Gains in Mills, Caremark, EOP, Cablevision highlight M&A rush; HMA seesaws; Commerce lower

By Ronda Fears

Memphis, Jan. 17 - With rival buyout bids ratcheting prices ever higher for The Mills Corp., Caremark Rx Inc. and Equity Office Properties Trust, amid a backdrop of the Dow Jones Industrial Average flirting with new highs almost every day thus far in 2007, traders said market players were scrambling to extend their reach for takeover candidates.

Meanwhile, Cablevision Corp. gained on a rejected $30 per share bid to take the company private by controlling holders and founders Charles and James Dolan, as some players think the ongoing merger and acquisition frenzy in the markets could make it a private equity or hedge fund target.

"It seems like the deep pockets are bottomless right now," said the chief equity strategist at one brokerage.

"Every threshold is being crossed for these buyouts and you might say that it's gotten out of hand. It is sort of like the antique dealer who was asked what a certain item was worth and he says it is worth whatever someone will pay for it. Not that that makes sense when you are talking about a company like Mills, but that is how the market is playing it out."

With bids rising and rival bids emerging, options traders said they have been frazzled by the increased level of business, but see an exciting year ahead.

"Like you hear everyone saying, there really doesn't seem to be an end in sight to the M&A activity," said a risk arbitrageur trader for a huge hedge fund in New York.

"There are more and more situations on the horizon. Even a hint of some sort of deal will create a stampede one way or the other."

Corporate restructuring measures also were in the spotlight Wednesday, headed by Intel Corp. and Health Management Associates Inc. (HMA), which both saw huge volume spikes with Intel heading south in a big way and HMA managing to advance after a rocky ride during the session. Intel posted better-than-expected earnings late Tuesday but also announced big layoffs, and the stock (Nasdaq: INTC) fell $1.26, or 5.65%, to $21.04 with some 192.5 million shares traded versus the norm of 59.5 million shares.

EOP rival bid on the mark

As many players were betting, the trump bid for EOP - by Vornado Realty Trust and a group of hedge funds led by Cerberus Capital Management - topped $50 a share and approached one player's hope for $53 a share. The latter said given the current M&A frenzy, he is still betting that the bid for Sam Zell's empire could go even higher.

"Everyone thought I was crazy when I said it could go to $53 because the Blackstone bid on the table was $48.50. Now they don't think that's so crazy," said a trader on the West Coast, who made the $53 call last week with Prospect News.

"I think Blackstone will probably come back to the table with a higher bid. I don't think it will go much past $53, but it could."

EOP shares (NYSE: EOP) gained $1.09 on the day, or 2.19%, to $50.94 and after the close advanced another 71 cents, or 1.39%, to $51.65.

The Vornado-led bid of $52 per share would consist of 60% cash and 40% Vornado stock, the parties said. On a per share basis, the new offer is 7.2% higher than the Blackstone bid of $48.50 a share. The Blackstone bid of $36 billion, including debt, would be a record leverage buyout; The Vornado bid surpasses that, valued at $39.2 billion based on Wednesday's market.

Vornado shares took a big hit on the news, however, which the West Coast trader surmised was big holders involved in the EOP deal bringing the stock down so that there is a bigger payout of Vornado shares in the deal. The stock (NYSE: VNO) lost $3.38 on the day, or 2.68%, to close at $122.55 and in after-hours activity dropped another $2.35, or 1.92%, to $120.20.

On rumors that Vornado had joined the Cerberus group in a purported bid to trump the record $36 billion buyout of EOP, EOP shares have steadily moved up but not past the previous widely considered threshold of $50 until Wednesday. In addition to Cerberus, Barry Sternlicht's Starwood Capital and Leon Bluhm's Walton Street Capital are involved in the EOP bid.

Vornado, run by Steven Roth, 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.

EOP agreed to be bought by Blackstone in November in what would have been the largest LBO 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.

Caremark holders hope for more

Debate about whether the sweetened bid of drugstore chain CVS Corp. for Nashville-based pharmacy benefits manager Caremark Rx Inc. was enough to sway holders from taking a rival bid from rival Express Scripts Inc. was moot in one opinion as the market suggests a higher bid will be required.

Caremark shares (NYSE: CMX) gained $2.15 on Wednesday, or 3.82%, to $58.40 - well past the bid from Maryland Heights, Mo.-based Express Scripts.

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

On Tuesday, Caremark and Woonsocket, R.I.-based CVS remain adamant to stick with their agreement, which would give Caremark shareholders 1.67 shares of CVS for each share of Caremark held, or roughly $22 billion, but they added a $2 per share cash dividend payment to the kitty, or the equivalent to $55.09 on Tuesday's market. Caremark and CVS also said their merger proposal now includes a plan to buy back 150 million shares after the deal closes, for which they have secured bank commitments for $5 billion.

"The market is saying this bid has to go higher," said a risk arb trader.

"Right now there is a big camp of folks who think the Caremark bid has to go to $60, and a few who think it could go as high as $65."

Some analysts have agreed that the saga is not over, but the trader commented that the market seems to think that all three players in the saga are winners.

Express Scripts shares (Nasdaq: ESRX) closed Wednesday better by $1.06, or 1.61%, at $66.77.

CVS shares (NYSE: CVS) added 69 cents on the day, or 2.17%, to $32.48.

"What's Next? We believe we have two companies highly committed to acquire/merge with CMX and we would not be surprised to see Express Scripts improve its offer to stay in the game," said Bear Stearns analyst Robert Summers in a report Wednesday.

"Our primary concern is the evolution of a strategic bidding war. In addition, we believe it is important to recognize the historical issues associated with vertical integration in this sector could unfavorably impact P/E multiple of CVS/Caremark entity."

Mills could see rival bids

In another example of the market anticipating a higher bid to emerge, Mills shares zoomed past the surprise $1.35 billion bid Wednesday for the beleaguered shopping mall developer from Canada-based Brookfield Asset Management Inc., challenging purported equity infusion deals sought by Mills from big stockholders Farallon Capital Management - for $500 million - and Gazit-Globe Ltd. - for $1.2 billion.

Brookfield is offering $21 per share, which Mills has accepted, but one trader said the Gazit-Globe equity infusion tops $1.8 billion and might be boosted.

"If you look at the February calls for Mills they are telling you that people think this is going to $22.50," said an options trader.

"Whether that comes from Brookfield or Gazit or Farallon, I don't know. I personally would not be playing this one. I like EOP better."

Mills shares (NYSE: MLS) shot up $4.69 on the day, or 26.39%, to $22.46.

Chevy Chase, Md.-based shopping mall developer Mills announced Wednesday that it had inked a deal with Toronto-based Brookfield for $21 per share, or $1.35 billion, including assumed debt and preferred stock. Under the deal, Mills would merge into a newly formed subsidiary of Brookfield, and the stockholders could elect instead to receive up to a maximum of 20% of the new public company. If holders of fewer than 10% of Mills elect this stock rollover, all Mills shares will be swapped for cash in the deal.

Two major shareholders of Mills had offered dueling plans Tuesday to pump new capital into the troubled mega-mall developer to help it pay off heavy debt and avert bankruptcy, which both said had been solicited by Mills. Farallon had proposed a $499 million investment via an equity private placement while Tel Aviv-based Gazit-Globe offered a $1.1 billion recapitalization.

Brookfield also agreed to provide Mills with debt financing until the merger is completed by assuming Mills' $1 billion senior term loan from Goldman Sachs Mortgage Co., revising the loan terms and providing a $500 million revolving line of credit, which Gazit referred to in an SEC filing as a "gun to the head" and a "ticking time bomb."

But the options trader noted that in addition to the loan snag, which Mills has warned could send it into bankruptcy, 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, its books are under investigation by the Securities and Exchange Commission, and it is considering an outright sale of the company.

Thus, the trader said these measures are "Band-aids" that will not fix the problems at Mills.

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

"Savvy managers are taking this pop in price as an opportunity to take money off of the table and find another game to play."

Cablevision joins frenzy

Cablevision players that had been unwinding positions last week because the $30 per share bid from the Dolan family to take the company private was considered to be a best and final offer were rethinking the stock as Cablevision rejected it as inadequate.

The Dolan family upped its offer to $30 per share, or $8.9 billion, on Friday for Bethpage, N.Y.-based cable operator Cablevision, saying it was their best and final offer, and the stock traded well below that mark as arbs bailed out. The Dolans' bid was upped from $27 in October, but the higher bid was still rejected Wednesday by a special committee formed by the company to evaluate the bid.

Cablevision shares (NYSE: CVC) gained 76 cents, or 2.67%, to close at $29.25 on volume of 14.9 million shares versus the norm of 1.8 million shares.

"We have thought all along that it's worth more than that [$30]," said one stock trader.

"The question people are asking is whether the Dolans will stick to their guns. Regardless, I think it's a buy anywhere under $30."

Cablevision founder Charles Dolan and his son James own about 20% of Cablevision stock but control 74% of the shareholder vote through a special class of shares.

Thus, the trader said it is probably unlikely they would sell out to an outside bidder since they were planning to take Cablevision private. But, he noted that there continues to be market chatter that Liberty Media is in informal talks with Cablevision to buy its Rainbow Media unit - a source of wrangling within Cablevision for several years.

Level 3 off on bumpy road

Level 3 Communications Inc. dropped sharply Wednesday on downgrades to sell ratings on the stock by a couple of investment brokerages expressing concern about integration costs related to a slew of acquisitions over the past year by the Broomfield, Colo.-based backbone internet services provider.

Level 3 shares (Nasdaq: LVLT) lost 37 cents, or 5.6%, to close Wednesday at $6.24.

"The stock is priced to perfection right now but they have some bumps in the road ahead because of transitioning from a 100% wholesale business to part wholesale, part retail," said a trader in the stock on the West Coast.

"We are saying short it over $5, but I think there could be some support at $6."

Another trader said that further debt reduction efforts or debt refinancing is expected from Level 3, but it would have to be very dramatic to make much of an impact on the overall stock story.

"This is the trouble you can get into with debt-funded acquisitions," he said.

Movie Gallery bombs

The online component of movie rentals is killing Movie Gallery Inc., and one trader said Wednesday that players are walking away from the story, giving up on speculation over the past year that a White Knight private equity firm would step in to rescue it.

Movie Gallery's coffin probably wasn't entirely nailed shut by rival Blockbuster Inc.'s recent move into online movie rentals to answer competition from the likes of Netflix Inc., but it certainly didn't help. The big blast, traders said, is the relaxed debt covenants that Movie Gallery got about six months ago, which could be expiring in the next three to six months.

Movie Gallery shares (Nasdaq: MOVI) came off the day's low of $2.81, which traders attributed to short covering, to close out with a loss of 12 cents, or 3.91%, at $2.95.

"Movie Gallery has run up on all this talk about a private equity firm coming in, but if that was going to happen it would have happened by now," the equity trader said, noting the 52-week high on the stock is $8.35.

"It would take massive, and I mean massive, amounts of work to turn this thing around. They have had four new CFOs in the last year. There was the Hollywood acquisition last year. It would be an enormous amount of work, not including looking at the online component and if they wanted to try to cross that bridge."

He noted that big hedge funds have been net sellers of Movie Gallery stock, specifically noting that Prentice Capital Management Inc. has been accumulating Blockbuster shares.

As for chatter that Movie Galley might be a takeover target by Blockbuster, the trader said it would seem more likely that Blockbuster would "starve them out" because Movie Gallery is not a threat to Blockbuster at all in the new operating environment for movie rentals.

Rumors that Movie Gallery might offer bondholders a debt-for-equity swap to refinance its 11% notes also have pressure the stock of late, the trader said.

More pressure is on the Dothan, Ala.-based Movie Gallery's stock from the threat of delisting because of delaying its SEC filing for the quarter ended Oct. 1 until completion of a review of the way it has accounted for end-of-term store lease obligations.

Commerce Banc dips again

Commerce Bancorp, Inc. extended losses Wednesday in the wake of the company's disclosure of an investigation by the Office of the Comptroller of the Currency, but traders said there was increased buying into the slide.

Trading volume also continued at a brisk pace after Commerce Bancorp revealed Tuesday 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.

Commerce Bancorp shares (NYSE: CBH) dropped another 79 cents, or 2.48%, to close Wednesday at $31.04, following a 8.32% loss the day before with a whopping 15 million shares traded versus the norm of 1.6 million shares. Some 10.7 million shares traded Wednesday.

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.

One trader said on the news that 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 in tandem with the price.

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

"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 numbers 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. I liked it at $31.30."

HMA news bittersweet

A spike in HMA before the opening bell on a one-time special dividend of $10 per share fizzled rapidly as the market digested the fact that it would be funded with $3.25 billion of new debt that sparked a downgrade into junk territory, but the stock managed to rally back at the end of the day to mark a gain.

"Bad debt expense is crushing for HMA and all the hospitals," said one trader. "There was a little bit of good news sprinkled in, but most of the news from HMA was bad, really bad."

As a result, he said HMA shares (NYSE: HMA) spent a good portion of the session in lower territory but managed to close the day with a gain of 54 cents, or 2.62%, at $21.17.

On top of the worsened credit view, the Naples, Fla.-based hospital chain warned that it expects 2007 earnings to decline by nearly 50% to 61 cents to 71 cents per share. For fourth-quarter 2006, the company said it expects to earn 28 cents to 29 cents a share on revenue of $1.045 billion to $1.055 billion, excluding special items.

As part of the major recapitalization of its balance sheet, HMA said it would pay $2.4 billion to shareholders through a special cash dividend of $10 a share. The special dividend is payable March 1 to shareholders of record Feb. 27. However, the company suspended its regular dividend indefinitely to reallocate cash to fund future operational plans.

In addition to the dividend, which will be funded with $3.25 billion of new senior secured credit lines that also will include refinancing current revolvers, the company said it would change the way it accounts for bad accounts. The company said it would take a charge of 50 cents a share, or $200 million, for bad debt expense in fourth quarter.

HMA is changing the way it handles bad or uncollectible accounts with a reserve that starts reserving for questionable accounts at the time they are created rather than waiting 120 days to do so.

Applica up in Round 5

In a fifth amended merger agreement, Applica Inc. said Wednesday that Harbinger Capital Partners had boosted its offer to $8.25 per share, besting rather than just matching the latest rival bid from conglomerate Nacco Industries Inc.

On Tuesday, Nacco boosted its bid to $8.05 - a threshold many players did not see coming, but the market now sees going even higher than Harbinger's fifth bid - as both have been "bulldogs" in the battle to gain control of the small appliance maker. The two have been leap-frogging bids for Applica for about six weeks now; the ordeal began in October with a $6 per share bid from Harbinger.

Applica shares (NYSE: APN) on Wednesday added 27 cents, or 3.32%, to $8.41.

Meanwhile, Nacco shares (NYSE: NC) continued to slide, losing $2.90, or 2.12%, on Wednesday to $133.80.

"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 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 were unchanged at $2.48.

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