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Zacks Analyst Blog Highlights: Novell, Red Hat, Microsoft Corporation, J.P. Morgan and Carnival Corporation

Zacks.com Analyst Blog features: Novell Inc. (Nasdaq: NOVL), Red Hat (NYSE: RHT), Microsoft Corporation (Nasdaq: MSFT), J.P. Morgan (NYSE: JPM) and Carnival Corporation (NYSE: CCL).

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Here are highlights from Wednesday’s Analyst Blog:

Attachmate Raises Funds for Novell Buy

According to a Bloomberg report, Attachmate Corporation plans to raise $1.09 billion in loans to fund its acquisition of Novell Inc. (Nasdaq: NOVL), an enterprise software developer.

Attachmate is a software company providing connectivity solutions and is supported by private equity firms such as Golden Gate Capital, Francisco Partners and Thoma Bravo.

According to the report, Attachmate is on the look out for an $825 million in first-lien term loan, a $40 million first-lien revolving line of credit and a $225 million second-lien facility. Bloomberg reported that the details were given out in a regulatory filing. The debt commitment is expected to cease if the initial funding of the facilities does not occur by April 20, according to the filing.

Novell agreed to be bought by Attachmate for $2.2 billion, the company said in a November 22 statement. Novell investors will get $6.10 a share. Attachmate also plans to use $425 million in equity financing to help pay for the acquisition.

The deal is expected to close in the first quarter of 2011. Attachmate Corporation will acquire Novell for $6.10 per share in cash in a transaction valued at approximately $2.2 billion.

The purchase price represents a premium of 28.0% to Novell's closing share price on March 2, 2010 (when Elliott Associates offered to buy Novell in a deal valued at about $1 billion) and a 9% premium to its closing stock price on November 19, 2010.

Novell was approached by various other entities this year for a takeover. In March, Novell rejected a buyout offer from the investment firm Elliott Associates L.P., citing the proposal of $5.75 per share (49.0% over the company’s enterprise value) in cash as inadequate and undervaluing the company's franchise and growth prospects. Elliott Associates will become a shareholder of Attachmate under the latest offer.

We believe Novell’s Linux assets deserve premium valuation as it has a valued customer base and generates significant revenue. Novell remains the #2 maker of the open source Linux operating system behind Red Hat (NYSE: RHT).

Novell had also announced that it has entered into a definitive agreement for the concurrent sale of certain intellectual property assets (more than 800 patents) to CPTN Holdings LLC, a consortium of technology companies organized by Microsoft Corporation (Nasdaq: MSFT) for $450 million in cash. This is reflected in Attachmate’s total purchase price.

Attachmate will operate Novell as two separate business units, namely Novell and SUSE (its open source business) and will integrate them with its other holdings, Attachmate and NetIQ. Novell had acquired the Germany-based SUSE AG in 2003. We believe the SUSE-Linux acquisition will boost Attachmate’s competitive position going forward.

Novell will be required to pay $60 million to Attachmate if it accepts a superior bid. If the deal fails to materialize for some other reason, Attachmate might have to pay Novell $120 million.

Attachmate’s acquisition of Novell is subject to customary closing conditions, including regulatory approvals and clearance under the Hart-Scott-Rodino Act. It is also dependent on the closing of the proposed sale of certain intellectual property assets to CPTN Holdings LLC. In addition, the transaction is subject to approval by Novell's stockholders.

J.P. Morgan (NYSE: JPM) is serving as financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Novell. Credit Suisse and RBC Capital Markets are serving as financial advisors and Jones Day is acting as legal advisor to Attachmate.

Our Take

Novell believes that the deal would add value to customers and would complement its existing product portfolio. In our opinion, the potential acquisition will boost Attachmate’s customer base and enhance its cloud computing abilities, thereby driving top-line growth over the long term.

Despite having a diversified portfolio and strong customer base, Novell remained undervalued particularly due to weak top-line growth in recent times. The company had $1.04 billion in cash and short-term investments at the end of the recently concluded third quarter. Revenues decreased 8.0% to $199.0 million from $216.1 million in the year-ago quarter due to weak license, maintenance and subscription services.

Considering the struggle to sustain growth, we believe the $1.2 billion valuation (net of cash), or 1.5 times sales is good. We expect the deal to be completed once it passes all regulatory hurdles. Currently, we maintain a Neutral rating on Novell on a long-term basis (6–12 months).

Earnings Scorecard: Carnival Cruises

Carnival Corporation (NYSE: CCL), the world’s largest cruise company, missed the Zacks Consensus Estimate by a penny due to voyage disruption as a fire broke out in the engine room of the Carnival Splendor off the coast of Mexico. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the fourth quarter of 2010, Carnival reported earnings of 31 cents, ahead of the year-ago quarter of 24 cents. Earnings for the quarter also exceeded management's guidance of 25 to 29 cents per share.

The improvement in results was aided by better-than-expected net revenue yields and ongoing cost reduction initiatives, which more than offset the hike in fuel prices. The results fared better despite the recently announced voyage disruptions, which reduced earnings by 7 cents per share.

Total revenue spiked 6.6% year over year to $3.5 billion, ahead of the Zacks Consensus Estimate $3.36 billion. On a constant currency basis, net revenue yields rose 3.9% from the prior-year quarter versus management’s guidance of up 2.5% to 3.5%. Gross revenue yields increased 1.5% in current dollars.

Net cruise costs, including fuel and voyage disruptions, fell 1.1% from the year-ago level on a constant dollar basis. Fuel price of $488 per metric ton was up 6.0% year over year, a slight increase from management’s guidance of $479 per metric ton.

Earnings Estimate Revisions – Overview

Following the release of Carnival’s fourth quarter results, estimate revision trends among the analysts depict a positive outlook for the upcoming quarters. Let’s dig into the earnings estimate details.

Our Recommendation

We believe Carnival will experience a strong booking and pricing trend, going forward. Its successful cost-containment efforts, strong balance sheet and a commendable debt-equity ratio, along with ample cash balance promise above-average long-term growth in an improving economy, marked by slower industry capacity growth and reviving consumer demand.

However, surging fuel prices, a greater exposure to European markets, lower Caribbean prices in the first half of 2011 and the overall economic uncertainty will likely hurt Carnival’s growth in the near term. Hence, we maintain a Neutral recommendation on the shares of Carnival, with a Zacks #3 Rank, which translates into a short-term Hold rating.

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