Delta surges, Northwest dives; Dominion gains; HMA slides; Salton spikes; Sun Micro surges

By Ronda Fears

Memphis, Jan. 24 - Airline stocks were all over the map Wednesday as a Senate panel grilled industry executives about consolidation in the sector on the heels of a less-than-stellar fourth-quarter and 2006 report from United Airlines parent UAL Corp. a day before. On some of the steeper declines, traders said there was buying that propped up several airline stocks late in the day.

Bankrupt No. 3 domestic carrier Delta Air Lines Inc. surged on remarks from its chief executive reiterating that a hostile takeover bid from US Airways Group Inc. would be a disaster. Bankrupt No. 5 domestic carrier Northwest Airlines Corp., however, was lower as Delta's chief unequivocally denied the two are planning to merge.

As a backdrop to that, the markets were exceptionally strong, with energy names - particularly alternative fuels on President Bush's remarks the night before on measure to decrease the United States' dependence on oil, and utility Dominion Resources Inc. seen getting competing bids for its oil and gas production assets.

Yet, while President Bush's comments in his State of the Union address gave a boost to alternative fuel names, hospitals were hit hard by his announcement of two major health care proposals, at least one of which was perceived to hold an immediately negative threat to the industry. Health Management Associates Inc. was the biggest loser in that group while rural hospital operator LifePoint Hospitals Inc. managed to eke out a gain.

Delta surges, US Air ekes up

Delta was one of the biggest losers in the group early in the session but reversed to higher ground as the skies became cloudier for its hotly contested takeover by US Airways, which one trader said could have been due to an arbitrage trade by many Delta bondholders. Northwest also was a big loser, as Delta's chief also seemed to put to rest talks of a merger between those two bankrupt carriers.

Delta shares were down by more than 10% early Wednesday but shot up as the Senate hearing got under way at 10 a.m. ET. After trading in a band of 99 cents to $1.21, the stock (Pink Sheets: DALRQ) settled higher by 12 cents on the day, or a gain of 11.32%, at $1.18.

"As the merger was discounted by Delta's CEO, the stock made a comeback. Generally, Delta stockholders have a better chance of recovery without a merger. Under a merger, in a combined company, the Delta bondholders will get more of the equity value," said one distressed stock trader.

He added, though, that Delta bondholders were likely aggressive sellers into the surge, in a situation commonly referred to as "feeding the pigeons."

US Airways shares were lower for much of the session, trading as low as $52.05 but gained on some analyst remarks that the decline in airline stocks might be a buying opportunity. The stock (NYSE: LCC) ended 8 cents higher at $53.35.

"US Air has lost $10 in just the last two weeks," remarked another trader "There were some people thinking it's at a low spot."

US Airways upped its bid for Delta to $10.2 billion from roughly $8.5 billion, but it continues to find resistance, not only from Delta but major creditors in the Delta bankruptcy.

For Delta's part, the company line remains steadfast against it, or any other combo. Delta has submitted a stand-alone reorganization plan that puts a value of $9.4 billion to $10.2 billion on the company as it exits bankruptcy.

"A Delta-US Airways merger ... is the poster child of the worst kind of merger and on its merits it should be rejected," says Delta CEO Gerald Grinstein in testimony prepared for a Senate Commerce, Science and Transportation Committee hearing Wednesday regarding consolidation in the airline industry.

Northwest off lofty levels

Rumors of a Northwest Airlines post-bankruptcy merger with Delta have swirled around the markets for weeks now, and both carriers have denied talking about it. Still, Northwest shares have spiked in recent weeks on speculation of some sort of merger being a major part of its reorganization, and the stock has been coming sharply off those levels this week.

"Of course, we take seriously our fiduciary duty to maximize the value of our company for our creditors. Some of our work in this area has generated rumors and speculation," Grinstein said. "One such is that Delta is negotiating with Northwest. To be very clear: we are not negotiating any such deal with Northwest."

Northwest shares (Pink Sheets: NWACQ) fell by 16 cents, or 3.85%, to settle at $4 after trading as low as $3.12 in the session.

But, echoing remarks from traders for weeks now, the distressed stock trader cited above said it had been trading at "ridiculous" levels of well past $5 recently on speculation of a merger to exit bankruptcy.

"There was a lot of back-peddling," he said.

At the same time, though, he said there are a lot of people who still believe in the Northwest Airlines story and are trying to place their bets during the trough.

Northwest Airlines has submitted a skeleton reorganization plan but was given an extension to file the disclosure statement, where details are outlined. The Eagan, Minn., carrier is slated to file the disclosure statement by Feb. 15.

Delta aims to exit bankruptcy around mid-year, as does Northwest Airlines.

Re-regulation raises ugly head

Many airlines extended losses Wednesday from the day before on UAL's numbers but were seeing buyers late in the day on the slump. The biggest gainers among the major carriers were top-ranked AMR Corp. and UAL.

AMR shares (NYSE: AMR) advanced 79 cents, or 2.15%, to $37.49 on volume of 15.6 million shares versus the norm of 8.9 million shares.

UAL shares (Nasdaq: UAUA) were better by 87 cents, or 1.94%, to $45.68 with 4.65 million shares changing hands compared with the norm of 3.4 million shares.

Traders said the specter of government regulatory oversight returning to the airline industry also cast a pall on the sector. In fact, one trader ventured to say that many of the gains seen in the airline group were the result of short covering that would soon play out and the entire field would land with much lower valuations because of merger uncertainty and volatile oil prices.

"Regulation would be a nail in the coffin for airlines," said one trader.

"In general, I don't think investors are that keen on consolidation, and fuel prices are anything but stable right now. I still say the valuations on these stocks have gotten out of hand and should be under serious scrutiny."

Re-regulation of the airlines surfaced as a scare following a comment from Sen. Ted Stevens, R-Alaska, who at one point in the committee hearing said, "I hear this from very conservative people in my state, they're asking for re-regulation of the airlines because of lack of service."

Sen. Jay Rockefeller, D-W.Va., said he was concerned that if the US Air-Delta deal went through it would prompt mergers among the four other large carriers, pairing AMR with Northwest Airlines, and UAL with Continental Airlines Inc.

Continental has been a popular carrier among investors, the trader said, but it sank on the news of the day and a downgrade to the stock. Continental shares (NYSE: CAL) lost $1.67, or 3.73%, to $43.15.

Regional airlines also have been picks amid the consolidation theme, the trader added, but they were mostly lower as their roles in a leaner industry are more uncertain. Southwest Airlines Co. (NYSE: LUV) was off 9 cents to $15.28, and JetBlue Airways Corp. (Nasdaq: JBLU) slipped 4 cents to $15.04.

Dominion gains on bid buzz

Two rival bidding groups are reportedly putting together offers for Dominion Resources' oil and gas assets that may approach or pass $15 billion, and with so much money getting poured into such deals in recent times, Dominion shares got a nice gain on the development, and traders see it going higher.

Dominion share (NYSE: D) rose $1.19, or 1.47%, to close at $82.04.

In looking at the options activity in Dominion on Wednesday, one trader said there are a lot of bets that the stock will go to $85 or $90 in the next three to six months.

"That seems very reasonable, to me," the trader said. "I mean, the bidders that are looking at these assets are impressive."

The Richmond, Va.-based utility said in November it planned to sell the assets to focus on electric utilities and energy pipelines, which makes it more similar to many other utility companies. Dominion plans the formal sales process to begin in mid-February with closing anticipated by the middle of this year. The assets include oil and gas operations in the deepwater Gulf of Mexico, West Texas, the mid-continent and Rockies, and the Western Canadian sedimentary basin.

One consortium includes both Goldman Sachs and Morgan Stanley and is reportedly working with a number of private equity firms on a possible bid, including Madison Dearborn Partners, Warburg Pincus, First Reserve and Carlyle Group and its affiliate Riverstone Holdings.

Another group is only made of the privately held Blackstone Group, Texas Pacific Group and Kohlberg Kravis Roberts & Co., according to reports.

Hospitals dip on health plan

President Bush's health reform proposals are not friendly to hospitals, by the pundits' accounts, and as a result many stocks in that sector took a hit Wednesday on the heels of his State of the Union address. In addition to HMA, other decliners were Community Health Systems, Inc. and Triad Hospitals Inc.

HMA shares (NYSE: HMA) lost 31 cents on the day, or 1.54%, to $20.02.

Community Health shares (NYSE: CYH) lost 23 cents to 436.06.

Triad shares (NYSE: TRI) slipped 5 cents to $42.44.

The only gainer in the group, albeit very slightly, LifePoint, saw its shares (Nasdaq: LPNT) manage a gain of a penny to $33.63.

Bear Stearns analyst Jason Gurda said at least one of Bush's two major health care proposals announced Tuesday would be immediately negative to the industry - namely shifting Medicaid DSH payments away from hospitals to subsidize state-organized health insurance purchases, as that would immediately reduce reimbursements.

The other is a tax code reform issue so that a standard deduction applies to all purchases of health insurance, whether purchased privately or through an employer. That proposal may have a long-term negative impact but will not be an immediate source of pain to hospitals, Gurda said.

As for the specific financial impact, the analyst said it is difficult to gauge as most publicly traded hospitals do not break-out Medicaid DSH payments. LifePoint does, however, and he estimates the implementation of Medicaid payments change could cost LifePoint about $13 million in annual reimbursement.

But Gurda stressed that Bush's plan could meet heavy resistance.

Salton spikes, eases back

Now that hedge fund Harbinger Capital Partners has acquired small appliance maker Applica Inc., after five rounds of rival bidding with conglomerate Nacco Industries Inc., shares of Salton Inc. spiked again Wednesday on hopes of a similar price appreciation. But a trader said there was some selling into the rally as the resignation of a Harbinger representative from the Salton board of directors sent a mixed signal.

Salton shares (NYSE: SFP) gained 25 cents on the day, or 9.26%, to close at $2.70 - well off the day's high of $2.99. The day before, Salton shares gained more than 16.38% on news that Applica's acquisition by Harbinger had been successful.

On Wednesday, Salton announced that David Maura, a vice president of investments with Harbinger, has resigned as a member of its board of directors in light of Harbinger's acquisition of Applica and would not be replaced.

"A lot of folks were unsure what to make of this," one trader said.

"I don't think it means that Harbinger has backed off Salton. Probably they just want the company to have an independent board when they present a deal."

Previously Harbinger, which also owns a majority stake in Lake Forest, Ill.-based Salton, said it planned to merge the two companies once it gained control of them both. On Wednesday, Harbinger affiliates declared an 18.88% equity stake in Salton in a Securities and Commission filing.

"We are enthusiastic about the small household appliance market and believe that a combination of Salton and Applica is compelling," Harbinger wrote in an SEC filing last fall. "Consolidation in this industry is inevitable and we believe likely to evolve rapidly. A combination of Salton and Applica will offer the best outcome for Salton's stockholders."

In a fifth amended merger agreement, Harbinger won Miramar, Fla.-based Applica for $8.25 per share, besting rather than just matching a series of rival bids from Nacco, which also had planned to merge Applica with its appliance unit. The ordeal began in October with a $6 per share bid from Harbinger.

Applica distributes small household appliances and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker.

Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances.

Borders seen as a fringe play

Book retailer Borders Group Inc. is quietly being added by some traders who see it as a nice turnaround story or think it's a prime target for a private equity buyout, the latter not being a new thought as the retail industry on whole is well under pressure as an underperforming sector.

Borders shares (NYSE: BGP) managed a 10-cent gain Wednesday to close at $20.95 but have been in a sharp downdraft amid its own warnings of weak performance and a protracted turnaround process.

Borders is scheduled to report fiscal fourth-quarter and year-end results March 22.

"I get a laugh out of all this negative talk about Borders. Once the restructuring is done, and Borders gets rid of the Waldenbooks slag holding them down, watch out," said one trader.

He said there is a "quiet accumulation" taking place in the stock, as buyers don't want to trigger a big surge.

"It was down almost 5% right after the holiday numbers came out," he said. "We have seen it slowly tick back up."

Earlier this month, Ann Arbor, Mich.-based Borders warned that fourth-quarter earnings would fall below expectations after announcing lower-than-expected same-store sales for the 2006 holiday season. The company said same-store sales at its Borders superstores dropped 1.9% in the nine-week holiday period and its Waldenbooks division fared worse with comparable sales falling 6.3%. Both figures were below the company's own projections.

Borders said it expects fourth-quarter earnings will be below its prior estimate of $1.80 to $2.00 per share for the fourth quarter. The company said total sales during the holiday season rose 3.5% to $1.1 billion with Borders superstores sales up 2.7% to $709.2 million, but Waldenbooks did poorly again, with sales down 9% to $227.6 million. Borders shares fell 4.2% to $21.16 on the warning.

The company said closing underperforming stores cut into this year's numbers.

"We have a lot of work to do and a turnaround will not happen overnight or even completely in the next year, but I am confident it will be achieved," said Borders chief executive George Jones, in a news release.

"As I work toward a turnaround of the company, I am focused on our mission to be a headquarters for knowledge and entertainment and the many exciting ways that we can make this a reality. Our strategic plan for the future, which is in development now and will be communicated in March, will provide specifics on how we will transform Borders superstores to drive higher comps and improved store productivity, as well as how we will address unproductive elements of our Waldenbooks and International segments to improve their contribution.

"We have a lot of work to do and a turnaround will not happen overnight, or even completely in the next year, but I am confident it will be achieved."

Sun Micro surges on KKR

The increased level of private equity buyouts also boosted Sun Microsystems, Inc., on the heels of its announced $700 million equity injection from private equity firm Kohlberg Kravis Roberts & Co. in the form of convertible notes. But traders said there also is an underlying upbeat sentiment on Sun Micro's overall turnaround progress.

Sun Micro shares (Nasdaq: SUNW) gained 49 cents on Wednesday, or 8.66%, to $6.15.

The server and storage products maker said Tuesday it privately placed $700 million of convertible senior notes with KKR. As a result, KKR will nominate a director to Sun Micro's board.

Sun Micro said it will use the proceeds to pursue growth opportunities.

"With turnaround stories, the key is margin expansion and milestones that we continue to see improving," said a trader at one of the bulge bracket firms.

"They hired the new CEO and have been very busy shoring up their business. Sun Micro has more work to do on cost, but we are more comfortable the outlook is even better than how the company has couched it."

Sun Micro reported a fiscal second-quarter profit of $126 million, or 3 cents a share, reversing a loss from a year ago of $223 million, or 7 cents a share, and a revenue gain of 7% to $3.57 billion. The company backed its 4% growth projection as it finishes fiscal 2007.

Analysts also noted that while Sun's funded debt level will increase with the private note placement to KKR, so will its already substantial net cash position. And, one analyst said the presence of a KKR nominee on Sun's might be a signal that KKR has plans for a going-private transaction, particularly in light of increasing LBO activity in the technology sector.

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