Lyondell deal pushes Nova; Pogo pops, Plains plunges; Encysive up; NovaStar falls

By Ronda Fears

Memphis, July 17 - As many players anticipated, not a week after dropping its bid for chemical maker Huntsman Corp., Access Industries Holdings, which owns Dutch chemical unit Basell Holdings NV, agreed to buy Lyondell Chemical Co. for $19 billion, including debt.

The Lyondell deal, coming on the heels of Huntsman's $10.6 billion buyout by Apollo Management LP's Hexion Chemicals - a buyout battle in which Basell bowed out of - served to boost Canadian synthetics concern Nova Chemicals Corp., traders said. Nova, as well as Dow Chemicals Co., has been on the rise over the past month on elevated takeover speculation in the sector.

Nova (NYSE: NCX) advanced $1.26, or 3.28%, to $39.64. Dow Chemicals (NYSE: DOW) added 73 cents, or 1.58%, to $46.91. Dow was embroiled in takeover speculation earlier this year and fired two executives for alleged unauthorized discussions about a merger.

Culminating a long proxy battle and being in play since February, independent oil and gas producer Pogo Producing Co. announced it will be acquired by Plains Exploration & Production Co. for $3.6 billion, or an equivalent of $60 per share, in cash and stock. While some did not like the structure of the deal, traders said it was a fair price and that the hit to Plains shares held Pogo back.

Auto parts wholesaler Keystone Automotive Industries Inc. agreed to a buyout by LKQ Corp. at $811 million, or $48 per share - a 10% premium to Monday's market. It was a boon for Chicago-based LKQ as the deal is seen doubling the size of the company. Pomona, Calif.-based Keystone (Nasdaq: KEYS) shot up $3.19, or 7.31%, to $46.80 while LKQ (Nasdaq: LKQX) rocketed up by $3.71, or 14.62%, to $29.09.

NovaStar Financial Inc. unveiled a $150 million recapitalization plan late Monday with private-equity funds run by insurer MassMutual and investment bank Jefferies Group, along with several other events such as a four-for-one reverse stock split, which put pressure on the stock but brought in long-term buyers. Earlier this year, the company put itself up for sale; this recapitalization transaction is the result of that exercise.

Encysive Pharmaceuticals Inc. said Tuesday it has retained an investment banking firm to help the biotech firm evaluate strategic alternatives to improve stockholder value. The company had said a month ago when its heart drug Thelin did not get Food and Drug Administration approval that it would lay off 70% of its workforce and explore strategic alternatives.

Lyondell deal no surprise

The Lyondell buyout was no surprise, and traders said it was a nice price at $48 per share - a 20% premium to Monday's market and a 45% premium to the May 10 closing price, which was a day before Access' Russian-born billionaire owner Len Blavatnik disclosed an 8.3% stake in Lyondell and suggesting he would make a play for the company.

Lyondell shares (NYSE: LYO) advanced $6.93, or 17.27%, to $47.05.

Some were anticipating that there could be a counteroffer, as Lyondell is the third-largest chemical company in the United States and owns a low sulfur oil refinery, but traders said that did not seem to be a widespread view.

It was a coup for Access, however.

"The 8.3% purchase of Lyondell by Access at the cheaper price of $32 and change from Occidental Petroleum is looking pretty good right about now, you think?" remarked one market source. "Then, Basell picks up a cool $200 million for playing high-stakes poker with the likes of Huntsman and the Apollo group."

Last month, Oxy sold the initial 8.3% stake to Access and last week sold its remaining position to Access.

Houston-based Lyondell is one of the largest North American chemical makers and a major producer of ethylene and propylene oxide, which are used to make plastics, varnishes and other products. Lyondell is also a refiner of heavy, high-sulfur crude oil and a producer of fuel products.

Access also recently lost out to Saudi-based Sabic in the auction process for General Electric Co.'s GE Plastics.

Blavatnik said in the press release, "The combination of Basell and Lyondell creates one of the top chemical companies in the world," while Lyondell CEO Dan Smith added, "This transaction offers significant value. The combination of our companies will enhance our opportunities."

Pogo price pleases some

Pogo stockholders will receive 0.68201 share of Plains and $24.88 per share in cash for the equivalent $60 per share, based on Monday's market. Traders said that while many players would have liked an all-cash deal better, after waiting for months for some resolution to the explosive situation, the price was fine.

"Looks like a good price, considering how screwed up management has been," one trader said. "The really interesting part is going to be what happens to Plains' stock price once they put all this together."

Pogo (NYSE: PPP) settled better by $7.02, or 13.91%, at $57.50. It traded up to $58.24 but profit taking reined it in, the trader added.

Plains (NYSE: PXP) lost $3.31, or 6.47%, to $47.88. The trader said many Plains holders did not like the dilution.

Some thought it was a low-ball offer for Pogo, however, and were hoping for a better bid.

"Considering the NAV of this company [Pogo], it justifies a price near or above $100 per share in a booming oil market, which we are now just entering," another trader said. "I think there will be others to enter the buyout frenzy soon."

The transaction almost doubles Plains' production with the addition of substantial producing properties and significant growth potential in Texas, primarily the Panhandle, Permian and Gulf Coast, plus the prolific Madden Field in Wyoming and the San Juan Basin in New Mexico, according to Plains chief executive James Flores.

Encysive players enthusiastic

Encysive is expected to receive considerable interest, onlookers said, despite the failure of its heart drug Thelin in the United States. The drug has approval in Europe and could see some interest, one analyst said.

On the news, the stock (Nasdaq: ENCY) gained 33 cents, or 19.41%, to $2.03.

In mid-June, the FDA rejected its Thelin pulmonary arterial hypertension drug, saying the developmental treatment required further trials. Encysive, a Houston-based biopharmaceutical company, has said it plans to dispute the FDA's decision and it is also exploring strategic alternatives.

"$5 is a minimum sale price when you factor in assets, tax benefits and debt. It could go higher, but a buyout will happen," said an analyst at a shop in Boston.

"I'm thinking Glaxo [GlaxoSmithKline plc]. But don't expect to see results in two weeks. This deal could take three to six months to work out. Folks are going to have to be patient."

The FDA stance on Thelin is an overhang, but he noted that Encysive has Thelin for pulmonary arterial hypertension approved in Europe and develops Argatroban for thrombocytopenia. It has collaborations with Mitsubishi Pharma Corp., GlaxoSmithKline plc and Schering-Plough Corp.

Last October, Gilead Sciences, Inc.'s $2.5 billion buyout of Myogen, Inc., which has Ambrisentan for pulmonary arterial hypertension, was fodder for takeover buzz. Gilead also has Letairis, which received approval from the FDA last month.

Following the FDA decision last month, Encysive said it would cut its U.S. work force by about 70% as part of a restructuring plan. Earlier this month, the company announced that its chief financial officer had resigned. Also, Bruce Given, former president and chief executive, resigned from the board.

NovaStar dives on deal

NovaStar's recap transaction pressured the stock because of dilution, but traders said it brought out some long-term buyers as it was seen a signal that the company will survive the subprime crisis rather than follow the way of bankrupt peer New Century Financial Corp. The decline was mitigated, however, by short covering on the same thinking.

The transaction was seen as a means for the company, a real estate investment trust that has to pay out 90% of its prior-year taxable income in dividends, to pay dividends in convertible preferred securities, instead of cash.

"Clearly a reverse split is seen by some as being negative. I couldn't be happier, because when people are confused, those who see the real value can come in to take advantage. The shorts are toast. Any thoughts of immediate bankruptcy are clearly in doubt," one trader remarked.

"Subprime is here to stay. Just imagine if subprime in total would disappear. It's simply impossible. The subprime market has cycles like many other industries like oil, apparel etc. It takes a few years to recover."

NovaStar shares (NYSE: NFI) lost 40 cents, or 5.33%, to close at $7.11.

As part of multiple agreements, MassMutual Capital Partners LLC and Jefferies Capital Partners IV LLC will invest $48.8 million in NovaStar. In return, the funds will get 2.1 million convertible preferred securities of NovaStar. MassMutual and Jefferies will also get one seat each on NovaStar's board, which will be expanded to eight directors from the current six.

NovaStar is also planning a shareholder rights offering in which it will sell preferred stock for $25 each. If no shareholders sign up, MassMutual Capital and Jefferies Capital agreed to buy the securities, up to a total value of $101.2 million.

The company plans to conduct a four-for-one reverse stock split on July 27. All of the terms of the placement are in pre-split shares.

"These steps will strengthen our financial position and establish NovaStar as one of the leading independent lenders and portfolio managers in the nonconforming mortgage sector," said Scott Hartman, NovaStar chairman and chief executive officer, in a news release.

Nevertheless, existing stockholders were not pleased for their current investment.

"This doesn't look like a very good deal for shareholders. I'm not sure what to say except after the split, and what appears to be a 68% dilution of dividend, that doesn't look like a good deal to me," a buyside market source said.

"It looks like most of the value of this company will be in the preferred shares soon. I think this deal stinks for common, but hey, it's a subprime company. I guess they didn't have much leverage in their strategic options."

As for the 2006 and beyond, the above trader said the company seems far better positioned to weather the subprime storm.

"One could infer that between Mass Mutual and the shareholders, we have invested $300 million into NovaStar to assure it as a going concern. At first blush it seems the best that one can expect under difficult circumstances," he said.

"It means buying more time to weather the subprime debacle and gives everyone a better-than-even chance to emerge whole in the long run. One of the problems I see is that the remaining shares of common will certainly drop by the value of the convertible pref. come ex-dividend day, and since the newly issued preferred stock will carry a high coupon, it is likely the common will do without a dividend for several years. It's not perfect but the best one could hope for, during these very troubled times."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.