Altria, Kraft players cheer, exit; Bristol-Myers speculation widens; Google gyrates; Delta Air dives

By Ronda Fears

Memphis, Jan. 31 - Tobacco giant Altria Group Inc.'s spinoff of its 89% stake in Kraft Foods Inc. was no surprise, but, as so much of the benefits had already been priced in, the negative overhang of a potential hefty dilution to Kraft caused many players to cash out Wednesday, though not without having made a good chunk of change in the trade.

Bristol-Myers Squibb Co. continued to climb, however, amid speculation that the drug giant hiring a team of bankers might mean that it is not married to a deal with Sanofi-Aventis SA but, rather, will be encouraging a bidding war that could include other drug giants Pfizer Inc., Schering-Plough Corp., AstraZeneca plc, Merck & Co. or Eli Lilly & Co. All but Merck were higher in trade Wednesday.

Delta Air Lines Inc. took a nosedive, though, on Wednesday as US Airways Group Inc. stepped away from its hostile bid of $10.2 billion, which had been boosted from $8 billion in mid-November. That news also sent peer bankrupt air carrier Northwest Airlines Corp. into a steeper tailspin. US Air, however, got a big bounce on the news.

Back in drug names, the biotech AtheroGenics Inc. was taken down sharply Wednesday amid rising concern that the market has over-valued the stock based on upcoming results for its heart drug that is in trials, a trader said. In another medical-related story, Alliance Imaging Inc. was higher; the company said at a financial presentation that it is looking for acquisitions.

Online search engine Google Inc. also was backtracking in a big way in after-hours action after making a big run ahead of its earnings report following the closing bell. The earnings were sharply higher but not as exciting as investors had anticipated. Traders had described Google options activity as "nuts" and had remarked that there would be a huge unwinding if the numbers were not where they wanted.

Earnings also boosted Hilton Hotels Corp. on Wednesday as well as Starwood Hotels & Resorts Worldwide Inc., although Starwood does not report results until Thursday. A trader said, however, that especially Hilton's news was a big boon for lodging players who are "expecting some consolidation in the sector." Hilton shares (NYSE: HLT) gained 99 cents on the day, or 2.88%, to $35.39, while Starwood shares (NYSE: HOT) shot up $2.15, or 3.56%, to $62.58.

Google options go ga-ga

Google's stock traded in a typical seesaw pattern on the earnings, according to one trader, but another said the options activity portended a major reversal because growth at the online search engine did not live up to expectations and some see the story getting stagnant because of acquisitions.

The stock (Nasdaq: GOOG) shot up $7.18, or 1.45%, to $501.50 ahead of the earnings, which came out right after the close. When the numbers hit the tape, the stock dropped as much as 3.7%, a stock trader said, but the last after-hours trade was at $492.03, a drop of $9.47, or 1.89%, from the close.

Options were where it got crazy, though, another trader said. He said there was a huge spike in the levels and volume of February calls between strike prices of $520 and up to $580.

"Google options are nuts, all the way up to $580," the options trader said.

"People are looking for some big move tonight but these options are going to evaporate if there is a big disappointment."

After seeing the numbers, which were well ahead of analysts' expectations, the options trader said the market had been anticipating a better signal for future growth. Instead, he said, it seemed that growth could be stalling at the online search engine giant because of acquisitions.

Expectations that Google would post strong results had been growing in the past few days on the strength of reports about its December market-share gains, but the price retreat in after-hours activity was of no concern to the stock trader.

"This is the pattern for Google," he said.

"Google always makes this big surge ahead of the earnings, then regardless of what the numbers are - and they have nearly all been ahead of the Wall Street consensus - the stock snaps bag in a big way just as the numbers come out."

Mountain View, Calif.-based Google posted fourth-quarter net income of $1.03 billion, or $3.29 a share, up from $372 million, or $1.22 a share, a year earlier. The First Call consensus called for $2.92 a share. Sales surged to $3.21 billion, up 67% from $1.92 billion, also passing the analyst consensus of $2.19 billion.

Many Altria, Kraft players exit

After months of waiting on Altria's divestiture of its remaining stake in Kraft, the transaction date of March 30 was announced Wednesday and players set up on call spreads were cheering, but many were cashing out with profits as they see little further upside potential, traders said.

"This was a big winner for us," said one risk arbitrage trader.

Kraft shares (NYSE: KFT) traded in a band of $34.13 to $35.20 before settling with a gain of 9 cents at $34.92. Altria shares (NYSE: MO) closed out with a loss of 15 cents to $87.39.

Altria announced plans to spin off its remaining stake in Kraft around mid-2006 so the event had been anticipated and the market had priced in virtually all of the benefits perceived from it - namely shedding the cigarette liability for Kraft and relinquishing the management of the food division for Altria. A 19% decline in Kraft net income was another slam to the story, traders said.

"One argument is that it has to make sense that separating the cigarette liability from Kraft will cause Kraft to go higher. But so much of that was priced into the stock months ago," one trader said.

"So, today we were seeing people bailing out because it suddenly struck them that there is also a big negative overhang - all these Altria holders getting Kraft shares may be anxious to sell, and if not, then there still is this big dilution effect from the extra stock."

Altria is distributing 0.7 share of Kraft to each of Altria stockholder. Stockholders of record as of March 16 will receive the distribution, which will be made March 30.

Without Kraft, the holding company Altria will be mostly a tobacco company, controlling 100% of Philip Morris USA and Philip Morris International as well as 28.7% of the London-based brewing concern SABMiller plc, which it spun off in 2002.

Bristol-Myers seen going to $31

A buyout for beleaguered Bristol-Myers is definitely being cheered on by investors, and amid rumors that a bidding war may ensue, an options trader Wednesday said that investors thus far have capped a deal at roughly $61 billion, or $31 per share, which is a bit more optimistic than analysts who have pegged it between $50 billion and $60 billion.

Bristol-Myers shares (NYSE: BMY) gained 76 cents on Wednesday, or 2.71%, to $28.79. The rumors have boosted the stock from around $26.25 on Friday.

"It's not really an amazing story looking at where the market is saying they expect a Bristol-Myers deal versus where the stock has been trading," said one trader.

"The market is saying it doesn't think they are going to get a deal over $31 a share. That's what the options activity is telling you. You have to realize, too, that these rumors have been flying around about Bristol-Myers since December when they brought on a new chairman to make sure they sell the company."

At $31 a share, with 1.97 billion shares outstanding, the Bristol-Myers price tag would be roughly $61 billion, he said, while analysts are projecting a Bristol-Myers deal could be priced between $50 billion to $60 billion.

The drag on a deal, the trader said, are the basic factors holding the entire range of Big Pharma stocks back - generic competition, the lack of up-and-coming new drugs, and taxes.

The buyout buzz broke Monday with the French financial newsletter La Lettre de l'Expansion saying there had been a pre-merger deal inked with Sanofi with a closing expected in a few weeks. But speculation widened Wednesday that Bristol-Myers was looking for better buyers by hiring an investment banking firm. Potential rival bidders are the usual suspects - other drug giants Pfizer Inc., AstraZeneca plc, Merck & Co. or Eli Lilly & Co. Merck was the only decliner among those big pharmas, with Lilly marking a big 2.6% advance on its earnings.

According to a report in the Financial Times, Bristol-Myers has added Lehman Brothers to its list of advisers to work alongside Citigroup and Morgan Stanley to examine alternatives.

ImClone Systems Inc., a small biotech in which Bristol-Myers holds a 17% stake, is another way to play the Bristol-Myers story, and the trader noted that another plus for this story is that noted financier and activist stockholder Carl Icahn holds a big stake. ImClone has abandoned efforts to seek a deal, but the trader said the stock is getting a push from the Bristol-Myers situation.

ImClone shares (Nasdaq: IMCL) were off 13 cents to $29.46 in the regular session Wednesday but were higher in after-hours activity by 45 cents, or 1.53%, to $29.91.

Delta, Northwest in nosedive

Traffic was next to dead in bankrupt airline stocks Wednesday as US Airways pulled its hostile bid for Delta due to lack of support from creditors in the Atlanta-based carrier's bankruptcy. That, in turn, put added pressure on Northwest. But in both stocks traders noted very light volume, and many see those stocks essentially in a bottomless nosedive.

Delta shares (Pink Sheets: DALRQ) lost 8 cents, or 6.9%, to $1.08. Meanwhile, US Air was cheered with an advance of $2.88, or 5.42%, to $55.98.

Delta creditors in the bankruptcy voted against US Airways' bid; the company had imposed a deadline of Feb. 1 to respond to its offer. Thus, Delta's stand-alone reorganization plan will go to a vote of its creditors in the bankruptcy on Feb. 7.

Northwest shares (Pink Sheets: NWACQ) extended a string of recent losses with a decline of 13 cents, or 3.79 %, to $3.30.

The stock had run up to a 52-week high of $6.55 in mid-December amid speculation that it could be seeking a merger, perhaps even with Delta. Northwest had got bankruptcy court approval in December to hire Evercore Group LLC to explore acquisition alternatives. But Delta has denied that a link-up is being explored with Northwest and since the US Airways-Delta deal began unraveling over the past week, Northwest shares have been severely hit.

Alliance Imaging on the hunt

Alliance Imaging shares were higher Wednesday, although traders said it likely had nothing to do with a company presentation in which chief executive Paul Viviano said the company has begun evaluating acquisition targets that are currently available or likely to be offered in the future.

The stock (NYSE: AIQ) added 4 cents on the day to $6.99.

Viviano spoke Wednesday at the Wachovia Securities Small and Mid-Cap Healthcare Conference in Boston, but a trader said that news probably had not filtered out to many players. He said Alliance Imaging shares have been trading sideways since the first of the year after a drop in late 2006 because of concerns about Medicare and insurance reimbursement reform.

Viviano said in his presentation Wednesday that the company's growth strategy largely hinges on the theory that declining reimbursements will cause many of its competitors to sell, restructure or close their businesses in 2007.

Anaheim, Calif.-based Alliance Imaging provides diagnostic imaging services to hospitals and other health care providers, including magnetic resonance imaging and positron emission tomography and positron emission tomography/computed tomography services.

"We believe we're in a very strong position in a very, very challenging industry. We're going to take advantage of those opportunities and be very proactive about picking up volume, about evaluating acquisition opportunities and about focusing on how we can be more efficient and effective in growing our business," Viviano said.

"The deal flow in our business is accelerating at quite a pace."

Alliance has already received calls from potential acquisition targets, he said, without naming any specific company.

AtheroGenics value reset lower

In another biotech name, AtheroGenics shares were pulled back sharply Wednesday without news, and one trader said it was due to a major correction in the value of the stock based on expected results from a clinical trial of the company's lead heart drug. And, he said the retraction may not be over.

"I think it has a ways to go yet," the trader said.

"There are some people saying that if this drug flops the stock could go to $1. On the other hand, if it turns out to be a blockbuster, then it could be worth $80. I think that's crazy."

AtheroGenics shares (Nasdaq: AGIX) lost 51 cents on the session, or 4.14%, to settle at $11.80.

The stock spiked higher in early January on speculation that the company would soon release positive results from the trial for its coronary drug candidate AGI-1067, he said, adding that there has been some speculation that the company may be a takeover target of AstraZeneca - it's partner on the drug - but that has cooled off as well as the excitement about the drug candidate.

But the stock began to sharply retrace those gains after AtheroGenics on Jan. 8 said that it did not plan to release initial results from the phase 3 clinical trial for AGI-1067 until late in the first quarter. The company said it aims to present the trial data at the American College of Cardiology Scientific Sessions in March.

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