Wendy's up; Kraft off; FedEx up; Movie Gallery plunges; Alcan, Alcoa firm; Getronics lifts IBM

By Ronda Fears

Memphis, July 3 - Wendy's International Inc. shares surged early Tuesday but ratcheted back as the Nelson Peltz factor in its search for a deal was considered to be a potential snag in the company's efforts to catch a deal. Peltz, which controls Arby's through his Triarc Cos. Inc., has boosted his stake in Wendy's though Trian Fund Management but has always been considered the "natural buyer" for Wendy's.

"He [Peltz] doesn't like the way Wendy's has been handling the sale process," remarked one trader. "That could be a bump in the road for the overall process. Obviously, they have been shopping a deal since April and nothing has come of it, so there definitely is something amiss."

In another Peltz name, Kraft Foods Inc. got another bounce on its bid for Danone Group SA's cookie division for $7.2 billion, which had been widely speculated previously. In a widely expected move, Kraft shares initially advanced on the news, climbing as high as $35.20, but selling pushed the shares down (NYSE: KFT) to settle with a loss of 87 cents, or 2.45%, at $34.66.

"The Kraft news was good for Peltz, you might say, because there was an initial bounce in the stock and he could maybe make some money on that to use toward Wendy's," the above trader said. "I have not heard that Peltz was a seller in Kraft today; it's just an interesting notion."

Metals names were on the tape as well and moving in the light pre-holiday session.

Aur Resources Inc. surged on its buyout by Teck Cominco Ltd. in a friendly cash-and-stock deal worth C$4.1 billion - or the equivalent of a C$41 per share offer, a 29% premium. Aur shareholders would receive C$30.75 in cash and 0.2187 of Teck class B stock.

Teck, one of the world's top zinc producers, has been reviewing ways to spend its stockpile of cash over the last nine months and said the Aur linkup will significantly boost its copper production. Aur (Toronto: AUR) advanced C$9.92, or 31.29%, to C$41.62; Teck class A shares (Toronto: TCK-A) climbed C$2.25, or 4.62%, to C$50.96 and class B shares (TCK-B) gained 31 cents, or 0.82%, to close at C$45.57.

Traders in the United States said there could be speculation that Aur would get a rival bid, as there has been so much consolidation in the metals sector.

Elsewhere in metals names, aluminum producer Alcan Inc. on Tuesday turned down rival Alcoa Inc.'s request for more talks on its hostile takeover bid. Canadian aluminum producer Alcan rejected a cash-and-stock offer from Alcoa in May, calling it inadequate; the offer is worth an equivalent of $75.6482 on Tuesday's market, one trader said. Both traded higher as both are still see seen as prime takeover targets, the trader said, plus Alcoa has made overtures that it may be willing to up its bid for Alcan. Alcan (NYSE: AL) added $1.40, or 1.69%, to $84.01; Alcoa (NYSE: AA) gained 41 cents, or 1%, to $41.50.

In technology names, Dutch IT firm Getronics NV, which has repeatedly been the subject of takeover chatter, jumped more than 19% in Amsterdam after saying it has received a potential takeover approach from a U.S. peer. Traders said the news pushed Electronic Data Systems Corp., Hewlett-Packard Co., Perot Systems Corp., Dell Inc. and International Business Machines Corp. (NYSE: IBM), which gained $1.57, or 1.5%, to $106.58, was a leader along those lines of thinking, a trader said. But, he noted Dell (Nasdaq: DELL), which lost 22 cents, or 0.76%, to $28.71, "needs a deal, but isn't in a position to do anything."

FedEx Corp. also marked a small gain with light volume during the session, which another trader attributed to a rumor that the Memphis-based freight company was making a play for its Dutch counterpart, TNT NV. He said there was chatter circulating among traders that FedEx is preparing a takeover offer of €50 per share, but he thought that sounded "very rich," since TNT (Amsterdam: TNT) settled Tuesday at €34.18, which was a gain of €0.59 on the day, or 1.76%.

Firmness in the broader markets, however, was taken with a grain of salt because of the light volume in the holiday-shortened session.

"We saw a bit of a pre-holiday pop today after another round of Monday merger mania. It was a surprisingly strong day today and the Nasdaq came within inches of a new multi-year high, but you really can't take away too much from it," said another trader.

"Trading volume was light ahead of the holiday, and that should remain throughout the week. We can't place too much importance on market moves until probably early next week."

While the broader markets still felt firm, distressed situations were hard hit.

Movie Gallery Inc. fell dramatically as its troubled outlook became evermore gloomy with the stock taking a dive after the movie and rental outfit said it was in a credit default situation and is exploring options, including a possible sale. The name has been speculated as a buyout target for months, traders say, but with the debt overhang, the company's value is seen insufficient to keep it out of bankruptcy. Traders in bond circles, however, said they expect Movie Gallery's banker, Goldman Sachs, to move to keep it out of bankruptcy, possibly making a play for it through its buyout arm.

Wendy's waffles on news

Peltz's remark that Triarc would be a "natural, strategic buyer" for Wendy's was no big revelation, and in fact, the market had always thought that was the case. But, his criticism of the company's sale process and inference that Triarc will make a bid was ultimately viewed poorly for the story, one trader said.

Wendy's shares settled the day near the session low, the trader noted; he added, however, that volume was very light. The stock (NYSE: WEN) traded in a band of $38.22 to $39.22 before closing at $38.39 for a gain of $1, or 2.07%. Volume was 1.52 million shares versus the norm of 2 million shares.

"We have heard that Peltz thought Wendy's should get $40. I do not believe a deal will go through at this price. I believe $40 is a bit steep given the mess Wendy's is in," the trader said.

"Who wouldn't like that price, but it's looking ugly. The thing is, though, that we're not so sure Peltz will pay $40 either."

According to the filing containing Peltz's remarks, Trian also upped its stake in Wendy's to 9.8% from 8.4%.

The trader pointed out that the stock has "pretty much hovered in the $38 neighborhood" since taking a leap from around $31 when Wendy's announced in April that it would launch a strategic review of alternatives, including a possible sale.

"Looks to me like if Peltz was interested in buying Wendy's he would have been working on a deal before the stock made a run and he would not be doing something that would cause a spike in the stock price," the trader said.

"That's the thinking that sort of sunk in today and you saw the stock pull back."

Last year, Peltz placed three nominees on the company's board and pressured Wendy's to accelerate its spin-off of the Tim Hortons Inc. coffeehouse chain; he also led to the sale of the Baja Fresh chain to an investment group.

In mid-June, Wendy's trimmed its earnings forecasts for 2007 on sluggish sales and higher costs, which the trader said has hurt its prospects of finding a buyer at the elevated stock prices. When Wendy's issued the warning, this trader said the downward outlook revision also was seen as a possible means of backing down the stock price amid negotiations with a potential buyer that was not willing to pay up at current market prices.

Peltz said Wendy's bankers invited Triarc to participate in the sale process, and following that invitation, it received a confidentiality agreement that has a one-year standstill clause to which Triarc has objected. A standstill agreement typically limits the amount of shares that an investor can own. Peltz had a standstill agreement with Wendy's that expired Saturday.

Movie dives on default

Movie Gallery chatter as a takeover candidate - which has lingered around the name for months - was exonerated Tuesday when the company said it is exploring options, including a potential sale, but hopes of a deal in which stockholders will see anything were dashed as the news comes with the company defaulting on its credit facility.

The stock (Nasdaq: MOVI) plummeted $1.23 on the day, or 65.08%, to close Tuesday at 66 cents with some 26 million shares traded versus the norm of 893,683 shares.

"Store valuations are in the crapper and without an online enterprise the brick-and-mortar assets just won't be enough. The bondholders would get the bulk of that now," said a distressed equities trader, acknowledging that there are many bondholders involved in the stock as a hedge play.

"I predicted last Friday that Movie Gallery would default in second quarter. It was obvious after reading Blockbuster's 8-K, which stated that the overall movie rental industry was down 16%. A 16% overall decline coupled with Blockbuster's Total Access made it impossible for Movie Gallery to meet the interest coverage test."

After Monday's close, the Dothan, Ala.-based movie rental chain notified its lender, Goldman Sachs Credit Partners LP, that it could not meet debt covenants because of a softer-than-expected second quarter. It said it will accelerate unprofitable store closures, consolidate stores in certain markets and consider a sale or merger of the chain. The company hired restructuring and corporate advisory firms Alvarez & Marsal and Lazard Freres & Co. LLC to come up with a long-term strategy.

Movie Gallery said it will work with lenders to try to remedy the credit defaults, which could include seeking a waiver, amendment, forbearance or a similar agreement. The company said it has drawn the remaining availability under bank revolver; its liquidity now consists of $50 million in cash.

Goldman playing on Movie?

If Goldman is preparing to make a play for Movie Gallery as a sort of White Knight, it would be the second such scenario in as many months. Bear Stearns Merchant Bank led a group of bidders, which included Goldman, who moved on troubled Puerto Rican bank Doral Financial Corp., chiefly to ensure the bank's ability to refinance a $625 million floating-rate bond coming due this month.

"This makes a lot of sense," the equity trader said. "But the stockholders are still left with nothing in the end."

Movie Gallery's bonds began trading flat Tuesday, which typically signals the market believes a bankruptcy filing is imminent, but bond traders were divided as to whether the situation is that dire yet.

"I don't think a company like that will file for bankruptcy," the bond trader said, supposing the company can keep EBITDA at 5 to 6 times. "It's either that or Goldman is trying to buy the company."

Movie Gallery bonds were seen trading as low at 16, now at 24 bid, 25 offered.

Another bond trader said Goldman Sachs will likely place itself higher up in Movie Gallery's capital structure, which "will screw everyone else." He added, "This is second time the company has needed a bail out. I don't think they stand a chance."

In mid-May, Doral inked the below-market buyout by a group of investors led by Bear Stearns Merchant Bank and Goldman Sachs, as a means to pay off its $625 million floaters. A rival bid emerged from FBOP Corp. of $610 million at $1.41 per share for 80% of the company - versus the Bear Stearns-led offer also at $610 million but which at the time worked out to $0.63 per share, for 90% of the bank. FBOP later pulled its bid.

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