Fremont preferreds find buyers; Herbalife off, NutriSystem up; Tribune up, Take-Two tumbles

By Ronda Fears

Memphis, March 30 - Herbalife Ltd. slumped after its board rejected a $38-per-share takeover offer from Whitney V LP as insufficient, but speculation of a better offer again boosted rival diet aide distributor NutriSystem Inc., although traders warned that buyers of the latter may be in for some pain.

Meanwhile, Tribune Co. extended gains as California billionaires Eli Broad and Ronald Burkle got back in to the ring and submitted a boosted bid of $34 per share for the Chicago media conglomerate, besting a $33 offer from Chicago real estate tycoon Sam Zell that is rumored to have board support. A March 31 deadline the board had set to consider bids was expected to again be extended; the company has been on the auction block since September.

Tribune shares continued to lag well below the bids as the market prices in considerable risk to both deals, traders said. But on Friday the stock (NYSE: TRB) rose 58 cents, or 1.84%, to $32.11; one trader also noted heavy buying volume in the August $35 call options.

DaimlerChrysler AG also advanced slightly amid speculation that private equity firms The Blackstone Group, Cerberus Capital Management and Centerbridge Capital Partners, as well as Canadian auto parts supplier Magna International Ltd., will be bidding for its Chrysler unit; the deadline for interested parties to approach DaimlerChrysler was Friday. Traders said the reaction in DaimlerChrysler shares was subdued because the bid has not been expressed in numbers yet and due diligence could take months. The stock (NYSE: DCX) advanced 25 cents, or 0.31%, to $81.81.

Riviera Holdings Corp. also got a little bump as the would-be takeover group Riv Acquisition Holdings Inc. called for the board of directors of Riviera to drop its opposition to their $27-per-share offer and put it to a shareholder vote; the bid is up from $17 per share last year. A trader said there was speculation the Las Vegas gaming establishment would get a higher bid, and Riviera shares (Amex: RIV) gained 35 cents, or 1.27%, to $27.95.

In the subprime mortgage lending sector New Century Financial Corp. remains a speculated bankruptcy candidate, and the stock (Pink Sheets: NEWC) traded sharply lower on the day, down to 92 cents, but ended the session better by 3 cents at $1.06.

Fremont General Corp. shares also were lower Friday, but there were buyers for its preferred stock on an argument that it is a safety zone in the troubled lender's capital structure. A buyside market source added that he is hedging his position in Fremont with deep-in-the-money puts on Corus Bankshares Inc., which a trader said is considered a potential buyer for Fremont's subprime business.

Impac Mortgage Holdings Inc., however, was a winner in the lending sector on news that it has completed two securitizations with a combined total of $2.2 billion of Alt-A residential loans and $235 million of commercial and multi-family loans. That leaves it with a preliminary projection of $130 million in cash and equivalents and an inventory of new or unsold loans of roughly $800 million. The company, however, slashed its dividend, saying it was more prudent to conserve liquidity amid the market volatility. Impac shares (NYSE: IMH) added 46 cents, or 10.13%, to close at $5.

Herbalife lifted off day's low

Vitamin and weight loss aide distributor Herbalife took a dive on word from the special committee of its board of directors that Whitney V LP's $38-per-share buyout offer was insufficient, but one trader said it rebounded strongly off the day's low on speculation that the bid would be bumped up or another bidder might emerge.

The trader noted that the stock had been steadily holding well above the bid, in the $40 area, on such optimism but fell as low as $38.79 during the session, still ahead of the rejected bid. The enthusiasm that a better bid would be needed to take the company was backed by remarks from Wedbush Morgan Securities that it should be closer to the neighborhood of the mid-$40s, he added.

On Friday, Herbalife shares (NYSE: HLF) settled lower by $1.08, or 2.68%, at $39.19.

"It traded up to $39.60 and came off that but there is some who believe Whitney will bump up its offer or maybe someone else is looking," the trader said.

Herbalife received the unsolicited offer from Whitney on Feb. 2; at that time, the $38 offer was a 14.8% premium to where the stock was trading. At the time, Whitney had a 27% stake in Herbalife.

In rejecting the bid, Leroy T. Barnes Jr., chairman of the special committee, said in a company press release, "We remain open-minded about ways to achieve appropriate value for the company, and would certainly consider an improved proposal from Whitney."

Continuing, he said the company is gaining momentum, underscored by a new license to operate in China and the recently announced marketing agreement with the L.A. Galaxy soccer team.

In January, Herbalife shares sank 20% after the company lowered its 2007 sales guidance to between 6% and 10%, down from a previous range of 10% to 15%, due to slower sales growth in Mexico.

But in late February, the company reversed course and boosted its first-quarter and 2007 profit outlook, largely from the expansion into China. The company expects quarterly earnings per share of 52 cents to 57 cents, up from a prior range of 50 cents to 55 cents. For the year, Herbalife lifted its EPS view to a range of $2.43 per share to $2.50 per share, up from prior guidance of $2.40 to $2.47.

NutriSystem gain may be pain

On the Herbalife speculation of better bids, diet food maker NutriSystem extended gains from earlier in the week, but traders were skeptical.

NutriSystem (Nasdaq: NTRI) traded as high as $53.16 before easing back to settle at $52.41 for a gain of $1.49 on the day, or 2.93%.

"People forget quickly," the trader said.

"Earlier this week we saw buying because Citigroup added NutriSystem to its model portfolio for high net worth clients. They were defending it down there but there is still a big short interest in the stock, like 11 million shares."

NutriSystem shares had come under heavy pressure earlier this year after the company on Jan. 30 warned that first-quarter results would miss analyst projections, but the stock's slide began in November with some big profit taking, the trader said.

"Beware of the euphoria," remarked another trader, also commenting on a heavy short position in NutriSystem.

"Shorts clearly have not capitulated, as evidenced by unimpressive volume today (2.12 million shares versus the norm of 2.7 million shares). Although upside volume may increase as the day progresses, I would have expected that short sellers' buy-stops being hit would have resulted in a price volume spike similar in order of magnitude to the numbers seen during the February sell-off. Obviously that is not what's happening today.

"At any rate, a short squeeze may be in the offing, but this ain't it. Additionally, the short sellers are way from done with this one, yet."

Fremont preferreds find buyers

Fremont may be seen as one of the worst offenders in the subprime debacle, according to one buyside source, but the preferred stock is undervalued and a safer place in the lender's capital structure. A sellside trader, however, stressed that would-be buyers consider that Fremont can defer dividends on the preferred for 20 quarters without causing any default.

On Friday, Fremont common stock (NYSE: FMT) lost 47 cents, or 6.35%, to $6.93 while the preferred (NYSE: FMT-P) gained 28 cents, or 1.35%, to $21.08.

While Fremont made its share of subprime loans, the buysider thinks it differs from some of its bankrupt or soon-to-be-bankrupt peers. For one thing, Fremont funded its loans with deposits - mostly retail certificates of deposit - not warehouse lines, thus avoiding a liquidity crunch. It also sold all its residential loans each quarter, instead of keeping them on the balance sheet.

Fremont's total amount of subprime loans as of Dec. 31 was roughly $5.1 billion, or 3.5 times equity, compared with 14 times equity for peers such as New Century and Accredited Home Lenders Holding Co., according to the buysider.

Moreover, Fremont has committed to exiting the subprime business and has already sold the majority of its subprime investments. This will leave them with an estimated $6 billion of commercial loans - largely condominiums - and $4 billion of additional loan commitments.

For the preferred stock to be impaired, the buysider said this pool of loans would have to be written down to under 60% of construction costs, implying a 40%-plus drop in condo prices.

Corus a hedge against Fremont

To hedge against losses in Fremont's loan pool, which the buysider said "could happen," the source said "we have hedged against it in various ways, including owning deep out-of-the-money puts on Corus, which currently trades at 1.2 times book [value]."

Corus shares (Nasdaq: CORS) on Friday lost 23 cents, or 1.33%, to close at $17.06.

The buysider said the depressed value of the stock "would imply a disastrous outcome for the U.S. economy" that seems unlikely.

In addition to there being some speculation that Corus might be interested in Fremont's subprime business, the buysider noted that Corus has been a buyer of Fremont stock in the open market, "which is, if not necessarily significant, at least interesting." Last week, Corus said it had recently boosted its stake to Fremont's fourth largest stockholder from sixth last fall.

Given this, the buysider said buying the preferred at 80% of par - in the $21 area - with an 11% current yield is an interesting investment.

Take-Two slips on shake-up

Video game maker Take-Two Interactive Software Inc. took a hit on the shake-up within the company, although it was widely anticipated, as some anxious players took the opportunity to exit the story, traders said. At its annual meeting, a new board was elected, and following the meeting chief executive Paul Eibeler was axed.

Take-Two (Nasdaq: TTWO) closed at the session low of $20.14, a loss of 96 cents on the day, or 4.55%, with some 3 million shares traded versus the norm of 2.72 million shares.

"None of it was unexpected, of course," one trader said. "I think there were just some Nervous Nellies out there who, because of the no bids statement from the company, were wanting to get out before it gets any worse. I still see any downdraft as a buying opportunity."

Earlier in the week, the company said that it has received no offers to present at its annual meeting, which added to the likelihood that activist shareholders OppenheimerFunds, D.E. Shaw, SAC Capital and Tudor Investments with a slate of new board nominees would gain control of the board.

Shareholders voted to appoint Michael Dornemann, Benjamin Feder, John F. Levy (incumbent), Jon J. Moses, Michael James Sheresky and Strauss Zelnick to the board. Grover C. Brown (incumbent) was appointed by the incoming board, and Strauss Zelnick was made non-executive chairman.

Feder was appointed to replace Eibeler.

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