Alliance Data lags deal; 24/7 up; Doral falls but settles above deal; EGL slips; Devon, Nabors climb

By Ronda Fears

Memphis, May 17 - Credit card services provider Alliance Data Systems Corp. shot up Thursday after agreeing to a buyout at $7.8 billion, including debt, by private equity firm Blackstone Group, but the stock lingered well below the takeout price, which one trader attributed to profit takers outnumbering willing arbitrageurs.

Online advertising concern 24/7 Real Media Inc. also saw considerable profit taking on its takeover by British advertising giant WPP Group plc on Thursday for $649 million, as the stock's run over the past five months had already put the stock close to the deal terms, another trader said.

Doral Financial Corp. on Thursday inked a deal to pay off its $625 million floating-rate notes that come due in July - a below-market buyout by Doral Holdings, a group of investors led by Bear Stearns Merchant Bank and Goldman Sachs - and while the news sent the stock reeling, traders said it was propped up to close well above the buyout price. Doral's debt - the floaters and several preferred issues - were higher.

The battle for Houston-based shipping company EGL Inc. came to an end Thursday with CEVA Group plc, an affiliate of Apollo Management LP, declared the winner with its $46-per-share bid, after EGL chief executive James Crane and Centerbridge Partners and The Woodbridge Co. Ltd. failed to match or beat it. CEVA started the bidding war in mid-March; Crane had been working on a management-led leveraged buyout since January with a bid at that time of $36. Many speculators were exiting the EGL story to move on to other situations, traders said. The stock (Nasdaq: EAGL) fell $1.12, or 2.42%, to $45.18.

Oil's surge renewed interest in drilling and independent exploration companies Thursday, many of which have seen speculation for months as takeover candidates. Those with the heaviest takeover chatter are driller Nabors Industries Ltd. (NYSE: NBR), which added 73 cents, or 2.09%, to $35.63, and exploration company Devon Energy Corp. (NYSE: DVN), which gained $1.48, or 1.97%, to $76.57.

"With oil acting so well and some people talking about $80 oil, adding any possible takeover candidate in the sector makes sense strategically," one trader said. "At these prices I wouldn't say they are cheap but there seems to still be a lot of upside. A lot of smart people are getting involved right now.

The July crude oil contract surged $2.31 to $64.86 a barrel Thursday on the Nymex.

Alliance Data up after close

Alliance Data continued to rise in after-hours trading but still remained well below the Blackstone deal terms at $81.75 per share - a 30% premium to Wednesday's market. The stock advanced only to $80.30 before heavy selling pushed it as low as $77.69 in the session.

It (NYSE: ADS) settled at $78.46 for a day's gain of $15.50, or 24.62%, on volume of 24.8 million shares versus the norm of 1.06 million shares; in after-hours activity the stock added another $1.50 to $79.96.

Traders said longs were taking profits to move on but they were at a loss to explain why there were not enough buyers, typically risk arbitrageurs in these situations, in the market Thursday.

"I don't know," why the stock did not reach the takeout price, "except to say that profit taking was outweighing arbs playing the situation," one trader said.

Another trader agreed it was a "head-scratcher," noting that the call spread on the deal was "very decent" and there did not seem to be much deal risk since it was a private equity takeout.

He noted that there was a similar trading pattern for credit card transaction processor First Data Corp. when its $29 billion buyout by private equity firm Kohlberg Kravis Roberts & Co. was announced in early April. The $34-per-share price - a 26% premium at the time - reflected little faith that a better bid would come along.

Alliance Data shares got "some lift from the First Data event, but really only moved up about 3 ticks, so there was not a massive amount of speculation."

24/7 holders take profits

Speculation that has lingered around 24/7 for nearly six months now had pushed that stock nearly to the limits of a deal price tag, however. Thus, there was heavy selling on the news Thursday that WPP Group was buying 24/7 for $11.75 per share - a 4% premium to Wednesday's market.

The stock (Nasdaq: TFSM) traded in a very tight range of $11.64 to $11.84 during the session before settling at $11.65 for a gain of just 39 cents on the day, or 3.46%.

"All the juice had already been squeezed from this one," another trader said, noting that 24/7 shares had gained almost 50% in just the past two months on takeover speculation. "There had been rumors that a deal was coming in the neighborhood of like $1 billion, but you can see by the stock price that there had not been a lot of people buying that."

Takeover chatter in the online media name began in December on Publicis Group SA's buyout of interactive marketing firm Digitas Inc. at $1.3 billion and was perpetuated further when Google Inc. bought DoubleClick Inc. in mid-April for $3.1 billion, which sparked some of the biggest moves in 24/7 shares.

On Friday, 24/7 gave credence to the market chatter when it announced that it had hired Lehman Brothers Inc. to help review strategic alternatives - the Wall Street catchphrase for going on the auction block.

WPP shares (Nasdaq: WPPGY) also gained on the news, adding 11 cents to $75.14, but volume was very light.

Doral shares find support

Shares of Puerto Rico-based Doral were bludgeoned by the discounted buyout news, in which the Bear Stearns group is taking 90% and leaving existing stockholders with a 10% ownership position, but traders it was propped up to close well above the buyout price. One speculated that bondholders were buying the equity in order to minimize the risk of the deal not getting stockholder approval.

"They want to hold it [the questionable votes regarding the deal] to under 10%," the trader said.

Doral shares were actually halted for all of Thursday's session but were trading verbally in an over-the-counter fashion; so, much of the trading was "blind," as another trader put it. After the closing bell, the stock (NYSE: DRL) had chalked up a loss of 24 cents, or 19.35%, to last stand at $1.

Early in the session, with the news on the wires before the open, Doral stock was halted due to order imbalances - "overwhelming selling interest," the trader said. When the day's dust settled, there were still plenty of sellers, he said, noting at the close he saw 10 million shares on the table offered at 99 cents.

By a third trader's reckoning, the deal was a "prisoner's dilemma for equity - get zero or cut your legs off. I like the plan but I think they should have given the equity ability to buy in at $0.63 with [a] rights offering, and if I was an equity holder I would fight like crazy."

But the previous trader thought the stockholders were fortunate to get anything.

"Typically, in a situation like this - so distressed that it really resembles a bankruptcy reorganization more than anything else - the stockholders are just left holding the bag, a worthless piece of paper," the trader said.

"They are lucky to walk away with 10% if you ask me."

In addition to stockholder approval, the buyout group also still must come up with another $215 million in funding, according to Doral's press release.

Doral stockholders also will see some of the proceeds as the bank will use it to pay for a class action shareholder lawsuit settlement alleging the company misled investors about the value of some of its investments. The company agreed to pay shareholders $129 million in April to settle the suit; of that, $34 million was to be covered by insurance.

Doral floaters trade to 99

But Doral will use most of the deal proceeds to repay its $625 million of floating-rate senior notes that mature July 20. That issue was the root of Doral's demise, according to market sources, who noted that many of the investors in the buyout are bondholders who have been negotiating with the company and a refinancing for months.

Early in the day, a bond trader said the floaters were trading in the 99 levels. Another trader parroted that number at the close, while another said he saw the bonds around 97.5 bid, 98.5 offered.

As far as the bonds, another trader said, "in my view you sell [or] short these [at] 98.75. [There are] a bunch of hurdles to get this done by July, [and I] think the downside risk far outweighs the little upside."

Still others think the deal will get done.

"If somebody decided they want to take a chance at a turnaround, that's the only way out for these guys," said Tom Carroll, an analyst with Imperial Capital LLC. "It's too close to go time for them to reject this. Something is better than nothing."

Carroll was surprised that the takeout was for under the previously thought levels of $700 million to $800 million but said it could not be a surprise that shares would go for less than a dollar.

"They had to know it was going to be below a buck," he said. "It's hard to believe that anyone was caught off guard by this."

In April 2005, Doral said it needed to restate five years of financial results because it incorrectly calculated the value of some of its mortgage-backed bonds. Those bonds had floating interest rates, and the bank said it recorded the value of the bonds using the wrong interest-rate guide.

The restatements ultimately led the bank to reduce its earnings during the five-year period by nearly $700 million.

Meanwhile, repayment of the floaters became an issue for the bank as well.

Bondholders had been talking with Doral about a debt-for-equity swap, market sources have said, but they wanted the equity to be valued at $1 per share or lower in those calculations. They also wanted a substantial cash payment, which had been rumored in the $275 million area, sources said.

The refinancing discussions have been taking place for well over six months, according to market sources.

Doral preferreds still sweet

Doral's preferreds remained the sweet spot in the capital structure, traders said, noting the company had continued to pay dividends on those four issues throughout the refinancing ordeal.

The 4.75% convertible preferred has been in the 115 bid, 130 offered neighborhood for weeks, and on the news Thursday a trader said he saw bids in the 140 and 150 area but not a lot of trades early on. At first, he said, the market for the 4.75s was stymied with bids at or below 150, providing no motivation to sellers. Eventually there were some bids hit, but traders said the traffic was very light in that issue.

Doral's 4.75% preferred (Pink Sheets: DORLL) ended the session with a gain of $20, or 15.97%, at $145.25. Par on that issue is $250.

Doral's three other straight preferreds traded heavier and with more significant gains.

The 7% series A (Pink Sheets: DORLP) gained $7.50, or 27.27%, to $35.

The 8.35% series B (Pink Sheets: DORLO) added $4.70, or 28.48%, to $21.20.

The 7.25% series C (Pink Sheets: DORLN) advanced $4.80, or 35.56%, to $18.30.

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