New Century demise imminent; Ocwen off; Gateway, Openwave higher; Tribune trips; Cortex rises

By Ronda Fears

Memphis, March 12 - A handful of deals provided some oomph for players to push several other speculated takeover targets higher, such as Openwave Systems Inc. and Gateway Inc., but the excitement of Monday's session was conjecture that subprime mortgage lender New Century Financial Corp. was prepping court papers to file bankruptcy.

New Century shares were halted for the session on news pending and face potential delisting by the New York Stock Exchange. In addition, the company acknowledged that its warehouse lenders have cut it off from funding, which onlookers said put a demand for payment on some $8.6 billion in bad loans back to the company, and Standard & Poor's cut the credit to default.

Together, traders said the news points to imminent insolvency, and in pre-market action New Century shares (NYSE: NEW) plummeted as low as $1.30. When the pre-market activity was racked up on the stock at the close, it marked a decline of $1.55, or 48.29%, to $1.66 with 1.55 million shares traded from before the open. The three-month running average volume in the stock is a little over 7 million shares.

While the developments extended losses in other subprime names like Novastar Inc., Fremont General Corp., Fieldstone Investments Corp. and Countrywide Financial Corp., a move by Ocwen Financial Corp. to launch a new unit to buy subprime mortgage-backed securities put some pressure on its stock.

The field of homebuilders also was lower on the subprime mortgage crisis, traders said, but many of those stocks were seeing buyers in after-hours action.

Atlantic City casino operator Trump Entertainment Resorts Inc., namesake of its founder and chairman real estate mogul Donald Trump, confirmed rumors on Monday that it has hired Merrill Lynch to help explore strategic alternatives that could include a possible sale. But the stock (Nasdaq: TRMP) eased back from an 8% advance on Friday, which one trader said seemed "over zealous" by Monday, so it came in by 14 cents to $18.05.

Applebee's International Inc. also was in retreat after saying Monday that its review of strategic alternatives will take another six to eight weeks, dimming hopes of a deal. The company said Friday that negotiations with activist hedge fund Breeden Capital failed to produce an agreement; Breeden rejected the company' offer of two board seats versus the fund's move for four seats. The stock (Nasdaq: APPB) slipped by 9 cents to $25.13.

There were a handful of deals on the tape that were encouraging, however, traders remarked.

Schering-Plough Corp. announced that it will buy Organon BioSciences for $14.4 billion in cash from Holland's Akzo Nobel NV. Akzo Nobel had previously planned to spin off the unit with an initial public offering. Schering-Plough (NYSE: SGP) gained 10 cents to $23.95 while Akzo Nobel (Nasdaq: AKZOY) shot up $10.02, or 16.48%, to $70.83.

Discount retailer Dollar General Corp., which is said to have the most stores (8,260 at March 2) of any domestic retailer, has agreed to be acquired by private equity group Kohlberg Kravis Roberts & Co. for $7.3 billion, or $22 per share - a 31% premium to Friday's market. The stock (NYSE: DG) gained $4.29, or 25.57%, to $21.07.

UnitedHealth Group Inc., the top domestic health insurance provider, is buying Sierra Health Services Inc. for $2.6 billion in cash, or $43.50 per share - a 21% premium to Friday's close. UnitedHealth (NYSE: UNH) added 27 cents, or 0.51%, to $53.27 while Sierra (NYSE: SIE) gained $5.67, or 1.579%, to $41.57.

Time share vacation company Sunterra Corp. also is going private with its acquisition by closely held Diamond Resorts LLC for $700 million at $16 per share - a 7% premium to Friday's market but a 35% premium to the March 8 close before rumors of the deal caused the stock to spike on Friday. The shares (Pink Sheets: SNRR) gained 73 cents, or 4.88%, to close Monday at $15.68.

Organon news pushes Cortex

Cortex Pharmaceuticals Inc. saw a big spike Monday from news of the Organon purchase by Schering-Plough, according to a buyside trader.

Cortex shares (Amex: COR) advanced 35 cents on the day, or 17.5%, to close Monday at $2.35 with some 1.86 million shares traded versus the norm of 385,293 shares.

"Cortex is our next runner," said the buyside market source in New York. "Big companies are watching this one. I think there will be news soon, and we could double from here. This one is set to explode any minute."

Irvine, Calif., based Cortex is developing a next generation drug for schizophrenia, Ampakine CX717, with Organon. It also has drugs in development for Alzheimer's, Parkinson's, attention deficit hyperactivity disorder and depression. Ampakine CX717 is its lead drug candidate.

Cortex also has a collaboration agreement with French drug firm Les Laboratoires Servier to develop and commercialize Ampakine for declining cognitive performance associated with aging and neurodegenerative diseases such as Alzheimer's.

New Century demise near

New Century shares never traded in the regular session Monday, but all indications in pre-market activity point to an imminent bankruptcy filing, traders said.

After the market opened, the NYSE suspended trading of New Century shares, citing a pending news announcement, and then after the company said it doesn't expect to file its annual report before March 16; the NYSE said it could face delisting because of that delay. It was a moot point for traders, however, who were anxious to see whether the company would file bankruptcy by the end of the session.

"It's that close, we are told, like they could file [bankruptcy] before the day is over," said one stock trader shortly after the market opened.

In pre-market activity, the stock plunged to bankruptcy levels, he said, dropping as low as $1.30. Traders had said last week that when the stock hit the $3 neighborhood - seriously depressed from the 52-week high of $51.97 - the distressed funds flocked in.

The NYSE freeze covered the common stock as well as New Century's 9.125% series A cumulative redeemable preferreds and 9.75% series B cumulative redeemable preferreds.

New Century did not return calls by press time.

With New Century on Friday discontinuing acceptances of loan applications because some of its financial backers were refusing to provide access to financing, onlookers suspect bankruptcy is looming. The lack of financial backing could force the Irvine, Calif., lender to repurchase about $8.4 billion in loans, which analysts said could virtually wipe out the company.

New Century now has less than $60 million in cash on hand, which also puts it in violation of many of its loan covenants. The company has said efforts to obtain waivers from its 11 warehouse lenders have been unsuccessful.

Its key lenders are Morgan Stanley, Citigroup, Bank of America, Credit Suisse, Barclays and Goldman Sachs - all of which have either discontinued financing or notified the company they plan to do so, according to a New Century filing with the Securities and Exchange Commission on Monday.

Some of the creditors also terminated the company's mortgage-servicing rights and say the company has failed to satisfy margin calls, the company said in the filing.

Additionally, New Century is the target of a criminal investigation into stock trading.

"Added all together, there is no way you could think there will be a White Knight step in to save the day for New Century," the trader continued.

"But there are some distressed funds that believe that will happen."

Ocwen off but buyers loom

There is tremendous interest in subprime mortgages among hedge funds, traders acknowledge.

One trader pointed to news late Friday from Ocwen that it has obtained commitments from Angelo, Gordon & Co., Metalmark Capital, LLC and other investors to form and capitalize a new business - Ocwen Structured Investments - to invest in the lower tranches and residuals of residential mortgage-backed securities, related mortgage servicing rights, ABX Index Protection and similar assets.

Ocwen, Angelo Gordon, Metalmark and other unidentified lead investors have committed to invest up to $250 million and the total capital raised is expected to be $300 million.

While Ocwen shares (NYSE: OCN) slipped on the session by 11 cents, or 0.96%, to $11.40, another trader said there was a "smart buying push at the end of the day."

Investor interest in the new business was very strong, and proposed commitments were substantially in excess of these amounts, according to Ocwen.

"In the current environment of rising mortgage delinquencies, our new venture presents an exciting opportunity to leverage our superior loss mitigation capabilities and knowledge of collateral to generate attractive returns for the investment partners," said Ocwen chief executive William Erbey in a news release.

Ocwen said it will provide a dedicated team responsible for managing the new portfolio under a long term management agreement. Ocwen is also entering into a long-term agreement to service the mortgage servicing rights acquired by the new venture.

Tribune players lack faith

Rumors stemming from a weekend report in Barron's that real estate magnate Sam Zell wants to take the Chicago-based media conglomerate Tribune private for about $13 billion failed to generate a gain in the stock Monday.

"The calculation on a $13 billion buyout would put the per-share offer at about $35.50 after you account for the debt and recent asset sales, which is about an 18% premium, but you see the market hasn't got a lot of faith in this deal, or really any deal, getting done," one trader commented.

He noted that rumors of buyout offers from the Tribune founding Chandler family, Los Angeles billionaires Ron Burkle and Eli Broad, and a sale of the broadcast division to private equity firm Carlyle Group have failed to gel. He added that Zell appeared Monday on Bloomberg Television and "was pretty cagey" about the situation, which rather than prop up spirits tended to turn off investors in Tribune.

Tribune shares (NYSE: TRB) lost 22 cents on the session, or 0.72%, to close at $30.33 with 1.43 million shares traded versus the norm of 1.32 million shares. It traded up to $31.11 but, according to the trader, there was heavy selling into the spike.

Tribune, which was under pressure from shareholders disappointed with its flagging stock price, appointed a special board committee in September to review options, including a possible sale, break up, or offers to be taken private. A decision on the review is supposed to be submitted by March 31.

Zell, who would become chairman of the surviving entity under the proposal, plans to personally contribute at least $300 million, along with commitments from lenders to achieve the buyout, according to the Barron's article.

Gateway seen as Acer target

Amid a surge in computer stocks, another trader said there was strong buying interest in Gateway on speculation that it was a takeover target. He said there was some conjecture that Apple Inc. might be a buyer, but more players were leaning to Taiwan computer maker Acer Inc. as the potential buyer.

Gateway (NYSE: GTW) gained 5 cents on the day, or 2.37%, to close at $2.16 with 6.75 million shares traded versus the norm of 5.4 million shares.

Acer (Taiwan: 2353) was unchanged at NT$62 amid light volume.

"If you read the Wall Street Journal article on Acer, I think you'd come to the conclusion that Gateway is definitely a possible target for them," the trader said.

"They are gaining market share in the U.S. but need to step that up; they could pick up Gateway as a cheap way to do that."

Regardless, the trader said he's a buyer in Gateway as he sees it at "the beginning of a turnaround story."

To avoid a proxy battle with one of its largest investors, Gateway in December added activist shareholder Scott Galloway, founder of Firebrand Partners, to its board of directors. Galloway will be accompanied by a second mutually accepted independent director, not yet named. Gateway is making the changes to avoid a potential proxy fight with Firebrand and Harbinger Capital Partners, which holds a 10.7% stake in the company, according to a Gateway statement.

In October, the investor group called on Gateway to add three board members and remove several obstacles that could deter unsolicited buyout offers.

"The company is going to go into play," the trader said. "I like it one way or the other in the $2 area."

Openwave spikes up

Openwave Systems, which makes mobile phone software, was another gainer on speculation that it could go into play soon, the trader above added. He said rumors last week included that its board met to discuss a sale. The rumors boosted the stock, but it "made a leap" on Monday.

The stock (Nasdaq: OPWV) gained 34 cents, or 4%, to close at $8.84 with 3.7 million shares traded versus the norm of 2.4 million shares.

Big holders in the stock - Harbinger Capital with 11%, Fidelity Management with 14% and activist investor Carl Icahn - have been pressuring for representation on the Openwave board, which is seen as a means to empower a sale transaction.

The investors also have expressed disappointment with Openwave chief executive David Peterschmidt, which the trader said center on the company rejecting previous offers of up to four times sales from Microsoft Corp. and Nokia Corp.

Harbinger tried unsuccessfully to replace two board members with its own in January and has filed a lawsuit accusing the company of unfair corporate governance. The trader said there were rumors Monday that the company had settled with Harbinger, most likely by offering the firm a seat or seats on its board.

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