Wachovia plummets on banking-asset sale; ImClone, Alpharma savor mystery suitors

By Paul Deckelman

New York, Sept. 29 - Wachovia Corp. was the disaster of the day in the financial markets - on a day which had no shortage of negative news - its shares nose-diving on the news that Citigroup will buy its banking operations for $2.1 billion, as the Charlotte, N.C.-based lender became the latest casualty of the ongoing credit crunch.

ImClone Systems Inc. continues to play its cards close to the vest when it comes to revealing the identity of the mystery suitor whom the New York-based pharmaceutical company said has made a provisional acquisition offer of $70 per share - better than two offers which it has gotten from 17% holder Bristol-Myers Squibb Co. However, it now says that it will reveal the other party's identity - definitive offer or no - by Wednesday night. Observers believe it could be a major pharmaceutical industry player.

In that same sector, King Pharmaceuticals Inc.'s efforts to persuade shareholders of Alpharma Inc. to go along with its hostile bid for the Bridgewater, N.J.-based maker of anti-pain medications may have hit a roadblock over the weekend in the form of a request by federal regulators scrutinizing the proposed takeover for antitrust issues that Bristol, Tenn.-based King furnish additional information to them. At the very least, an analyst said, it dashes any hope that King may have had for a quick victory over Alpharma's balky board of directors. Alpharma also says that it has had a better offer from an as-yet unidentified third party.

Circuit City Stores Inc.'s shares slid badly after the nation's second-largest electronics retailer posted a wider fiscal second-quarter loss versus a year ago and withdrew its previously announced full-year outlook.

Wachovia is whacked

Wachovia shares (NYSE: WB) at one point lost virtually all of their value, quoted as low as one penny per share, before finally coming off that low to end down $8.16, or 18.60%, at $1.84. Volume of 375.4 million shares was almost 4 times the norm.

The Citigroup deal was brokered with the Federal Deposit Insurance Corp, although the FDIC insisted that Wachovia - up until now the nation's fourth-largest bank - did not fail.

Citigroup will assume $53 billion worth of debt and will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the FDIC to cover remaining losses, if any. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC.

Wachovia will not go out of business; without its banking assets, it will be a greatly diminished public company that will have its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises.

Analyst Meredith Whitney of Oppenheimer & Co. was skeptical, saying: "It seems like a very complicated deal. I don't know what Wachovia is left with, with Evergreen and A.G. Edwards. And how will they capitalize that if most of their capital is going towards Citi?"

Whitney was also wary of Citi's prospects, declaring that she is "seller still on Citigroup," noting that although the banking giant had positioned itself as one of the "winners" likely to survive the current industry shakeout, "the structure has been so bloated in terms of expenses that they haven't right-sized that system. We're in a very different revenue paradigm. The revenues don't match the expenses.

"So I don't know how they absorb the $42 billion on the income basis they have, not to mention, the least of which is support their dividend. So I would remain cautious on Citi." The bank's shares (NYSE:C) which fell $2.40, or 11.91% to $17.75. Volume of 197.8 million shares was about 10% above average.

Mystery pursuer to be revealed

Elsewhere, ImClone chairman Carl Icahn knows something that just about nobody else knows - but he said Monday that he will let the rest of the world in on the secret, come Wednesday night.

The closely guarded information the billionaire investor is keeping under his hat is the identity of the mystery suitor that has made what Icahn and ImClone say is a $70 per share offer for the company, subject to completion of due diligence. Such an offer, if it is made for real, would top the $62 per share bid that Bristol-Myers Squibb has on the table for the 83% of ImClone that it does not already own.

ImClone rejected Bristol-Myers' original $60 per share offer as well as its sweetened $62 offer, which Icahn called "absurd." Bristol-Myers meantime threatened to go directly to its fellow shareholders and mount a proxy fight to oust Icahn and his board. The offer from the unidentified suitor was disclosed on Sept. 10, followed a few days later by the second Bristol-Myers offer. The suitor began doing due diligence on ImClone and was originally supposed to have concluded the process and formally announced either a definitive offer or an end to the process last Thursday, but the deadline was extended to give the would-be buyer more time to examine ImClone's books. ImClone said that if will announce the results of the due diligence process, either way, come Wednesday.

Who might the mystery suitor be?

The fact that ImClone said that any proposal from its ""large pharma company" would not be conditioned on financing would seem to indicate that the unknown bidder is most likely a cash-rich major pharmaceutical company, according to analyst Linda Bannister of Edward Jones, who said in a research note that "it wouldn't surprise me at all if Pfizer [Inc.] is taking a look"; Bannister noted that ImClone develops cancer drugs and oncology is a major therapy area for Pfizer.

ImClone (Nasdaq: IMCL) - which gained wide notoriety several years ago on the disclosures of insider trading in the company's shares by then-CEO Sam Waksal and his friend, TV personality Martha Stewart, resulting in the jailing of both - was down $1.42, or 2.24%, to $61.96. Volume of 2.1 million shares was about the usual.

Alpharma antitrust process extended

Alpharma said in a Securities and Exchange filing Monday that it had been notified that antitrust regulators will require more information about King Pharmaceuticals' previously announced $37 per share bid for Alpharma, and the tender offer which King began - without the approval of Alpharma - on Sept. 12. That "second request," as authorized by the Hart-Scott-Rodino antitrust law, essentially defeats King's strategy of attempting to get quick investor approval for its deal, according to analysts such as Ken Trbovich of RBC Capital Markets Corp.

"It puts their bid in jeopardy. Their bid is contingent upon clearing anti-trust, [and the second request] substantially delays their ability to try and close this deal."

He told Prospect News that King's tender offer to Alpharma holders "is contingent upon [their] clearing antitrust, and it was supposed to close on Oct. 10. The odds that they will actually complete their antitrust review by Oct. 10 is almost zero. They will have to extend the deadline, because they won't have the antitrust clearance - which is why from a competitive standpoint, they are not in the best position.

"If someone else were to make an identical bid and not have antitrust problems, [the second bidder] would be more likely to be able to close."

And such a bidder has apparently emerged, according to Alpharma's statement Friday formally rejecting King's offer, which had been sweetened from the $33 a share which it had originally offered Alpharma in August. Alpharma said that it had "already received a written preliminary indication of interest for a business combination from a party that includes a per share price in excess of the King offer of $37.00 per share," as well as less-developed expressions of potential interest from several other parties as well.

King on Friday responded by reiterating its offer without raising it, a response which Trbovich called "a joke."

Its statement was "essentially a head fake," since company officials knew that if they got a second request from the regulators, "they would have to explain that they've gotten a second request for information and that they're going to potentially have to extend the expiration of the tender offer, and that to be competitive, they are going to have to raise the bid," whether through the tender process, or by entering into an auction process. "Either way, if they want this company, they're going to have to raise the bid," he said, to at least the $40 per share mark. "We think they have the ability to do so without going beyond the capital that they've already raised."

Trbovich - who nicknamed the as-yet unidentified second suitor "Company X,"- noted that it made its greater than $37 bid before Alpharma signed a deal, announced last Monday, for a new product, Eladur. Durect Corp. said that it had entered into a development and license agreement with an Alpharma affiliate giving the latter company the exclusive worldwide rights to develop and commercialize Eladur, a new anti-pain medication delivered by means of a skin patch. The analyst noted that the King bid also does not take the potential value of Eladur to Alpharma into consideration.

He said that King - which as of Monday evening had not officially disclosed having received the second request from the regulators, is going to have to make "some disclosure about whether they're still in the deal or not in the deal. At some level, they're going to have to say something about the antitrust situation and potentially extending the expiration of their tender offer, or, terminating the tender offer and entering into a confidentiality agreement and beginning the auction process, which would be private - you wouldn't know how it ends until it's concluded. The final option is they could just walk away altogether - but at this point, the walking away altogether isn't as much as a threat to Alpharma, now that they've got 'Company X' with a bid that's at least that high."

The analyst further said that now that Company X had emerged with an offer, although it has not been publicly identified, "even if King doesn't bid, the process of diligence and making a formal final offer and negotiating a final price between Company X and Alpharma is going to continue, regardless of what King does now," a process he said is likely to take around four to six weeks.

Ironically, Alpharma "cannot back away from that process now. Company X can - but Alpharma cannot."

Alpharma (NYSE: ALO) was off by $1.49, or 4%, to $35.76 on volume of 1.5 million shares, a little less than normal. King Pharmaceuticals (NYSE:KG) lost 66 cents, or 6.76%, to end at %9.10. Volume of 3.3 million shares was slightly above normal.

Circuit City withdraws outlook

Outside of the M&A sphere, Circuit City (NYSE:CC) plunged by 29 cents, or 21.17%, to $1.08, on volume of 5.4 million shares, about 20% above average, after the Richmond, Va.-based electronics retailer reported a sharply wider fiscal second-quarter loss and shelved its full-year outlook due to unsettled market conditions.

Circuit City - trying to hang onto market share despite the assaults of bigger rival Best Buy and discount retailing behemoth Wal-Mart Stores - lost $239.2 million, or $1.45 per share, in the three months ended Aug. 31, considerably bigger than its year-earlier loss of $62.8 million, or 38 cents per share.

Excluding $73 million of non-cash asset impairment charges, the loss came to $162.7 million - better than earlier forecasts for a loss from continuing operations of between $170 million and $185 million. The company said it was withdrawing its guidance for the fiscal year, given the current uncertain environment.

The numbers tell a grim tale, according to analyst David A. Schick of Stiefel Nicolaus, who rates the shares a hold.

"Circuit City's pressures are coming from all sides," Schick said in a research note - "and the overarching macroeconomic economic conditions are still quickly worsening."

He said that the company "shows a worsening top line against easier comparisons, despite the tax rebates that aided discretionary spending" during the quarter. He raised the specter of bankruptcy, saying such risks "are very real - vendors will have to decide how they plan to do business at CC."

He cut his third-quarter estimate from a loss of 90 cents a share to a $1.03 per share loss due to a lower top line, only partially offset by higher gross margin. For the full fiscal year, he cut his per-share estimate to a $3.03 loss, versus the previous estimate of a $2.81 loss. In fiscal 2009, the loss will again widen to $3.24 per share from the prior estimate of $2.77.

Schick said that Circuit City could still "be important in the marketplace" - but only if it downsizes, cutting both the number and size of its stores and repositions itself as a commission-based higher-end retailer.

However, he cautioned that "we are not sure that shareholders and landlords aren't hurt first."

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