Sallie Mae slammed; Chaparral climbs; Unilever rises; Ventana advances; Huntsman pulls back

By Ronda Fears

Memphis, July 11 - SLM Corp., the student loan company commonly known as Sallie Mae, voiced the concern that from the outset has overshadowed its April 15 buyout by J.C. Flowers & Co., Bank of America and JPMorgan Chase - that pending legislation to slash government subsidies in the wake of a nationwide kickback scandal might scuttle the $25 billion deal altogether.

Many who were involved in Sallie Mae were caught off-guard by the news, however, and traders said it put pressure on the call spreads of other deals - namely, First Data Corp., Alltel Corp., Aeroflex Inc. and Huntsman Corp. As for whether it, along with resistance LBO deals have met in the high-yield bond market, is a signal that the deal train could be slowing was a matter of debate. (See full story elsewhere in this edition.)

Huntsman also was under pressure as shareholder Isaac Augenstein of Brooklyn, N.Y., filed a lawsuit to block Huntsman from accepting Basell's $5.6 billion offer, or $25.25 per share. Apollo Management LP's Hexion Specialty Chemicals Inc. of Columbus, Ohio, has offered $28 a share, or $6.5 billion, upping its trumped bid of $27.25 proffered last week to Huntsman.

Basell had until Wednesday to top Hexion, but whether that happened was not known by press time. Meanwhile, continuing a theme that a higher bid will not come to fore, Huntsman (NYSE: HUN) slipped another 15 cents, or 0.54%, to close at $27.57.

Despite the potential bump in the road for deals that Sallie Mae might present, there were deals on the tape and targets rising amid anticipated higher offers.

Ventana Medical Systems Inc. was a big riser Wednesday while it again rejected a $3 billion tender offer from Swiss drugmaker Roche Holding AG, saying the hostile bid undervalues the diagnostics company and its prospects in the fast-growing cancer testing market. The market is betting that Roche will up its bid, or another bidder will emerge as diagnostics firms have been a hot item of late.

Chaparral Steel Co. accepted a $4.22 billion takeover bid from Canada's Gerdau Ameristeel Corp., after being in play since April, and, while the premium was not extraordinary at 14%, many players in that sector were encouraged about deals for others like United States Steel Corp. and AK Steel Holding Corp. U.S. Steel (NYSE: X) added $1.37, or 1.25%, to $111.11; AK Steel (NYSE: AKS) advanced 68 cents, or 1.78%, to $38.80

In fact, Gerdau Ameristeel parent the Brazilian steel giant Gerdau SA said it remains on the hunt for acquisition targets, and traders mentioned Wheeling Pittsburgh Corp., Commercial Metals Co. and Insteel Industries Inc. higher in that vein.

Of course, Alcoa Inc. continues to have takeover chatter swirl around it, even though it has a hostile bid on the table for Alcan Inc. Many onlookers think the move for Alcan was a means by Alcoa to ward off a takeover attempt. But recent speculation puts Rio Tinto plc in talks with Alcan to fend off Alcoa's advances. And Companhia Vale do Rio Doce is considered to still be in the mix of that fray. All were sharply higher Wednesday in trade.

Hotels are another sector on special situations players' radar, and traders noted Gaylord Entertainment Co. and FelCor Lodging Trust Inc. higher on thinking they could be getting takeover offers. Nashville-based Gaylord, which has hotel and entertainment operations like the country music venue Grand Ole Opry, also is scheduled to present at the CIBC World Markets Consumer Growth Conference in Boston on Thursday. Gaylord (NYSE: GET) gained 74 cents, or 1.32%, to $56.94. FelCor (NYSE: FCH) added 18 cents, or 0.66%, to $27.31.

Elsewhere, consumer products biggie Unilever NV shot up amid reports that Colgate-Palmolive Co. was looking to buy all or part of Unilever, which makes Dove soap and Ben & Jerry's ice cream, among other well-known household items. One trader said he heard that the bid was presented at $46 per share for the entire company, which would be roughly a 39% premium to Wednesday's market. Unilever (NYSE: UN) rose $1.06, or 3.32%, to close at $32.97. Colgate-Palmolive also was higher amid the chatter with the stock (NYSE: CL) advancing $1.12, or 1.7%, to $66.89.

Comverse Technology Inc. is rumored to be on the brink of presenting a restructuring plan that could result in the disposition of some assets; the stock saw a big gain the day before on speculation it was going on the auction block. The company operates via subsidiaries Verint Systems Inc. and Ulticom Inc., which one trader said the company might entirely divest. Comverse (Pink Sheets: CMVT) edged up 19 cents, or 0.89%, to 21.65; the trader said his analyst thinks the company could fetch up to $30 per share. Verint (Pink Sheets: VRNT) lost 55 cents, or 1.65%, to $32.70, and Ulticom (Pink Sheets: ULCM) was off 10 cents, or 1.11%, to $8.90.

Sallie Mae, or may not

The potential of lower government subsidies for student loans was not foreseen, per se, as a barrier in the buyout of Sallie Mae, but the deal was viewed skeptically from the outset because of anxiety that regulators may contest it in light of the sweeping student loan scandal that came to light earlier this year.

"It's not pretty," said one risk arbitrage trader at a hedge fund in New York.

"We passed on this one because this is exactly what I figured would happen. But a lot of guys got in and tried to hedge their positions; I just don't think they were able to fully insulate themselves from this."

Sallie Mae agreed in mid-April to be acquired by JC Flowers & Co., J.P. Morgan & Co. and Bank of America for $60 per share in cash, but the market has kept the stock well below that - trading only up to $58 in the wake of the deal news.

On Wednesday, the stock (NYSE: SLM) plunged as low as $43 before clawing back up to $57.87 and then settling at $52.15 for a loss of $5.65, or 9.78%.

Traders had anticipated that trading pattern, saying at first there was a massive sell-off followed by short covering and then further shorting.

Sallie Mae said it does not agree but that its prospective buyers say current legislative proposals pending before the U.S. House of Representatives and U.S. Senate regarding a measure to lower student loan funding "could result in a failure of the conditions to the closing of the merger to be satisfied."

The company said it intends to proceed toward the closing of the merger transaction as rapidly as possible and will take all steps to protect shareholders' interests.

The White House said late Tuesday that if the House bill went to President George W. Bush in its current form, his senior advisers would recommend that he veto the bill. But the market is pricing in extra risk with the development.

Sallie Mae was a high-profile target of a sweeping nationwide investigation into alleged kickbacks to college officials from lending companies. Just a week or two ahead of the buyout deal, New York attorney general Andrew Cuomo announced a settlement with Sallie Mae in which it would adopt a new code of conduct regarding student loans and contribute $2 million to an education fund.

Chaparral bid seen final

Chaparral said after the close Tuesday that it approved its acquisition by Gerdau Ameristeel for $86 per share - a 14% premium to the market - and while that was not overwhelmingly cheered traders said another bid is not anticipated and considerable risk was priced into the deal.

"I think this is the final bid," one trader said.

"Nothing against Chaparral, but I think the valuation and premium must have been a well thought out process for a long while now. But, given the market today, there was a lot of profit taking and some risk priced in."

Chaparral (Nasdaq: CHAP) ended at $83.67 for a gain of $7.98, or 10.54%.

When Chaparral went into play in April - the stock had hit a string of new highs on takeover speculation - but the day before the company made the news of looking for a deal official it was at $63.96. That, the trader pointed out, would make the $86 price tag a roughly 34% premium, which he characterized as "pretty decent."

He figured the deal was announced ahead of earnings also so that it would beat an anticipated earnings pop, because on Wednesday, the Texas-based structural steel beam maker reported fiscal fourth-quarter profit surged on strong demand from the nonresidential construction market.

For the quarter ended May 31, Chaparral posted earnings of $80.2 million, or $1.65 per share, compared with $56.1 million, or $1.16 per share, a year before, while revenue rose to $488.7 million from $405.5 million. For fiscal 2007, the company earned $269.3 million, or $5.57 per share, compared with $157.1 million, or $3.32 per share, for fiscal 2006 as revenue rose to $1.72 billion from $1.47 billion.

Gerdau parent on the hunt

Brazilian steelmaker Gerdau, parent to Gerdau Ameristeel, said on a conference call Wednesday that it is seeking potential acquisitions in the United States, Europe and Asia. Gerdau was higher, and traders said Wheeling-Pittsburgh, Commercial Metals and Insteel were higher as potential takeover targets.

"We are going to remain open to new acquisitions and continue with our strategy of being one of the consolidators," chief executive Andre Gerdau Johannpeter said on the call.

"We remain on the hunt."

Gerdau (NYSE: GGB) gained 37 cents, or 1.37%, to $27.32.

Johannpeter said Gerdau is particularly interested in specialty steel firms as that part of the sector has been outperforming. Already the largest long steel producer in North America, Gerdau has led a push among Brazilian companies in recent years to expand overseas.

Wheeling-Pittsburgh (Nasdaq: WPSC) gained 90 cents, or 4.48%, to $21.01.

Commercial Metals (NYSE: CMC) shot up $1.90, or 5.71%, to $35.16.

Insteel (Nasdaq: IIIN) added 82 cents, or 4.27%, to $20.04.

Ventana bid expected to rise

Ventana again rejected the $75-per-share offer from Roche as inadequate, and while Roche said the bid is fair, the market is widely anticipating that it will bump it up. If not, then many think another buyer will step up for Ventana.

The stock (Nasdaq: VMSI) closed at $82.53 for an advance of $2.28, or 2.84%, but in after-hours trading slipped back by $2.33 to $80.20.

The $80 mark is key to many players involved in Ventana, however, so traders were not overly concerned about the after-market pull back.

"New info makes us more comfortable we will get a deal," said a buyside market source, who would not elaborate about the nature of the new information. He added, however, "We need $80 to make our full potential profit."

Roche said it will continue to pursue the acquisition "unilaterally" if Ventana refuses to negotiate. Roche also said it may nominate new directors to Ventana's board.

Ventana's board unanimously rebuffed the bid and is recommending stockholders vote against the tender.

"Roche's offer does not come close to adequately compensating Ventana stockholders," Ventana chief executive Christopher Gleeson said in a statement.

The $75-per-share price represented a 45% premium to Ventana shares when Roche launched the hostile takeover effort last month.

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