Doral stock, Jan. 2009 calls spike; Applica slides; EOP up after close; Calpine Canada off; Mills recovers

By Ronda Fears

Memphis, Jan. 10 - In after-hours action, rumors that hedge fund Cerberus Capital Management was preparing a rival bid for Equity Office Properties Trust to best the pending $36 billion - a record leveraged buyout - offer on the table from The Blackstone Group sent the Chicago-based REIT's stock soaring 1.68% following a gain of 1.2% in the regular session.

In another takeover battle, small appliance maker Applica Inc. was lower on the day as it deferred a stockholder vote for a week on the rival offers from conglomerate Nacco Industries Inc. and hedge fund Harbinger Capital Partners. Nacco shares, however, were up solidly along with household appliance maker Salton Inc., which majority owner Harbinger proposes to merge with Applica if it gains control of both companies.

Calpine Power Income Fund, another Harbinger target north of the border, was lower Wednesday, a day after the hedge fund said it was confident that its $831 million hostile takeover offer for the fund represents "full and fair value" despite its rejection of the bid. Calpine Power units (Toronto: CF-UN) lost C$0.14, or 1.09%, to close at C$12.89. Bankrupt San Jose, Calif.-based independent power producer Calpine Corp., however, which was a former sponsor of the Canada fund, saw a spike in its stock (Pink Sheets: CPNLQ) by 11 cents, or 7.86%, to $1.51.

Bankrupt airline paper, namely Delta Air Lines Inc. and Northwest Airlines Corp., also zoomed higher as US Airways Group Inc. boosted its hostile bid for Delta by roughly $2 billion to around $10.3 billion based on Wednesday's market. Renewed chatter that Delta and Northwest were in talks about a post-reorganization also boosted the latter's stock.

Elsewhere, companies seen verging on bankruptcy were of note, as well.

Doral Financial Corp., the Puerto Rico mortgage bank that has been struggling to refinance $625 million of floating-rate notes coming due this July to avoid bankruptcy, saw a huge spike in the stock and very bullish trading in call options on Wednesday amid rumors that a refinancing deal has been firmed up.

The Mills Corp. was rebounding Wednesday from a big drop the day before when the Chevy Chase, Md.-based mega-mall developer renewed warnings of a possible bankruptcy filing if it cannot refinance $1.1 billion of bank debt. The stock (NYSE: MLS) regained 65 cents, or 4.39%, to settle at $15.47, following a 22% plunge on Tuesday.

EOP bondholders balk

As the ad hoc committee of EOP noteholders maintain opposition to the tender offer and consent solicitation needed to clear the path for Blackstone's deal, which has been in the works for two months, late reports put Cerberus in the mix and sent EOP shares rocketing higher.

"I say they [Cerberus] are going to offer $53," said a trader on the West Coast, which would handily top Blackstone's bid of $48.50. He acknowledged that a $53 per share bid also would surpass the $50 mark, which is the top options contract levels thus far written on EOP.

EOP shares (NYSE: EOP) closed with a gain of 58 cents, or 1.2%, to $48.75 and advanced in after-hours activity by another 82 cents, or 1.68%, to $49.57.

Blackstone's $36 billion bid, including debt, for EOP emerged in November and is considered to be the biggest LBO in history if finalized. But it has run into resistance from an ad hoc group of bondholders led by American International Group Inc.

On Wednesday, EOP extended its tender offer for the $8.4 billion of bonds by a day and then again to Jan. 17 in the face of the opposition and sweetened its price. Under the new offer, EOP would repurchase the three bond issues at a yield spread of 70 basis points versus a previous offer of 160 basis points.

The West Coast stock trader said he thinks EOP bondholders may continue to balk and a fatter offer from Cerberus could seal a deal, but it likely will have to go significantly past the $50 mark that arbitrageurs have thus far set in options contracts.

"We're talking about the largest office REIT in the world, the Sam Zell [EOP chairman] empire," he said. "I think they will go a little higher."

He said there was speculation as well that Cerberus likely would have partners in a bid for EOP; chatter included Starwood Capital and Vornado Realty Trust.

Doral deal details seen directly

Doral Financial shares were sharply higher, skyrocketing in fact, as market chatter began to circulate Wednesday that a refinancing deal has been struck between the Puerto Rico bank and holders of the $625 million issue. Nothing had hit the wires by press time, but market sources said they expected details soon, perhaps by the week's end.

The stock (NYSE: DRL) shot up 42 cents on the day, or 19.91%, to close at $2.53.

While there were no fresh details speculated, the most recent chatter put the bondholders getting about one-third to one-half of the payoff in cash and the remainder in equity. Negotiations of the debt-for-equity split, traders have said, have hinged on a view by the bondholders that Doral shares were worth $1 or less.

Doral shares have come down from over $4 a couple of months ago when the refinancing talks were said to have gotten under way.

A couple of stock traders said Wednesday that even without knowing the finer details of the debt refinancing, they don't see Doral shares worth more than $2.

One trader said his best take on the stock move Wednesday was short covering with uninformed investors on the other end.

Doral calls show bullish sign

Another stock trader said short covering would not account for the surge in activity and a decidedly bullish trend in the Doral options contracts, particularly and surprisingly those for January 2009.

Option volume has been heavy for a couple of sessions, in fact, the trader said, with the heaviest activity showing buyers of January 2009 $2.50 and $5 calls. The $2.50 calls gained 30 cents to $1.40 and the $5 calls advanced 20 cents to 80 cents.

"I am not that bullish," he said.

He said there also was considerable activity in the January 2007 calls on Wednesday with the contract up 15 cents to 25 cents. The trader said it might make sense for buyers to pick up the options on the cheap but he could not see such big participation by the Doral bondholders; rather he would figure the bondholders to be net sellers of calls.

Doral's floaters were quoted on Wednesday at 94, up 2 points over the past couple of sessions, and a bond trader said that, as for move in bonds, his best assessment was that big holder(s) might just be figuring if they are involved in the story, they may as well be in big and end up with more of Doral equity following the refinancing, thus having more control to steer the future of the company by virtue of a majority equity stake.

A week ago, Doral's chairman of the board John Ward resigned after a disagreement with the board of directors over the future direction of the company - including a sale of the company versus piecemeal asset sales. Ward, who became chairman in July 2005 and was later interim chief executive, also objected to Doral's third-quarter earnings release and the process used to draft it.

Doral named Dennis Buchert, an independent director who joined the board in October, to succeed Ward as chairman.

Delta up 8%, Northwest up 9%

Delta Air Lines shares on Wednesday closed nearly the day's high as US Airways sweetened its bid for the Atlanta-based bankrupt carrier by upwards of $2 billion and renewed rumors put Delta in talks with rival bankrupt carrier Northwest Airlines about a post-reorganization merger boosted the latter's stock.

In what one trader said continues to be a "crazy" level of activity and interest, Delta shares (Pink Sheets: DALRQ) advanced 10 cents on the day, or 7.69%, to $1.40 after trading in a band of $1.36 to $1.41 with volume of 9.78 million shares versus the norm of 5 million.

Meanwhile, US Airways shares (NYSE: LCC) ended with a solid gain of $1.03, or 1.78%, at $58.93 but considerably shy of the session high of $60.04. Over 3.8 million shares traded versus the norm of 2.16 million.

Northwest shares (Pink Sheets: NWACQ), which also have seen escalating interest, zoomed higher by 43 cents, or 9.35%, to $5.03, easing back from the session high of $5.10, on volume of 8.95 million shares compared with the norm of 4.7 million.

Delta and Northwest bonds also were sharply higher Wednesday and traders said Delta bondholders waffled between exuberance because of the prospects of an extra $1 billion cash distribution in a US Airways deal and less enthusiasm about holding stock in a "new" debt-laden airline after the bankruptcy cases are concluded.

As for Northwest, traders said the outlook based on scenario of a post-bankruptcy merger with Delta would depend on Northwest's ability to attract a white knight sponsor for its reorganization. The Eagan, Minn.-based carrier faces a deadline of next Tuesday to file its reorganization plan.

Meanwhile, Wednesday opened with news from US Airways that it had raised its bid for Delta by roughly 20%, or $1 billion in cash and 11 million additional shares of US Airways.

Delta creditors would get $5 billion in cash and 89.5 million shares of US Airways stock, for a total deal value of roughly $10.3 billion based on Wednesday's market, under the revised offer. It is up from a previous bid of $4 billion in cash and 78.5 million shares of US Airways stock, which would be worth about $9.3 billion at current prices. Delta creditors would hold a 49% stake in the combined airline versus 45% previously.

Tempe, Arizona-based US Airways was created from a merger with America West while it was in bankruptcy in September 2005. The Delta offer would more than double its shares outstanding, which stood at 88.2 million at the end of September. The new debt would also far exceed its current market value of $5.1 billion.

In December, Delta submitted a stand-alone reorganization plan valuing the post-bankruptcy carrier at $9.4 billion to $12 billion. And the reaction and the company's answer Wednesday to the new US Airways offer was civil but shadowed by a continued staunch resistance.

"On its face, the revised proposal does not address significant concerns that have been raised about the initial US Airways proposal and, in fact, would increase the debt burden of the combined company by yet another $1 billion," Delta said in a statement.

US Airways made its original bid for Delta on Nov. 15 and it has served to divide Delta creditors, with the creditors group in the bankruptcy case leaning toward support of the Delta plan and an ad hoc group of creditors backing US Airways.

Gordon Bethune, the former chief executive of Continental Airlines Inc., is the new independent adviser to the Delta bankruptcy creditors committee, and widely expected to be a vote in favor of the US Airways merger, however. Bethune led Houston-based Continental from 1996 to 2004, taking over after two bankruptcies at the carrier.

On Monday, US Airways bolstered the financial muscle behind its effort by adding Morgan Stanley as a lead backer for its plan, joining Citigroup, raising the committed capital for the merger to $8.2 million from $7.2 million. But the afore-cited trader said the cash payout is weighed against some level of ownership in a post-bankruptcy airline made up of US Airways and Delta and a hefty debt burden.

A Feb. 1 deadline was imposed by US Airways for Delta creditors to react to the latest bid. There is a Feb. 7 bankruptcy hearing scheduled to start the voting process on Delta's stand-alone plan, which might be delayed if US Airways gets a signal of support for its plan.

Applica defers vote by a week

The time line in the Applica story, however, was pushed back by a week on Wednesday as Nacco Industries yet again bumped up its rival bid to $7.90, topping a matched offer of $7.75 from Harbinger and market a third round of bidding.

A trader in Applica said he still does not see the stock worth more than $8 and on the turmoil, Applica shares (NYSE: APN) slipped by 2 cents, or 0.25%, to close the day at $8.03, a touch off the day's high of $8.04.

Nacco shares (NYSE: NC), meanwhile gained $1.37, or 1.03%, on the session to settle at $133.81.

Applica adjourned a special shareholders meeting Wednesday that had been called to vote on the merger agreement with affiliates of Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, LP.

Because of Nacco's boosted bid, however, the meeting has been reset to Jan. 17, but Applica said the record date for holders who can vote will remain Nov. 27, 2006. The ordeal began in October when Harbinger made a $6-per-share bid for Applica.

Nacco has formed Apex Acquisition Corp. to accomplish the Applica merger, and extended its offer to Jan. 23. The Mayfield Heights, Ohio, conglomerate said that on July 24 last year it planned to spin off its Hamilton Beach/Proctor-Silex business and merge it with Applica.

Miramar, Fla.-based Applica said Wednesday it continues to support Harbinger's offer. The company distributes small household appliances makes and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker.

Harbinger, which also owns a majority stake in Salton, has said it plans to merge the two if it gains control of both. Lake Forest, Ill.-based Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances.

Salton shares (NYSE: SFP) on Wednesday gained 6 cents on the day, or 2.52%, to end at $2.44.

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