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Philip Morris Cos. still expects to close its merger with Nabisco Holdings Corp. this year, but likely not until the latter half of December. A Philip Morris spokesman said the company is still complying with the second request in the antitrust review by the Federal Trade Commission. “We’re in discussions,” the spokesman said of the FTC review. “It’s a pretty fluid process.” The spokesman declined to say if the maker of Marlboro cigarettes and Kraft cheese products was divesting assets to satisfy the FTC. If the company arranges any divestitures, it will announce the sales publicly, the spokesman said. The FTC review, expected to involve sales of the Royal gelatin brand and cheese spread, will likely go into late December, the spokesman said. The holiday season, however, is not expected to slow the process or prevent a close before year-end, he said. Nabisco, worth $55 a share in the deal, closed Tuesday, Oct. 31, at a spread of $0.94, or 1.7%. The spread was relatively unchanged from early October. The acquisition of Nabisco’s holding company, Nabisco Group Holdings Corp., by R.J. Reynolds Tobacco Holdings Inc. for $30 per share, is expected to close following Philip Morris’ purchase of the operating company. Since its announcement, the R.J. Reynolds deal has traded at a wider spread to account for the risk that the deal could be blocked over tobacco litigation issues. The theory is that a “fraudulent conveyance” lawsuit might prevent shareholders from getting the cash Nabisco Group Holdings will realize from the sale of the Nabisco operating company. However, arbitragers have gained confidence that no such lawsuit will be brought and the difference between the spreads has narrowed. During the past 60 trading days the spread on the food company deal has narrowed by about 28 percent, while the spread on the holding company deal has narrowed by 63 percent. It makes sense to be playing the holding company, rather than the food company, one arb said. However, there is still a chance that litigation will surface, he cautioned. While the two deal spreads have recently traded equal in dollar terms, the return on the holding company’s acquisition by RJ Reynolds should always be wider, the arb noted. The holding company deal was at a spread of $1.13, or 3.9 percent at Tuesday’s close. On an annualized basis that represented a return of 23 percent, as compared with an annualized return of 16 percent for the Nabisco deal with Philip Morris. Pending deals without troublesome issues continue to trade at tight spreads even though, as the year comes to a close, many arbs are keeping their gains in cash. Arbs may be pickier about what positions they hold in coming weeks, which means some spreads could open up, according to Bear, Stearns & Co. But at the same time, Bear Stearns notes some arbitrage funds, particularly European arbs, are increasing the leverage they are using. That could keep spreads on some deals tight. High-leverage bets are traditionally reserved for the safest deals, particularly bank mergers. But if leverage in the market increases significantly, deals will increasingly be split between those with tight spreads and those that are questionable and have large spreads, an arb said. Copyright (c)2000 TDD, LLC. All rights reserved.

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