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Friday, March 29, 2013

Pinnacle IPO to Test Appetite

NEW YORK–Thursday's initial public offering for frozen foods purveyor Pinnacle Foods Inc. is setting up to be a test of how much investors are willing to pay for a company that offers a hefty dividend but comes saddled with debt and limited prospects for growth.

The maker of Van de Kamp's fish sticks and Lender's frozen bagels is slated to set a price for its IPO late Wednesday, a deal that is likely to be the year's third-largest IPO. Shares are expected to fetch between $18 and $20 per share and could raise as much as $580 million.

Pinnacle, which is backed by Blackstone Group LP, is the latest in a string of deals brought to market this year by sponsors including private-equity shops or venture capital firms. Blackstone bought Parsippany, N.J.-based Pinnacle for $2.16 billion in 2007. It added Birds Eye Foods Inc. in 2009 with a $1.3 billion deal.

Pinnacle said in its prospectus that it's targeting an 18-cent quarterly dividend, which would imply a 3.8% annual yield based on the midpoint offer price. That compares with a 2.2% dividend yield on stocks in the Standard & Poor's 500-stock index. With interest rates at rock bottom, high-dividend paying stocks have been commanding a premium from investors.

"I would be surprised if it doesn't price at the top end of the price range or above that," said Josef Schuster, founder of IPOX Schuster LLC, an IPO research-and-investment firm based in Chicago. "It's a stable business and has good brand value. I think investors are also looking at it for the dividend yield," he said.

Mr. Schuster's fund, the $67 million First Trust U.S. IPO Index exchange-traded fund, doesn't participate in first-day IPO trading, but said he is looking hard at adding shares in the coming weeks.

Another potential positive for the deal is that investors have been taking a shine to IPOs brought to market by financial sponsors such as Blackstone. Thirteen such deals have generated an average first-day gain of 20%, compared with a 14% first-day pop for all initial offerings, according to Ipreo, a market intelligence firm.

On the potential negative side of the ledger, Pinnacle's brands–which also include Vlasic pickles and Celeste pizza–are widely known, but its sales have mostly been flat. The company booked $2.5 billion in sales in the 2012, up 0.4% from the year earlier.

Then there's the debt: As of the end of last year, its total debt stood at $2.1 billion, or about five times 2012's adjusted earnings before interest, taxes, depreciation and amortization.

But leverage hasn't been much problem for recent IPOs. With the Federal Reserve expected to keep interest rates low, investors have relegated concerns about debt loads to the back burner.

For example, Realogy Holdings Corp., a real-estate services firm that owns and franchises brokerages including Century 21 and Coldwell Banker, had net leverage of more than seven times its forward Ebita when it went public in October. That deal, which was backed by private-equity firm Apollo Global Management LLC, fetched a price at the high end of its prospective range and shares are up more than 80% since their IPO.

In Realogy's case, investors jumped at the chance to play an IPO tied to a broader recovery in the housing market, observers say. Stocks like plywood maker Boise Cascade Co. and Tri Pointe Homes LLC have seen strong stock gains after their IPOs this year.

Analysts also note the consumer-staples sector generally tends to be more supportive of debt loads because sales, even if uninspiring, are usually relatively stable.

"The food industry is an example of an industry with relatively low operating risk. So food companies, whether it's Heinz, or Pinnacle Foods, can support higher debt ratios than companies in more cyclical industries," said Jay Ritter, a finance professor at the University of Florida who tracks IPOs.

Pinnacle will list Thursday on the New York Stock Exchange under the ticker PF and would carry a market value of $2.2 billion at the high point of the prospective price range.

Write to Chris Dieterich at chris.dieterich@dowjones.com or Matt Jarzemsky at matt.jarzemsky@dowjones.com

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Small States Stress Distance from Cyprus

BRUSSELS—Luxembourg and Malta moved to defend their economic models after Cyprus's bailout turned the spotlight on other small euro-zone countries with large financial sectors.

Senior officials from the two countries, both of which have financial sector assets many times the size of economic output, slammed what they called misleading comments from senior European officials suggesting that small countries with huge financial sectors may present a threat to financial stability in the euro zone.

In a statement released early Wednesday, Luxembourg's government said it is "concerned" about recent "comparisons between the business model of international financial sectors in the euro area."

The comments come two days after Cyprus secured a €10 billion ($12.9 billion) European bailout under terms that include winding down its second-largest bank, Cyprus Popular Bank PCL. On Wednesday Cyprus laid out details of aggressive capital controls to curb the flow of money out of the country.

Luxembourg, with a population of just 525,000, has one of the European Union's largest banking sectors on paper, thanks to a tradition of low taxation and comparatively light regulation dating back decades. According to European Central Bank data, the country's banking assets are about 22 times its annual economic output, compared with a multiple of around seven for Cyprus.

The Luxembourg government took particular issue with comments by some officials that have attempted to boil down the essence of Cyprus's problems into a simple question of the size of its banking system, relative to its overall economy. What matters, rather, is the "quality and solidity" of the financial sector and its size in relation to the euro area as a whole, the government said in a statement.

The Luxembourg government said that its financial industry has a "diversified customer base, sophisticated product services, efficient supervisory mechanism and rigorous respect and implementation of international standards add to its uniqueness". By contrast, Cyprus's financial sector was considered to be "structurally unbalanced," it said.

Cyprus's bailout has sparked fresh warnings from policy makers about overreliance on financial sector revenue. In a speech in Moscow last week, European Commission President José Manuel Barroso said the crisis in Cyprus was "the result of an unsustainable financial system" that was a multiple of the country's GDP and "certainly has to adapt."

"Markets are now focusing on potential weaknesses in euro-zone states whose banking sectors very large relative to their economies," said Christian Schulz, an economist at Berenberg Bank in London.

The Cypriot bailout was notable for being the first in the euro zone to impose losses on bank depositors for the first time. The agreement is designed to protect deposits up to €100,000, but will impose severe losses on bigger ones.

Berenberg's Mr. Schulz said that the political signals from the Cyprus bailout are a clear threat to Luxembourg's interests. "That in itself will raise concern with people who have large deposits there," he said.

Still, Luxembourg's banking sector consists largely of subsidiaries and branches of foreign banks, so significant support might be expected from mother banks and, ultimately, the governments of those mother banks, in the event of a crisis. Just 8% of Luxembourg's banking assets are held by domestic banks compared with 71% for Cyprus, according to Mr. Schulz.

That is reflected in the assessment of the three big international credit ratings firms, all of which still rate Luxembourg's government debt at triple-A.

"The Cyprus crisis has had no impact on Luxembourg banks or on client deposits," said Ernst Wilhelm Contzen, the Luxembourg Bankers' Association chairman, in an emailed statement.

"The Luxembourg banking system is one of the soundest and safest in the European Union, with Luxembourg banks having an average solvency ratio of over 17% over the last years" and remains a "haven for investors and depositors at the heart of the Euro-zone," he said.

In an interview published Wednesday, the central bank governor of Malta, another small country with big ambitions to build a financial sector, also dismissed as "misleading" any comparison with Cyprus. The assets of Malta's major banks amount to "just below 300%" of GDP, which by international standards was "within normal limits," Josef Bonnici said in an interview with the Times of Malta. Mr. Bonnici also highlighted the exceptional nature of Cypriot banks' losses on Greek government debt.

"Maltese domestic banks have limited exposure to securities issued by the program countries," Mr. Bonnici said.

Write to Tom Fairless at tom.fairless@dowjones.com

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Wednesday, March 27, 2013

U.S. Stocks Sag

Stocks pared early declines, but remained lower for the day amid a renewal of economic and political concerns in Italy.

The Dow Jones Industrial Average was off 39 points, or 0.3%, to 14521 in afternoon trading, after falling as many as 120 points in the opening minutes of trading. The Standard & Poor's 500-stock index gave up three points, or 0.2%, to 1561, while the Nasdaq Composite slipped three points, or 0.1%, to 3250.

The declines nudged the Dow and the S&P 500 off their quest for new record highs. On Tuesday, the blue-chip Dow rallied 112 points to a new record, while the S&P 500 finished less than two points from its October 2007 record close.

The U.S. losses on Wednesday were triggered by signs of further deterioration in Europe's economic prospects. The European Commission's economic-sentiment indicator for March fell for the first time since October, to 90 from February's 91.1, below expectations of 90.5. In Italy, retail sales and industrial orders both fell far short of expectations.

On the political front in Italy, Democratic Party leader Pier Luigi Bersani's attempts to form a coalition government took a hit after the anti-establishment Five-Star Movement rejected his call for support.

In addition, Cyprus's government is preparing aggressive curbs on the flow of cash out of the country, which will cap the amount of cash people can bring out of the country, as well as the amount of credit-card purchases of goods outside Cyprus.

The Stoxx Europe 600 fell 0.5% and Italy's FTSE MIB index pulled back 0.9%, while the euro weakened to below $1.28 for the first time in four months.

The European concerns loomed large for U.S. investors, who see the turmoil there as a potential headwind after the strong start to the year.

As the end of the first quarter approaches on Thursday, Peter Tuz, president of Chase Investment Counsel, which manages about $600 million in Charlottesville, Va., has been weighing whether to pull some of his clients' money out of stocks, partly because of worries about Europe and the durability of the rally.

While Cyprus has been a concern, "what's going on in Italy is much more worrying—they've got their backs against the wall, and they can't cobble together a government," Mr. Tuz said.

For some of his clients who have 80% of their portfolio in stocks, he is considering paring that exposure to about 75%. "It might make sense to make the portfolio marginally a little more conservative after we've had this very long rally," Mr. Tuz said. "We had a great first quarter, and now we face an uncertain earnings season and greater uncertainty in Europe."

The U.S. stock declines on Wednesday were led by financial shares, amid the latest downturn in Europe's prospects. J.P. Morgan Chase led the Dow components lower, while Bank of America and Citigroup also declined.

Other decliners included blue chips Coca-Cola, Verizon Communications and Home Depot .

Asian markets closed mostly higher as encouraging earnings reports out of Hong Kong and strength in the Australian mining sector provided support. China's Shanghai Composite and Japan's Nikkei Stock Average each gained 0.2%.

Crude oil erased early declines to trade flat at $96.36 a barrel, while gold rose 0.7% to $1,606.10 an ounce. Although the dollar strengthened against the euro, it lost ground against the yen. Demand for Treasurys rose, sending the yield on the benchmark 10-year note down to 1.84%.

In U.S. economic news, pending home sales for February fell 0.4%, a touch more than expectations for a 0.3% decline.

In corporate headlines, Apple declined after the company went to court in China amid accusations that it infringed voice-recognition software used for the "Siri" personal assistant on its iPhones.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

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