Equity Office, Phelps Dodge, U.S. Trust sales spark speculation; Doral shares sink; Winn-Dixie slumps

By Ronda Fears

Memphis, Nov. 20 - Merger mania continued to fuel volumes on Wall Street with a trio of mega deals announced Monday: Equity Office Properties Trust's $36 billion buyout by Blackstone Group, Phelps Dodge Corp.'s $25.9 billion buyout by Freeport McMoRan Copper & Gold Inc. and Charles Schwab Corp.'s sale of U.S. Trust Corp. to Bank of America Corp. for $3.3 billion.

The EOP deal also pushed several other REITs up sharply, namely Boston Properties Inc., Mack-Cali Realty Corp. and Vornado Realty Trust.

After Charles Schwab's sale of U.S. Trust with a hefty profit, as the San Francisco-based on-line discount brokerage bought it six years ago for $2.7 billion in stock, some were speculating that Schwab would become either a takeover target itself or might be looking for another acquisition, such as E*Trade Financial Corp., which saw a nice spike Monday.

Also of note in the banking sector, Doral Financial Corp. shares were on the retreat on speculation that the Puerto Rico-based bank was in talks with holders of its $625 million floating-rate notes due July 2007 to issue equity and cash from the sale of a portfolio of loans to refinance or repay the issue.

Elsewhere, players were looking at a slump in the Winn-Dixie Stores Inc. when-issued stock and noting another newcomer to the when-issued block: Nextwave Wireless LLC.

Winn-Dixie shares (Pink Sheets: WINNV) had been trading at $12 for the most part since the issue emerged last week, but took a dive of $1.30 on Monday to $11.20.

The new Winn-Dixie stock will be issued probably around 30 days after the Florida-based grocery chain's plan of reorganization is confirmed but the plan, which was approved Nov. 9, was appealed by The Florida Tax Collectors, creditor Liquidity Solutions, Inc. and several store landlords on Friday. And, on Monday, two more creditors - Orix Capital Markets, LLC and CWCapital Asset Management, LLC - joined the appeal.

Nextwave shares [Pink Sheets: NXWVV] have just started trading and are quoted at $6.

EOP sellers follow Zell's cue

Following what the pundits are calling the biggest REIT deal in history, traders said there was heavy selling in EOP shares. Excluding the $16 billion debt portion of the Blackstone deal, at $48.50 per share the price is an 8.5% premium to Friday's price and 20.5% above the three-month average.

EOP shares (NYSE: EOP) gained $3.42 on the day, or 7.65%, to $48.14 with some 37.2 million shares moved versus the norm of 2.5 million. It traded in a band of $47.80 to $48.52.

"There was huge profit taking on this news," one broker said.

The Chicago office property REIT will go private in the Blackstone deal. But the broker noted that EOP shares are up over 60% from a year ago, "and pretty much all the juice is out of it now."

"Yes, the REITs are hot stuff - just look at what Sam Zell [EOP chief executive] is doing, selling," said another sellsider. "I want to be on same side of the market as he is, not buying what he thinks is over valued."

Neither management nor the trustees of EOP are participants in the buying group.

Other REITs scream higher

The EOP news, however, sparked heavy buying into other REITs. The picks, traders said, were Boston Properties Inc., Mack-Cali Realty Corp. and Vornado Realty Trust.

"It was an awesome day," said a buyside risk arb trader. "This is what you live for. There is a huge amount of stress in these trades, but it's what we do. You have to have a strong stomach, a cast-iron stomach as they say."

Real-estate stocks have defied jittery nerves about valuations and economic slowdown, he said, and with $294.6 billion in M&A deals, including the EOP deal, already this year, "it doesn't seem like an end is in sight yet."

According to Morningstar Inc., so far in 2006, REITs have delivered the best performance for any sector category with a 27.9% return. Through Friday's close, EOP shares were up 52% for the year-to-date.

Boston Properties hit a new high with the shares (NYSE: BXP) rocketing up by $6.93 on the day, or 6.38%, to $115.55 after trading as high as $118, with some 2.62 million shares changing hands versus the norm of 704,976. The Boston office property REIT's shares have traded in a range of $72.90 to $109.88.

Mack-Cali shares (NYSE: CLI) shot up by $2.51, or 5.05%, to $52.17 after trading as high as $53.99, also on heavy volume. The Edison, N.J.-based REIT also is focused on office properties.

Vornado shares (NYSE: BXP) also hit a new high, climbing $3.91 on the day, or 3.34%, to $120.91 after trading as high as $125. The New York-based Vornado shares have traded in a range of $82.72 to $119.89 over the past 52 weeks.

"We expect the pace of REIT private-equity transactions to continue to accelerate over the near to intermediate term," said CreditSights analyst Rob Haines in a report Monday.

"From a fundamental perspective, we believe that the office sector is likely to continue to firm up over the near-to-intermediate term, which will allow private equity investors to continue to arbitrage the spread between public and private real estate values."

Phelps Dodge bets hedged

Freeport McMoRan's equivalent $125.46-per-share bid for Phelps Dodge Corp. at a 33% premium to Friday's close also tops the near 30% year-to-date return for Phelps shareholders, but analysts and players alike seemed to think that the deal may have to be bumped a bit higher. Of the $25.9 billion offer, $18 will be paid in cash.

The transaction, if approved by shareholders, would create the world's largest copper miner, topping Codelco of Chile. But there was a huge amount of angst about the prospect of it not getting done, traders said.

Thus, traders also noted heavy volume in Phelps Dodge options for December. Particularly the $125 calls, which one broker said saw the most action with a $1.65 gain to $2.05. Conversely, he also saw the $125 put drop $21.50 to $6, as players reined in the premiums on that play.

"A lot of bets were in place, but they were all covered, too," said one broker. "There is a lot more deal risk on this one than EOP, I think."

New Orleans-based Freeport is offering $88 per share to Phelps Dodge stockholders plus 0.67 share of Freeport stock. The $126.46 work out was based on Friday's close of $57.40 for Freeport shares (NYSE: FCX), which dropped $1.77 on the news Monday, or 3.08%, to close at $55.63.

Echoing sellside equity analysts, one trader said he doesn't think "anything under $150 will be acceptable to stockholders." Prudential Equity Group analyst John Tumazos was one of the proponents of a higher price tag; he upped his target on the stock in October to $170 from $110.

Phelps Dodge shares (NYSE: PD) surged to nearly $124 before easing back to settle the session higher by $25.45, or 26.78%, at $120.47. A whopping 29.2 million shares changed hands versus the norm of 5.3 million.

"The risk is that if they hold out for a bigger offer the deal will fall through altogether, like the Phelps Dodge bid for Inco," one broker said. "Yeah, a better bid would be nice, but with the Inco/Falconbridge buyout, you might be hanging your hat on a PE [private equity] buyout. Not impossible, though. They obviously have deep pockets (see the EOP news)."

Another said: "I wonder if someone like BHP [BHP Billiton Ltd.] or RTP [Rio Tinto plc] might want to join the fray here."

Phoenix-based Phelps Dodge earlier this year had been pursuing the purchase of two Canadian mining concerns, Inco Ltd. and Falconbridge Ltd. in a stock and cash deal worth $40 billion. But the three-prong deal collapsed and ended with Inco being controlled by Brazil's Companhia Vale do Rio Doce and Falconbridge being bought outr by Swiss-based Xstrata.

Doral shares trade off 4%

Elsewhere, Doral Financial shares traded down amid chatter in the capital markets that the Puerto Rico-based bank was working on a deal to offer holders of its $625 million floating-rate notes due July 2007 equity and cash from an asset sale, as it has openly said it needs to refinance or reorganize that debt.

Last week, Doral hired Bear Stearns and JPMorgan to help evaluate alternatives for refinancing those notes and restructuring its balance sheet to reduce interest rate risk exposure and improve its future earnings profile.

A caveat to the reaction in the stock was additional chatter that the hedged noteholders were wanting to run the stock down to $1 or as close thereabouts as possible beforehand so they get more shares. Then, the bet would be that when the dust settles, the stock will go up and, thus they stand to make more out of the deal.

Brokers saw no significant change in the short interest in Doral shares, at least on Monday, so either the move has yet to solidify or it has been staved off by negotiations with the company, one trader said.

Doral shares (NYSE: DRL) lost 28 cents on the day, or 6.31%, to close at $4.16.

A buysider speculated that a $1 stock figure probably stemmed from what holders would think a follow-on equity offering might fetch under the current strain the company is facing.

"Doral's alternatives to shore up are almost limited solely to issuing highly dilutive common equity," the buysider said. "Raising equity at a fraction of book value, and all these deals have to be discounted, or most of them, leads to an adjusted book value moving to $1/share. Asset values are hard to understand."

Doral preferreds a sweet spot

Perhaps the best place in Doral's capital structure, one sellsider said, is the 4.75% preferred shares, which he pegged Monday at 115.5 versus a par of 250.

"The Doral FDIC call report [cease-and-desist order on Doral Bank] situation looks really sad. I hear they did an accounts receivable facility and a mortgage portfolio sale for liquidity," he said.

"The interesting play is the 4¾% preferred, which if the company gets recapped is best upside piece of the structure."

The buysider agreed. "There is no doubt the preferreds are the sweet spot. The issue is currently yielding 9.54%."

In October, Doral first acknowledged it would require outside financing or other sources of capital to repay the $625 million floating-rate senior notes when they mature on July 20, 2007, saying it might issue high-yield bonds, equity or sell assets to fund the refinancing or restructuring.

Credit analysts have said the company's low capital levels and a high percentage of hybrid equity along with the floaters are troublesome short-term and long-term concerns include regulatory restrictions on Doral Bank, ongoing capitalization constraints, poor operational performance in 2006, and potential financial impact from lawsuits and the change of business model from a mortgage company to a full service bank.

Schwab hunting or hunted?

In another bid deal Monday, Charles Schwab Corp. announced the sale of its U.S. Trust Corp. unit to Bank of America Corp. for $3.3 billion in an all-cash deal which will vault Bank of America to the top spot in private banking, with $261 billion of assets under management.

Charles Schwab shares (Nasdaq: SCHW) gained just 38 cents on the day, or 2.05%, to $18.94 as traders said there was heavy speculation that it would be on the hunt again or planning to sell out. As a buyer, sources pegged E*Trade Financial Corp. as a likely target, but many think Schwab is inclined to be a buyer rather than seller.

E*Trade shares (NYSE: ET) were up $1 on the day, or 4.19%, to $24.85.

"I have been thinking about the idea that Schwab shedding off U.S. Trust. What it does is help reinforce my original idea that Chuck is trimming down the company to sell it. He sold the board seats and the market making division to UBS, and then the U.S. Trust division to Bank of America, for a nice profit I might add," said a buyside trader.

"This leaves a more focused, pure play on the online banking space. In the brokerage business, you are either growing or you are shrinking. These divestitures lead me to believe that Chuck is simply making the entire company more digestible for sale and has now made the most of the parts that a potential buyer would not want. We also now know that Bank of America will not be buying Schwab, just U.S. Trust.

"The way I see it, Chuck is either going to buy E*Trade or sell out to the likes of UBS. Now that Chuck has stripped the company down to its core business, someone can buy the remainder.

"In the meantime, until a deal happens, the company can now buy back a ton of stock. E*Trade's business model is not as attractive as Schwab's but the same people that would be interested in buying Schwab would probably buy a combined Schwab/E*Trade. But I think Chuck is selling out. He does not seem to be in an expansionary mindset."

Charles Schwab bought U.S. Trust in 2000 for $2.7 billion all-stock merger. Schwab itself was bought by Bank of America in 1983 but split off in 1987 in a $280 million management-led buyout.

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