Delta, Northwest merger could spark other airline deals; CME rebounds; old hand makes new Children's Place bid

By Evan Weinberger

New York, Feb. 7 - Despite rampant merger reports, neither Delta Air Lines Inc. nor Northwest Airlines Corp. jumped Thursday. Much of the talk revolved around a stock-for-stock transaction with a small premium, which kept investors from getting too excited, a market source said.

In fact, the only airline stock to make any appreciable advance was Continental Airlines Inc., which was reported to be in reluctant merger talks with UAL Corp., the parent company of United Airlines.

CME Group Inc. recouped some of its lost value Thursday as fears subsided over concern that the Justice Department would get involved with the merger of the Chicago-based exchange with Nymex Holdings Inc. Concern grew over a Justice Department opinion calling for a shakeup in the organization of the futures trading industry.

Speculation also grew that Microsoft Inc. was using its bid for internet portal Yahoo! Inc. not just as a block against Google Inc., but also against Amazon.com Inc.

Calpine Corp. had its first day of regular trading since emerging from Chapter 11 bankruptcy last week.

Trading on the major indices was bumpy Thursday as investors continued to pour through downbeat economic data.

The Dow Jones Industrial Average gained 46.90 points, or 0.38%, to close at 12,247.

The Nasdaq picked up 14.28 points, or 0.63%, for a 2,293.03 close.

And the Standard & Poor's 500 added 10.46 points, or 0.79, for a 1,336.91 close.

Airline consolidation on the way?

The Wall Street Journal and the New York Times both reported that Atlanta-based Delta Air Lines and Eagan, Minn.-based Northwest Airlines were close to a merger agreement. The Journal reported that an announcement could come next week.

When potential mergers are floated, stocks usually react in a big way, up or down.

Not so in this case, although several airline stocks saw a late-day bump.

The deal being discussed, according to the reports, is a stock-for-stock transaction at a relatively small premium. While a potential merger would reduce costs for both airlines by making two hub airports redundant and provide complimentary routes, a low premium does little for stock players looking for a quick cash-in, a market source said.

Delta stock (NYSE: DAL) picked up 54 cents, or 3.01%, to close at $18.49.

Northwest stock (NYSE: NWA) inched up 3 cents, or 0.16%, for an $18.50 close.

Where the merger gets interesting is its impact on other airlines.

Already there are reports that Chicago-based UAL, the parent company of United Airlines, is looking to make a deal with Houston-based Continental.

Continental has long said that it had no interest in merging with another air carrier. Two rivals forming a larger entity may force its hand, however. "They might try to resist it," he said, adding that a deal would "probably eventually" get done.

There will be hurdles outside of Continental's reported reluctance.

Continental's pilots union has made its demands for acquiescence to any deal known to management. It is believed that the union will want stringent worker protections if any deal goes through. "Union preparation for this has been especially strong," the market source said. "That might dissuade management."

Late in the day, the Chicago Tribune reported that UAL and Continental were ready to announce a deal once Delta and Northwest come together.

UAL stock (Nasdaq: UAUA) gained $1.88, or 4.99%, to close at $39.55.

Continental stock (NYSE: CAL) stretched $1.67, or 5.80%, for a $30.45 close.

CME regains some value

Chicago-based derivatives and futures exchange CME Group was pummeled in recent days after a Justice Department official said that changes were needed in the way futures trades are processed. On Thursday, the group's stock made a comeback.

The Justice Department, in an opinion provided two days ago in response to a request from the Treasury Department, said that the clearinghouse where futures trades are processed should be spun off. According to BusinessWeek, 85% of all futures trades are processed through CME Group. In the opinion, Justice said that increased competition would lead to increased innovation.

The opinion said CME's trade-procession may be anti-competitive.

CME began firing back on Wednesday, saying that their competition is international and that a major U.S. exchange was necessary to compete with European futures exchanges.

CME also pointed to the rise of the Atlanta-based InterContinental Exchange as proof that there was room for competition and growth in the futures trading space.

Analysts at JPMorgan called the Justice Department memo a "non-event," and Bank of America analysts said CME's 18% fall Wednesday was an overreaction.

If the Justice Department pushes, a market source said, CME could be forced to separate its clearinghouse from the rest of the operation. Or the $11 billion merger with Nymex could be put into peril if Justice decides to do more than issue an opinion on the question. "It's a question about whether someone at DOJ will get a bee in their bonnet about this and block it. That's entirely possible," the source said, citing the Federal Trade Commission's actions against Whole Foods Market Inc.

CME stock (NYSE: CME) gained $42.76, or 8.81%, to close at $528.01.

Nymex stock (NYSE: NMX), which had also been hurt in the run on CME, rose $7.07, or 8.05%, for a $94.95 close.

Microsoft's Yahoo bid to beat back Amazon?

While much has been made of Redmond, Wash.-based Microsoft's bid for internet portal Yahoo as a way to battle Google, a second theory has emerged.

Trip Chowdhry, an analyst at Global Equities Research, told Marketwatch that he thinks Microsoft was trying to head off an alliance between Yahoo and Amazon.com.

The analyst said that the deal was so rich that Yahoo would eventually have to say yes. But he speculated that regulators wouldn't let it go through on anti-trust grounds. This way, a potential merger with Amazon, which Chowdhry told Marketwatch was beginning to take shape, couldn't occur.

Microsoft denied the speculation, saying their bid was legit.

A market watcher similarly scoffed at the speculation. "Amazon has a real business," he said. "Why would they want Yahoo?"

In other news, Congressional hearings into the deal, originally scheduled for Friday, were postponed Thursday. They were not rescheduled.

Yahoo stock (Nasdaq: YHOO) moved up 47 cents, or 1.65%, to $29.04.

Microsoft (Nasdaq: MSFT) slid 40 cents, or 1.40%, to $28.12.

Children's Place ex-CEO steps in

Ezra Dabah, the former CEO of Secaucus, N.J.-based The Children's Place wants to take over the troubled children's apparel retailer.

Dabah wrote a letter to The Children's Place's board dated Wednesday informing them he was considering a $24-per-share, or $578 million, bid on the company. The former chief executive, who owns a 17% stake in the retail chain, is working with private equity firm Golden Gate Private Equity on the deal.

This is not Dabah's first time making noise about taking over The Children's Place. He first floated the idea in October, soon after being ousted from his position for violating company policies on securities trading.

In a statement Thursday, the board of directors of The Children's Place said that it had received Dabah's letter.

The Children's Place already hired Lehman Brothers to help it sift through its strategic alternatives in October, the statement continued.

Stock in The Children's Place (Nasdaq: PLCE) shot up $3.50, or 19.69%, to $21.28 Thursday.

Calpine's big step

A little over two years after entering Chapter 11, Calpine resumed "regular way" trading on the New York Stock Exchange Thursday under the ticker symbol CPN. The energy company has headquarters in San Jose, Calif., and Houston.

"Calpine is proud to once again be traded on the New York Stock Exchange," Robert P. May, Calpine's CEO, said in a statement. "We have streamlined our operations and strengthened our balance sheet, and we are returning to the NYSE as a stronger and more competitive power company with one of the cleanest generating fleets in the United States. We are confident that the new Calpine is well-positioned in the market and poised for success as a corporate leader in the nation's energy industry."

Calpine received bankruptcy protection in December 2005, staring at $22 billion in debt. The company officially emerged from Chapter 11 on Jan. 31 after closing a $7.3 billion financing facility. A $300 million one-year bridge loan is part of the financing facility, and Calpine expects to pay that off by the end of the first quarter.

As part of the reorganization plan Calpine announced last week, the company planned to issue 485 million shares of its new common stock to holders of allowed claims. Those were expected to be distributed by Feb. 10.

Calpine management and directors were expected to receive a further 15 million shares.

The new shares were valued at $17.36.

Calpine stock closed its last day of over the counter trading Wednesday at $16.45. The stock closed its first day of regular trading since coming out of bankruptcy at $16.60, a rise of 15 cents, or 0.91%.

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