Alcoa, Alcan gain; Applebee's rises; Time Warner Cable eases; Caremark climbs; Grant Prideco up

By Ronda Fears

Memphis, Feb. 13 - Speculation fueled activity Tuesday, with dubious chatter of a buyout offer for metal giant Alcoa Inc. sparking a sympathetic gain for Canada's Alcan Inc. and California-based Century Aluminum Co. Additionally, the ongoing rivalry for Caremark Rx Inc. sent it higher as CVS Corp. upped its bid in an attempt to best Express Scripts Inc. for the prescription benefits manager.

Hydril Co.'s buyout by Tenaris SA at a 17% premium also was fueling interest in several other oilfield services concerns, such as Grant Prideco Inc., National Oilwell Varco Inc. and Cameron International Inc., as potential takeover targets. Despite the extreme volatility in oil and gas prices, which is likely to cause swings in oil and gas production trends, one trader said the oilfield services industry looks like "a relatively safer bet." Crude for March delivery jumped $1.25 to settle at $59.06 per barrel on the New York Mercantile Exchange while natural gas rose 14.1 cents to $7.367 per 1,000 cubic feet; both followed sharp declines on Monday.

Meanwhile, casual restaurant chain Applebee's International Inc. became the latest in a growing number of companies going on the sale block at the behest of activist shareholders. Florida-based homebuilder WCI Communities Inc. was one that joined those ranks Monday, and that stock (NYSE: WCI) on Tuesday edged up 15 cents, or 0.68%, to close at $22.20, following a 7% rise the day before. Eddie Bauer Holdings Inc. is another looking at alternatives following the shareholder rejection of a $9.25 per share offer from private equity.

DaimlerChrysler AG was another stock gaining on anticipation that the company may address on Wednesday with its earnings suggestions that it should spin off the Chrysler division. The stock (NYSE: DCX) was up 41 cents, or 1.24%, to $64.45. The market also is anticipating other potential measures such as plant closings and layoffs in response to a projected $1 billion loss at the automaker.

The Brinks Co. was another name garnering interest because of stockholder activism, according to one trader, although the company has yet to officially seek strategic alternatives. Last week, however, the company relented to pressure and placed a member of majority stockholder Pirate Capital LLC on its board. The stock (NYSE: BCO) was seeing some selling pressure Tuesday, however, slipping 70 cents, or 1.13%, to $61.40.

Amid a rising stack of lawsuits against New Century Financial Corp. and following a Morningstar analyst saying the subprime mortgage lender could be in jeopardy of bankruptcy, the stock was improving on an upgrade by Stifel Nicholas and a Merrill Lynch report admonishing that subprime risk was overblown at the big banks. But a couple of traders remarked Tuesday that they felt the risk of holding New Century had just barely surfaced. One noted the bankruptcy filing on Monday by privately held ResMAE Mortgage Corp., one of the top 20 domestic subprime mortgage lenders, as cause for "serious anxiety."

Time Warner Cable Inc. officially became a public company Tuesday on the reorganization plan of Adelphia Communications Corp. going into effect, finally, after a five-year stint in bankruptcy. But the when-issued Time Warner Cable shares were back-peddling because the price at which the distribution is being determined is well below where the stock has been trading.

Alcan players' mettle steeled

Traders said there was considerable skepticism surrounding the buyout buzz targeting aluminum giant Alcoa but it served to concentrate a great deal of focus on Montreal-based Alcan as well as Century Aluminum as perhaps better buyout targets, and some players were taking profits in Alcoa to buy the latter.

Pittsburgh-based Alcoa was named in an article Tuesday by The Times in London as a takeover target between rival bidders BHP Billiton plc and Rio Tinto plc.

"There was a 10% spike in Alcoa in the pre-market and as the day wore on we were seeing profit taking on that," said one trader.

"A lot of analysts are really skeptical of an Alcoa deal, but Alcan got a lot of positive remarks. And it looks like even Century Aluminum is going to finish better today than Alcoa, even with the buyout rumor."

Alcoa shares (NYSE: AA) spiked up to $36.05 before coming off the day's high to settle with a gain of $2.10, or 6.38%, at $35. Also higher on the speculation, BHP shares (NYSE: BHP) advanced $1.01, or 2.29%, to $45.02 while Rio Tinto shares (NYES: RTP) gained $6.56, or 3.12%, to $216.99.

The trader, however, said he thinks the market prefers Alcan for a deal among the three, noting "big action and a very decent push" in the March contract for Alcan $55 and $60 calls as well as the June contract for a $60 call option.

Alcan shares (NYSE: AL) advanced to $55.40 before easing back to close with a gain of $2.56, or 4.91%, to $54.75.

Century Aluminum shares (Nasdaq: CENX) rose $2.26, or 4.95%, to $47.92.

Fueling the rumors, the trader said, was consummation Monday of market chatter from two weeks ago regarding Novelis Inc., which accepted an offer from India's largest aluminum producer, Hindalco Industries Ltd., for $6 billion in cash, or $44.93 a share, including the assumption of $2.4 billion in debt. Novelis shares (NYSE: NVL) gained another 18 cents to $43.85 on Tuesday, following a 13% rise on Monday.

Applebee's rising on sale plans

Applebee's, an Overland Park, Kan.-based restaurant chain, said Tuesday that its board had formed a committee of independent directors to explore strategic moves aimed at increasing shareholder value, including a possible recapitalization or sale of the company, and the news sent the stock shooting higher.

The stock (Nasdaq: APPB) traded in a band of $26.15 to $27.32 but went out Tuesday higher by $2.09, or 8.63%, at $26.32 with some 10.3 million shares changing hands versus the norm of 1.3 million shares.

An options trader reckoned that a considerable amount of the stocks' gain Tuesday was short covering, as he saw the March options contracts suggesting the company will not get more than $25 per share in a takeover scenario.

One sellside analyst said he previously had expected the company's long-term plans would be focused on executing a turnaround, and Tuesday's announcement "obviously moves the company in a very different direction," but he saw it as a positive step.

Applebee's said the committee has retained Citigroup Global Markets Inc. as a financial adviser and that the company has retained Banc of America Securities LLC in a similar role. Legal advisers are Cravath Swaine & Moore LLP and Blackwell Sanders Peper Martin LLP.

In addition, the company rescinded its financial forecast for the 2007 fiscal year. In November, the company had forecast 2007 earnings of $1.15 to $1.20 a share.

The company is scheduled to report fourth-quarter and year-end results on Wednesday.

In the past few months, Applebee's has been under pressure to improve returns from shareholders, including Breeden Capital Management LLC with a 5.25% stake.

Caremark rivalry persistent

Drug store chain CVS boosted its bid for Nashville-based Caremark on Tuesday by tripling a proposed special cash dividend to $6 per share, after proxy advisory firms urged rejection of its previous offer, which Caremark has backed. But even with the sweetener, traders said analysts see it lacking compared to the latest hostile bid from rival pharmacy benefits manager Express Scripts.

On the development, Caremark shareholders managed to push back the vote on the bids from Feb 20 to March 9. It was thought that the delay in the Caremark vote also would push back the scheduled vote by CVS shareholders on Feb. 23. Alco, Express Scripts extended the expiration date of its hostile offer until March 16 from Feb. 13.

Woonsocket, R.I.-based CVS has offered $23.5 billion in stock, at an equivalent of $53.88 per share, plus the $6 per share cash dividend.

St. Louis-based Express Scripts is offering cash and stock worth $26.6 billion, or the equivalent of $61.08 per share.

Caremark shares (NYSE: CMX) advanced another $1.97, or 3.23%, on Tuesday to settle at $67.88.

Express Scripts is expected to raise its offer for Caremark, a buyside trader at a New York hedge fund said. Thus, Caremark stock continues to trade above both offers. He also noted that Institutional Shareholder Services as well as the advisory firm Glass Lewis have criticized Caremark for refusing to hold talks with more suitors.

Grant Prideco, Varco pumped

Oilfield service names were in the spotlight Tuesday, one bulge bracket firm trader said, following Hydril's buyout by Tenaris, and he said Grant Prideco and National Oilwell Varco were the clear "winners" although Cameron International got a nice bounce as well. All of the Houston-based service companies were higher Tuesday.

Grant Prideco shares (NYSE: GRP) gained $1.63 on the day, or 3.82%, to $44.29.

Varco shares (NYSE: NOV) added $2.50, or 3.76%, to $69.03.

Cameron shares (NYSE: CAM) were better by 84 cent, or 1.51%, to $56.59.

"These companies provide drill bits, tubing, wireline winches, wellheads, the basic guts of an oil rig. Even without new rigs coming into play, they do well because of the aging rig fleet," the trader said. "That's in the same category as Hydril, which makes pressure controls for rig casings, tubing and drill pipes."

Houston-based Hydril agreed to a buyout by Luxembourg-based Tenaris at $97 per share, a 17% premium to Friday's market, which the trader said was a "very nice surprise." He reckoned Hydril players would have been happy with an offer at $90 per share, noting the stock was at about $83 on Friday. Hydril shares Tuesday eased back by 14 cents to $95.10.

Bear Stearns analyst Robin Shoemaker said in a report Tuesday that the Hydril transaction may signal other deals.

"It seems clear now that the oil service industry is attracting the attention of strategic buyers, industry consolidators, and possibly large private equity funds in the near future," Shoemaker said in the report.

"The acquisition of Hydril by Tenaris is a milestone in the current business cycle and it signals what strategic buyers are willing to pay for high quality assets and operations."

Also of note, Banc of America analyst James Wicklund upgraded Grant Prideco to a buy from neutral on Tuesday and upped its price target to $57 from $49, saying it will get a boost from Tenaris' purchase of Hydril.

New Century tugged higher

Stifel Nicolaus upgraded New Century shares to hold from sell, and the stock got a big bounce, but there were still plenty of skeptics as several other analysts downgraded the stock to sell on the company's disclosure of severe exposure to subprime default risk last week.

"When you have some of the more conservative analysts intimating that it could be facing bankruptcy, well I don't think a 50% drop is out of line and it hasn't lost that much yet," said one trader.

"I think the upgrade will get some attention as Stifel had been negative on New Century ahead of the blow-up last week. Most of it probably will be the remaining, and shrinking, short community. I suspect Stifel's call will cause some of the remaining short positions to be covered, which makes sense, but not beyond that."

New Century shares (NYSE: NEW) regained $1.38, or 8.02%, to close Tuesday at $18.59, having dropped from the $30 neighborhood last week before releasing the bombshell.

Merrill Lynch analyst Kenneth Bruce of Merrill Lynch said in a report that he thinks New Century will soon "shift to survival mode, putting shareholders at further risk."

Morningstar analyst Ryan Batchelor was another on the negative post for New Century. In a report published Friday, the analyst lowered his fair value estimate for the stock by $20 to $44 per share and said he was taking into account "some possibility of bankruptcy, which we are explicitly modeling now." He said he modeled in a 25% chance of bankruptcy, in which stockholders would walk away with only about $11 per share - roughly half his estimate of book value.

"We think there is a good chance of a liquidity crisis and bankruptcy for New Century if the capital markets get spooked enough to stop lending to the company or buying its loans, in which case shareholders would be left with very little," Batchelor said in the report.

"We think New Century's business model and strategy makes sense over the long term, but the firm has to survive the near term for it to have any chance of achieving its potential. We expect the dividend to be significantly cut in the near future, and we think the firm - along with its entire industry - will be struggling to stay alive over the next year or so. For those with ample patience and the intestinal fortitude for high risk, we think an investment in this company could eventually pay off, but we warn that it will probably be a scary, bumpy ride with the potential for catastrophe."

Indeed, the trader said the biggest risk facing New Century immediately is that its bank lines could get pulled, as the restatement of previous quarters the company warned of last Thursday and losses would breach covenants.

Fieldstone eases risk jitters

Part of Stiefel analyst Christopher Brindler's reasoning in the New Century upgrade was that subprime mortgage lender Fieldstone Investment Corp., a smaller, more troubled subprime REIT, recently was able to renegotiate its lines (and remain operational) despite breaching several key covenants.

In late December, Fieldstone, also a real estate investment trust like New Century, told investors that in anticipation of downbeat fourth-quarter results, it restructured its financial covenants in exchange for lines of credit under four agreements for up to $1.8 billion.

The new terms with JP Morgan Chase & Co., Credit Suisse Group and Lehman Brothers Holdings Inc. require Fieldstone to maintain its tangible net worth at $365 million, as opposed to the previous $400 million. In addition, the lenders agreed that the operating loss projected by Fieldstone for the second half of 2007 will not result in a breach of agreements. Fieldstone said it is continuing to negotiate with the lenders to extend the current terms.

Fieldstone shares (Nasdaq: FICC), which have lost well over 50% in the past year, were better by 19 cents on Tuesday, or 7.51%, closing at $2.72. The stock's 52-week range is $2.50, which it hit last week, to $12.64.

The trader cited above said he doesn't feel Fieldstone has improved its situation much with the relaxed covenants, which he added also must be extended, but it may have some merit on recent speculation that it could be a takeover target. He said National Mortgage News, a trade publication, recently reported that the company has hired bankers to explore a potential sale.

Time Warner Cable slips

Time Warner Cable became an official public company on Tuesday, although the shares likely will not begin trading on the New York Stock Exchange until around March 1. Meanwhile, the when-issued shares were trading off on the valuation that Adelphia's plan used to estimate distribution.

In order to calculate the number of initial shares being distributed, Adelphia said Tuesday that a deemed value of $34.63 per share of Time Warner Cable was used.

Time Warner Cable shares (Pink Sheets: TWCAV) were not heavily traded Tuesday, but the stock lost 35 cents on the day, or 0.85%, to settle at $40.65.

The stock began traded on a when-issued basis Jan. 5 and opened at $43, which one trader said was way out of bounds as he pegged it at $38. Since then, amid several delays in the Adelphia plan getting confirmed and the company emerging bankruptcy, the stock has traded as low as $40 and as high as $44.

A considerable number of Adelphia bondholders have sold their Time Warner Cable shares during this period, another trader said Tuesday, which "seems to look pretty smart right now." He said trading in the when-issued stock has been hampered by a requirement to have a position in the bonds, although Adelphia stockholders also are expected to own 16% of Time Warner Cable once the distribution is made.

Last July, Time Warner Inc. and Comcast Corp. bought the cable systems of Adelphia in a $17 billion deal, with Time Warner paying $8.9 billion in cash plus 16% of equity in the new company, Time Warner Cable. The 16% equity - which is the subject of the distribution - amounts to 156 million shares of Time Warner Cable.

Also being distributed by Adelphia is what is referred to as CVV Interests - units in a trust pursuing certain claims against third-party lenders, accountants and other parties.

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