Commerce Bancorp slides; WCI spikes up; Vornado gains on EOP; Mills up; Caremark up after close

By Ronda Fears

Memphis, Jan. 12 - In the developing saga over pharmacy benefits manager Caremark Rx Inc., rival Express Scripts Inc. launched its so far-thwarted $25 billion offer Tuesday but after the close Caremark and its betrothed takeover pick, drugstore chain CVS Corp., added a $2 per share dividend bonus to takers of that $21.2 billion deal.

On rumors that Vornado Realty Trust is joining Cerberus Capital Management in a bid to trump the record $35 billion buyout of Equity Office Properties Trust by The Blackstone Group, Vornado and Equity Office were both higher. But traders were saying that the market expects the story will take a couple of months to play out and the bets are running that Vornado eases back considerably. Meanwhile, Equity Office was hovering just below $50 - a threshold many players are expecting the bid to reach or surpass.

In another developing story among REITs, The Mills Corp. got a shot in the arm from the prospects of a $500 million equity private placement with Farallon Capital Partners, its largest shareholder, plus a renewed $600 million recapitalization offer from another big investor Gazit-Globe Ltd. Yet, on the view that these are seen as "Band-aids" that will not fix the problems at the Chevy Chase, Md.-based mall developer, one trader said he was a heavy seller into the rally, which he characterized as short covering more than ebullience from the capital infusion.

Homebuilders were very active Tuesday, as well, with Centex Corp. issuing another warning. But the play of the day in that sector, according to traders, was in WCI Communities Inc., which moved sharply higher as many players expect billionaire investor Carl Icahn, a big stakeholder in WCI, to issue a demand for WCI to boost stockholder value, signaling perhaps a fresh wave of consolidation via mergers.

Mortgage banks like IndyMac Bancorp Inc., which also warned about fourth-quarter results because of troubles among mortgage borrowers, saw further sell-offs, too. In another bank name, Commerce Bancorp, Inc. also was sharply lower but the situation, however, is not related to the housing sector; rather it was prompted by an investigation by the Office of the Comptroller of the Currency and, thus, one trader was a buyer into the slide.

In another takeover battle, Applica Inc. got a bounce from Round 4 of that bout between majority stakeholder Harbinger Capital Management and Nacco Industries Inc., which upped its bid yet again.

CVS, Caremark bid sweetened

Nashville-based Caremark was lower in the regular session but shot up after-hours on news of the $2 per share dividend added to the all-stock CVS bid that faces a competing cash-and-stock bid from Express Scripts.

Caremark shares (NYSE: CMX) dropped 58 cents, or 1.02%, to close at $56.25 on light volume of 7.1 million shares versus the norm of 8.2 million. In after-hours action, though, the stock zoomed up by $1.25, or 2.22%, to $57.50.

"This changes the whole ballgame," said one trader on the West Coast, noting that he really didn't think a Caremark deal would go past the equivalent of $55.

Maryland Heights, Mo.-based Express Scripts launched its hostile offer directly to Caremark stockholders on Thursday, offering $29.25 in cash and 0.426 of a share of Express Scripts for each share of Caremark held, which it valued at $56.87 based on Friday's prices, or roughly $25 billion. The offer expires Feb. 13, unless extended.

Express Scripts shares (Nasdaq: ESRX) closed Tuesday better by 88 cents, or 1.36%, at $65.71 but slipped by 3 cents in after-hours action.

For their part, however, Caremark and Woonsocket, R.I.-based CVS remain adamant about sticking with their agreement, which would give Caremark shareholders 1.67 shares of CVS for each share of Caremark held.

CVS shares (NYSE: CVS) ended the session lower by 15 cents, or 0.47%, at $31.79 but after the closing bell were seen higher by 21 cents at $32.

Caremark and CVS also said their merger proposal now includes a plan to buy back 150 million shares of the combined company after the deal closes, for which they have secured bank commitments for $5 billion.

In addition to the special one-time dividend, CVS and Caremark said that they will retire 150 million of the outstanding shares in the new company, representing 10% of its stock. The retirement is expected add to the new company's per-share income and boost its return on equity, officials said.

CVS and Caremark added that they now expect $800 million to $1 billion in incremental revenue in 2008, and Caremark continues to argue that a merger with Express Scripts does not make sense from a synergistic standpoint.

Vornado spikes, EOP higher

Elsewhere, a purported rival bid for Equity Office that still hasn't materialized failed to get much of a response in Equity Office shares, but rumors that Vornado is part of the new bid sent Vornado shares rocketing. Yet, one trader said there was considerable selling into the rally late in the day.

Open interest in March calls for Vornado suggest the situation will be protracted, the trader added. And, he noted that there was heavy buying Tuesday in Vornado $115 and $120 March calls.

"The spike today could be short covering as well as the EOP news," he said. "I think the Vornado story is overall a good play but the run-up today isn't where I would be a buyer. I would be a seller into this rally."

The trader said reports that Vornado has joined a consortium of investors working on a bid for Equity Office, the empire of noted real estate tycoon Sam Zell, that would rival the would-be record $36 billion from Blackstone lends credibility to the effort, "if it ever hits the table." But he said there was looming doubt. Previous reports also named Barry Sternlicht's Starwood Capital and Leon Bluhm's Walton Street Capital as Cerberus partners.

Run by Steven Roth, Vornado was part of the $5.5 billion private equity buyout of Toys 'R' Us in 2005. The company also owns New York's Hotel Pennsylvania, a string of office buildings in New York and Washington, D.C., and malls around the United States.

Equity Office agreed to be bought by Blackstone in November in what would become the largest leveraged buyout on record, exceeding the $33 billion buyout of the hospital chain HCA Inc. by Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch in July 2006.

Commerce drops over 8%

Trading volume of Commerce Bancorp skyrocketed Tuesday after it revealed an investigation by the banking regulatory branch, the Office of the Comptroller of the Currency, and the Federal Reserve System for transactions with its officers, directors and related parties.

Also Tuesday, the Cherry Hill, N.J.-based bank reported fourth-quarter net income shot up 68% to $78.7 million, or 40 cents per share, compared with $46.9 million, or 26 cents per share, in the year-ago period while revenue grew by 24% to $492.3 million.

Commerce Bancorp shares (NYSE: CBH) fell $2.89, or 8.32%, on the day to close at $31.83 with a whopping 15 million shares traded versus the norm of 1.6 million.

One trader said the downdraft was a buying opportunity, or at least an opportunity for short positions to cover cheaply. He suggested shorts cover one-third of their position, and noted that, oddly, short interest in Commerce Bancorp has been coming down while the price has been coming down.

Commerce said it has been advised that the scope of the investigation will include but not be limited to transactions with its officers, directors and related parties, including transactions involving bank premises.

"Because this is a regulatory investigation in its early stages, we're not able to answer further questions on this matter," chief financial officer Doug Pauls said on a conference call. Company officials declined to say when the probe began or how long it could last.

The trader said that Commerce Bancorp's earnings numbers were enough reason to own the stock, given the vagueness of the regulatory probe.

"They've been just sucking it up for the past six quarters," the trader said.

"The yield curve at some point will dis-invert and when it does their margins will come back."

Meanwhile, he thought the quarter's figures were actually pretty good in the face of the current operating environment for banks, in that loan growth was decent and somewhat offset net interest margin compression.

Bottom line: "I think the bank is looking attractive down here. I mean, how cheap does it have to go? It's trading at 17 times earnings."

IndyMac falls 7%

Among troubled banks, in a whole other arena of banking - mortgages - there is IndyMac, which also saw a sharp decline Tuesday as it warned of losses. Compounding its troubles were warnings from the homebuilders group, including Centex Corp., which couched the industry's woes as "one of the most challenging housing environments in the past 25 years."

IndyMac shares (NYE: NDE) dropped $3.05, or 7%, to $40.50.

The Pasadena, Calif., mortgage lender warned that the U.S. housing slowdown will cause a big fourth-quarter earnings shortfall as its borrowers face difficulties affording higher interest rates on adjustable-rate mortgages and other esoteric loans. As a result of the conditions, the company said it is being forced to raise reserves and provisions for losses, which directly impact its bottom line.

IndyMac said it expects fourth-quarter net income of 97 cents a share, worsened from its earlier forecast of $1.30 to $1.40 a share. But the company said it expects to keep its dividend at 50 cents a share for the quarter and is considering a stock buyback plan to enhance shareholder value.

Centex shares (NYES: CTX) fell $1.55 on the day, or 2.92%, to $51.61.

WCI building big interest

Despite the renewed Centex warning, traders said they expected to find a spike in interest in homebuilder stocks related to possible consolidation in the industry related to the tough economic environment the group is facing. At the top of the list of candidates is WCI Communities.

WCI Communities was the stand-out gainer in the homebuilding group with the stock (NYSE: WCI) jumping $1.45 on the day, or 6.9%, to $22.47 on volume of 6.4 million shares versus the norm of 1.9 million.

One trader said comments by financier Carl Icahn in a regulatory filing that he has increased his stake in the company to about 14.6% and plans to contact the company to get its views "on how to unlock the inherent value of the shares" sparked chatter that there could be a merger in the offing.

Centex could be a target, the trader said, or KB Home, but the more likely candidate he thinks is Lennar Corp., the third-largest U.S. home builder, which is slated to report quarterly earnings Wednesday morning. Both KB Home and Lennar have warned about weak performance.

Also spurring interest in homebuilders, though on the short selling side, another trader noted that the National Association of Home Builders is expected to release its monthly confidence index and the U.S. Commerce Department is slated to report December housing starts and building permits on Thursday. Economists expect housing starts a seasonal decline of 0.8% to 1.575 million units after a gain of 6.7% in November.

As for WCI Communities, he figures the stock was seeing a fair amount of short covering and once quarterly figures are reported it will trend lower. Thus, he is a seller into the rally.

"My mantra has been that intrinsic land value and a short squeeze elevated the [WCI Communities] stock past $15. Now that short squeeze is over, in my opinion, I think this stock will drop to the high teens when sluggish sales are reported," the trader said.

"Fair value of company is probably $25, but since there is no dividend, and because it is in a tumultuous industry, I think it will trade at an appropriate discount - $17 to $20 over next 6 months. I would recommend they sell now as the short squeeze peters out."

Mills selling into short covering

Mills shares took a leap Tuesday on news it has investment offers on the table that will help it repay a $1.1 billion loan and, thus, presumably avert bankruptcy but one trader said there was considerable selling into the surge, which he characterized as mostly short covering.

Mills shares (NYSE: MLS) gained $2.56 on the day, or 16.83%, to close at $17.77 with 6 million shares traded versus the norm of 1.2 million.

The Chevy Chase, Md.-based mall developer has agreed to a $500 million equity private placement with Farallon Capital Partners, its largest shareholder, plus a renewed $600 million recapitalization offer from another big investor Gazit-Globe Ltd. Yet, the trader said these are seen as "Band-aids" that will not fix the problems at Mills.

"It's a downhill ski slope," the trader said.

"There really are not a lot of buyers left, outside of Farallon and Gazit and a lot of shorts covering because of the news. The institutions selling to them are sitting pretty, trying not to flood the market and reduce the price. I must admit, things are looking a little better from where they stood last week, but at the expense of book value. In essence, the infusion of cash is partly coming from current stockholders because of the dilution from the PIPE. Savvy managers are taking this pop in price as an opportunity to take money off of the table, take the tax loss, and find another game to play."

He conceded that the infusion would help Mills pay off the $1.1 billion so-called Goldman Sachs loan, which Israel-based real estate investment firm Gazit referred to in an SEC filing as "a "gun to the head" and a "ticking time bomb."

Mills has a $1.1 billion loan from the Goldman Sachs Mortgage Co. that was due on Dec. 31, 2006, but extended at the last minute to March 31. Mills said it hopes to refinance four of its malls to generate $35 million for operating expenses, with any additional money going to pay down the debt. If it can't repay the loan, the company has said it may be forced to file bankruptcy.

In addition to the loan trouble, Mills has replaced most of its top management amid accounting errors by past executives that could cost it as much as $352 million. The company is restating earnings back to 2001, it books are under investigation by the Securities and Exchange Commission, and it is considering an outright sale of the company.

Applica begins round 4

In another round of boosted bids, Applica shares gained on an increase in its offer by Nacco to $8.05 - a threshold many players did not see coming but traders said the market now sees the price going higher as Harbinger and Nacco have been "bulldogs" in the situation to gain control of the small appliance maker.

Applica shares (NYSE: APN) added 10 cents on the day, or 1.24%, to $8.14.

Meanwhile, on Tuesday, Nacco shares (NYSE: NC) fell $2.68, or 1.92%, to $136.70.

Last week, Nacco bumped up its rival bid to $7.90, topping a matched offer of $7.75 from Harbinger and market a third round of bidding. The ordeal began in October when Applica and Harbinger agreed to a buyout at $6 per share.

"It's like watching a dog fight. They are both bulldogs. But the [Applica] board can't ignore $8.05. It's 3.87% higher than Harbinger's last bid and that was a 3.33% increase from where Nacco took it," said a buyside trader.

"The market clearly thinks the bidding will continue. The next bid, assuming Harbinger matches this one, is probably $8.35. Really, where it stops only Harbinger and Nacco know now. It's already gone past where anyone thought it would."

Nacco has formed Apex Acquisition Corp. to accomplish the Applica merger, and extended its offer to Jan. 23. The Mayfield Heights, Ohio, conglomerate said that on July 24 last year it planned to spin off its Hamilton Beach/Proctor-Silex business and merge it with Applica.

Miramar, Fla.-based Applica said Wednesday it continues to support Harbinger's offer. The company distributes small household appliances makes and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker.

Harbinger, which also owns a majority stake in Salton, has said it plans to merge the two if it gains control of both. Lake Forest, Ill.-based Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances.

Salton shares (NYSE: SFP) on Wednesday gained 7 cents on the day, or 2.9%, to end at $2.48.

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