Lone Star deal propels Ipsco, others; Tribune rises; Riviera recoils; IMAX off; CuraGen dives

By Ronda Fears

Memphis, March 29 - United States Steel Corp.'s expansion into oil and gas services with its $2.1 billion buyout of oilfield drill pipe maker Lone Star Technologies Inc. pushed both higher in trade, but the deal was characterized as risky by some arbitrageurs, keeping Lone Star well below the takeout price.

The deal also gave rise to other steel firms with a focus on oilfield pipe, such as Ipsco Inc. and Northwest Pipe Co., as well as steel suppliers to pipe makers, such as Friedman Industries Inc., traders said.

Elsewhere, Tribune Co. was getting a rise from further reports that billionaires Eli Broad and Ronald Burkle are back in the bidding for the Chicago-based media conglomerate against a $33 per share offer from real estate tycoon Sam Zell. The stock was "hanging back," however, as one trader put it, because of "tremendous doubt" regarding any deal since the company has been on the auction block for six months and many expect the March 31 deadline to consider bids will be extended. Tribune (NYSE: TRB) settled at $31.53, up 40 cents on the day, or 1.28%.

There were several story names southbound Thursday, however.

Riviera Holdings Corp. tumbled after the company's board rejected the buyout offer from Riv Acquisition Holdings Inc. for $327.6 million, saying they are prohibited from doing so under Nevada's takeover law because of actions by the buyout group.

CuraGen Corp. plummeted after the biotechnology concern announced its sale of majority-owned subsidiary 454 Life Sciences to partner Roche Holdings AG for up to $154.9 million. One trader said it was a huge bargain for Roche and "an act of desperation that did not go unnoticed," but he also observed after-hours buying on the downdraft.

IMAX Corp. also plunged after further delaying its 2006 annual report, which triggers default on bank and bond debt. The company said it has waivers from bank lenders giving it until June 30 to deliver financial statements and will be seeking the same from bondholders. IMAX shares (Nasdaq: IMAX), however, lost 6.15%, or 33 cents, to close Thursday at $5.04.

U.S. Steel deal risk factored in

While players in U.S. Steel and Lone Star alike were cheering the merger, pushing both stocks higher, risk arb traders were holding Lone Star back to price in some deal risk. With the negative overhang, one equity trader said there were outright sellers into the Lone Star rally late in the day.

Pittsburgh-based U.S. Steel is paying $67.50 per share, a 39.3% premium to Wednesday's market, for Houston-based Lone Star.

"I had one guy who was selling say they can have the last $1.50 if it's that risky," the stock trader said. "I guess he figured to just take 36% or whatever and move on."

Lone Star (NYSE: LSS) gained $17.66 on the session, or 36.45%, to close at $66.11.

In a statement, U.S. Steel said, "This transaction represents a compelling strategic opportunity for U. S. Steel to strengthen our position as a supplier to the robust oil and natural gas sector."

John Surma, chief executive of U.S. Steel, said it also widens the company's geographic footprint, since Lone Star has a pending joint venture in China, another in place in Brazil and is in discussions with a company in India. U.S. Steel has operations worldwide.

"With continued high energy price forecasts and anticipated growth in North American drilling, most industry observers believe tubular-product demand should remain robust," Surma said during a conference call.

But oil and gas drilling firm Nabors Industries Ltd., which has been rumored as a takeover target for months, on Thursday warned that it will miss Wall Street's first-quarter projections because of less drilling rigs operating in North America. Nabors (NYSE: NBR) lost 52 cents, or 1.71%, to close at $29.93.

On the analyst call, Surma was asked if he was concerned about Nabors' warning and said, "We would like to have more rigs working than fewer," but characterized the Lone Star deal as a long-term strategic maneuver.

In buying Lone Star, U.S. Steel is adding production of welded pipes used in energy drilling and transportation, a market to which it already supplies higher-margin seamless pipes. The deal will ratchet up U.S. Steel's yearly output of North American tubular steel to as much as 2.8 million tons, which will make it the top producer in that market.

Friedman flies with Lone Star

The deal also propelled several other steel pipe makers like Ipsco and Northwest Pipe as well as steel suppliers to pipe makers, such as Friedman.

"Everyone is embracing the consolidation trend in steel," another trader remarked. "Most of these companies are flush with cash, and steel is a fragmented industry that needs consolidating."

His pick was Houston-based Friedman, which is involved in pipe manufacturing and processing, steel processing and steel and pipe distribution.

"U.S. Steel just paid 1.5 times annual revenues for Lone Star - $2.1 billion for $1.4 billion in annual revenues. At that price, Friedman is damn undervalued with $200 million in annual revenues and a $60 million market cap. They have no debt, either," the trader said. "The damn thing trades at only 0.3 times annual revenues. If the thing traded at only 1.0 times revenues, it'd be a $34 stock."

Friedman (Amex: FRD) shot up to $9.70 in the session but eased back to close at $9.14 with a gain of 40 cents, or 4.58%.

Lisle, Ill.-based Ipsco was the pick among the bigger steel names, however, the trader said. The stock (NYSE: IPS) gained $12.20 on the day, or 10.32%, to $130.41 on volume of 7.19 million shares versus the norm of 935,398 shares.

Northwest Pipe, based in Portland, Ore., also had heavy volume, the trader said. That stock (Nasdaq: NWPX) gained 60 cents, or 1.56%, to $39.01.

Riviera bidders fumble deal

Riviera said its board rejected an acquisition offer from Riv at $27 per share because it had to do so under a Nevada law because the group signed a lockup and option agreement for 9.2% of Riviera's outstanding stock held by Triple Five Investco LLC and Dominion Financial LLC without prior approval by Riviera's board.

That, the company said, triggered defensive provisions of Nevada's business combination law and Riviera's rules on substantial stockholders. Riv and its related parties are now disqualified from engaging in an acquisition or other combination with Riviera for three years, as specified in the business combination law.

"Sounds like they shot their own foot," remarked one trader.

"But they may still get another bid, or some people think that's a possibility."

The stock had been trading above the buyout price on thinking the bid might have to be boosted since it was just a 6% premium when announced Monday, the trader said. The stock (Amex: RIV) lost 40 cents on Thursday, or 1.43%, to settle at $27.60.

The Riv group had bid $17 per share for Riviera last year, but that drew opposition from hedge fund D.E. Shaw & Co., a big stockholder, and it was voted down. The new bid had been contingent on the company waiving restrictions of voting rights of stockholders with a 10% stake or more.

"As a result of RAH's acquisition of a lockup and option without board approval, RAH and its related parties are not only disqualified from a merger or other combination with Riviera for three years, but if they buy our shares from Triple Five, Dominion Financial or anyone else without our board's prior approval, their voting rights as to those shares will be reduced to 1/100 of one vote per share, to the extent provided in our articles of incorporation," said William L. Westerman, chairman and CEO of Riviera, in a news release.

Curagen punished for unit sale

CuraGen plunged Thursday on its sale of its 454 Life Sciences subsidiary to Roche as the market thought the price was a huge discount and leaves the company with a drastically reduced revenue stream, a biotech stock trader said.

"Roche just got an 80% discount as we see it," the trader said. "CuraGen holders got hosed. You can't even hope for a counter offer because Roche is already too close to 454 for that to happen. This will go down as one of the dumbest moves in biotech history."

CuraGen shares (Nasdaq: CRGN) fell 77 cents, or 20.05%, to $3.07.

But the trader said there was some after-hours buying on the decline that pushed the stock up by 33 cents, or 10.74%, from the close to $3.40.

Piper Jaffray downgraded the stock to market perform from outperform, reducing its price target to $3.50 from $5, citing reduced revenues because of the deal and expected delays in a cancer treatment development program.

The majority of CuraGen's 2007 projected revenues were from 454 Life Sciences, and without that unit, CuraGen becomes a pure cancer drug discovery company dependent on its lead drug candidate Velafermin. Phase 2 trial results on Velafermin are expected in third quarter.

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