DaimlerChrysler, GM up; AMR, British Airways rise; Winn-Dixie gains; Fieldstone, HomeBanc up

By Ronda Fears

Memphis, Feb. 16 - Reports that General Motors Corp. is in preliminary talks to buy the Chrysler division of DaimlerChrysler AG and that American Airlines parent AMR Corp. is a takeover target of British Airways plc and Goldman Sachs sent those stocks higher, but traders said there was considerable skepticism looming for both rumored deals.

Meanwhile, a huge dive in housing starts sent homebuilders into a tailspin while mortgage lenders and real estate investment trusts were widely mixed, traders said. Construction of new homes and apartments plunged by 14.3% in January, the biggest drop in a decade, the U.S. Commerce Department reported Friday.

REITs and mortgage lenders - including, in many cases, companies operating as both - were mixed on the housing data and a surprise buyout of a subprime mortgage lender, traders said. Office REITs like Duke Realty Corp. and Highwoods Properties Inc. were lower, although there was a considerable boost to those REITs over the past couple of months during the takeover battle of Equity Office Properties Trust, which resulted in a record buyout of $39 billion by private equity shop The Blackstone Group.

Mills Corp.'s announcement Friday that it has chosen the latest cash offer from Simon Property Group Inc. and hedge fund Farallon Capital Management of $7.9 billion, or $25.25 per share, was a drag on the office REIT sector, one trader said. He said players were hoping for a bigger surge than the run from the initial offer of $21 per share by Brookfield Asset Management Inc., noting that the price tag for EOP went to $55.50 from $48.50 before a deal got done. Mills (NYSE: MLS) fell $1.22, or 4.57%, to $25.48; Simon (NYSE: SPG) slipped 16 cents to $118.24. Brookfield (NYSE: BAM) gained 55 cents, or 1.02%, to $54.40.

In Canada, takeover activity of income trusts shows no sign of slowing down following tax code changes last fall that sparked a frenzy of buyouts, sources north of the border said Friday. One trader said Altus Group Income Fund is considered the up-and-coming target, noting that earlier in the week Entertainment One Income Fund was bought out at a 33% premium and Harbinger Capital Partners won its bid for Calpine Power Income Fund at a 24% premium to the unit price when the buyout effort began in mid-December. Altus group (Toronto: AIF-UN) gained C$0.05 to C$12.50 on Friday.

Mortgage lender mostly weak

Mortgage lenders, as REITs or not, however, have been in a slump for six months or longer, taking some of the biggest declines over the past week, and with conflicting views on whether the state of affairs in that industry is appropriately reflected by the weakness in those stocks, the group was widely mixed Friday ahead of the long weekend - but several high-profile issues were in positive territory.

New Century Financial Corp., for example, continued to rebound as it has basically all week, following a walloping it took the previous week on a warning about restating results for three quarters last year to account for bad mortgage loans. While many believe that New Century's situation is dire enough to use the bankruptcy word, others think the drubbing in the stock has been overdone. New Century (NYSE: NEW) on Friday added 62 cents, or 3.3%, to close at $19.40; the stock fell to a new 52-week low of $16.15 the previous week, down from about $30 when the industry began to unravel and a 52-week high of $51.97.

Fieldstone Investment Corp.'s surprise buyout at $259 million, or $5.53 per share, a whopping 113% premium to Thursday's market, however, was a bittersweet shocker to players in the subprime mortgage sector, one buyside source said, noting the stock on Tuesday hit a 52-week low of $2.40. Buying the Columbia, Md.-based lender is Credit-Based Asset Servicing and Securitization LLC, or C-BASS, an affiliate of MGIC Investment Corp. and Radian Group Inc., which just agreed to a $5.5 billion all-stock merger last week.

HomeBanc Corp., an Atlanta-based mortgage bank, was up sharply in sympathy with Fieldstone, as many see it as a prime takeover target amid the tough industry conditions and its depressed stock price, according to a trader, who also remarked that the company has been considering strategic alternatives since around mid-2006. As part of its options under consideration, the company announced last month that it would cease to operate as a REIT in 2007.

Compass, regionals up on acquisition

Beyond mortgages, the buyout of Birmingham, Ala., regional bank Compass Bancshares Inc. by Spain's second biggest bank, Banco Bilbao Viscaya Argentaria SA, or BBVA, for $9.6 billion - $71.82 per share, or 2.8 BBVA American Depositary Shares. It was an 8.2% premium to Thursday's market when Compass shares surged 7.4% on the buyout rumors. Compass (Nasdaq: CBSS) climbed $4.33, or 6.52%, to $70.70; Banco Bilbao (NYSE: BBV) lost 66 cents, or 2.52%, to $25.57.

The Compass news pushed other southeast regional banks sharply higher; the biggest movers were BancTrust Financial Group Inc., First Financial Service Corp., Colonial Bancgroup and Cardinal Financial Group. The largest southeast regional bank, Regions Financial Corp., also was modestly higher Friday.

Winn-Dixie strong

Also of note, Florida-based supermarket chain Winn-Dixie Stores Inc. gained ground with decent volume, as one trader put it, ahead of fiscal second quarter results scheduled to be reported Tuesday following the three-day weekend. The company just emerged from bankruptcy in November and the stock (Nasdaq: WINN) has run from a when-issued basis at that time of $12 to close Friday at $17.63, up 27 cents on the session, or 1.56%. The stock hit a high of $18 on Valentine's Day, following Perry Capital's declaration of at 5.02% stake in Winn-Dixie, which is thought to make it the biggest player in the story.

Pogo gains

And, in one of the latest movers on shareholder activism, Houston-based independent oil and gas producer Pogo Producing Co. gained ground Friday after announcing it has hired Goldman, Sachs & Co. and TD Securities Inc. to help the company explore strategic alternatives but Third Point LLC with a 7.9% stake has launched a proxy fight to install a new slate of directors. The stock (NYSE: PPP) was lifted 62 cents, or 1.23%, to $51.20.

GM rumor panned by arbs

A rumor that GM is in talks to buy Chrysler, first reported Friday by trade magazine Automotive News, was not a popular concept, said one risk arb trader.

"We think this would be a nightmare. I wouldn't touch it with a 10-foot pole," a trader at a New York-based hedge fund remarked.

He acknowledged heavy positioning on the rumor, but noted heavy buying in March put options for GM at $35, which he said suggests the market generally doesn't think it would be a good idea for GM to buy Chrysler.

GM shares seesawed throughout the session, first declining then gaining - trading in a band of $35.63 to $36.83 - but the stock (NYSE: GM) went out for the long week-end lower by a dime at $36.34 and was seen in after-hours trade lower still at $36.32.

Meanwhile, DaimlerChrysler shares continued to extend gains made since Wednesday when it announced a major restructuring plan in the face of $1.5 billion in losses for 2006, including a possible spinoff of the Chrysler division and a whopping 13,000 layoffs over the next two years. The shares (NYSE: DCX) traded up to $74.53 on Friday before easing back to go out with a gain of $3.08, or 4.38%, at $73.33.

The buyside risk arb trader parroted remarks from a credit analyst at Gimme Credit, saying the move would be like "the blind leading the blind" as GM's turnaround effort over the past two years - including massive layoffs, plant closures and the spinoff of its finance arm General Motors Acceptance Corp. - has hardly gained traction while such efforts at Chrysler have just begun.

AMR lifted, peers mixed

Similar skepticism swirled around the rumors of a takeover for AMR but traders noted the renewed consolidation theme in the airline industry has pushed the sector higher in recent months and some sort of deal is probably inevitable. That doesn't mean it is popular, however, according to one trader.

"We feel like there will be a deal eventually in the sector," the trader said.

"We all know there are talks going on, and a lot of resistance. I think there will be a deal, but I don't think it will be a panacea. No more than the Delta and Northwest bankruptcies."

AMR shares (NYSE: AMR) went as high as $39.74 before easing back to close out the session at $38.97, a gain of 92 cents, or 2.42%.

That is much less that the rumored price tag being discussed, however. According to the Feb. 26 issue of Business Week, the investment group proposing to buy AMR is talking about a deal valued between $9.8 billion and $11.1 billion, or $46 to $52 per share. The magazine is reporting that the buyout group includes investment bank Goldman Sachs as well as British Airways

British Airways shares (NYSE: BAB) edged up 2 cents to $112.65.

The news did little in the way of lifting any AMR peers. United Airlines parent UAL Corp. (Nasdaq: UAUA) gained 15 cents to $44.65 while US Airways Group Inc. (NYSE: LCC) lost 70 cents, or 1.22%, to $56.70.

Bankrupt airlines Delta Air Lines Inc. - which was the target of a failed $9.6 billion buyout by US Airways last month - and Northwest Airlines Corp. fell sharply on Friday. Delta (Pink Sheets: DALRQ) plunged 26% to 75cents and Northwest (Pink Sheets: NWACQ) dropped 7% to $2.65.

Fieldstone deal sparks anger

The sale of Fieldstone brought an immediate round of criticism and speculation that it will be contested, traders said.

While the surprise buyout at $259 million, or $5.53 per share, was a whopping 113% premium to Thursday's price of $2.60, a buyside source noted it was priced against an historic low level for the stock. On Tuesday, the stock hit a 52-week low of $2.40.

"A 113% premium? So what. This is not good, no way you look at it," said a hedge fund manager in New York.

"Everyone holding this stock is taking a killing."

Fieldstone shares (Nasdaq: FICC) in reaction to the news shot up $2.38, or 91.54%, to $4.98, after trading as high as $5.18. The trader suggested the realization that the deal will likely be contested probably put a damper on trading activity.

Affiliates of Fieldstone buyer C-Bass, MGIC and Radian, which just agreed to a $5.5 billion all-stock merger last week, were lower on the news. MGIC (NYSE: MTG) slipped 38 cents to $65.59 while Radian lost 9 cents to $62.72.

The trader said although Fieldstone operates in the subprime mortgage sector, where some two dozen lenders have failed or been sold during the crisis of the past year, amid surging delinquencies, he does not think shareholders will stand for the severely depressed price tag.

HomeBanc surges 7%

Yet, the Fieldstone deal served to boost several other distressed mortgage lenders Friday, not the least of which was Atlanta-based HomeBanc. The trader cited above said he thought this was a good buy, even if HomeBanc doesn't snag a buyout offer, which he doesn't think is likely.

"HomeBanc traded up in sympathy, as it would be a great takeout candidate itself," the trader said.

"It is trading way below book and in my opinion was way oversold at $3-something. I was a buyer this week and I bought today. Even if they don't get a deal, it's a buy I think."

HomeBanc (NYSE: HMB) added 24 cents on the day, or 7.06%, to $3.64.

For several months last year and into the new year, the company was assessing "strategic alternatives" that did not result in a merger or acquisition, the trader pointed out.

On Jan. 16, HomeBanc announced that its president Kevin Race had been named successor to chief executive Patrick Flood and that it was going to cease operating as a REIT going forward in 2007. The company said Race was instrumental in its reorganization, change in business model and initial public offering in 2004.

In addition, the company said that, after carefully considering a number of strategic alternatives, it "determined that the most appropriate course of action to maximize shareholder value at this time is to focus on operating efficiencies and opportunities for growth" although the company "remains committed to considering other opportunities" that might arise.

In October, HomeBanc cur 4% of its mortgage origination staff in an effort to trim costs and said it expects an overall reduction in 2007 origination expenses of $19 million. The company closed $5.1 billion of mortgage loans in 2006 and currently has a servicing portfolio in excess of $7.7 billion.

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