Dow Jones dives; BCE up, Telus off; Sharper Image slides; Calpine climbs; Kraft rockets

By Ronda Fears

Memphis, June 21 - Dow Jones & Co. Inc. took a dive Thursday after General Electric Co. said it has broken off talks with Financial Times publisher Pearson plc about a possible rival bid to the $5 billion, or $60 per share, offer from Rupert Murdoch's News Corp.

"A bunch of guys made a killing on this," one trader remarked, as Dow Jones shares ran up as high as $61.76 on the GE/Pearson prospective bid.

"Today, everyone was running for the doors."

Dow Jones shares (NYSE: DJ) traded in a band of $59.14 to $61.25 before settling at $59.71 for a loss of 94 cents, or 1.55%, on the session. The trader also noted that Dow Jones options were backtracking on the GE news as well, with the $65 call options dropping 55 cents to 35 cents on volume of 12,745 contracts and open interest of 19,445.

Meanwhile, the brewing battle for BCE Inc. in Canada is heating up with Telus Corp. entering the fray. But Telus fell to BCE's gain on the news, as stiff antitrust opposition is anticipated to a linkup of the two Canadian telecommunications giants.

In another controversial deal, Whole Foods Market Inc. took a hit as the ongoing opposition from the Federal Trade Commission to its $565 million acquisition of rival Wild Oats Inc. will likely drag the deal out. Traders said it is expected to ultimately gain approval, noting further details Thursday on the divestiture of some 35 Wild Oats stores to an Apollo Capital Management affiliate if approved. One trader said there is some noise that the Apollo affiliate, Sharp Holdings Inc., might consider a bid for Wild Oats if the Whole Foods deal falls through because of the antitrust issue.

Kraft Foods Inc. was a big gainer Thursday as activist investor Nelson Peltz has reportedly accumulated a 3% stake in the company, according to a report in the Wall Street Journal online, which also speculated he will urge Kraft to sell the Maxwell House coffee and Post cereal brands and may also push for more share buybacks.

Kraft was spun off from Altria Group earlier this year and has a $5 billion stock buyback plan in place, noted one trader, who said he was skeptical of the report. "I'd take the money and run. They won't be doing any buybacks at this level," he said. "As for the other stuff, I might be a buyer when the stock comes back down, and it will." Kraft (NYSE: KFT) nonetheless zoomed, adding $2.28 on the day, or 6.62%, to close at $36.74.

To the downside, Sharper Image Corp. continued to slide in the wake of its fiscal first-quarter results earlier in the week, which was a big miss from the specialty retailer. A buyside market source said there was heavy shorting in the stock and he thinks that with the poor performance and the company's new bank facility increase, its chances of catching a buyout bid is slim. Bullish sellsiders, however, see big potential for a private equity buyout, noting one LBO firm already owns 20%. The views on the story are far-reaching, indeed, a trader said.

There were a couple of firm deals on the tape Thursday as well.

Oakley Inc. turned heads after accepting a buyout offer of $2.1 billion, or $29.30 per share - a 16.1% premium to Wednesday's market - from Italian eyewear maker Luxottica Group SpA, the world's biggest eyewear maker. Despite the "rich" price tag, traders said the union was viewed positively on both sides. "Luxottica is even more of a powerhouse now," as one trader put it. Oakley (NYSE: OO) gained $3.22, or 12.76%, to $28.45 while Luxottica (NYSE: LUX) added $3.18, or 9.13%, to $38.02.

Hotel real estate investment trust Equity Inns Inc. said Thursday it agreed to be purchased by an affiliate of Whitehall Street Global Real Estate LP 2007 for roughly $1.26 billion in cash, or $23 per share - an 18.8% over Wednesday's close. The stock (NYSE: ENN) advanced $3.32, or 17.15%, to $22.68.

Elsewhere, bankrupt Calpine Corp. shares headed north Thursday on heavy bets that the payout to common stockholders could get substantially boosted in the final claims negotiations of the power producer and its bondholders. The estimated payout cited by the company of $1.80 per share could go as high as $3.50 or a little better.

Sharper Image selling big

Sharper Image has seen big selling for three sessions following its results late Monday, and one buyside market source was advocating a short sell on a lack of confidence that new management at the specialty retailer will not be able to turn the company around despite their expertise. Moreover, this source thinks that takeover speculation surrounding the company has little possibility because it is now leveraged to the hilt with a new bank facility.

Moreover, this source said that while Sharper Image seems to have averted a credit crunch, at least on a temporary basis, by expanding its credit line, he thinks weak retail sales trends and a weak balance sheet portend "a bankruptcy filing after Christmas is very possible."

The stock (Nasdaq: SHRP) fell 50 cents, or 4.13%, to close Thursday at $11.61.

But a bullish sellside market source said he thinks Sharper Image can outperform its peers in the specialty retail group, and he is particularly keen on the company's turnaround management - chief executive Jerry Levin, who was previously at American Household Inc., formerly Sunbeam, and at Revlon Inc. before that.

Company founder Richard Thalheimer resigned last September following a bitter proxy battle with an activist stockholder group headed by affiliates of Knightspoint Partners. Thalheimer also sold virtually his entire stake in the company. The sellsider noted that Knightspoint now has a 20%-plus stake and an LBO outfit holds another 20% stake.

On top of weak performance in fiscal first quarter, the buysider pointed out that the company now has a load of new products coming in September that could be a drag on bulging inventory levels from lackluster sales. The rebound the stock has seen from the 52-week trough of $8.95 is overdone, he said; he values the stock at $6.

Late Monday, Sharper Image reported a fiscal first-quarter ended April 30 net loss of $16.8 million, or $1.12 per share, widened from $12.7 million, or 85 cents per share, a year before, while revenue fell to $67.6 million from $106.8 million. It was a big miss, as Thomson First Call analysts on average were expecting a loss of 88 cents per share on sales of $73 million.

"Management may be capable but does not have the time, assets or balance sheet to turn around Sharper Image," the buyside source said.

"Levin was brought in September 2006, and I do not feel the need to argue about his track record, though it is not perfect (Revlon). I simply think, given the balance sheet and current rate of operating losses, Mr. Levin does not have the time or financial wherewithal to turn SHRP around without going through bankruptcy. As Warren Buffett has said, bad businesses usually trump good managers - that seems to be the case here."

On the possibility of a buyout, he continued, "I think a buyout at any premium from today's prices, given the necessary costs for restructuring and the mounting losses, seems very unattractive."

The sellsider, however, said that with buyout firms already involved in the Sharper Image story, they could take the company private and turn it around, even with it leveraged up, and sell it down the road for a profit.

Calpine bettors push for more

Calpine players were betting for a better outcome in the final analysis of the power producer's reorganization plan that was initially outlined by the company, sources said. In addition, traders said there was huge interest in the stock now that it has been determined there will be some level of payout, as Calpine is seen as a prime takeover target once it emerges bankruptcy.

The stock (Pink Sheets: CPNLQ) closed a penny shy of the day's high at $3.33 for an advance of 40 cents, or 13.65%, on whopping volume of 50.5 million shares versus the norm of 8.24 million shares.

"I believe this is a starting point," said one buyside source, referring to the company's estimate of a $1.80-per-share payout to stockholders.

At the heart of equity holders' hope is that Calpine said allowed claims will range from $20.1 billion to $22.3 billion, thus giving general unsecured creditors 91% to 100% recovery rates. The company valued the common stock at $1.80 per share, but he said that if the lower claims amount is used, the stock value could go to $3.50 or a tad higher.

"It's a crapshoot pretty well covers the matter," said a distressed equities trader.

"The claims amount is still an unsettled issue and may not be settled until sometime after confirmation since some of the claims are being litigated. And the valuation of the enterprise used to complete the debt/equity swap and cancel the current common is also still unsettled, although Calpine has put forth its valuation range in the disclosure statement.

"There's no way to underwrite what the common might get unless you have some solid understanding of what final claims will be. Probabilities favor a negotiated settlement with the common getting something."

Another trader said the big interest in Calpine was as a takeover target once it exits the bankruptcy process.

"Vultures are now sizing up the carcass. This company's fleet of clean burning plants, and fresh government mandates that utilities buy a certain percentage of clean gas-fired electricity, along with the relative newness of Calpine's fleet, combine to make it a prime target," he said.

"The shares are undervalued tremendously on that basis."

He said the potential suitors for Calpine are the "usual suspects" - the major electric utilities, PG&E, Edison, Sempra, etc.

Whole Foods sinks

In addition to there being more time value risk involved in the Wild Oats pursuit by Whole Foods, additional pressure hit the latter stock Thursday on a lowered price target by CIBC World Markets to $35 from $38 because of the antitrust opposition facing the deal.

Whole Foods (Nasdaq: WFMI) lost 69 cents, or 1.77%, to close Thursday at $38.35.

All that came in spite of confirmation from Sharp Holdings, the holding company for Smart & Final Inc. - a private company controlled by Apollo, that it will buy 35 Henry's and Sun Harvest stores from Whole Foods if the Wild Oats merger goes through.

The FTC dispute pushes back the deal until at least September and has already forced Whole Foods to extend its tender for Wild Oats shares through July 20, and it will likely be extended again, as the next FTC hearing is scheduled for July 31.

Whole Foods has proposed to buy Wild Oats for $18.50 a share.

Wild Oats (Nasdaq: OATS) added 5 cents, or 0.3%, to close Thursday at $16.80.

Telus calls on BCE

Telus fell hard Thursday on confirming talks with BCE about a merger of the two Canadian telecom giants, as the market anticipates stiff antitrust opposition.

Telus (NYSE: TU) lost $1.83, or 3.01%, to $58.90.

BCE (NYSE: BCE) advanced $1.12, or 3.05%, to $37.89.

The two companies - which together have a combined market capitalization of more than $50 billion - have entered into a mutual non-disclosure and standstill agreement on a non-exclusive basis, BCE said in a press release after the market close Wednesday.

Vancouver, B.C.-based Telus joins a growing list of companies eyeing Montreal-based BCE, which confirmed earlier this year it was reviewing options to increase shareholder value. Other suitors include groups led by the Canada Pension Plan Investment Board, Ontario Teachers Pension Plan Board, and U.S. private equity firm Cerberus Capital Management LP.

Formal offers are expected to be submitted to BCE before the Canada Day weekend. BCE has said it expects its review of strategic alternatives for the company to be complete in the third quarter of 2007.

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