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Is Weill After AmEx?

It looks as if American Express (AXP) might be Sandy Weill's last hurrah. Whispers persist that the Citigroup Chairman is determined to acquire AmEx, of which he was president in the early 1980s. Some of his intimates say Weill had expected to end up running AmEx, succeeding Chairman Jim Robinson. Instead, Weill lost out in a power struggle. But he has gone on to bigger and better things. And now that he heads a financial giant with assets of $900 billion and a market value of $230 billion, buying AmEx, with assets of $155 billion and a market cap of $53 billion, seems within reach.

"Weill has had a lot of triumphs, but this will be the glorious prize that had eluded him," says Lewis Rabinowitz of investment firm R.L. Lewis. He thinks talks are going on. At 39, AmEx stock is ripe for the picking, he notes--way below its October high of 63.

But why would Weill bother? For starters, AmEx would be "a great strategic win," says Dan Goldfarb of money-management firm David L. Babson, which owns 2 million shares. Combining 53 million high-spending AmEx card members with Citibank's cardholders would give Citigroup gigantic scale--in addition to the world-famous AmEx name.

Goldfarb figures the AmEx card and travel operations are worth 30 a share, its financial advisory unit 15, and its American Express Bank, about 10. Tom Goggins of John Hancock Financial Industries Fund, which owns 2.1 million AmEx shares, puts AmEx' value higher. On fundamentals alone, he says, it's worth 70 a share.

Citigroup isn't the only one after AmEx: Morgan Stanley Dean Witter and American International Group are also in pursuit, says Goldfarb. A Weill spokeswoman declined comment. AmEx says the company does not comment on rumors. The hunt is on for undervalued oil-and-gas operators. Especially ones with the exploration and production capacity--and proven reserves--to lure deep-pocketed buyers.

"Shell Oil's hostile bid for Barrett Resources has made it open season," says one investment banker. He says a potential target is Stone Energy (SGY), a Big Board-listed company with properties along the Gulf Coast. This pro says Stone may have already gotten bids from the likes of Phillips Petroleum, Exxon Mobil, or BP Amoco. CFO Jim Prince says he isn't aware of any offers.

In 2000, Stone produced a record 3.3 million barrels of oil and 46.5 billion cubic feet of gas. The company aims to boost production by 15% this year. Ellen Hannan of Bear Stearns rates the stock, now at 49, a buy. Stone is an "excellent operator with strong growth prospects," says Hannan, who has a 12-month target of 78. This year, she figures Stone will earn $7.24 a share and generate cash flow of $14.27 a share.

The stock, trading at just 3.8 times Hannan's estimated 2001 cash flow, historically trades at 4.5 to 9 times forward cash flow, she notes. Stone's low-cost structure and low leverage have enabled the company, she says, to lift reserves and production without straining its balance sheet. The period of mourning may be over at the world's largest funeral and cemetery operator. Throughout 2000, shares languished between 1.25 and 2. But this year, the stock has revived, rising to 4.55 on Mar. 28. John Ransom, an analyst at Raymond James & Associates, has upgraded his rating on the stock to a "strong buy" from a "market perform," with a price target of 6. The stock hit 40 in 1999--but then over-expansion and price competition began to hurt the company.

Ransom's bullish stance stems in part from management's efforts to reduce its debt load and increase cash flow per share. But there is another factor that has helped revive the stock: Service Corp. has been getting takeover nibbles from several groups, including two leveraged-buyout outfits and two major financial-service companies, says one money manager. Service Corp., as of the end of 2000, operated 3,611 funeral parlors, 569 cemeteries, and 200 crematoriums in 18 countries on five continents.

In a buyout, the company could be worth 7 to 8, says one investment banker. He says suitors are attracted by the company's strong cash-flow growth and real estate properties. Service Corp. has been selling some properties to pay off debt. Its goal, he says, is to slash debt of $3.3 billion, to $2.5 billion or $2 billion, by the end of 2002. Ransom projects cash flow of 44 cents a share in 2001 on revenues of $2.4 billion. Service declined comment on the buyout rumor.

The Citigroup CEO may be courting American Express. Oil-patch operator Stone could be getting bids. And a fresh flowering may loom at Service Corp.

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