Mercedes Benz. If Model X production ramps up aggressively and starts making real inroads in the luxury SUV market, the Model 3 could form the second prong of a dangerous pincer movement aimed at the most lucrative parts of the car industry: high-end SUV models and compact luxury sedans.

As Tesla’s charging station network expands and buzz around the structural innovation of the new models builds, rival car vendors seem to be wading through molasses. From GM to BMW, the old behemoths are experimenting with electric cars, but their efforts seem curiously tentative and half-hearted, much like Nokia and Motorola seemed to move in slow motion back in 2008 through 2010 as the Apple surge was building.

This reshaping of the car industry has all of the drama and big personalities that defined the phone industry seven years ago. Who would have thought back then that all the excitement would migrate to car business so rapidly?

Banks’ new encrypted chat service could infuriate SEC

The chat and instant-messaging service Goldman Sachs and five other banks are close to adopting has CIA-like encryption powers that could make life difficult for regulators, The Post has learned.

The six Wall Street powerhouses are expected to invest a total of more than $40 million for a stake in Perzo, the extremely sophisticated messaging service, sources said.

The deal is expected to close in the next few days, two people briefed on the matter told The Post.

The deal is being touted as a way to help the banks save money by switching lower-level employees — who now use Bloomberg’s sophisticated $24,000-a-year terminals mostly for chat and basic functions — to a lower-cost rival terminal, like those from Thomson Reuters. But less known is that the chat service offered by the privacy-obsessed Perzo boasts that its messages cannot be instantly read by snooping investigators at the Securities and Exchange Commission — or the NSA for that matter.

“A user can mark a message confidential, and in this condition, this message can’t be read even if it is forwarded,” Perzo founder David Gurle told The Post.

That feature could infuriate regulators — who have used their quick access to non-encrypted chat and e-mail logs to buttress investigations into interest-rate rigging and high-frequency trading.

The SEC’s enforcement division, which only discovered the 11-year-old Bloomberg Chat service as an investigative tool as recently as five years ago, according to the former government official, benefited from it in a second way, too.

While probes may have spread across several banks, Bloomberg, which saved the non-encrypted chats and instant messages for at least five years, was a central depository, making it a sort of one-stop shopping spot for serving subpoenas.

“The more efficient way [to subpoena bank records] was to have Bloomberg provide it,” said the official, who declined to provide his name so he could talk more freely.

A Bloomberg spokesperson declined comment.

Perzo, on the other hand, doesn’t store chat information — and that will require prosecutors and regulators looking to get chat logs in the future to subpoena separately each bank involved in a probe for its distinct encryption key.

That exercise could take longer and, possibly, slow down investigations.

“I don’t know how this is not going to tick off the SEC,” the official said.

“We retain and monitor all of our communications channels,” Tiffany Galvin, a Goldman spokeswoman, told The Post. “We make our communications available to our regulators as required. A system that does not allow Goldman to comply with those regulations would not be viable for Goldman.”

The terms of the deal with Perzo, which haven’t been made public, could allow banks to alter Perzo’s technology so they’re in compliance with skeptical regulators, one person said.

For example, banks would have to allow compliance officers to regularly and anonymously monitor calls, e-mails and chats, one person said.

Each financial firm in the deal is going to pay about $6 million to the company, two people said.

The package is slated to be made available next year under the name Symphony, the blog FT Alphaville reported Thursday.

Galvin declined to comment on the Symphony program.

Cover story is negative on Z, noting its merger with TRLA isnt the sure winner bulls contend; The two companies havent monetized much of their Web traffic, and get just a sliver of real estate advertising dollars, and both have been offering deep ad discounts to real estate chains; Its far from clear the merged Zillow-Trulia will grow revenues enough to match their puffed-up market values. 

Features: Positive on TWX, COV, SHPG, TMUS, WAG: Shares of these five companies are down because of aborted plans for mergers or inversions, giving investors a good opportunity to find bargains; Positive on TEX: Maker of cranes and other large machines is benefitting from pickup in big construction jobs, improved efficiency, strong position in port business, and its cheap shares could see a 30% boost in next 12 months. 

Softbank Corp. [TYO: 9984] has not given up on acquiring T-Mobile US Inc. [NYSE: TMUS], after the company suspended talks with the US' third-largest operator of wireless telecommunication services, Japanese newspapers reported.

Softbank still believes that a triangular battle is better than the dominance by two biggest players to secure a healthy competition in the US telecommunication market, the Nihon Keizai Shimbun and Yomiuri Shimbun reported, citing President Masayoshi Son.

The company, Japan’s third-largest telecommunication service provider, and its US unit, Sprint [NYSE: S], ended talks with T-Mobile earlier this week on a plan to acquire the US company, Japanese newspapers had reported. In a press conference on 8 August announcing the first quarter earnings, Son declined to make an official comment on those reports about scrapping the acquisition plan, the Nihon Keizai report said today.

For other M&A opportunities outside the US, the company is always looking for a good opportunity, the president was cited in the newspaper report.

Source Nihon Keizai Shimbun, Yomiuri Shimbun

Telecom Italia has hired three advisers to work on the merger between its controlled company Tim Brasil and Vivendi’s GVT.

The Italian-language daily La Repubblica reported this information, quoting unnamed sources, and added that the advisers are Citigroup, Banco Bradesco and Mediobanca.

Banco Bradesco will help finance the deal, Citigroup will help find international investors, while Mediobanca is to mediate in the relationship with Vivendi, the article noted.

Source La Repubblica