New Century skids on Chapter 11; First Data, Global Imaging rise on deals; Midwest Air, Tribune gain

By Ronda Fears

Memphis, April 2 - Finally, as has been anticipated for weeks, New Century Financial Corp. filed bankruptcy Monday and, while it was not a surprise, it sparked a new wave of jitters in the lending sector. Otherwise, a handful of buyouts propelled several stocks, but traders observed a theme of holding back due to an elevated perception of deal risk.

Credit card transaction processor First Data Corp. shot up on its $29 billion buyout by an affiliate of private equity firm Kohlberg Kravis Roberts & Co., but the stock was held well below the buyout price, which was a 26% premium to Friday's market. One trader said the market was pricing in some risk because the company has 50 days to seek other bids; another said it reflects a belief that a better bid will not surface.

Tribune Co. also continued to lag behind a sweetened $34-per-share buyout bid from Chicago real estate magnate Sam Zell, which the publishing giant said Monday it has accepted. One trader said the market now is factoring in litigation risk as California billionaires Ron Burkle and Eli Broad may sue over the deal, as they offered $34 a share to best Zell's previous $33-per-share offer. The stock (NYSE: TRB) ended up by 70 cents, or 2.18%, at $32.81.

EGL Inc., the trader noted, is being sued by Federated Kaufmann Small Cap Fund, which is challenging the proposed management-led leverage buyout of EGL at $38 per share in the face of a reported $40 per share bid from Apollo Management. Federated Kaufmann announced the suit Saturday. EGL (Nasdaq: EAGL) added 3 cents on Monday to close at $39.66.

In another ongoing dispute, AirTran Holdings Inc. made another sweetened offer for Midwest Air Group Inc., which it called its best and final offer, boosting it to $389 million from $290 million. One trader said he thinks the price tag will have to be bumped up; another said there was selling into the new bid.

The all-around hit of the day was Global Imaging Systems Inc.'s $1.5 billion takeover by Xerox Corp. at a 49% premium to Friday's market, sending both higher.

Beyond deals, financials were at the forefront of many participants' attention Monday. New Century's demise aside, anxiety continues to bleed beyond subprime mortgages into prime lenders and many in-between, as well as many homebuilders and auto lenders.

M&T Bank Corp., a Buffalo, N.Y.-based regional bank, fell hard Monday after disclosing Friday that it is having trouble selling some of its Alt-A mortgage loan packages, which are between prime and subprime. M&T (NYSE: MTB) fell $9.88, or 8.53%, to $105.95.

Other big Alt-A lenders also were lower Monday; namely, IndyMac Bancorp Inc. and Impac Mortgage Holdings Inc., the latter of which gained last week on news that it completed two securitizations with a combined total of $2.2 billion of Alt-A residential loans. IndyMac (NYSE: NDE) lost $1.40 on the day, or 4.37%, to $30.65. Impac shares (NYSE: IMH) dropped 26 cents, or 5.2%, to close at $4.74.

Big banks also were feeling the pinch, such as Bank of America Corp. and warehouse lenders to mortgage companies like Bear Stearns Cos. Inc.

One maverick trader, however, saw the decline in Bear Stearns and IndyMac as buying opportunities, saying that he did not believe their exposure to subprime lending risks would be long-lasting problems or of a magnitude to cripple their entire operations like was the case with New Century.

New Century vultures swoop in

There were lots of buyers for New Century shares, too, amid the stampede to exit on the bankruptcy filing.

New Century shares (Pink Sheets: NEWC) traded down to 74 cents but as high as $1.09 before closing the session with a drop of 14.5 cents, or 13.68%, at 91.5 cents. Some 7.75 million shares traded.

"The jackals are taking it all [New Century shares] now," the trader said, referring to distressed funds that prey on bankrupt companies.

Traders said many were short covering and/or distressed funds establishing positions or boosting existing stakes. New Century's demise created a situation where many hopeful buyers in the stock last week were stampeding to get out of the situation. The trader cited above referred to these as "last-gaspers" who bought thinking there would be a White Knight show up to rescue the company from the gates of bankruptcy.

Once the second-largest domestic subprime mortgage lender, New Century's bankruptcy filing follows the delisting of its stock from the New York Stock Exchange, an SEC investigation, federal criminal investigation into stock transactions, numerous shareholder lawsuits and more than a dozen cease-and-desist orders from federal and state banking regulators.

So it came as no big surprise to most players.

At the time of the filing, the company said it would dismiss 54% of its work force, or 3,200 employees, and the company said it would sell its major assets - signaling a line of thought that the assets would be severely damaged.

"If they could have sold those assets at a pretty decent price, they would have and then avoided bankruptcy," remarked another distressed equity trader.

Indeed, New Century chief executive Brad A. Morrice said in a statement, "The Chapter 11 process provides the best means for selling our servicing and loan origination operations to financially sound parties. It is our hope that potential buyers will be in a stronger position than we are."

The trader said investors, primarily distressed funds that specialize in bankruptcy situations, are now trying to determine the amount and quality of the loans on New Century's warehouse line and how the residuals for the on balance sheet portfolio are performing. He said the portfolio is mostly 2005 vintage mortgages, from what he hears.

New Century said it has agreed to sell its loan servicing business to Carrington Capital Management LLC for about $139 million, subject to the approval of the bankruptcy court. And, it agreed to sell certain loans and residual interest in some trusts to Greenwich Capital for $50 million.

CIT Group and Greenwich Capital Financial Products Inc. have agreed to provide up to $150 million in working capital in the form of a debtor-in-possession facility to facilitate the reorganization process, the company said.

First Data marks gain on deal

First Data said Monday it has agreed to be acquired by an affiliate of private equity firm Kohlberg Kravis Roberts & Co. for $34 per share deal - a 26% premium over Friday's market and about a 34% premium over the 30-day average.

But under terms of the deal, First Data can solicit third-party proposals over the next 50 days, and the company said it plans to actively solicit proposals during that time.

First Data was higher in the pre-market than anytime during the session, which traders said reflected some risk in the deal. The stock (NYSE: FDC) traded up to $32.95 before the open but during the session traded in a band of $32.37 to $32.90 before closing at $32.45, a gain of $5.55, or 20.63%.

"The fact that it is trading below $34 indicates that the market does not expect any better offers than KKR's," said one trader. "I would have thought this would be bid up to the $40 range in a take out."

First Data said it plans to tender for all of its outstanding bonds in conjunction with the closing.

Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch have committed to provide debt financing for the transaction subject to customary terms and conditions, and are acting as financial advisers to KKR.

Global Imaging zooms

Global Imaging Systems rocketed up on its takeover by Xerox at $29 per share - a 49% premium to Friday's close - and the latter also rose.

Global Imaging shares (Nasdaq: GISX) gained $9.14 on the day, or 46.87%, to $28.64.

Xerox (NYSE: XRX) rose 19 cents, or 1.12%, to $17.08.

"Speculators made a decent coin with Global Imaging," one trader said.

Following a warning from the Tampa, Fla., office equipment distributor in January that its fourth-quarter results would fall below Wall Street expectations, he said there was a big sell-off followed by some buying on speculation that the company would be a prime takeover candidate. He said there had been some mention of Xerox as a suitor, but really no stand-out suitors.

The deal is structured as a two-step acquisition including a cash tender offer for all outstanding shares of Global common stock followed by a cash merger in which Xerox would acquire any remaining outstanding shares of Global common stock, Xerox said.

Global Imaging, with roughly $1.1 billion of annual revenue, is a leading distributor of office equipment to the small and medium sized business market throughout the United States.

Midwest Air flies, some bail

Midwest Air shares got a bounce after AirTran increased its tender offer to an equivalent $15 per share, based on Friday's market, up from its previous offer of $11.25 per share. One trader said, however, that given the level of contention in AirTran's pursuit of Midwest Air, there was "considerable" selling into the rally.

AirTran's latest bid, which it described as its best and final offer, consists of $9 per share in cash plus 0.5842 of a share of AirTran common stock for each Midwest share. The total equity value of the exchange offer is $389 million. Midwest has repeatedly rejected offers from AirTran, which go back to October.

At $15 per share, the revised offer is an 11% premium to Midwest Air shares at Friday's close and 67% better than where the stock was trading Oct. 19, the last trading day before AirTran delivered its original bid to the Oak Creek, Wis.-based carrier.

Midwest shares (Amex: MEH) gained 99 cents on Monday, or 7.33%, to $14.50 after trading as high as $14.75.

"I think they may get a lot better response with this current offer," one trader said. But he said there were lots of sellers as the stock approached $15.

"This is very risky, so a lot of folks take their profits every time it spikes up. That also leads me to think AirTran gets closer every time that happens because they are probably buying in the open market. Personally, I still think the merger is not good for Midwest Air."

The trader said AirTran chief executive Joe Leonard reportedly said institutional investors told him they thought $15 a share was a fair price. He said it also was being circulated that Octavian Advisors LP, a big Midwest Air stakeholder, said the latest offer is encouraging and the two sides should negotiate.

Another trader countered, however, saying, "If they raise the offer to $17, all in cash, it will fly. No pun intended."

Midwest Air said its board of directors is evaluating the offer and will respond in 10 business days. AirTran said the offer, made through its Galena Acquisition Corp. subsidiary, expires on May 16.

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