merger

BANK OF AMERICA CORP. $38.50, New York symbol BAC, has agreed to buy troubled mortgage lender Countrywide Financial Corp. (New York symbol CFC) for $4 billion in stock. In August 2007, Bank of America bought $2 billion of convertible preferred shares from Countrywide. The preferred shares are convertible under certain circumstances into Countrywide common shares at $18 a share, or about 14% below Countrywide’s then market price of $21.00. These preferred shares have since lost approximately 65% of their value. The merger will make Bank of America the largest mortgage lender in the United States, with 25% of mortgage originations and 17% of the mortgage servicing market. Bank of America can also market other services such as deposit accounts and credit cards to Countrywide’s large client base....

AGRIUM INC. $60 (Toronto symbol AGU; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 134.0 million; Market cap: $8.0 billion; SI Rating: Average) has agreed to buy publicly traded UAP Holding Corp., which sells seeds and other agricultural products to North American farmers through 370 distribution and storage facilities. The $2.65 billion price is high compared to the $269 million or $2.01 a share that Agrium earned in the nine months ended September 30, 2007 (all amounts except share price and market cap in U.S. dollars). So to pay for the purchase, the company will issue $1.25 billion worth of new shares. Agrium feels the merger will let it cut its annual expenses by $115 million by 2010. UAP will give Agrium steadier revenue streams, and cut its reliance on bulk fertilizer sales. However, Agrium needs natural gas to make its fertilizers, so it’s still vulnerable to rising gas prices....

THE THOMSON CORP. $40 (Toronto symbol TOC; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 640.8 million; Market cap: $25.6 billion; SI Rating: Above average) provides a wide range of specialized information to professionals in the financial, tax and accounting, medical, legal and scientific fields. Over 80% of Thomson’s revenue comes from electronic products, which cuts its printing and distribution costs. As well, 80% of its revenue comes from subscription-based products, which cuts its reliance on cyclical advertising. In May 2007, Thomson agreed to acquire UK-based Reuters Group plc for $17 billion in cash and stock (all amounts except share price and market cap in U.S. dollars)....

THE PROCTER & GAMBLE CO. $71 (New York symbol PG; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 3.1 billion; Market cap: $220.1 billion; WSSF Rating: Above average) is one of the world’s largest makers of household and personal care products. Over 20 of its 300 brands have annual sales of over $1 billion, including Crest (toothpaste), Tide (detergent), Head & Shoulders (shampoo) and Pampers (diapers). The company is making good progress integrating its 2005 acquisition of The Gillette Co. The restructuring should eventually let Procter realize over $1 billion in annual cost savings. That will help it cope with rising raw material, packaging and fuel prices. The Gillette purchase added several top-selling brands to Procter’s portfolio, including Gillette razors and Oral-B oral care products. Procter will probably sell some slower growing household brands, like Duracell batteries and Folgers coffee, to focus on its more profitable health and beauty operations....

MOLSON COORS CANADA INC. (Toronto symbols TPX.A $50 and TPX.B $56; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 179.3 million; Market cap: $10.0 billion; SI Rating: Average) has gained roughly a third in the past year, mainly due to its success in cutting costs following the merger of Molson and Coors in February 2005. The company now aims to cut costs by a further $500 million a year with an agreement to merge its operations in the United States and Puerto Rico with those of SAB Miller PLC (all amounts except share price and market cap in U.S. dollars). Molson Coors earned $1.02 a share (total $184.3 million) in the second quarter of 2007. Each will have 50% voting interest in new venture, called MillerCoors, but Miller will have a 58% economic interest while Molson Coors will have 42%. This new business will have 27% of the U.S. beer market. That should help it compete with Anheuser- Busch, which accounts for about half of U.S. beer sales. If regulators approve, MillerCoors should begin operations in 2008....

MOLSON COORS BREWING CO. $55.05, New York symbol TAP, has agreed to merge its operations in the United States and Puerto Rico with those of rival brewer SAB Miller PLC. Each will have 50% voting interest in this new venture, called MillerCoors, but Miller will have a 58% economic interest while Molson Coors will have 42%. This new joint venture will account for about 27% of the beer market in the United States. That should help it compete with Anheuser-Busch (see below), which accounts for about half of U.S. beer sales. Assuming regulators approve, the new company should begin operations in 2008. Like the earlier merger of Molson and Coors, the main attraction of this plan is cost savings. Molson Coors expects to save $500 million a year by sharing its distribution networks and other assets with Miller. To put that in context, Molson Coors earned $184.3 million or $1.02 a share in the second quarter of 2007....

A key part of our approach to investing is spreading your money out among the five economic sectors: Finance; Utilities; Consumer Goods & Services; Resources & Commodities; and Manufacturing & Industry. That way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor fashion. Generally speaking, stocks in the Resources & Commodities sector and the Manufacturing & Industry sectors are apt to expose you to above-average volatility, while those in the Finance and Utilities sectors involve below-average volatility. Consumer stocks are in the middle. Due to the recent market downturn, investors are now taking a closer look at Consumer stocks. But the Consumer sector is a two-tier market, where some stocks thrive while others stagnate. That’s why it pays to zero in on well-established companies with strong brands that are attractive in relation to current prices, like these three....

MOODY’S INC. $46.45, New York symbol MCO, has dropped by a third since the start of June due to the turmoil in the mortgage market. Moody’s charges bond issuers a fee for a credit rating, and the recent problems could hurt investor interest in new debt securities. The company could also face class-action lawsuits from subprime mortgage investors who relied on Moody’s ratings. Politicians will probably call for new controls on rating agencies, which could hurt Moody’s prospects. Our view is Moody’s will overcome these setbacks. But the stock could fall further in the next few weeks....

In our July 27 Hotline, I said that the market downturn that had just begun could carry on till October and knock another 5% to as much as 15% off the market indexes. That’s still my view. I doubt that the liquidity problems in subprime-related areas are going to spread. I do think that subprime lending is dead for five years or more. This will hurt real estate and related industries. But ultimately it could help the rest of the economy. That’s because former subprime specialists will go on to something more productive, and former subprime borrowers will quit overextending themselves on housing and instead spend their money on consumer goods, investments, education for their children and so on. However, for now through October, I’d say the market could suffer more damage. But it has dropped enough now that you might want to start buying. That’s especially so if you have a lot of cash. Of course, I could be wrong, so you should only put money in stocks that you can afford to keep in stocks for, say, three to five years. WAL-MART STORES INC. $43.49, earned $0.76 a share from continuing operations in its second fiscal quarter ended July 31, 2007, up 5.6% from $0.72 a year earlier. However, if you disregard unusual items, earnings were flat. Sales rose 8.9%, to $92.0 billion from $84.5 billion, partly due to a 15.7% jump in sales at its international operations....

STATE STREET CORP. $69 (New York symbol STT; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 336.4 million; Market cap: $23.2 billion; WSSF Rating: Average) has completed its $4.2 billion all-stock acquisition of Financial Services Corp., which provides custodial and related services to institutional investors. To offset the extra shares outstanding, the company plans to buy back $1 billion worth of its stock in the next six months. Merger costs will hurt State Street’s earnings in the next year or two. But the acquisition makes it a leading service provider to private equity funds. The company also plans to focus on high-growth markets in Asia and Europe. It aims to soon increase overseas revenue to 50% of the total, from 43% in 2006....