Services Sector Review: Amazon Rumored to Launch Retail Store, Netflix Takes More Heat

SureWest Communications (NASDAQ:SURW): Consolidated Communications (NASDAQ:CNSL) and SureWest Communications (NASDAQ:SURW) have entered into a definitive agreement under which Consolidated will acquire all the outstanding shares of SureWest in a cash and stock transaction valued at $23 per share, or a total of approximately $340.9M, exclusive of debt. Under the terms of the agreement, SureWest’s shareholders may elect to exchange each share of SureWest common stock for either $23 in cash or shares of Consolidated common stock having an equivalent value based on average trading prices for the 20-day period ending two days before the closing of the acquisition, subject to a collar. Overall elections are subject to proration such that 50% of the SureWest shares will be exchanged for cash and 50% for stock. The stock portion of the transaction will be received tax free.

The transaction will be accretive to Consolidated’s free cash flow per share in the first full year following closing, excluding integration costs, and the transaction is deleveraging to Consolidated. The consideration represents a 47% premium to SureWest’s stock price as of the close on Feb. 3. The transaction is expected to generate annual operating synergies of approximately $25M and annual capital expenditure synergies of $5M-$10M, which are expected to be fully realized by the end of the first full year after close on a run-rate basis. Consolidated expects to incur merger and integration costs, excluding closing costs, of approximately $20M-$25M over the first two years following closing. In addition, Consolidated will be in a position to benefit from SureWest’s net operating losses of approximately $67M, as of Sept. 30, 2011. The merger is subject to standard closing conditions including federal and state regulatory approvals and the approval by both Consolidated and SureWest shareholders.

The shares closed at $22.67, up $7.08, or 45.41%, on the day. Its market capitalization is $319.44 million.

O’Charley’s Inc. (NASDAQ:CHUX) shares are up over 42% this morning after reporting quarterly earnings and announced an agreement to be acquired by Fidelity National Financial (NYSE:FNF). The company posted a loss from continuing operations of 38c on revenue of $182.2M. Analysts had expected a loss of 22c on revenue of $181.03M. O’Charley’s said blended comparable sales increased 1.1% for the quarter, with blended comparable sales up 1.7% for FY11. For Q4, O’Charley’s said SSS for company-operated restaurants declined 1.5%, while SSS for Ninety Nine Restaurants increased 5.5%; SSS for Stoney River Legendary Steaks increased 7.2% in Q4. Meanwhile, O’Charley’s will be acquired by Fidelity National for $9.85 per share in cash, representing a total equity value of approximately $221M on a fully diluted basis. The purchase price represents a premium of approximately 42% to the company’s closing stock price of $6.92 on February 3, and a premium of approximately 57% to the 20-day average trading price of $6.27 Under the terms of the definitive agreement, O’Charley’s may solicit superior proposals from third parties through March 6. The transaction has been unanimously approved by the boards of directors of both companies. O’Charley’s shares are up 42.09%, or $2.91, to $9.83 in mid-morning trading. Fidelity National shares are down 1.25%, or 23c, to $18.20.

The shares closed at $9.81, up $2.89, or 41.76%, on the day. Its market capitalization is $215.51 million.

Medco Health Solutions (NYSE:MHS): Key FTC officials believe a planned merger between Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS) should be stopped but want to be sure to have adequate evidence to win a court fight, according to sources reporting to Reuters, who said a decision on whether or not to sue is expected by late February or early March. The latest objection to the merger comes from The Food Marketing Institute, a group representing grocery chains, which sent a letter of protest to the Federal Trade Commission last week, the report added.

The shares closed at $58.47, down $5.14, or 8.08%, on the day. Its market capitalization is $22.63 billion.

Express Scripts, Inc. (NASDAQ:ESRX), Medco Health Solutions (NYSE:MHS): Key FTC officials believe a planned merger between Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS) should be stopped but want to be sure to have adequate evidence to win a court fight, according to sources reporting to Reuters, who said a decision on whether or not to sue is expected by late February or early March. The latest objection to the merger comes from The Food Marketing Institute, a group representing grocery chains, which sent a letter of protest to the Federal Trade Commission last week, the report added.

ESRX shares closed at $49.67, down $2.42, or 4.64%, on the day. Its market capitalization is $24.16 billion.

MHS shares closed at $58.47, down $5.14, or 8.08%, on the day. Its market capitalization is $22.63 billion.

Netflix, Inc. (NASDAQ:NFLX) retreated after Verizon (NYSE:VZ) and Coinstar (NASDAQ:CSTR) announced that they would form a movie rental joint venture. Expected to launch in the second half of 2012, the joint venture will combine the kiosks of Coinstar unit Redbox with a new video on-demand streaming and download service from Verizon. The joint venture will also sell subscriptions, the company said. In December, there was speculation that Verizon would look to acquire Netflix. Verizon subsequently denied that it had any interest in buying Netflix, but there may have still been some speculation that such a deal could take place in the future. In addition to creating more competition for Netflix, Verizon’s deal with Coinstar may have dampened speculation about an acquisition of Netflix by the telecom company. However, Yahoo executives discussed acquiring Netflix before the latter company’s stock price rallied over the last several weeks, All Things D reported today. In early trading, Netflix declined $3.81, or 3.01%, to $122.62. Meanwhile, Coinstar (NASDAQ:CSTR) added 1.10% to $50.20.

The shares closed at $129.25, up $2.82, or 2.23%, on the day. Its market capitalization is $7.16 billion.

Amazon.com, Inc. (NASDAQ:AMZN): According to sources close to the situation, Amazon (NASDAQ:AMZN) is planning to launch a retail store within the next few months in Seattle, Goodereader.com reports. The main emphasis in the stores will be on books from the growing Amazon Exclusives line, as well as e-readers and tablets. Amazon is said to be testing the market to see if a chain of stores would be profitable.

The shares closed at $183.14, down $4.54, or 2.42%, on the day. Its market capitalization is $83.34 billion.

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To contact the reporter on this story: Stella Mariz at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com