Bristol-Myers up; Harrah's slips; First Bancorp, Doral, W Holding up; Sea Containers slides; Delta better

By Ronda Fears

Memphis, Jan. 29 - A plethora of merger deals announced Monday supported an overall buying attitude in the markets among speculation situation players, but in some names moving on speculation traders said there was selling into the rally, such as Bristol-Myers Squibb Co., which is rumored to be a target for French drug giant Sanofi-Aventis SA.

Bristol-Myers spiked in pre-market activity, and traders said by the time the market opened there was heavy selling into the rally; Bristol-Myers shares (NYSE: BMY) came off the day's high of $28.26 to end with a gain of $1.22, or 4.65%, at $27.43. Selling was heavy in Sanofi, too, with the stock (NYSE: SNY) losing 77 cents on the day, or 1.7%, to settle at $44.57.

Neither Bristol-Myers or Sanofi commented about the market chatter, but traders said it was a prime example of the swiftly shrinking spreads in merger arbitrage. Yet, while it is getting tougher to make a buck in merger arbitrage, traders said it is still a growing focal point because of a healthy deal flow.

"Spreads are getting very tight. Not that it has really scared many players away; it's just an observation at this point," remarked the head risk arb trader at a big hedge fund in New Jersey.

"The door gets slammed in your face pretty quick these days, though. We don't even have one day of play in a lot of these situations, unless it is one where there hasn't been a deal announced and it's all speculation. Even then, though, the spreads are really getting tight by the time the news hits. If the news is out there, a lot of times it's all over by the time the market opens."

As a result, traders said there are some interesting "cash management trades" taking place.

"It's sort of a cash management trade where you see some people taking profits they've made in one situation to plug into something else," commented a trader at a huge hedge fund in New York.

"On the other side, there are people buying on speculation that a better bid will come along in many cases; in others, they are looking for a position ahead of any firm bid."

Harrah's Entertainment Inc. was such a situation, he said. On Monday there was selling into a rally from Friday sparked by speculation of a rival bid emerging to the $90 per share offer from private equity groups Apollo Management and Texas Pacific Group agreed to in December. On that selloff, however, traders said there were many players adding to their positions. Harrah's shares (NYSE: HET) closed the day with a loss of 60 cents, or 0.7%, at $84.94.

Tembec gains on Bowater deal

On the news of the so-called merger of equals between papermakers Bowater Inc. and Abitibi-Consolidated Inc., which comes on the heels of the Weyerhaeuser Co. merger with Domtar Inc., traders said there was strong buying in troubled Toronto-based forest products concern Tembec Inc.

"I don't think Tembec could get a really fat bid but the idea that they could be taken out by a stronger company would be good news," said a distressed stock trader. He said the stock traded steadily higher on "decent" volume but added that the stock was somewhat held back by hedged bondholders.

"That Abitibi could get a deal done speaks volumes for the possibility of Tembec getting a deal," the trader continued. "Lord knows, they need one."

Tembec shares (Toronto: TBC) gained 3 cents on the day, or 1.08%, to C$2.80 - the day's high - with 481,587 shares traded versus the norm of 407,617 shares.

For their part, players in Greenville, S.C.-based Bowater and Montreal-based Abitibi-Consolidated players moved both stocks higher in response to the all-stock transaction valued at $8 billion. Under the deal, each share of Abitibi-Consolidated will be exchanged for 0.06261 share of the new AbitibiBowater, and each Bowater share will be exchanged for 0.52 share of the new company.

Bowater shares (NYSE: BOW) added $5.24, or 23.88%, to $27.44. Abitibi-Consolidated (NYSE: ABY) advanced 69 cents, or 26.14%, to 3.33.

The companies said the merger would create a company better able to adapt to lower demand for newsprint in North America while competing more effectively in an increasingly global market for publication papers.

Last year, Weyerhaeuser announced a merger with Domtar in a $3 billion deal.

Since the beginning of the year, paper and pulp names have done better because of weakness in the Canadian dollar as that is seen likely to spur Canada's exports of such products as lumber and newsprint, both key Tembec products.

Kansas City Southern skids

Elsewhere, Kansas City Southern stock was derailed by a consent solicitation from bondholders in which the company is seeking waivers to covenants that outline key financial measures that the Kansas City-based railroad has violated.

Kansas City Southern shares (NYSE: KSU) dropped 41 cents, or 1.38%, to $29.39. Some 1.2 million shares traded versus the norm of 771,545 shares.

"They are having to pay off the bondholders to avoid a default call on the bonds and that does not bode well," said a stock trader.

"The stock traded up big over the last year so I think a lot of people are ready to take some profits off the table here."

The railroad announced Monday that it is seeking consents to amend certain definitions in the indentures related to its 9½% notes due 2008 and its 7½% notes due 2009 and to waive defaults that may have arisen in conjunction with a covenant violation. The consent solicitation expires on Feb. 9, but the company is offering special incentives for early consents by 5 p.m. on Feb. 5.

The company is paying a $3 consent fee per note to 9½% noteholders and a $5 consent fee per note to the 7½% noteholders, plus a $1.50 bonus per note for early consents tendered.

Credit analysts at Standard & Poor's also said that it believes that the company is also in default under its bank agreement as a result of this situation.

The company has scheduled a meeting on March 14 with analysts to go over its five-year strategic plan and present its outlook for key performance targets.

Sea Containers shares sink

In another troubled transport name, bankrupt Sea Containers Ltd. took a dive Monday on the heels of news that David Tepper of the well-known hedge fund Appaloosa Management LP had sold off some 50% of his holdings in the Bermuda-based maritime company.

Sea Containers shares (Pink Sheets: SCRA) plunged 51 cents on the day, or 32.69%, to end at $1.05.

Late Friday, the sale was disclosed in a Securities and Exchange Commission filing. Last year before Sea Containers filed bankruptcy Tepper via Appaloosa had amassed an 11.3% stake in the company. A distressed trader in the credit markets said Tepper had been viewed as Sea Containers' White Knight, so the sale was a bad omen.

Sea Containers filed for bankruptcy in October.

Owl Creek pushes Northwest

In another bankrupt name, and another transport as well, bankrupt Northwest Airlines Corp. shares were higher for most of Monday's session amid short covering, as one trader observed, and then were sold off sharply in the final hour as the news of the day overrode short covering early in the session.

The news related to a letter to Northwest from majority stockholder Owl Creek Asset Management requesting a meeting to develop a reorganization plan that would provide some recovery for Northwest stockholders.

"If Owl Creek is unhappy with the situation, then it can't be good," said one distressed stock trader, who said moderately heavy short covering propped up the stock until the last hour of trade but once that subsided the stock "fell like a rock." He noted light overall volume in the stock, though.

Northwest shares (Pink Sheets: NWACQ) traded up to $4 on Monday before it eased back to settle the session with a loss of 9 cents, or 2.43%, at $3.62.

Owl Creek owns more than 5% of the outstanding Northwest shares and also has requested the establishment of a formal equityholders committee in the Northwest bankruptcy case.

"To start, the company must agree to give its stockholders a voice in the bankruptcy," said Jeffrey Altman, founder of Owl Creek Asset Management, in a letter to Northwest dated Jan. 26.

Northwest filed a reorganization plan on Jan. 12, stating that it would cancel existing stock, as the company has said would happen all along.

Owl Creek had been speculated to be a potential equity backer for Northwest's reorganization play, but the letter seemed to run counter to that speculation. Northwest has until Feb. 15 to file the disclosure statement to its reorganization plan, which will outline specific details of its emergence.

Delta, US Airways higher

In another bankrupt airline story, the trader said Delta Air Lines Inc. shares got a slight lift from a Wall Street Journal report over the weekend that US Airways Group Inc. is prepared to add a $1 billion cash sweetener to its offer to acquire Delta in a reorganization plan.

While US Airways reportedly denied making a higher offer for Delta, it also was reported Monday that the unofficial committee of unsecured claimholders were urging the official creditors committee in the bankruptcy case to "carefully consider the meaningfully improved proposal" by US Airways.

The distressed stock trader said that it was unclear whether the unofficial creditor committee was referring to the existing US Airways bid, which has been increased once before, or "a new and improved bid." Thus, he cited little activity in Delta stock.

Delta shares (Pink Sheets: DALRQ) added a penny to $1.16.

US Airways has already boosted its cash-and-stock buyout offer to $10.8 billion from roughly $8 billion by adding around $1.2 billion in cash to its original bid that was submitted two months ago.

Delta has submitted a standalone reorganization plan that values the Atlanta-based carrier at $9 billion to $10.2 billion. Delta creditors are slated to vote on its plan by Feb. 5.

US Airways shares (NYSE: LCC) were better by $2.30, or 4.41%, at $54.43 on Monday, a day ahead of its earnings report.

Merrill, Citi push the envelope

Shares of brokerage giants Merrill Lynch & Co. and Citigroup Inc. were punished Monday on buyouts of both firms that were seen as far too hefty. Merrill is paying a 46% premium for First Republic Bank at $1.8 billion, and Citigroup inked a deal to acquire British insurer Prudential plc's Egg Banking plc online bank for $1.13 billion.

Meanwhile, in the face of those developments, traders noted a surge in selling into the rally for mortgage lender Countrywide Financial Corp., which was rumored Friday to be a target of banking giant Bank of America Corp.

"The Merrill deal was really out of line, as the market saw it; they were punished severely," remarked a trader at one of the bulge bracket firms away from Merrill, Citigroup and Bank of America.

"Already by late Friday, they were taking Countrywide down and when a deal didn't transform Monday we saw more selling in that name."

Merrill shares (NYSE: MER) fell $2.14 on the day, or 2.26%, to $92.39.

Citigroup shares (NYSE: C) lost 61 cents, or 1.12%, to $54.06.

Countrywide shares (NYSE: CFC) closed with a gain of $1.38, or 3.29%, at $43.38, coming off the day's high of $44.70, with 16.9 million shares traded versus the norm of 4.62 million shares.

Bank of America shares (NYSE: BAC) lost 58 cents, or 1.11%, to $51.46.

First Bancorp, Doral spike up

Regional banks focused in Puerto Rico also made the radar of the market Monday with rumors that Bank of Nova Scotia has made a written offer to acquire FirstBank, Puerto Rico's third biggest bank, from First Bancorp Holding Co. Also higher were Puerto Rican banks Doral Financial Corp. and W Holding Co. Inc.

First Bancorp shares (NYSE: FBP) advanced 89 cents, or 9.34%, to $10.42.

A report in the Caribbean Business newspaper in Puerto Rico sparked the move in First Bancorp, a trader said. Spokespersons for First Bancorp and Bank of Nova Scotia did not comment on the report.

Bank of Nova Scotia was punished similar to Merrill and other big banks with merger news on the tape, with the stock (NYSE: BNS) slipping 40 cents, or 0.92%, to $43.06.

One distressed stock trader said the First Bancorp news might have sparked the move in Doral shares, but another stock trader said it was unlikely; the latter trader reckoned the move in Doral was short covering by its bondholders.

"When it comes to regional banks you don't see the sector moving because of one piece of news," the latter trader said.

"Now, what happens is a certain item will pique someone's curiosity and they begin to look around. I suspect that is what we saw with Doral today."

Doral shares (NYSE: DRL) closed up by 13 cents, or 5.26%, at $2.60 but had traded up to $2.75. The company has been rumored to be in refinancing discussions with holders of its $625 million of floating-rate notes due July 2007 for nearly two months, but there has not been any firm news emerge along those lines.

W Holding is another troubled story with some good news on the immediate horizon. Last week, small New York specialty pharmaceutical firm Inyx Inc. said that as the result of getting financing for a management-led leveraged buyout to take the company private, it will repay a $120 million loan to W Holding's Westernbank Puerto Rico. The loan was promised to be repaid by year-end 2006 but that fell through because of the LBO taking longer to fund.

W Holding shares (NYSE: WHI) added 3 cents on Monday to $5.59. The company on Monday rescheduled its conference call on fourth-quarter and 2006 earnings to Wednesday from Tuesday, citing technical difficulties.

Vornado seen upping EOP bid

In another situation of selling Monday what was bought Friday on speculation, traders noted a pull back in Equity Office Properties Trust as Vornado Realty Trust had not stepped up to best the latest bid of $54 per share for EOP made by The Blackstone Group. Yet, a risk arb trader said he believes the market doesn't think the situation has entirely played out yet.

"People were buying, small, but they were buying Friday thinking that Vornado would come in with another bid, and then when nothing was there this morning [Monday], there was a selloff," the buysider said.

"We suspect, and this is purely personal, that Vornado will do something; what, I don't know. We're set up OK on this one already, so we don't care a whole lot."

EOP shares (NYSE: EOP) on Monday slipped by 37 cents to $54.85, while Vornado shares (NYSE: VNO) advanced by $1.69, or 1.37%, to $125.11. Both essentially erased moves made Friday.

EOP said Monday that Institutional Shareholder Services has recommended holders of its shares vote for the $54 per share proposal from Blackstone but also noted that it has given Vornado Group until Wednesday to present a counter offer.

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