Domino's spikes; Aquila sinks, Great Plains, Black Hills flat; Empire, Westar gain; EOP slips

By Ronda Fears

Memphis, Feb. 7 - Aquila Inc.'s acquisition by Great Plains Energy Inc. in a $1.7 billion cash and stock deal, which hinges on a $940 million asset sale to Black Hills Corp., was another disappointment from this week's slate of deals so far, but one trader said it underscored a recent spark of interest in regional utility stocks, pointing to sharp gains in Empire District Electric Co. and Westar Energy Inc.

In another frustrating situation and an example of the risk in special situations, as one trader put it, Houston-based transportation and logistics company EGL Inc. took a huge dive after the equity sponsor for a management-led leverage buyout, General Atlantic LLC, withdrew from the $36-per-share offer. The move followed the company's warning about a shortfall in fourth-quarter results from analysts' expectations. Chief executive James Crane, however, has advised the company he is seeking another backer, but EGL shares (Nasdaq: EAGL) fell $6.25, or 16.5%, to $31.64.

Players were rather pleased, however, to see the battle over Equity Office Properties Trust come to a close - at a record level of $39 billion including debt - with private equity firm The Blackstone Group winning over rival bidder Vornado Realty Trust. Vornado dropped out after EOP shareholders voted for the Blackstone cash offer at $55.50 per share versus Vornado's cash and stock offer valued at an equivalent $56 per share cash. The bidding began at $48.50 by Blackstone in November.

EOP shares (NYSE: EOP) dropped back nearer the Blackstone bid range, ending with a loss of 60 cents, or 1.07%, to $55.45. Meanwhile, Vornado shares (NYSE: VNO) climbed on the development, adding $8.75, or 6.89%, to $135.75.

Boston-based outsourcing firm Keane Inc. got a big bounce on news that Caritor Inc., a San Ramon, Calif.-based closely held IT outsourcing firm, would buy it for $14.30 per share is cash, or roughly $854 million. Caritor said it has debt financing commitments from Citigroup Global Markets, UBS Securities and Banc of America Securities. Members of the Keane family and affiliates, which own an equity stake of about 20%, have said they will vote to approve the merger. Keane shares (NYSE: KEA) advanced $2.03, or 16.92%, to settle at $14.03.

Elsewhere, it was a teetering start Wednesday for pizza delivery chain Domino's Pizza Inc. on news of a recapitalization plan that included a Dutch auction to repurchase about 13.9 million common shares between $27.50 and $30 - versus the stock's close Tuesday of $28.70 - and a tender offer for all of its $284 million of 8¼% senior subordinated notes due 2011, both to facilitate a switch it financing to asset-backed securities in order to get better terms.

One trader said his player in Domino's initially tried to short the stock, thinking the Dutch auction would be a drag on it, but "we got our faces ripped off." Instead of seeing any weakness on the news the stock made a run and traded right through the auction range, which another trader said was largely due to short positions scurrying to cover.

Aquila deal draws protest

Aquila, Great Plains and Black Hills announced a two-fold transaction that immediately drew criticism from 5% Aquila stockholder Pirate Capital Management, which had a representative on the conference call that said the firm would vote against the deal.

In addition to uncertainty about regulatory approvals, traders said Aquila players were "mad as hell" about the 2.8% discounted price tag for the Kansas City-based troubled utility, which has been severely struggling since at least 2002.

Under one part of the deal, Great Plains Energy, better known for its utility subsidiary Kansas City Power & Light, will acquire Aquila and its Missouri-based electric utility assets for $1.7 billion - $1.80 in cash plus 0.0856 of a share of Great Plains shares, or the equivalent of $4.54 per share based on Tuesday's market.

Aquila shares closed Tuesday at $4.67. After trading as low as $4.17, the stock (NYSE: ILA) on Wednesday fell 33 cents, or 7.07%, to $4.34.

Under the other part of the deal, Black Hills will purchase Aquila's electric and gas utility operations in Colorado as well as certain other Aquila-owned utility assets in three other states, for $940 million.

The transactions are subject to regulatory approvals in Missouri, Kansas, Colorado, Nebraska and Iowa and the Federal Energy Regulatory Commission, as well as antitrust review.

In addition, each of the two transactions is conditioned on the completion of the other. Thus, the parties said they expect closing in about a year.

Pirate may draw other bids

Pirate Capital's representative on the call said Aquila would have done well to poll its biggest investors before inking the deal.

The Norwalk, Conn., hedge fund, according to a stock trader, was pivotal in the derailment of Mirant Corp.'s proposed acquisition of NRG Energy Inc. last year but recently had been scaling back its position in Aquila following a shakeup at the firm last fall. In December, Pirate reported that it had lowered its stake in Aquila to 18.7 million shares from 24.7 million shares at Sept. 30.

Nonetheless, the trader said Pirate will likely be a sore spot in the Aquila deal that will either force Great Plains to pony up more money or cause the merger to collapse entirely. He said there is another angle being pursued by some Aquila players - that Pirate's stance will entice another bidder for Aquila.

However, a buyside market source, away from Pirate Capital, said there are many "elephants" in the market who will be recalling Aquila's efforts to find buyers in 2002 to no avail.

"I don't like the price any better than anyone. I would have hoped for a premium, but look at it this way, if you just leave it alone like you were more than likely going to do you get stock in Great Plains paying a 5% dividend and I would believe most won't have much to pay in taxes at $1.80 in cash as it will be a return of capital," the sellside trader said.

"I think they [Pirate] might generate interest for Aquila from another buyer. Meanwhile, if Aquila gets down in the $3s, I would buy more."

Black Hills plans equity sale

On Thursday, Black Hills also will host a conference call at 10 a.m. ET to discuss the transaction in greater detail. Also Thursday, Black Hills and Great Plains are scheduled to report fourth-quarter and 2006 results.

Black Hills shares were mostly softer in Wednesday's session on the Aquila news, but the stock (NYSE: BKH) managed to settle unchanged at $39.08. Traders said the weakness was caused by the company's plan to fund the $940 million Aquila asset purchase with some sort of equity offering, which would be dilutive.

The Rapid City, S.D.-based utility said it has entered into a binding agreement with a group of lenders including ABN Amro Bank as administrative agent for a committed acquisition credit facility to finance the transaction.

But, "reflecting its prudent and conservative financial philosophy," Black Hills said it expects the permanent financing to replace the bridge facility will be a combination of new equity, mandatory convertible securities, unsecured debt at the holding company level and internally generated cash resources.

The contemplated permanent financing is expected to be deemed investment grade by credit rating agencies.

Black Hills chief executive David Emery said on the Aquila call Wednesday that the timing of the equity and/or equity-linked offering has not yet been determined.

Empire, Westar soar

Despite disappointment in the Aquila deal, the utility stock trader said it rekindled interest in regional utility stocks, and he pegged Empire District Electric and Westar Energy as the best leaders of that group Wednesday. He said those were higher on lines of thinking that they are good suitors for Aquila as well as prime acquisition targets.

"There are a number of small to mid-sized utilities in the Midwest that look like good acquisitions, in addition to Great Plains and Black Hills, like Empire and Westar, just to name a few," the trader said.

"We've been expecting this. I think Great Plains won't be the only suitor wanting Aquila. The games are just beginning."

Empire shares (NYSE: EDE) in fact hit a new 52-week high of $25.24, advancing 56 cents, or 2.27%, on the day. The stock closed just shy of the intraday high of $25.25 and eclipsed the previous 52-week high of $25.10.

Westar shares (NYSE: WR) also settled near the day's high, closing with a gain of 22 cents, or 0.81%, at $27.35.

The trader also noted that while Black Hills and Great Plains failed to mark a change on the Aquila deal, both shares are up sharply since late January. Black Hills at $39.08 is up from about $37 two weeks ago and Great Plains at $32.05 is up from around $31.25 in that time frame, he said.

This trader a couple of weeks ago, in fact, had remarked to Prospect News that potential deals in the utility sector were creating "fantastic" interest as growing demand for electricity was expected to fuel deals in the sector.

He said Teco Energy might be another regional utility outside of the Midwest worth looking at, noting the Florida-based holding company announced Tuesday that it was going to be trying to sell its transport business. Teco shares (NYSE: TE) ended up 3 cents at $17.01 on Wednesday.

Domino's climbs 13%

News from Domino's on Wednesday that it would repurchase about 13.9 million common shares in a Dutch auction and buy back bonds as part of a plan to switch its financing to asset-backed securities at first was perceived by some players as a negative to the stock because of the auction range. But after a great deal of scrambling by those with short positions, the stock zoomed well past the auction range.

Domino's shares had closed Tuesday at $28.70, and the company set the auction for between $27.50 and $30. After trading in a huge band of $29.85 to $32.40 on Wednesday, the stock (NYSE: DPZ) closed the session with a gain of $3.68, or 12.82%, at $32.38.

The Ann Arbor, Mich., pizza delivery service also said it was tendering to repurchase all of its $284 million outstanding 8¼% debt due 2011 at par plus a $20 per note consent fee. In addition, the company said it will repay all of its outstanding borrowings under the existing credit facility.

The company said it was negotiating an asset-backed securitized facility of up to $1.85 billion. The tender offer for the bonds runs through Feb. 23.

"It was very confusing at first to my player in this," said one trader. "He was trying to short it and we got our faces ripped off. We covered and then it went up and up; it traded right through the range."

A big source of confusion about the Dutch auction, one trader said, was the role of big Domino's stockholder Bain Capital LLC. Domino's said its directors and executive officers, as well as Bain Capital, which owns a 27% stake in the company, would not take part in the transaction.

However, after the tender offer, Domino's said it could buy back shares from Bain under certain conditions so that Bain's total ownership will not exceed one-third of shares outstanding. In March 2006, Domino's purchased 5.6 million shares from Bain, which reduced its stake from 34%.

Domino's said in order to fund the transactions it will take out a bridge loan for $1.35 billion and should it fail to get an asset-backed securitized facility, the bridge loan will convert into a five-year term loan. The company aims to get a lower interest rate and more relaxed covenants from the asset-backed securitized facility than traditional bank and bond financing.

After repayment of debt, Domino's said will use any remaining proceeds to pay a cash dividend and make payments and adjustments to holders of outstanding stock options.

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