Some thoughts on the effect of current credit conditions and whether or not they now give Sears Holdings (SHLD) Eddie Lampert an opportunity to make a long awaited acquisition at prices he will pay.

Drastically tightened credit markets have lead to a sudden withdrawal by PE firms making potential buyouts. With both credit and terms of it becoming less advantageous, many deals that PE firms would have made before are now attractive only to strategic buyers who can merge operations.

A look at the restaurant industry shows earlier deals by PE buyers included OSI Restaurant Partners (Outback Steakhouse) acquisition by Kangaroo Holdings, Long Star Steakhouse's purchase by Lone Star Funds, and Ryan's Restaurant Group's acquisition by Caxton-Iseman Capital.

Now, if we look at recent deals we see that strategic buyers are the ones doing deals now. Applebee's (APPB) pending $2 billion purchase by IHOP (IHP) is as transaction most people thought would go to a private equity firm. Rare Hospitality's (RRH.BE)$1.4 billion acquisition by Darden Restaurants (DRI)., which operates Olive Garden and Red Lobster, closed just last month.

Back in June there was talk about Sears Holdings making a bid for Macy's and at the time I said "Should we root for this? Yes. If Lampert goes for it, he is seeing value in the assets and name far in excess of the current price. The plus of having Lampert buy it? He will have the ability to quickly extract that value for shareholders, of which, we must always remember, he will be the largest one."

I also said that a deal then was unlikely due to Macy's (M) price at the time. But, consider now that shares have dropped over 25% since then and if Lampert were to make a run at the retailer, he now likely would be the only bidder, lowering any potential price.

Why would Lampert want Macy's? Probably because of the value of it is along the same lines as Sears when he bought it. The retailer owns more than half of its 858 Macy's and Bloomingdales stores. The rest the company stores it leases or owns on leased land. Owning Sears, Kmart, Bloomingdales and Macy's would make Lampert option #1 for anyone wanting footage for retailing. It would also give Lampert a stunning array of options to increase shareholder value of which, it bears repeating, he is by far the largest.

Macy's has a market cap of $13 billion about 2/3 that of Sears. Without any significant debt currently ($2.6 billion) and over $1 billion in cash assuming they complete the recently authorized $1.5 billion buyback this quarter, Sears could do the deal easily. Macy's produces about $4 billions a year in cash from operations and Lampert would save another $275 million by eliminating the dividend.

PE firms were causing a bidding war for companies earlier in the year and with their specter drastically reduced, it may be the time for Lampert to make his next move.

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For Ruby Tuesday (RT) investors, almost every trading day is like Black Monday.

Another day, another two conferences. Today, I’ll be skipping between the Institutional Investor Forum at the Waldorf and the World Business Forum at Radio City to hear two different takes on activist investing. (If you’re at either, ping me and say hello). This morning, former SEC Chair Richard Breeeden spoke at the Waldorf about activist [...]

UPGRADES

Logitech Intl SA LOGI Avondale Partners Mkt Perform » Mkt Outperform
Fresh Del Monte FDP BB&T Capital Mkts Hold » Buy
Lexington LXP Stifel Nicolaus Hold » Buy
Equinix EQIX Needham & Co Hold » Buy
China Mobile CHL HSBC Securities Neutral » Overweight
Nokia NOK HSBC Securities Neutral » Overweight
Brocade BRCD Citigroup Hold » Buy
Tween Brands TWB Susquehanna Financial Neutral » Positive
Ford Motor F Bear Stearns Peer Perform » Outperform
Temple-Inland TIN UBS Neutral » Buy

DOWNGRADES

Maguire Properties MPG Stifel Nicolaus Hold » Sell
Ryanair Hldgs RYAAY UBS Buy » Neutral
Applebee's APPB Oppenheimer Neutral » Sell
Aventine Renewable Energy AVR Soleil Buy » Hold
Alcatel-Lucent ALU UBS Buy » Neutral
British Amrcn Tobacco BTI Lehman Brothers Equal-weight » Underweight
Marsh McLennan MMC Citigroup Buy » Hold

Filed under: Analyst reports, Analyst upgrades and downgrades, New York Times'A' (NYT)

MOST NOTEWORTHY: New York Times Co, Lee Enterprises, McClatchy Co, Marsh & McLennan, Deutsche Bank, Ryanair and Applebee's were today's noteworthy downgrades:

• Merrill reduced estimates on New York Times Company (NYSE: NYT), Lee Enterprises (NYSE: LEE) and McClatchy Company (NYSE: MNI) to Sell from Neutral due to the slowing economy and the impact from the housing market on newspaper advertising.
  
• Citigroup downgraded shares of Marsh & McLennan Companies (NYSE: MMC) to Hold from Buy following the departure of Brian Storms, CEO of Marsh Brokerage, as they believe it suggests a continued struggle at the company's core business.
  
• The firm also downgraded Deutsche Bank (NYSE: DB) to Sell from Hold to reflect a more bearish outlook for European Banks due to the drop in credit-market revenue.
  
• UBS downgraded shares of Ryanair Holdings (NASDAQ: RYAAY) to Neutral from Buy as they expect higher costs to squeeze margins.
  
• Oppenheimer downgraded shares of Applebee's International Inc (NASDAQ: APPB) to Sell from Neutral as they do not expect another suitor to come forward.

OTHER DOWNGRADES:

• Goldman Sachs removed Forest Oil Corporation (NYSE: FST) from its Conviction Buy List.
  
• Bear Stearns downgraded Novo Nordisk (NYSE: NVO) to Peer Perform from Outperform.
  
• Soleil downgraded shares of US BioEnergy Corporation (NASDAQ: USBE) and VeraSun Energy Corporation (NYSE: VSE) to Sell from Hold.
  
• Leap Wireless (NASDAQ: LEAP) was downgraded to Market Perform from Outperform at Raymond James.

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