Applebee's dips, rebounds; EGL gains; Palm sold off after-hours; Accredited Home, Fremont rise

By Ronda Fears

Memphis, March 21 - Palm Inc. got another spike in the regular session on continued speculation of an imminent buyout offer but sellers showed up in after-hours activity on uncertainty about the rumors, which have driven the stock sharply higher in recent weeks.

EGL Inc., however, under stern criticism from a big stockholder, was solidly higher as it relented to take a rival bid from Apollo Management into consideration.

Friendly Ice Cream Inc. was higher Wednesday, too, but heavy selling into the rally then sent the stock into a tailspin, a trader said. It had been rising this week on speculation the company is close to announcing a buyout offer. The stock (Amex: FRN) gained to $15.79 but closed out the day with a loss of 61 cents, or 3.94%, at $14.87.

Applebee's International Inc. saw early selling on news of its divestiture of 24 restaurants, as that seemed to signal a buyout type transaction was not in the works. But a trader said that players "rethought it" and reckoned that shedding the underperforming restaurants might be a prerequisite to a deal, so the stock ended on higher ground.

With the Federal Reserve standing pat on interest rates and mortgage applications showing a decline, including a 4.5% drop in refinancing activity over the past week, subprime mortgage lenders continued to trade in an erratic fashion as traders capitalized on the extreme volatility in the sector.

"In the subprimes, there were short sellers covering and re-shorting," one trader observed, adding that distressed players continued to take new positions on several names in the sector. "They are making a killing."

The trader said the vultures circling the subprime sector are the big investment banks like Morgan Stanley, Citigroup and Goldman Sachs, which in many cases are the warehouse lenders for the mortgage firms, as well as the big hedge funds; that, he said, has created a sense among investors that there will be some competition in the bidding process for the loan packages if not the entire companies.

Meanwhile, the anxiety continued to spread into other sectors as Moody's Investors Service reported that after years of improvement, January 2007 credit card performance deteriorated in three of the five metrics of the Moody's Credit Card Credit Indices, which tracks $410 billion of U.S. bank credit card loans backing securities rated by the agency.

And Moody's economist John Lonski said in a report Wednesday that mortgage data will likely show extended deterioration in the coming weeks.

"It may not be until the middle of April that homebuyer mortgage applications supply a reasonably clear indication of the damage done to housing by the subprime mortgage debacle," Lonski said.

New Century plunges, gains

New Century Financial Corp. was the most blatant example of the vol trade, which on days like Wednesday transpires in a single session rather than over two or three as in most other cases in the subprime mortgage sector, the trader remarked.

The New Century situation, however, is driven largely by ongoing rumors that the company literally is on the verge of filing bankruptcy, he added.

New Century shares (Pink Sheets: NEWC) were down by more than 20%, dipping to $1.20, before buying pushed it as high as $1.78; the stock closed off by 2 cents at $1.67.

Accredited rises 11%

Accredited Home Lenders Holding Co. was another seeing wild swings this week, moving sharply higher Wednesday as the market learned huge hedge fund Citadel LP has a 4.5% stake in the San Diego mortgage firm. On Tuesday, Accredited received a five-year, $200 million loan with a 13% coupon from Farallon Capital Management LLC, which owns a 6.9% stake in the company.

There is increased speculation that Accredited Home will recover with a big financial bailout from the likes of Citadel or another big hedge fund, another trader said.

He noted Citadel inked an agreement to buy ResMae Mortgage Corp. out of bankruptcy for about $22 million earlier this month; the Brea, Calif., subprime lender had filed bankruptcy Feb. 12.

Accredited Home (Nasdaq: LEND) traded up to $12.30 before easing back to settle at $11.96 for a gain of $1.19 on the day, or 11.05%.

Fremont finds buyers

Fremont General Corp. also was better on finding a buyer or buyers for a $4 billion subprime mortgage package, at a discount, which gave steam to conjecture that it too will find a financial White Knight, the trader added.

Earlier this month, Fremont General hired Credit Suisse to help sell its Fremont Investment & Loan subprime unit; it then would focus on commercial real estate lending and retail banking.

There were buyers for the stock, too, one trader said, on hopes that "something is salvageable here."

Fremont shares (NYSE: FMT) closed Wednesday better by $1.41, or 16.06%, at $10.19.

Palm players lose faith

Amid ongoing chatter of an imminent buyout for handheld device market Palm, buying pushed the stock up to $19.50 on Wednesday. But after the close traders said sellers were lightening their positions on growing skepticism about the elevated buyout talk that has swirled around Palm since the first of the year.

Palm shares (Nasdaq: PALM) advanced 68 cents, or 3.62%, to close at $19.45, following a similar gain Tuesday. But in after-hours activity, one trader said the stock saw heavy volume and traded as low as $18.82.

"There is a lot of chatter on this one and people were lightening up on uncertainty about it," he said.

A fresh round of talk propelled the stock Tuesday, pegging potential buyers as the usual suspects - Nokia Corp. and Motorola Inc. - in addition to private equity firms Texas Pacific Group and Silver Lake Partners.

The anticipated price tag, however, remains basically unchanged at about $2 billion, or roughly $20 per share, since the rumors began in January, the trader said. Palm also is rumored to have hired Morgan Stanley to facilitate a transaction, and the Sunnyvale, Calif.-based company has been viewed as a buyout target for years.

Since the first of the year, when Palm shares were trading at around $14, the stock has risen nearly 40%.

"Not a whole lot has changed in what is being bandied about; it's the same names, the same numbers," the trader said. "I think people are losing faith."

EGL chastised by Ramius

Under scrutiny and criticism from outraged stockholders, EGL said late Tuesday it will give consideration to a $40-per-share offer from Apollo that rivals a management-led buyout offer of $38 per share it accepted on Monday.

EGL shares (Nasdaq: EAGL) gained 60 cents, or 1.55%, to $39.21, after trading up to $39.45 in the session.

Ramius Capital Group LLC partner Mark Mitchell said in a letter to EGL on Wednesday that he was shocked to learn of the Apollo bid after the company accepted the $38 offer from chief executive and chairman James Crane, who owns 18% of EGL shares, and affiliates of Centerbridge Partners and The Woodbridge Co. The Crane bid was boosted from $36 earlier this month and a $35 offer submitted in January.

Still, Ramius' Mitchell said he had "significant reservations" about the company's purported sale process if Apollo's advances to EGL were spurned, saying that "Apollo evidently was attempting to engage in a meaningful dialogue with EGL in the days and weeks" before the LBO was announced.

"Frankly, serious questions are raised if the company did not engage in discussions with Apollo early on in the process in any effort by the board to maximize the value of EGL, especially given the ownership by Apollo of CEVA Logistics," Mitchell said in the letter.

"If there is any truth to Apollo's assertion that its efforts to obtain information for diligence were ignored, this would seem to be a clear violation of the board's fiduciary duties which the shareholders will not tolerate."

Admiral Advisors LLC, an affiliate of Ramius, owns 2.9% of EGL shares.

Houston-based shipping company EGL agreed to a boosted management-led LBO offer of $1.7 billion from the Crane group on Monday.

Applebee's retreats, rises

Applebee's initially sank on news that it planned to close 24 restaurants but hope "blossomed," as one trader put it, that the move was a precursor to a buyout or merger transaction. Last week, the company said its independent directors had a broad mandate to conduct a comprehensive evaluation of strategic alternatives, which at the time was seen as a negative development in the process.

The trader said he was split on how the events are developing at Applebee's but he likes the stock in the $25 neighborhood, noting the 52-week high is $27.11.

Applebee's (Nasdaq: APPB) dropped to $24.59 early on Wednesday but bounced back to close out the session better by 28 cents, or 1.13%, at $25.11.

"There is growth, then there is no growth, then there is what Applebee's is doing," the trader said.

"It looks to me like there are no buyers for the business in whole, and Applebee's is trying to save itself from going under. I think there is a trade in the stock and you can make money at $25."

At the heart of the restaurant chain's efforts is a boardroom battle with Breeden Capital Management LLC, which has a 5.25% stake in Applebee's. Breeden has launched a proxy battle to elect four nominees to the company's board, seemingly to gain control and steer the strategic process.

Applebee's board is recommending that shareholders reject a slate of director nominees offered by Breeden.

Applebee's independent board member committee has retained Citigroup as a financial adviser and the company has retained Banc of America Securities LLC in a similar role.

Affiliated Computer opens doors

Affiliated Computer Services Inc. said Wednesday it will form a special committee of independent directors to study a $59.25-per-share management-led buyout offer for the information-technology-services company, lending credence to speculation Tuesday that a rival bid or sweetened offer would emerge.

The stock (NYSE: ACS), however, snapped back from a strong gain the day before, ending with a drop of 42 cents, or 0.7%, to $59.53.

One trader said there still was "great optimism" that a better buyout price will come for Affiliated Computer, but he said "a lot of people thought it was overbought yesterday [Tuesday]."

The company on Wednesday said it also asked founder and chairman Darwin Deason to drop an agreement to work exclusively with Cerberus Capital Management LP in bidding for ACS.

Deason and Cerberus offered $59.25 per share, a 15.5% premium, but the stock jumped to $59.95 as investors speculated a sweetened offer or a new bidder would emerge.

ACS said Wednesday that its board named a committee of three outside directors to study strategic options; it also hired the law firm of Weil, Gotshal & Manges LLP, and expects to retain financial advisers.

The company said it was concerned that Deason's promise to work exclusively with Cerberus would chill interest from other parties.

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