Sallie lags below deal; Quest off; Fremont firms; Innkeepers stock up but convertible slides; Cott up

By Ronda Fears

Memphis, April 16 - The buyout price announced Monday to take SLM Corp. - better known as Sallie Mae - private was higher, at $25 billion, than speculations made Friday and the buyers were different than rumored. The stock was held back, traders said, because of anxiety that regulators may contest the deal in light of the ongoing student loan scandal sweeping the nation.

In another private equity deal, Innkeepers USA Trust agreed to be acquired by an Apollo Investment affiliate for $1.5 billion. Traders said the stock soared past the price tag due to convertible players attempting to recover some of their losses in the Innkeepers preferred, which took a dive on the all-cash transaction.

Clear Channel Communications Inc. was basically steady Monday ahead of the vote on its going-private deal, which is set for Thursday, as the California Public Employee's Retirement System, or Calpers, joined Fidelity Investments and Highfields Capital Management in opposing the proposed $19 billion buyout by private equity firms Thomas H. Lee Partners LP and Bain Capital LLC. One trader said the market is largely anticipating the vote will be pushed back, but most players are holding pat to their positions. The stock (NYSE: CCU) added 11 cents, or 0.3%, to close at $36.35.

Quest Diagnostics Inc. announced it is buying AmeriPath Inc., a private Palm Beach Gardens, Fla., diagnostic testing services provider, for about $2 billion. While diagnostic testing firms have spiked recently due to an increase in deals in the subsector, Quest was punished in trade Monday for the price it paid for AmeriPath.

The downtrodden subprime mortgage group got a lift Monday by news from Fremont General Corp. that it has found a buyer for about $2.9 billion of subprime mortgages and entered into exclusive talks to sell its residential lending business to the same unnamed party. Novastar Financial Inc., tagged along into the rally, as it last week joined a growing list of beleaguered subprime mortgage lenders hitting the auction block.

Biotech MedImmune Inc. got another boost Monday after stockholder Carl Icahn said he would not pursue a boardroom battle in light of the company putting itself on the auction block. Several weeks ago, Icahn said that due to lackluster performance at the company, he believed the best course of action was to put the company up for sale and that he intended to nominate an opposing slate at the upcoming 2007 annual meeting to accomplish this. But he said he will pick up the pursuit if the company fails to complete a sale transaction. The stock (Nasdaq: MEDI) advanced another $1.25, or 2.83%, to $45.44.

Canadian beverage concern Cott Corp. continued to climb Monday, following a 28% surge on Friday when it confirmed that it is in talks with parties interested in merging with the beverage arm of Cadbury Schweppes plc to create a stronger rival to Coca-Cola and Pepsi. British beverage concern Cadbury Schweppes has announced plans to split its confectionery and Americas beverage businesses. Cott shares (NYSE: COT) gained 83 cents Monday, or 5.16%, to $16.93.

Sallie sets back from deal price

Sallie Mae agreed to be acquired by JC Flowers & Co., J.P. Morgan & Co. and Bank of America for $60 per share in cash, versus estimates of $45 to $55 made Friday. Blackstone Group was speculated as a potential bidder for Reston, Va.-based Sallie Mae on Friday, as well, but traders said they are not expecting a bidding war to ensue.

In fact, one buyside trader at a hedge fund in New Jersey said the market was pricing in considerable risk of the transaction getting strong resistance from legislators and regulators.

"There are too many hurdles," the trader remarked, in saying that he was passing on getting involved in the situation.

Following a 14.75% advance on Friday amid the rumors, the stock (NYSE: SLM) added another $8.59, or 18.37%, to settle at $55.35 on Monday but was still well below the takeover price.

The $60 price tag is a 47% premium to the stock price Thursday before the rumors pushed the stock up.

On Friday, another trader on the sellside of the market said players were pegging a deal between $45 per share and $50 while there was some conjecture that a price tag could top $55. After the $60 price appeared, he said it was a "nice surprise" but agreed that the market will factor in considerable risk until there is some idea of how legislators and regulators react to the deal in light of the ongoing scandal.

Last week before the takeover buzz emerged, 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. Sallie Mae, the biggest student loan originator with $23.4 billion of the $85 billion market last year, was a high-profile target of a sweeping investigation into alleged kickbacks to college officials from lending companies. Sallie Mae has recently expanded into other areas of lending, such as debt collection and college savings plans, however.

Under the deal announced Monday, J.C. Flowers and private-equity firm Friedman Fleischer & Lowe will invest $4.4 billion and own 50.2% of the company, and Bank of America and JPMorgan Chase each will invest $2.2 billion and each will own 24.9%. They also will provide $200 billion in backup financing.

Innkeepers convertible plunges

Traders said that not only was the premium in the Innkeepers deal a disappointment, there couldn't have been a worse scenario for players from the convertible side of the story.

The Palm Beach, Fla., hotel real estate investment trust agreed to a buyout by Apollo Investment affiliate at $17.75 a share - an 8% premium over Friday's market. The stock traded as high as $18.13 due to convertible players attempting to stem their losses in the Innkeepers preferred, one trader said.

Innkeepers common (NYSE: KPA) settled at $17.96, a gain of $1.51, or 9.18%.

The Innkeepers convertible preferred (NYSE: KPA-PC), however, fell $1.70, or 6.66%, to settle at $23.82.

Essentially, the convertible preferred traded down to parity because the all-cash transaction collapsed the conversion premium on the issue, one trader said. Some were frantically buying the common stock before the price breached the takeover level, he said, in order to recoup some losses.

"It's the worst thing that can happen to a convertible preferred, an all-cash deal," the trader said.

Quest paid too much: trader

Quest was seen overpaying by roughly $500 million to buy AmeriPath, a trader commented, adding that the market did not like the company picking up another $770 million of AmeriPath debt in the transaction.

As a result, Quest shares (NYSE: DGX) dropped $2.62, or 4.82%, to $51.69.

AmeriPath, which is controlled by Welsh, Carson, Anderson and Stowe IX LP, has annualized revenue of more than $800 million, the trader said, which adding in the assumed debt should have put the price tag at $1.57 billion. Additionally, he said the market was not impressed with the addition. Quest said it sees a minimal impact from the deal on its earnings per share for 2007 and anticipates it will be modestly accretive to earnings per share in 2008 before anticipated charges.

"I think the pissed off sellers are gone now and have moved on to better things," the trader said. "They only paid something like 2.5 times revenue but it was like 17 times 2006 EBITDA, and a lot of people were upset about the added debt."

Prior to the news, he said there was considerable excitement about Quest in light of several recent deals in diagnostic testing names. Now, he said players in that space "probably won't come back to Quest for a while" because of the company's projections of its impact.

"Their acquisition appetite is just too strong," the trader continued. "They overpaid for this probably by as much as $500 million. Yes it will be accretive to earnings, but will weigh down the rest of the business. Quest gave away its value - cost synergies and better borrowing rate - to Welsh Carson."

Quest plans to pay for the acquisition, refinance AmeriPath's existing debt and the debt from the HemoCure acquisition completed earlier this year with the proceeds of a new $1 billion one-year bridge loan and a new five-year $1.5 billion term loan, both committed to be underwritten by Morgan Stanley. The bridge loan is expected to be refinanced shortly after the closing.

"This acquisition will establish our leading position in cancer diagnostics with a focus on dermatopathology, anatomic pathology and molecular diagnostics," said Quest chief executive Surya N. Mohapatra in a statement.

Lyndhurst, N.J.-based Quest offers routine tests, including blood cholesterol and other blood tests, pap smears, urinalyses, pregnancy tests, alcohol and drug tests, and asthma and allergy tests. It also conducts gene-based testing and anatomic pathology services, testing for clinical trials, and risk assessment services for the life insurance industry.

AmeriPath provides physician-based anatomic pathology, dermatopathology and molecular diagnostic services to physicians, hospitals, clinical laboratories and surgery centers.

Fremont fuels hope for some

Fremont's news provided some buying impetus in the troubled subprime mortgage group, one trader said, as estimates suggest that while the company sold its loan package at a discount, estimates suggest it is getting somewhere in the neighborhood of 96.5% of par "and that's awfully darn good these days for these folks."

Fremont shares (NYSE: FMT) rocketed higher by $1.83 on the day, or 25.96%, to close at $8.88.

And the news sent Novastar shares (NYSE: NFI) up by 5.88%, or 30 cents, to $5.40.

The most likely buyer for Fremont's subprime unit is widely considered to be Fortress Investment Group, which has been a big buyer of subprime loan packages in recent months, oftentimes through its affiliate Newcastle Investment. The trader noted, however, that hedge fund Farallon Capital Management also has been investing in the sector recently.

Santa Monica, Calif.-based Fremont did not identify the buyer but said that the party is completing due diligence, negotiating terms and working toward a definitive agreement.

But not all Fremont players were optimistic, however, according to the trader.

"Earnings season is coming up and it's not going to be pretty; so, we had a lot of people take some profits here," the trader said.

"They saw this as a nice last gasp play today. When the facts come out about how much is being lost and that liabilities are all that is left, then that other shoe will drop."

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