Peabody slides; Nevada Gold & Casinos drops; Bally bounces; Imation, TDK slide; Calpine up

By Ronda Fears

Memphis, April 19 - Peabody Energy Corp. lost ground Thursday after announcing it is considering a spinoff of its coal operations in West Virginia and Kentucky, which one trader said was good news except there is considerable doubt it will get a good price for those assets.

"Let me say it this way, a spinoff of the coal operations would be good, if they find a buyer at the right price. That is a big if. The first-quarter miss was pretty big, too, so we saw some people head for the door," the trader remarked.

"Since coal is so easy to get to in the U.S., supply is way ahead of demand. That keeps coal prices low, and coal companies barely profitable. While it's true that coal won't go away as an energy source in the U.S. because it's cheap and we have a lot of it, it just won't make you much money," he continued.

"Supply outstrips demand in the U.S. Will coal demand improve? The answer is clearly no. The demand side of the coal equation won't get any better because new [electricity] plants will use natural gas and nuclear."

Peabody said it is evaluating strategic alternatives regarding its operations in West Virginia and Kentucky that is expected to result in a spinoff or other transaction to enhance long-term shareholder value. The company has retained Morgan Stanley to assist in the review. The St. Louis-based coal mining concern said the West Virginia and Kentucky mines did not fit with its focus going forward. The company also has big coal operations in Australia, Venezuela and is moving into the China market, the trader noted.

Also Thursday, Peabody reported a 32% drop in first-quarter earnings of $88.5 million, or 33 cents a share, while revenues rose 4.1% to $1.37 billion. The company, however, reaffirmed guidance for 2007 earnings of $2.10 to $2.75 a share.

"With the big fat miss on earnings, I had one guy say he thought the stock should trade back down to $40 again," the trader said. "Then, another guy thought the revenue miss was already priced into the stock so it should go higher on the divestiture news."

Peabody shares (NYSE: BTU) lost 62 cents, or 1.34%, to settle Thursday at $45.59.

In another mining story of sorts, Nevada Gold & Casinos Inc. took a tumble after announcing it has ended discussions to sell interest in Isle of Capri-Black Hawk without a deal.

Nevada Gold & Casinos (Amex: UWN) lost 15 cents, or 6.67%, to close at $2.10.

A distressed equity trader said there had been increasing concern about the company getting a deal inked, noting a slide of about $1 in the stock over the past month. The company also has hired an auction company to divest a 260-acre parcel near its casino properties in Black Hawk, Colo.

Imation, TDK soundly lower

Imation Corp. and TDK Corp. both pulled back Thursday after announcing that Imation would acquire TDK's brand recording media business for $300 million in stock and cash. Traders said there was considerable profit taking amid disappointment that there was not an all-out acquisition recorded, as well as a weak first quarter for Imation.

As Imation shares took a dive on the developments, which a sellsider attributed to profit taking to deploy capital elsewhere, there also were buyers on the downdraft. A buysider said a lot of the buying was held off until late in the session and continued into after-hours trading.

Imation shares (NYSE: IMN) fell $5.09, or 12.33%, to close at $36.20. After the close, at 4:35 p.m. ET, the stock was seen better by 1.15% at $36.6166.

"This is a boon for Imation," the buysider said. "People are nuts for selling."

But the sellside trader said players, "the speculators," who had bought Imation at low spots over the past month or so were pocketing some profit to put to work elsewhere. He also was a buyer on the decline in Imation.

Imation and TDK announced they have reached a definitive agreement under which Imation will acquire the TDK brand world wide recording media business and use of the TDK brand name for recording media products, for $300 million in a combination of Imation common stock and cash.

TDK will retain its R&D, manufacturing and OEM business.

TDK shares (NYSE: TDK) lost $1.98, or 2.24%, to $86.39.

TDK had been on a steady climb since around mid-March, the sellside trader said, on scuttlebutt that a deal to be acquired was in the works. Thus, he said the news Thursday was a big disappointment.

At closing, TDK will receive about $280 million in Imation common stock, representing around 17% of outstanding shares, plus $20 million in cash subject to certain conditions with the potential for payment of up to another $70 million based on future financial performance of the acquired business.

Also Thursday, Imation reported first-quarter revenue grew 25.9% to $421.9 million from $335.2 million a year ago, boosted by sales of optical and flash products due to the addition of Memorex brand revenue, which it bought in early 2006. The company posted net income was $23.6 million, or 44 cents per diluted share, down from $29.3 million, or 55 cents per diluted share, a year earlier.

Analysts had been expecting earnings per share of 61 cents and revenue of $448 million, the sellside trader said.

Bally bounces amid ballyhoo

There were some contrarian buyers for Bally Total Fitness Holding Corp., which has warned that it could be forced to file bankruptcy if unsuccessful in getting waivers from bondholders, but traders said the buyers were only tepidly stepping into a bigger position.

Bally (NYSE: BFT) advanced 7 cents on the session, or 10.29%, to 75 cents, but volume was light.

"There are signs that they are getting things worked out," one trader remarked. "But, then again, they could file [bankruptcy] any minute."

The Chicago-based fitness club owner last week got a waiver from bank lenders and said it is in talks with bondholders about waivers; the company, however, skipped a coupon payment on one of its bond issues last week, as well, hence, the source of hesitation among equity players, the trader said.

Bally has said it may file for bankruptcy court protection to cope with some $827 million in debt. The company's demise gained steam in August when plans for a merger were scrapped and its chairman and chief executive resigned. It has since failed to file its 2006 financial statements, due to mistakes in its membership database, and faces possible delisting from the New York Stock Exchange.

"We think Bally will file a prepackaged bankruptcy in the end; there are rumors to that effect going around," the trader said.

Calpine up on bondholder deal

Bankrupt independent power producer Calpine Corp. stock got another strong boost Thursday after announcing a preliminary agreement with bondholders holding defaulted ULC1 bonds of its bankrupt Canadian unit that, if approved, would eliminate more than $8 billion of claims. The deal is subject to approval from the bankruptcy court and equivalent courts in Canada.

"This is an extremely creative resolution and I am grateful for the hard work of everyone involved in achieving this mutually beneficial outcome," said Calpine chief executive Robert May, in a news release.

"If approved, the settlement will reduce multiple bankruptcy claims relating to these bonds to a single claim."

Calpine shares (Pink Sheets: CPNLQ) added 7 cents on the day, or 2.16%, to close at $3.31 amid volume of 15.4 million shares versus the norm of 7.7 million shares.

About $2 billion of the defaulted ULC1 bonds were issued in 2001 by Calpine Canada Energy Finance ULC, an indirect wholly owned Canadian subsidiary of Calpine, which is in Canadian insolvency proceedings. These ULC1 bond obligations were guaranteed by parent Calpine.

Under the proposed settlement announced Thursday, more than $12 billion of claims will be replaced by a single nominal claim of about $3.5 billion, Calpine said. The bondholders have agreed that their actual recovery will be no greater than principal, accrued pre-petition and post-petition interest at the contract rate, plus fees, according to Calpine.

Amid speculation of a private equity buyout and/or an equity rights offering to bring the company out of bankruptcy, the common shares have been steadily climbing since the first of the year on hopes of some sort of distribution to the equity holders.

"I still feel there is upside in the price of the stock; there may be a time to sell, but for me it's not now," commented one market source who is playing the equity.

"I think there is accumulation going on in the bonds and the stock by people looking for a juicy distribution. Yesterday and last week I would have disagreed, because the bonds were trading at par plus 18 months of accrued interest. For example, the 10.5% bonds were trading for 116 while the 7.625% bonds were trading for 112. But today I see that many of the bonds, regardless of coupon, have shot up over 121."

"The stock, a bankrupt stock, hit a new high of $3.46 this week [Monday]. Of course neither scenario guarantees anything to the current shareholders. It all depends on what the franchise value of Calpine is perceived to be. I have not been of the opinion that there is enough value to leave something for the current shareholders, but the market clearly is saying otherwise, and I am reluctant to argue with the market. If, or when, that changes I'll be a seller."

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