DirecTV hits new high on News, Liberty Media stake exchange; Level 3 climbs; Movie Gallery up

By Ronda Fears

Memphis, Dec. 7 - News Corp. and Liberty Media Corp. both gained on reports they are nearing a deal for News Corp. to buy back Liberty's $11 billion stake in it and on news that as part of the deal Liberty would get News Corp.'s 39% stake in DirecTV Group as well as some cash and three regional sports networks.

Meanwhile, players were dipping their toes into DirecTV, at least in terms of moving the stock much higher. Yet, DirecTV shares (NYSE: DTV) hit a new 52-week high of $23.60 with a 7-cent gain, and volume was a whopping 12 million shares versus the norm of 7.62 million shares.

"I put on a small position in DTV," said one risk arbitrage trader.

"There are lots of unknowns about DTV valuations now. It looks like everyone was covering their bias in terms of 'buy the rumor; sell the news' because this has been talked about for a while. Long term I believe it's a positive; short term I think it's going to be choppy. But, hey, another six-year high was established today. Year-to-date gains of 60% practically equal Comcast, and they have content - they're not simply a conduit at the mercy of content providers' price increases.

"I'm a little worried, but better to be worried here than at $17."

News Corp. shares (NYSE: NWS) added 66 cents on the day, or 3.04%, to $22.40. Liberty Media shares (Nasdaq: LCAPA) shot up $2.35, or 2.67%, to $90.28.

The agreement, which the companies have been discussing for several months, could be finalized in the next few weeks.

Movie Gallery buyers stream in

Movie Gallery Inc. buyers continued to line up, traders said, including a fair amount of holders of the Dothan, Ala., movie rental retailer's bonds as they look for a refinancing move, including the possibility of a debt for equity swap.

On Thursday, Movie Gallery shares (Nasdaq: MOVI) added another 42 cents on the day, or 10.32%, to settle at $4.49, following a 16% spike the day before.

"The arbs just kept coming in," said an equity trader. "I was really looking for a 30-cent hit today at the end of the day but it didn't happen. I was surprised."

There also has been rumors circulating that Movie Gallery may be a takeover target of movie rental rivals Blockbuster Inc. or Netflix Inc. The equity trader said there is considerable skepticism about a merger, but he thinks it isn't so farfetched although not a smart move for any buyer.

"Netflix could buy Movie Gallery with petty cash. NFLX's market cap is almost 20 times MOVI, so buying MOVI is almost lunch money," the trader said.

"That doesn't mean it's going to happen. It wouldn't be a smart thing for NFLX, or Blockbuster. They don't have to take out the competition; MOVI has taken care of that for them."

Movie Gallery's downfall, the trader observed, as has other onlookers, was it's acquisition of Hollywood Entertainment Corp. last year. He added that while Movie Gallery's $2.5 billion annual revenue might sound enticing, versus $912 million for Netflix, Movie Gallery also is carrying "a load of baggage," such as Hollywood.

Level 3 selling into rally

Conversely, traders said there was considerable selling into the rally of Level 3 Communications Inc. shares late Thursday, after the stock had flirted with a new 52-week high.

Level 3 shares (Nasdaq: LVLT) gained 21 cents on the day, or 3.79%, to settle at $5.75, easing back from an intraday high of $5.95. The 52-week high for the stock is $6.09, set May 1.

"The company has shown some improved financial results lately and has been subject sporadically of takeover talk," a stock trader said.

He went so far as to call it a "sucker rally," however, as Level 3's "$6.5 billion of debt is a big anchor."

In the midst of it, or rather on the same line of thinking, risk arbs were setting up for another big decline in Level 3.

"I had some nice action today setting up what will surely be another successful journey with LVLT," said a risk arb trader.

"The last short position profited only 8% but this has much more potential."

Rank off on Hard Rock sale

Rank Group plc saw its shares fall 4.13% after agreeing to sell its Hard Rock café and casino business for $965 million to the Native American Seminole Tribe of Florida. The London-based leisure and gaming group reportedly will return £350 million of the £460 million in sale proceeds to its shareholders via a 65p-a-share special dividend. An additional £110 will be used to reduce borrowings.

Selling the approximately 130 branded Hard Rock cafes, hotels, casino hotels and concert venues will allow Rank to capitalize on opportunities in the gaming market.

Rank shares (London: RNK) dropped 11p, or 4.13%, to 255.5p.

Tarrant Apparel adds 20%

Tarrant Apparel Group stock was up more than 20% on news of the company's plans to acquire certain assets of Canadian contemporary clothing designer/manufacturer the Buffalo Group for up to $120 million.

The purchase price includes roughly $40 million in cash and $15 million in promissory notes, plus stock, earn-out payments of up to $12 million plus a contingent and debt assumption. Tarrant, a Los Angeles-based design and sourcing company for casual apparel, expects to complete the acquisition during the first quarter of 2007.

Tarrant stock (Nasdaq: TAGS) rose 27 cents, or 20.30%, to $1.60.

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