Sallie rides going-private rumor higher; Bally bounces; Calpine climbing; Novastar Financial off

By Ronda Fears

Memphis, April 13 - Amid a nationwide student loan scandal, SLM Corp., or the student loan company better known as Sallie Mae, rocketed Friday after rumors circulated that the student lender is in talks with private equity firms about a buyout in the neighborhood of $20 billion, traders said.

Meanwhile, a handful of other companies that went on the auction block during the week marked gains going into the weekend ahead of Merger Monday. Those included steel concern Ipsco Inc., biotech MedImmune Inc., independent power producer Mirant Corp. and nursing home operator Manor Care Inc.

Beleaguered subprime mortgage lender Novastar Financial Inc., however, slid into the weekend. One distressed trader said interest in subprime mortgage stocks "has trailed off dramatically" amid waning hope of any decent recovery levels. Novastar shares (NYSE: NFI) slipped 2 cents to $5.10.

"They will sell; you can bet there are lots of low-ball bidders for these loans, but the common stockholders shouldn't look for a lot," the trader said.

Sallie sails amid speculation

Blackstone Group is a potential bidder for Reston, Va.-based Sallie Mae, according to a report in The New York Times, citing unnamed sources. One trader said that the rumors fueled heavy buying in the stock as well as call options pegging a deal between $45 per share and $50 while there was some conjecture that a price tag could top $55.

Sallie Mae (NYSE: SLM) rocketed up by $6.01, or 14.75%, to close Friday at $46.76. The trader said call options in virtually all months saw huge volume on the $50 contract; likewise, he said the $45 puts saw huge volume.

While the media reports put the takeover talks at $20 billion, which would be roughly $48.72 per share with 410.5 million shares outstanding, the trader said there was a sellside shop saying Sallie Mae should fetch at least $55 per share, or around $22.6 billion.

"The firm believes that the speculated acquisition price does not fully encapsulate the potential value opportunity within the shares. They believe a fair value for SLM shares would imply a price of at least $55," the trader said.

"They also believe that the implication that SLM is receptive to acquisition offers will induce competitive bids from other financial institutions that are associated with the student lending industry. The potential for increased competition around SLM may help alleviate the near-term pressure, which headlines and legislative concerns have applied to the stock."

Sallie Mae was a high-profile target of a sweeping nationwide investigation into alleged kickbacks to college officials from lending companies. Earlier in the week, New York attorney general Andrew Cuomo announced a settlement with Sallie Mae in which it would adopt a new code of conduct regarding student loans and contribute $2 million to an education fund.

Bally up on refi, deal hope

Health club operator Bally Total Fitness Holding Corp., which warned last month it may be forced into bankruptcy, shares bounced Thursday on short covering by bondholders, according to a trader, who said there was confidence of a refinancing and chatter of a possible takeover.

On Friday, Bally said it has obtained a waiver of sorts related to its $284 million senior secured credit facility; the company also said it will not make a $15 million coupon payment due Monday on its 9 7/8% senior subordinated notes due October 2007.

Bally (NYSE: BFT) traded in a band of 67 cents to 84 cents before settling Friday at 70 cents, a gain of 4 cents on the day, or 6.06%.

"Liquidity is up to $54 million as of April 11 from $45 million on March 14 - nice," the trader said. "There are some folks who think they will get the waiver for payment and then will refinance - double nice. The biggest stockholders are the bondholders, so that tells me it is pretty firm. We also heard that there as some chatter that there could be a takeover very quickly, before the October note will be do."

The company said it is in talks with bondholders regarding waiver and forbearance agreements on the 9 7/8% notes, and declared liquidity of about $54 million as of Wednesday. The company said that outside of the bonds about to mature, it believes it has enough operating liquidity to continue into 2008.

Under the forbearance agreement with bank lenders, they won't exercise any remedies under their credit agreement as a result of defaults due to Bally's inability to provide financial reports for the fiscal year ended Dec. 31. The forbearance period expires July 13 but may expire earlier under certain conditions.

The Chicago-based company warned March 15 it may file Chapter 11 bankruptcy because of trouble repaying some $827 million debt, $300 million of which are the 9 7/8% bonds. But skipping the coupon on that issue also will nonpayment on the subordinated notes will trigger a cross default under the indenture governing the company's 10.5% senior notes maturing in 2011.

Bally stock also is under a threat of delisting due to the company's failure to file its 2006 annual report on time, among other factors.

Mirant higher into weekend

Going into the weekend, players were picking up Mirant Corp. shares on the possibility of a deal getting announced on Monday, traders said. The Atlanta-based power producer announced April 9 that it was considering a possible sale and other measures to boost shareholder value, following several big asset sales that will wrap up over the next few months.

In addition to Mirant common shares, traders reported interest in the series A and series B warrants - which were distributed in the company's bankruptcy reorganization - are getting lots of buyers.

Mirant common stock (NYSE: MIR) gained 96 cents, or 2.18%, to close Friday at $44.95. The series A warrants (NYSE: MIR-WTA) climbed 80 cents, or 3.21%, to close at $25.70, and the series B warrants (MIR-WTB) rose 62 cents, or 2.39%, to end at $26.57.

"My guess would be that every Friday will see extra interest in Mirant as people expect an offer by Monday. If the announcement last week was caused by the submission of a bid to Mirant then something could roll out in the near term, but it should be a starter bid followed by a go-shopping period," the trader said.

Even without a deal, this trader thinks there is good reason to buy and hold Mirant.

"There's no reason to try to jump ship too early because whether Mirant jettisons cash to shareholders and then makes a move or they just sell out ahead of time, there should be something very interesting on the horizon in the near term," he said.

"Beyond that, one could consider that natural gas prices have firmed and with the extended winter natural gas supplies might get off to a slow start and plenty of natural gas has been contracted out for this year, so I think the generators are looking at a good year in terms of pricing, which should lead to more support for the stock price even if some other transaction wasn't going to happen."

Calpine steadily climbing

In another power name, bankrupt Calpine Corp. continued to see big buying Friday, which other traders also attributed to anticipation of deal news on the immediate horizon. The San Jose, Calif.-based independent power producer is looking for a merger or equity rights offering sponsor to back its Chapter 11 reorganization.

"It may not come Monday, but the rumor has been out there a while that they have a buyer on the hook," one distressed stock trader said.

Another remarked, "It's a monster. There is some serious buying. It could be all buy-ins or short covering, but probably not."

Indeed, rumors that private equity or another power name like AES Corp. in partnership with a private equity firm will make a bid for Calpine have sparked a steady increase in the stock price. While often times there is no distribution to equity holders in a bankruptcy, because there was a payout in Mirant's bankruptcy and other recent examples of that, such hope is largely behind interest in the stock.

Calpine shares (Pink Sheets: CPNLQ) advanced 27 cents, or 9.03%, to close Friday at $3.26. That followed a 22% gain Thursday.

But there was a seller earlier in the week who was thrashing himself by Friday.

"I watched it go up, up, up and on Wednesday sold off a big chunk thinking it would have to be hitting some big resistance," the buysider said, noting that the stock took a dive of nearly 7% on Wednesday.

Activist shareholder participation in the Calpine bankruptcy case, though, is fueling confidence that there will be a "decent" payout to common stockholders, the trader said. Calpine filed bankruptcy in December 2005, burdened by more than $22 billion in debt. Since then, it has sold roughly one-fifth of its 92 power plants and reduced its labor force by about one-third.

Calpine faces a June 20 deadline to submit a Chapter 11 reorganization plan.

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