Four Seasons, Hilton, Starwood slide; Southwest soars; Eddie Bauer off; WCI up; Onyx rockets

By Ronda Fears

Memphis, Feb. 12 - In an extension of disappointing deals that began in earnest last week, Four Seasons Hotels Inc. said it has agreed to the previously announced going-private offer from Cascade Investment LLC, Kingdom Hotels and Isadore Sharp for $3.8 billion, or $82 a share, in cash - a 2.2% discount to Friday's market.

The news also sent shares of Hilton Hotels Corp. and Starwood Hotels & Resorts International Inc. lower, a trader said, as those "have really been thought to be sleeper takeover targets" and the Four Seasons deal was a "price tag shock" to players in these names.

Elsewhere in leisure stocks, Harrah's Entertainment Inc. saw little reaction to its announcement that it plans to spin off its real estate holdings, traders said, as the market has anticipated such a move for several weeks now so it had already been priced into the Harrah's shares. Harrah's shares (NYSE: HET) added 14 cents to $85.09. In December, Harrah's agreed to be acquired by Apollo Management and Texas Pacific Group.

Biotech Cell Therapeutics Inc., however, got a little bounce from its news Monday that it plans to spin off its biologics technology unit, to be named Aequus BioPharma. The unit uses genetic polymer technology to extend the plasma half-life of therapeutic proteins, which is aimed at lowering the cost for developing next-generation biologics, such as chemotherapy-related treatment Neulasta or anemia drug Aranesp. Cell Therapeutics shares (Nasdaq: CTIC) edged up 2 cents to $1.60. In after-hours trade, though, a trader remarked that the gain was wiped out with a sale back at $1.58.

Following up on word a couple of weeks ago that Atlanta-based rolled aluminum sheet metal giant Novelis Inc. was for sale, the company announced Monday it would be acquired by India's Hindalco Industries Ltd. for $6 billion in cash, or $44.93 a share, including the assumption of $2.4 billion in debt. On Jan. 26, players drove the stock up 24% to around $30 in response to Novelis' acknowledgement that it was in talks to sell the company. Novelis shares (NYSE: NVL) on Monday added $5.13, or 13.31%, to $43.67.

Water treatment services company Nalco Holding Co. took a hit from news that Blackstone Group, Apollo Management, LP and GS Capital Partners would be selling about 18.1 million shares in a secondary offering. The shares represent about 12.7% of the current shares outstanding. Nalco shares (NYSE: NLC) lost 69 cents, or 2.87%, to $23.36.

Under pressure from activist stockholders, WCI Communities Inc. said Monday it has retained Goldman Sachs & Co. to evaluate ways to increase shareholder value. WCI shares were sharply higher on the news, but virtually all of its homebuilding peers were lower on the session.

Mortgage lenders also extended precipitous declines from last week, led by big losses Monday in Countrywide Financial Corp., New Century Financial Corp. and Novastar Financial Inc. One trader categorized New Century's decline as a "bona fide freefall." The stock (NYSE: NEW) lost another $1.01, or 5.54%, to close Monday at $17.21. New Century shares are off from around $30 since the sector began to unravel last Thursday.

Eddie Bauer looking good

The buyout of Eddie Bauer Holdings Inc. was scuttled last week as shareholders failed to approve the $286 million, or $9.25 per share, cash offer from Sun Capital Partners Inc. and Golden Gate Capital, but that was not really a surprise to some onlookers, one of which was saying Monday that with the stock's decline it was "very attractive."

Eddie Bauer shares (Nasdaq: EBHI) on Monday dropped 26 cents, or 2.84%, to $8.91.

Late Friday, the Seattle-based casual clothing retailer announced that its chief executive Fabian Mansson was resigning and board member Howard Gross was named interim. Gross has more than 35 years of experience in the retail apparel industry, having served as chief executive of Limited Stores and Victoria's Secret Stores, as well as CEO of the Hub Distributing, Millers Outposts, and Levi's Outlet Stores divisions of American Retail Group, Inc.

"We didn't think they would get it approved," said a sellside market source.

"I have thought all along that it was way too low a price."

As a result of the buyout getting nixed, he sees the stock as a great buy at current levels, regardless of whether another bid emerges. For one thing, he said the stock is trading at 0.6 times sales versus the retail industry average of 1.6 to 1.7 times.

"I am not banking on anyone else coming in at all," the sellsider said.

"It's possible, but this is very attractive just on the fundamentals."

At a special stockholder meeting last Thursday, the buyout was rejected, but with Mansson's resignation the company said Friday that it was "evaluating appropriate next steps" to effectuate its turnaround efforts.

Gross commented, "Our board is committed to taking the necessary actions to put Eddie Bauer on a path to improve its performance and capitalize on the strong potential of its brand. We are moving forward thoughtfully and expeditiously to position the company to execute its turnaround strategy."

Southwest lifts airlines

Bear Stearns upgraded shares of Southwest Airlines Co. to outperform, citing "enormous untapped value" as a buyout candidate. Southwest shares were lifted on that along with virtually the entire pack of airline stocks. Southwest also boosted ticket prices Monday, which sparked similar price hikes at other airlines.

"Consolidation is the going theme with the airlines," said one trader.

"I am not so sure anything is going to get off the ground in this sector, from that angle, but I would be a buyer of Southwest. I do think it is one of the more attractive airlines from a takeover standpoint, but also as a standalone holding in the sector."

Southwest, the top discount domestic carrier, said on Monday it raised fares by up to $10 each way, sparking ticket increases by other carriers, but traders said the stock was getting play mostly from the buyout angle.

Southwest shares (NYSE: LUV) rose 62 cents, or 4.09%, to $15.77.

American Airlines parent AMR Corp., United Airlines parent UAL Corp., Continental Airlines Inc. and US Airways Group Inc. - which recently lost a bid to buyout bankrupt Delta Air Lines Inc. - were all better Monday, but the trader said there is not a "clear leader" in that group as a buyer in a consolidation story.

Bear Stearns airline analyst David Strine noted in a report Monday that Southwest shares are down 8% from January 2006 versus a 9% gain for the airline index. He said rising labor costs, a network shift and less favorable hedges have served to diminish relative and absolute margins at Southwest but non-fuel margin performance is recovering and should continue to improve in 2008.

"Seeing enormous untapped value at Southwest, we believe running through an LBO exercise helps illustrate how shareholders can be rewarded," Strine said in the report.

"Given aircraft deposits, unencumbered aircraft, the value of fuel hedges and potential spinoffs, even baking in a 50% equity premium, we believe Southwest could be purchased with an outlay of $7.40/share or 8x 2007 EPS. We believe Southwest's risk/reward profile is favorable," he said, adding that "risks include changes in oil, capacity, and the economy."

WCI seen on the sale block

The economy is a nice segue into the housing sector, with it coming as no big surprise to players that WCI Communities is on the sale block. Well, the Bonita Springs, Fla., homebuilder said Monday that it has hired Goldman Sachs to explore "a strategic review," including a potential sale of the company.

WCI shares (NYSE: WCI) gained $1.37, or 6.62%, to $22.05.

"Everyone knew this was coming," said one trader.

"I am hoping some of this rise [in WCI shares] is short covering, really, because I think that given the state of affairs in housing construction, I am not as optimistic as the market was today."

Such a move has been anticipated for several weeks. The upscale home and condominium builder has been under pressure from Carl Icahn, Hotchkiss & Wiley Capital Management and SAC Capital Advisors to find a way to unlock value in the stock.

WCI also said Monday that it expects to generate $1 billion in free cash flow in 2007 and will consider additional stock buybacks and asset sales to help reduce debt. Once the balance sheet is improved, the company will review strategic alternatives, including a possible sale of the company.

The housing industry has attracted private investors looking to buy companies struggling in the steep U.S. housing downturn. After setting records for five straight years, sales of both new and existing homes suffered sharp declines in 2006, which the U.S. Department of Commerce said was the biggest decline in 16 years.

There have been rumors circulating for several weeks that other builders are considering buyout proposals, including Centex Corp. and Lennar Corp. On Monday, however, the entire group of homebuilder stocks - also including Toll Brothers Inc., Hovnanian Enterprises Inc., Beazer Homes USA Inc. and Pulte Homes Inc. - was lower.

Four Seasons sinks hotels

Four Seasons was another disappointment as far as deal price goes, announcing Monday that it had agreed to be taken private by Cascade Investment LLC, Kingdom Hotels and Isadore Sharp for the previously announced proposal of $3.8 billion, or $82 a share in cash - a 2.2% discount to Friday's market.

Four Seasons shares (NYSE: FS) lost $2.52, or 3%, to $81.36.

The deal was inked last November with Saudi Arabia Prince Alwaleed's Kingdom Hotels International and Cascade Investment LLC, the investment vehicle of Microsoft Corp. chairman Bill Gates, but traders said many Four Seasons players were anticipating a better bid to emerge.

Thus, he said the news also sent Hilton and Starwood lower.

"I think people were hoping for a better bid to come along," said one trader.

"There had been a lot of players getting involved in Hilton and Starwood because of the Four Seasons situation. Those have really been thought to be sleeper takeover targets. But the Four Seasons deal was a price tag shock."

Hilton shares (NYSE: HLT) dropped 16 cents to $36.20.

Starwood shares (NYSE: HOT) lost 43 cents to $66.53.

Toronto-based Four Seasons said a shareholders meeting to vote on the deal is expected in April, the company said. The transaction will require approval by two-thirds of the votes cast by holders of limited voting shares. Prince Alwaleed already has a 23% stake, while Cascade has 8.2% of the company.

It is not a new consideration to play Hilton and Starwood as takeover candidates, the trader said, but he believes that if the stock continues to come in "those could very well see an offer put on the table."

Onyx rise may be too early

Cell Therapeutics' news was a nice marker for the sector, traders said, but Onyx Pharmaceuticals Inc. was the hot biotech story of the day with the stock nearly doubling on positive trial news on its liver cancer drug Nexavar, which is being developed with Bayer Pharmaceuticals Corp. Biotech market sources, however, said Onyx's rocket ride may have taken off prematurely.

With a whopping 55.76 million shares traded compared with the norm of 1.68 million shares, Onyx shares (Nasdaq: ONXX) shot up $11.89, or 96.98%, to $24.15. One options trader also noted big volume and similar moves in the $20 and $25 February calls but added that the January 2009 calls at $30 had big volume and open interest with the contract gaining $3.35 on the day to $3.50.

One biotech trader said he thought the run in Onyx was "way overdone" and noted a similar line of thinking in a report by Merrill Lynch biotech analyst Eric Ende.

"We believe the Street may be rushing to extrapolate the positive data in liver cancer to increasing Nexavar's probability of success in lung cancer," Ende said in the report.

"Avastin [from Genentech Inc.] is the only drug to improve survival in front line lung cancer over doublet chemo, and in that case by less than two months. In contrast, Onyx management has previously indicated that the Nexavar lung cancer trial is powered to show a 30% (or three-month) improvement in survival over doublet chemo. Also, the Nexavar trial is enrolling more difficult to treat patients, including both squamous (more difficult) and non-squamous cell carcinoma patients. As a result, significant risks still remain for Nexavar in large cancer markets, including lung cancer."

Bayer also rose on the news with the stock (NYSE: BAY) up 62 cents, or 1.07%, to $58.45.

As for other major drug companies, Sanofi-Aventis SA rose on a report in London that it has called off merger talks with Bristol-Myers Squibb Co. - news which sent Bristol-Myers shares into a tailspin on heavy profit taking as one trader put it.

Sanofi shares (NYSE: SNY) gained 51 cents, or 1.16%, to $44.29; Bristol-Myers shares (NYSE: BMY) lost 93 cents, or 3.26%, to $27.59.

The trader also remarked that the market is "feeling a little bi-polar" about Big Pharma deals right now.

International Tech spikes

Elsewhere north of the border, Canada's International Technologies Corp. was getting some play Monday on news from last week that Wal-Mart Stores Inc. has launched an online movie download venue, a trader in Canada said.

International Tech shares (Toronto Venture: ITI) added C$0.025, or 7.69%, to close Monday at C$0.35.

On Monday, Northern Securities Inc. analyst Marcel Brichon said in a report that Wal-Mart's news was a "vote of confidence for companies such as International Tech competing in the 'other than Apple' space," referring to Apple Inc.'s iPod and similar launch of online movie downloads.

While unrelated, Brichon also noted that on Jan. 4, International Tech announced that Wal-Mart Canada had become its latest customer for the MP3 player market.

"While there is no relationship at present between International Tech and Wal-Mart USA, this development does indicate that Wal-Mart as a corporation is putting resources into the 'non-iPod' sector of the portable media player market," Brichon said.

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