Level 3 makes debt/equity swap; EOP pushed up; Six Flags higher; Doral talks sour; Midwest Air up

By Ronda Fears

Memphis, Jan. 11 - Extending a 7.5% advance in the regular session, Level 3 Communications Inc. shares added another 2% in after-hours activity on the company's announcement after Thursday's closing bell that there would be an exchange of $490 million of bonds for 160.1 million shares. On Friday, however, traders expect the stock may trade off on the dilution.

In other refinancing efforts, however, Doral Financial Corp., the Puerto Rico mortgage bank that has been struggling to refinance $625 million of floating-rate notes coming due this July to avoid bankruptcy, saw another spike in the stock even as market sources said rumors the day before that a refinancing deal has been ironed out were premature or have fallen apart.

"With every stroke of the pen this changes, you know," said one source, who is familiar with the Doral talks. "Needless to say, it's not over yet."

New York-based amusement park owner and operator Six Flags Inc., however, was seen buying some breathing room with the sale of seven parks for $312 million - $275 million in cash plus a $37 million receivables note. The stock (NYSE: SIX) gained 47 cents, or 8.66%, to $5.90 with some 6.3 million shares traded versus the norm of 1.5 million.

Elsewhere in after-hours action, Equity Office Properties Trust also extended gains from the regular session although there still was nothing further on rumors that hedge fund Cerberus Capital Management was preparing a rival bid to the $48.50 per share offer, or $36 billion, on the table from The Blackstone Group. Players are hoping for an offer price hike to $50 to $53.

Meanwhile, discount airline AirTran Holdings Inc. boosted its bid for regional carrier Midwest Air Group Inc. almost 20% to $345 million but Midwest management continued to spurn the deal. Both stocks were solidly higher in the session, however, with Midwest surpassing the latest bid.

In bankrupt airline paper, Delta Air Lines Inc. and Northwest Airlines Corp. zoomed for a second session after US Airways Group Inc. boosted its hostile bid for Delta by roughly $2 billion to around $10.5 billion based on Thursday's market. Delta shares (Pink Sheets: DALRQ) rose another 6 cents, or 4.29%, to $1.46 while Northwest shares (Pink Sheets: NWACQ) added 51 cents, or 10.14%, to $5.54.

US Airways shares (NYSE: LCC) shot up $2.27, or 3.85%, to $61.20, following a 2% advance on Wednesday, but gave back much of the day's gain in after-hours action. The stock lost 95 cents after the close, or 1.55%, to $60.25, but there was no news on the wires about the Delta matter.

Bear Stearns airline analyst David Strine said US Airway's new bid for Delta implies $2 billion to $3.5 billion more value for Delta creditors than Delta's standalone plan. He said using a 6x multiple, the new US Airways shares would be valued at $82 apiece, implying 42% upside, and using a multiple of 6.4x yields $88 apiece for the stock of a combined airline.

Level 3 may open lower

On news of Level 3 Communications Inc.'s debt-for-equity exchange late Thursday, traders said the stock probably will see some negative reaction Friday because of the dilution.

"This is great for the debtholders but crappy for the stockholders," said one stock trader.

Level 3 shares (Nasdaq: LVLT) gained 45 cents on the day, or 7.46%, to close at $6.48 and in after-hours activity advanced another 13 cents, or 2.01%, to $6.61. In the regular session, some 72.4 million shares changed hands versus the norm of 33.9 million.

After the close, the Broomfield, Colo., internet backbone company announced that pursuant to an exchange agreement, Southeastern Asset Management, on behalf of certain investment accounts, and Legg Mason Opportunity Trust have agreed to exchange $490 million of its 10% convertible notes due 2011 for 160.1 million shares plus accrued and unpaid interest. The company has 1.18 billion shares outstanding.

That works out to an equivalent of 326.78 shares per $1,000 note, a hefty premium to the bond terms that provide a conversion rate of 277.77 shares per $1,000 note.

Level 3 chief executive Sunit Patel said the measure would reduce the company's 2007 cash interest expense by $47 million and helps reduce leverage and interest expense. The company last year had outlined a plan to refinance its 2010 and 2011 tenor bonds.

Doral refi talks in jeopardy

In a sudden change of course, market sources were saying Thursday that refinancing talks between the Puerto Rico bank Doral Financial and holders of its $625 million of floating-rate notes, which had been described as virtually wrapped up the day before, were either exaggerated or suddenly turned sour.

Rather than having a sealed up deal, one source said Thursday the chatter about the negotiations was characterized as, the "situation is bleak."

Yet Doral shares (NYSE: DRL) continued to move up, adding 9 cents, or 3.56%, to settle at $2.62, following a 20% spike on Wednesday. The Doral floaters also continued to trade up, adding 2 points to 96, as well as the 4¾% preferreds, which gained to 98 bid, 102 offered.

Major points of contention remain the equity portion of the refinancing talks, sources said. The negotiations have been going on for several weeks now and have always suggested a debt-for-equity swap plus some level of cash. The chatter Thursday put the cash portion of the discussions as low as $275 million to a cap of $295 million.

On discussions about the equity portion of the refinancing, bondholders had been arguing that the value on the stock should be around $1 per share but chatter Thursday suggested an agreement to a strike price of $1.75 if they could get a senior convertible preferred or bond, as they are currently senior creditors with the floater. Doral shares have come down to $2.62 on Thursday from over $4 when the refinancing talks were said to have begun in November.

But one onlooker noted that covenants in Doral's existing preferreds - and there are four or five issues - would have to be amended to permit more senior paper. But he could understand the holders of the floaters wanting to retain senior status in the capital structure.

The floater matures in July 2007 and if something cannot be ironed out by then, onlookers speculate that the bondholders will force the company into bankruptcy. In addition to the refinancing matter, Doral is combating regulatory issues with its banks and financial reporting requirements.

One source said another point of contention with the bondholders is that they want the company to establish a litigation reserve in the neighborhood of $250 million to $750 million, and may be pushing for asset sales to accomplish that.

The troubles at Doral have sparked a string of leadership changes. Last week, the chairman of the board John Ward resigned after a disagreement with the board of directors over the future direction of the company - including a sale of the company versus piecemeal asset sales. Ward was named chairman in July 2005.

Midwest Air goes to $13.40

Signaling speculation that Midwest Air will catch a higher bid, the stock surpassed AirTran's increased bid of $13.25 per share, up from $11.25, by 15 cents on Thursday.

"This was a little surprising," one trader said.

"But it was such a big increase in the bid that some people are saying it could go that much higher again. At $15.25, I think that's crazy myself. Heck, I think $13.25 is crazy."

Midwest shares (Amex: MEH) gained 50 cents on the day, or 3.88%, to close at $13.40.

AirTran, the discount carrier based in Orlando, Fla., raised its cash-and-stock offer for Milwaukee-based Midwest to an equivalent of $13.25 a share, up from $11.25 a share previously. AirTran is putting its offer directly to Midwest Air shareholders because Midwest Air management has continued to spurn its advances.

Last month Midwest Air rejected AirTran's initial offer of $290 million, saying the bid was undervalued.

AirTran said its new offer represents a premium of 61% over the 30-day average closing price of Midwest Air common stock at the time of AirTran's initial $11.25 per share bid. Under the revised bid, AirTran is offering to pay $13.25 per Midwest share, including $6.625 in cash and 0.05884 shares of AirTran shares; the offer expires on Feb. 8.

Midwest Air said it would study the proposal and make a recommendation to shareholders within 10 business days and is requesting shareholders not to take any action until then.

Meanwhile, Midwest Air on Wednesday put forth a plan to add routes and update its fleet as it seeks to convince shareholders it should remain independent.

AirTran shares also gained on the development, with the stock (NYSE: AAI) up 48 cents, or 4.03%, to $12.40.

EOP players look for $50-$53

While there was no indication that hedge fund Cerberus Capital Management is preparing a rival bid for Equity Office Properties Trust to The Blackstone Group's pending $48.50-per-share offer - a record leveraged buyout at $36 billion - there continued to be considerable market chatter about such a development with players saying they are looking for the bid to go higher in any event.

Continued opposition from the ad hoc committee of EOP noteholders to the increased price levels of a tender offer needed to clear the path for the Blackstone deal could be reason enough for the EOP offer to go up, one player said.

Meanwhile, EOP shares (NYSE: EOP) advanced with a gain of 51 cents, or 1.05%, to $49.26 on Thursday and in after-hours activity gained another 57 cents, or 1.16%, to $49.83.

When asked about the reasonability of a $53 bid as suggested by a trader on Wednesday, the head trader at a hedge fund playing the situation said, "It could get there.

"If it goes to $50, we're set; we're playing this very conservatively," the buyside trader said. "There's so much liquidity out there we are seeing things happen we don't understand. To say that there are rules like a private equity shop doesn't trump another private equity shop's bid is about the most hypocritical that it gets. It's business, not personal. All's fair in hate and war."

Kathleen Shanley, a credit analyst at Gimme Credit, said in a report that while a competing offer for EOP can't be ruled out, "a competitor to Blackstone faces formidable hurdles" such as raising funds.

"Financing is not a trivial roadblock even in today's easy-money environment, since most folks don't keep $36 billion in loose change lying around the house," Shanley said in a report Thursday.

She also pointed to the failed effort a couple of months ago by Carl Icahn along with partners Mack-Cali Realty Corp. and New York developer Harry Macklowe to mount a hostile offer to bust up the SL Green Realty Corp. acquisition of Reckson Associates Realty Corp.

Blackstone's $36 billion bid, including debt, for EOP emerged in November and is considered to be the biggest LBO in history if finalized. Its biggest hurdle is resistance from an ad hoc group of bondholders led by American International Group Inc. On Wednesday, EOP extended its tender offer for the $8.4 billion of bonds by a day in the face of the opposition and sweetened its price. Under the new offer, EOP would repurchase the three bond issues at a yield spread of 70 basis points versus a previous offer of 160 basis points.

That was again rejected and EOP amended the offer to a yield spread of 60 basis points, and extended the offer to Jan. 18, or by a week.

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