Merger plans push Bank of New York, Mellon higher; LSI off on Agere union; Stations up on LBO

By Ronda Fears

Memphis, Dec. 4 - In addition to merger news on Bank of New York Co. Inc. and Mellon Financial Corp. in a $16.5 billion stock deal and LSI Logic Corp. and Agere Systems Inc. in a $4 billion stock deal, there was a $5.2 billion management-led leveraged buyout for Station Casinos Inc.

As well, there was a breakdown over the weekend in Carl Icahn's bid for Reckson Associates Realty Corp. with Mack-Cali Realty Corp. and Harry Macklowe withdrawing their participation in the previous $4.6 billion bid. SL Green Realty Corp. has a competing standing bid now valued at about $4.1 billion for Reckson.

In addition, players were looking at a slew of biotech stocks as Pfizer Inc. abandoned further development of its prospective new cholesterol drug Torcetrapib and said it may accelerate job cuts and plant closings but also boosted its search to acquire new products. Pfizer shares (NYSE: PFE) fell $2.96, or 10.62%, to end the day at $24.90.

Pfizer halted development of Torcetrapib over the weekend after failures in trials; the company had hoped the drug would replace its cholesterol drug Lipitor - which generates 25% of its $51 billion annual revenue and almost 50% of net income - when the patent expires in four years.

The New York-based drug giant is aiming to cut $4 billion in annual costs by 2008, but also said it will hasten spending of its roughly $29 billion in cash to diversify revenue, including acquisitions of products as well as small biotechs with drugs in late-stage development. Pfizer mentioned no specific takeover targets but said vaccines and cancer drugs were areas of interest.

Biotechs with heavy interest on the Pfizer news, one equity trader said, included Allos Therapeutics Inc., Novavax Inc., Isis Pharmaceuticals Inc., Emisphere Technologies Inc., Coley Pharmaceutical Group Inc., Cubist Pharmaceutical Inc., Immunomedics Inc. and Seattle Genetics Inc.

Elsewhere, Winn-Dixie Stores Inc.'s when-issued continued to track northbound with the stock (Nasdaq: WINNV) up Monday by 21 cents, or 1.48%, at $14.40. The Jacksonville, Fla.-based grocery chain, which is coming out of a bankruptcy reorganization in which bondholders and other creditors are getting a distribution of 54.5 million of a 150 million stock limit, had seen some profit taking last week.

Reckson off on Mack-Cali exit

Reckson players were frantically unwinding positions as support from partners in Icahn's bid for the New York REIT unraveled, although Icahn is remaining steadfast in a bid for Reckson but lowered the offer to $4.3 billion from $4.6 billion.

"The spreads were tightening around us like a noose," said one risk arbitrage trader. "It just doesn't work now, the way we were set up, with the change in Icahn's bid."

Reckson shares (NYSE: RA) fell $2.34, or 4.87%, to $45.75 in the regular session and in after-hours the stock was seen lower by another 76 cents, or 1.66%, at $44.99.

With Macklowe withdrawing from Rome Acquisition LP, created for the Icahn bid, and Mack-Cali pulling out, he said that Icahn's move on Reckson "will not be as strong." Macklowe had previously committed to contribute $600 million of equity to Rome. Mack-Cali had pledged a $400 million contribution to Rome.

Icahn outlined a new bid worth $4.3 billion to Reckson on Monday and said a formal proposal will be filed by Tuesday. Icahn's latest offer uses $1 billion of cash and $3.3 billion in a new class of preferred stock of ACP, whereas it was an all-cash deal with Macklowe and Mack-Cali in the mix. It works out to a $49 per share offer, however, according to analysts.

On Wednesday, Reckson shareholders are scheduled to complete a vote on a rival bid from SL Green valued at $4.1 billion, or roughly $46 per share. The vote had already been postponed once, to Nov. 28 from Nov. 22, after the Rome bid surfaced. Mack-Cali joined the Rome effort on Friday and withdrew on Sunday.

Mack-Cali shares (NYSE: CLI) gained 32 cents on the day, or 0.58%, to $55.10.

CL Green shares (NYSE: CLG) slipped by 95 cents, or 0.7%, to $134.

Station Casinos zooms 23%

Station Casinos Inc. shares zoomed Monday, but traders said the stock may have gotten ahead of itself in a rise fueled by speculation that a bidding war for the Las Vegas casino operator could ensue. In a management-led buyout valued at $4.7 billion, the acquisition offer is at $82 per share, while the stock ran to near $85.

"There was a big short squeeze first to contend with," said a stock trader, who estimated that they lost $153 million based on recent declarations of short positions.

"But there were a lot of speculators that the bid was too low, that an MGM or other big player, like maybe a Tracinda Corp., will put something else on the table. It got out of hand, though."

He noted that Station Casinos shares were pulling back in after-hours activity. The stock (NYSE: STN) ended with a gain of $15.80, or 22.87%, to $84.90 and after the close gave back 20 cents to $84.70.

The bid comes from Fertitta Colony Partners LLC, a new company formed by Station Casinos chief executive Frank J. Fertitta III and president Lorenzo J. Fertitta along with Colony Capital Acquisitions LLC, an affiliate of Colony Capital LLC.

Station Casinos said it has created a special committee of independent directors to evaluate the proposal. Meanwhile, Colony said it has a commitment for a new $500 million bank revolver for the buyout proposal.

"The Fertittas might have to ante up. Kirk Kerkorian [via Tracinda] just sold all his GM stock and he's got a big piece of MGM Mirage. The game might not be over," said another trader, who added that in his view the $82-per-share offer was too low in the current market.

"Only $82 bucks a share? There is a reason private equity wants to buy at $82 bucks, because they feel that over the next few years Station will grow incredibly for them. This is a steal."

Banks both gain on big merger

Bank of New York Co. Inc. and Mellon Financial Corp. were both higher on news of the $16.5 billion all-stock deal that will create the world's largest securities servicing company and one of the biggest asset managers, with a risk arb trader estimating that there was 4.5 to 5 points of premium to capture on the pairs trade. He did not specify how he set the trade up, however.

Bank of New York shares (NYSE: BK) gained $4.27 on the day, or 12.03%, to $39.75.

Mellon shares (NYSE: MEL) added $2.73, or 6.82%, to $42.78.

"Although both firms have large custody operations, Mellon and BNY have investment management operations around the country with various styles," said a sellside market source. "Some are very quantitative as in San Francisco, some much more traditional. How the new firm will sort this out is an interesting question. You make money running money not doing that doggy custody work."

Another hedge fund trader saw the merger as good for Bank of New York and bad for Mellon and was disappointed with the premium for Mellon.

"I don't see much of a premium here, we're talking fractions," he said.

"There's just not a whole lot of space there to make anything on this. In 1998, Bank of New York offered $24 billion for Mellon in a hostile takeover. Mellon could have easily negotiated a higher offer. Six years later, Mellon hands over the keys to the bank for $17 billion to the very same acquirer and commits to job cuts of nearly 4,000 positions and abandon Pittsburgh. The Bank of New York/Mellon deal is a win-win for Mellon execs, that's all."

The new company, which will be called Bank of New York Mellon Corp., will be the world's leading asset servicer with $16.6 trillion in assets under custody. It will also rank among the top 10 global asset managers with more than $1.1 trillion in assets under management. But in announcing the deal they said it will result in the elimination of about 3,900 jobs, or nearly 10% of their combined work force.

Bank of New York shareholders will receive 0.9434 shares in the new company for each share of Bank of New York that they own, and Mellon shareholders will receive 1 share in the new company for each Mellon share they own. That means Bank of New York shareholders would get about 63% of the new company.

LSI falls 14%, Agere adds 8%

LSI Logic Corp.'s $4 billion stock purchase for rival chip and storage systems maker Agere Systems Inc. sent LSI shares sharply lower while Agere gained modestly, which one trader attributed to "a pretty lousy pair once you really look at it."

"There was a decent trade, but this is a dog of a deal," said the risk arb trader.

LSI shares (NYSE: LSI) fell $1.44 on the day, or 13.64%, to $9.12.

Agere shares (NYSE: AGR) gained $1.51 on the day, or 8.49%, to $19.30.

Agere shareholders will receive 2.16 shares of LSI for each Agere share, valuing Agere at $22.81 per share - a 28% premium to Friday's closing price of $17.79.

"I do not think the numbers work on this deal. LSI is paying a $845 million premium for Agere but say they will lose a little this year but will save $125 million next year," the trader said.

"And, on the conference call they gave no real assurances that additional savings would come after 2008. There will never be an $845 million return to the bottom line. This is a bad deal."

LSI shares were not bolstered by the Milpitas, Calif.-based chip firm's simultaneous announcement that it would buy back $500 million of stock with cash on hand, the trader added, because LSI will issue about 379 million shares to complete the acquisition.

Another trader agreed that the deal might not be the best, but he thinks LSI combined with Agere might still be a prime takeover target once this transaction is complete.

"I did not expect this move, but I don't think it's as bad as a lot of people think - long-term. To me, the fact that it is an all stock deal really mitigates the premium they paid, which is now right around 12%. The share buyback addresses the issue of LSI's extra cash on the books. The new company will have a market cap of around $8 billion, meaning that it will still be cheap on a price-to-sales basis versus its competitors and it will be in a stronger position than it was before," the trader said.

"In a way, LSI could be more attractive to an LBO shop now because it is a bigger deal, the valuation is similar and the company will still have a solid balance sheet. Finally, the combined company may want to take the LBO route because as they go through the integration, there may be some bumps along the way but in the end, there should be some efficiencies. The stock should eventually get to $15. I think it may take a while but eventually this company faces the same problem - either they get a multiple similar to peers (such as Marvell Technology Group Ltd.) or they are still takeover bait."

LSI said that combined with Allentown, Pa.-based Agere it would have revenue of $3.5 billion for the 12-month period ended Sept. 30, 2006. The acquisition is expected to slightly lower LSI's 2007 earnings and add to EPS in 2008. Cost savings are expected to reach at least $125 million in 2008.

Kyphon up 30% on purchase

Medical devices firm Kyphon Inc. zoomed Monday on news of its acquisition of St. Francis Medical Technologies, a privately held California-based maker of the X STOP interspinous process decompression system for back surgery, for up to $725 million.

Kyphon shares (Nasdaq: KYPH) rocketed up by $10.08, or 30.07%, to $43.60 with a whopping 9.2 million shares traded versus the norm of 660,505 shares.

Under the agreement, Kyphon will pay $525 million in cash upfront, plus additional revenue-based contingent payments of up to $200 million in cash or a combination of cash and stock but no earlier than 2008.

Excluding the impact of the non-cash related charge, Kyphon said it expects the acquisition to be $0.15 to $0.20 dilutive to pro forma, non-GAAP earnings per share in 2007. Excluding the charge and the non-cash amortization of intangibles related to the transaction, the company said it would be neutral to $0.10 accretive to 2007 EPS. In 2008 and thereafter, Kyphon anticipates it will be significantly accretive.

Kyphon will finance the upfront payment through a combination of cash on hand and bank financing, including a syndicated term loan and credit facility. Depending on market conditions, the company may access the equity or equity-linked markets in 2007 to retire some portion of the debt.

Sunnyvale, Calif.-based Kyphon develops medical devices designed to restore spinal function and diagnose low back pain using minimally invasive technologies. St. Francis Medical Technologies is a privately held medical device company based in Alameda, Calif., focused on orthopedic and neurological spine surgery.

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