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An Oil Patch Megadeal


Many energy industry CEOs don't know what to do with the gusher of money flowing into their tanks. They've resorted mostly to paying down debt, buying back stock, and watching the cash pile up. Not ConocoPhillips' (COP) James Mulva. The 59-year-old boss, already one of the biggest spenders on new supplies (BW -- Dec. 12), put his princely profits on the line on Dec. 12 by agreeing to pay $35.6 billion for gas producer and Houston neighbor Burlington Resources (BR). The price is more than triple Burlington's market cap just three years ago. Worried investors drove down ConocoPhillips' share price 7.4% by Dec. 14.

It may be rivals that ultimately quail, however. Mulva figures his company will catapult over six giants, including Exxon Mobil (XOM), BP (BP), and Royal Dutch/Shell (RD), to become No. 1 in the white-hot North American natural gas market. ConocoPhillips is banking on buoyant gas prices over the next few years and beyond that sees the deal opening the way for lucrative plays in liquefied natural gas and Arctic gas.

See "Why ConocoPhillips Is So Hot On Gas"

Just about everyone arrived for the Dec. 13-18 World Trade Organization conference in Hong Kong knowing it would fizzle. The talks were meant to break the deadlock between developed and developing countries over issues such as farm subsidies and market access, but expectations have fallen so low that some people say the WTO will be lucky if the process doesn't grind to a halt. What's odd is that the inertia behind closed doors seems to be spreading to protesters. On Dec. 14 only a few thousand people took to the streets, and the whole effort felt halfhearted. The highlight? Several dozen Koreans wearing photogenic bright orange life jackets tried to swim to a spit of land where negotiators were cloistered.

See "The WTO's Shaky Common Ground"

The unthinkable gets more thinkable every day in Detroit. On Dec. 12, Standard & Poor's (MHP) dropped General Motors' (GM) debt rating two more levels into the junk ditch and said that bankruptcy is not "a farfetched possibility." At the same time, billionaire Kirk Kerkorian quit talks without a deal to get one of his top deputies on GM's board. Insiders speculate that he could wage a proxy war to grab the wheel. On the other hand, parts maker Delphi (DPHIQ) hinted that it might make a higher- octane offer to the United Auto Workers, which could head off a strike that would stall GM and cost it billions. The UAW also said on Dec. 14 that it will make concessions to Ford (F) on its health-care plan for retirees similar to those it gave GM, which could save Ford a billion a year in cash.

See "Another Credit Downshift For GM"

Read between the lines of the Fed's Dec. 13 remarks, and outgoing Chairman Alan Greenspan seems to be saying: "My work here is almost done." On Dec. 13 the central bank raised the federal funds rate to 4.25% -- the 13th increase since June, 2004, when the Fed began weaning the economy off the easy money that had helped spark growth after the 2001 recession. It also hinted that it won't need to tighten much more. That jazzed the bond market and Wall Street, where the Standard & Poor's 500-stock index on Dec. 14 hit a 4 1/2-year high.

See "So Where's The Economy Going Now?" and "Between the Fed's Fewer Lines"

We have Janet Jackson to thank for this one. The cable industry caved in to Washington on Dec. 12 when six operators, including Comcast, Time Warner Cable, and Advance/Newhouse, agreed to offer a "family-friendly" programming package. Ever since Jackson bared her breast at the 2004 Super Bowl, federal lawmakers and regulators have been raging to clean up TV -- especially cable, where content is unregulated. Senate Commerce Committee Chairman Ted Stevens (R-Alaska), who once threatened to extend broadcast indecency restrictions to cable, says he'll call off the legislative dogs if the cable companies do the right thing.

On Dec. 11, Steve Case, co-founder of AOL and until recently a Time Warner (TWX) board member, went over to the enemy, joining the Carl Icahn camp in advocating a breakup of the media behemoth. Of course, given the way many Time Warner shareholders feel about the man who helped engineer the merger that eventually vaporized $135 billion in equity, Icahn may wish Case had kept quiet. Meanwhile, AOL kept talking with Google (GOOG) and Microsoft (MSFT) about a search and advertising partnership, and Bill Gates, visiting India, speculated that Microsoft might reward users of its search engine with a piece of the ad revenue it generates.

The contest for Sumner Redstone's heart is in full swing. In the weeks since his Viacom (VIA) split in two, both new Viacom and new CBS have hustled to plump up their assets. Viacom, eager to return the fading Paramount studio to star status, hooked DreamWorks' live-action unit with a steep $1.6 billion bid, stealing the scene from General Electric (GE). That gives Paramount a 60-film library including works from Steven Spielberg (Saving Private Ryan) as well as a potential blockbuster in the distribution rights for movies made by DreamWorks' animation company. CBS has been making noise that it, too, may be scouting a good-sized deal to buttress its TV networks and Infinity radio chain, which it's renaming CBS Radio. It recently bought the College Sports TV cable channel for $325 million and pondered a bid for the Hallmark Channel (CRWN).

See "Memo to GE: Don't Cross David Geffen"

The duel shaped up like a spaghetti Western showdown. After filing for bankruptcy in September, Delta Air Lines (DAL) asked a judge to force its pilots to take $325 million in pay and benefit cuts. The pilots, already smarting from $1 billion in annual givebacks agreed to last year, seemed set to strike, which could have put the carrier six feet under. But on Dec. 11, the Air Line Pilots Assn. flinched, accepting a 14% pay trim that will save Delta $143 million a year. It's unlikely this marks the end of the standoff: The deal must be ratified, and it might not go far enough. Delta may need another fistful of dollars to stay aloft.

It was a draw, but Wall Street saw it as a loss. On Dec. 12 the judge in Merck's (MRK) first federal case involving its withdrawn painkiller Vioxx declared a mistrial after jurors couldn't agree. Investors had expected Merck to win because the case involved the death of a man who had taken Vioxx for less than a month. Merck also looked bad a few days earlier when the New England Journal of Medicine ran an editorial chiding researchers, including two Merck employees, for not including three heart attacks in a 2000 study the journal published. A Merck attorney says the heart attacks were left out because they came after a specified cutoff date for the data, but plaintiffs' lawyers licked their chops at the prospect of using that info at trial. There was one cheery prognosis: On Dec. 14 an FDA panel recommended approval of a Merck vaccine against a virus that causes severe childhood diarrhea.

See "Merck's Plan for Relief"

These days, one could be forgiven for imagining that private equity will soon own everything, everywhere. A trio of buyout firms on Dec. 12 said they'd pay a sugary price of $2.43 billion for Dunkin Brands. Pernod Ricard, the French wine and spirits vendor, is dumping Dunkin, along with Dunkin's Baskin-Robbins ice cream and Togo's sandwich chains, to pay off debt. But this is no turnaround play for buyers Bain Capital, Carlyle Group, and Thomas H. Lee Partners. They like the doughnut chain's recipe to nearly triple in size, to 15,000 outlets worldwide, in the next 10 years, and they're keeping management in place. Dunkin has been taking on Starbucks (SBUX) by selling lattes and cappuccinos for less, but it's fattening nicely by aping its competitor's "be everywhere" strategy.

And in the grill galaxy of the fast-food universe, chains that rely on twentysomething men for a supersized chunk of their sales are getting orders from an older cohort -- hedge fund managers. Instead of cheeseburgers, these guys want divestitures, and they just may get their way at Wendy's International (WEN). On Dec. 13, Nelson Peltz's latest vehicle, Trian, disclosed a 5.5% stake in Wendy's. Trian told the Dublin (Ohio) company it should sell off all its ancillary brands, including Canadian doughnut giant Tim Hortons. Back in July, Wendy's agreed to offer 15% of Tim Hortons to the public to calm the appetites of Pershing Square Capital Management, which owns 10% of Wendy's. Pershing Square also owns 4.9% of McDonald's (MCD) and is pushing the company to spin off its company-owned outlets. Big Mac says that would hurt results.

How do you say "unfortunate typing mistake" in Japanese? Tokyo markets are abuzz about the mother of all trading errors that saddled colossus Mizuho Financial Group with $335 million in losses and triggered the resignation of Tokyo Stock Exchange President Takuo Tsurushima. A Mizuho staffer on Dec. 8 offered 610,000 shares of recently listed recruiting company J-Com for one yen apiece, when he meant to sell one share for 610,000 yen, or about $5,630. Worse, on Dec. 11 the TSE admitted that Mizuho frantically tried to stop the trade, but the exchange's computers refused to do so for 10 agonizing minutes, during which predatory investors snapped up the dirt-cheap shares. That was doubly embarrassing for the exchange, which suffered a meltdown that halted trading back in November. So sayonara, Tsurushima-san. This being Japan, Mizuho bigwigs have been bowing deeply before cameras -- and buying back shares at a painful premium.


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