IHOP jumps with Applebee's; Con-way drives trucking firms; DJ Ortho rises; Doral drops off

By Ronda Fears

Memphis, July 16 - Restaurant chain IHOP Corp., formerly known as International House of Pancakes, is buying bar-and-grill chain Applebee's International Inc. for $2.1 billion in all, at a 4.6% premium, and traders liked the deal on both sides.

IHOP got a bigger bounce than Applebee's, in fact, as traders liked the diversification for that restaurant chain. With such a disappointing premium, traders said the Applebee's deal might face heavy resistance, however, and the terms did little to boost other restaurants looking for a deal, such as Wendy's International Inc., which has been in play since late April. Applebee's had been looking for a deal since February.

Knee and ankle brace maker DJO Inc., formerly DJ Orthopedics, players, however, were very pleased with the buyout offer of $1.6 billion, including debt, at a 19.4% premium, by The Blackstone Group affiliate ReAble Therapeutics Inc., traders said. DJO has a 50-day go-shop period, but traders said the bid was not expected to see an improvement.

Trucking company Con-way Inc. is buying privately held carrier Contract Freighters Inc. for $750 million, and the news pushed Con-way shares sharply higher. As the sector has been on the radars of special situations players, traders said the news boosted several in the sector, such as Old Dominion Freight Line Inc. and Arkansas Best Corp. and furthered Con-way as a potential target.

Puerto Rico bank Doral Financial Corp. lost ground Monday as word of a new competing bid sparked jitters among players, a distressed equities trader said, although the company said it will not consider the proposal by Atlas Monetary International Trust and, in fact, described it as "entirely frivolous."

Wireless telecommunications company Vodafone Group plc denied a report by The Financial Times on Monday that it was considering a $160 billion bid for Verizon Communications Inc. to consolidate their wireless joint venture. Despite the denial, Verizon (NYSE: VZ) settled with a gain of $1, or 2.39%, at $42.76 while Vodafone (NYSE: VOD) lost 37 cents, or 1.1%, to end at $33.15.

Ford Motor Co. also continues to deny reports that it is preparing to sell Volvo as it divests its Premier Auto Group. Ford has acknowledged looking for buyers of Jaguar and Range Rover, which are part of that group, but has denied it plans to include Volvo. Reports out of Europe, however, repeated Monday rumors that Volvo is on the sale block. "Everyone likes the idea of Ford making some money on these divestitures," a risk arbitrage trader said. "We're seeing the reversal of the consolidation trend in autos, and that's good." Ford shares (NYSE: F) lost 11 cents, or 1.23%, to close at $8.86.

Applebee's deal may be battled

IHOP's purchase of Applebee's at $25.50 per share, or a 4.6% premium to Friday's market, was considered a bargain and raised IHOP shares. Applebee's shares, however, were holding well back from the deal amount as traders anticipate some resistance because of the low price.

Applebee's (Nasdaq: APPB) added 53 cents, or 2.17%, to close at $24.91 after trading up to $25.

IHOP (NYSE: IHP) made a leap of $4.99, or 8.87%, to $61.24.

Though some traders thought the cheapness of the deal would meet resistance, one trader said, "It [Applebee's] trades with a 2.7% gross return which, if there is no [antitrust] issue, is in line."

Despite weak performance at Applebee's, which has been shopping a deal since February, and Wall Street expectations of a difficult second-quarter for restaurants due to rising inflationary measurements, traders said the price tag was too far below industry norms.

"I'm voting no unless the offer is raised at least another 20%, which is what it would take for Applebee's price to cashflow to equal the industry standard of 15.29 - Applebee's was 12.75 at Friday's close," one trader said. "Applebee's price to free cashflow is 28.74 versus the industry standard of 39.32; thus a 37% increase in the bid is needed just to equal the industry standard, much less adding a premium to the price."

Another said the offer should have at least been $27 per share, saying the IHOP bid was "a lowball number."

In April, Applebee's struck a deal with activist stockholder Richard Breeden of Breeden Capital to add him and one other person to its board, amid pressure to improve operations.

From the IHOP angle, the deal was a big hit. IHOP said it expects to continue paying a dividend and said the deal should add to earnings starting in 2008.

Wendy's hopes waning

The Applebee's deal didn't help hopes for Wendy's to get a nice deal, traders said. The stock (NYSE: WEN) traded in a band of $37.20 to $37.84 before closing off 2 cents at $37.56.

"With each passing day and they don't have a deal, more people peel out of this one," one trader said.

Earlier this month, the stock surged as investor Nelson Peltz, who controls Arby's through his Triarc Cos. Inc., boosted his stake in Wendy's though Trian Fund Management and alluded to being a "natural buyer" for Wendy's. But a bid from Peltz has not materialized.

"If Peltz puts his money where his mouth is then that would be one thing, something people might have a little faith it - but, to be honest, a lot of folks avoid names he is involved in because they don't trust him," the above trader said. "But he hasn't done anything to really make an offer for Wendy's."

Additionally, traders have said that Peltz's criticism of the company's sale process and inference that Triarc will make a bid has been viewed poorly for the auction effort. One trader said earlier this month that Peltz was heard to want $40 per share for Wendy's.

DJ Ortho lifted, bid seen final

DJ Orthopedics' buyout at $50.25 per share - a 19.4% premium to Friday's market - was "acceptable," traders said, and even with a 50-day go-shop period, a better bid was not expected to surface than that from ReAble, formerly Encore Medical.

"This was a good price even though the premium doesn't look all that big," said one trader, noting his firm's analyst had a $47.50 price target on the stock.

DJO shares (NYSE: DJO) advanced $8, or 19%, to $50.10.

"DJO and ReAble have established strong positions in the orthopedic and rehabilitation markets," said Ken Davidson, CEO of ReAble, in a news release. "The strategic fit, both in the U.S. and overseas, is absolutely compelling."

DJO and ReAble provide complementary products in orthopedic rehabilitation and pain management, and, when combined, will offer a broad go-to-market approach through multiple sales channels, the firms said. If DJO gets a better offer within the next 50 days, it would have to pay an $18.7 million break-up fee to ReAble. Otherwise, the deal is expected to close by year-end.

Con-way pushes truckers

Trucking companies were mostly higher on the Con-way news, and one trader said Con-way itself may be an acquisition target, noting it was the biggest gainer. Old Dominion and Arkansas Best also made nice gains, but YRC Worldwide Inc., the product of a merger between Yellow and Roadway, declined.

"This sector was one where some more consolidation was expected, probably for at least the past six months," the trader said.

Con-way shares (NYSE: CNW) rose $3, or 5.65%, to $56.06.

Old Dominion (Nasdaq: ODFL) advanced 38 cents, or 1.21%, to $31.89.

Arkansas Best (Nasdaq: ABFS) gained 74 cents, or 1.85%, to $40.71.

YRC shares (Nasdaq: YRCW) dropped $1.01, or 2.66%, to $36.99.

C.H. Robinson Worldwide Inc. also was a big gainer, with that stock (NYSE: CHRW) adding 99 cents, or 1.89%, to $53.27.

"The business is tough right now, but we think there will be more trucking deals," the trader said. "I would be guessing that it will be mergers, consolidation, because these are not companies that would likely attract private equity."

Doral snubs 'frivolous' bid

Doral said it will not consider a rival buyout proposal by Atlas Monetary International Trust, which Atlas said it plans to introduce at the shareholder meeting scheduled for July 17; otherwise details of the offer have not circulated. In fact, Doral said the resolution will not be considered at the meeting because it does not comply with bylaws.

On Friday, Doral said proxy advisory service Institutional Shareholder Services has recommended a vote for the standing proposed $610 million recapitalization by Doral Holdings, LLC - buyout entity made up of Bear Stearns Merchant Banking, Goldman Sachs & Co., Marathon Asset Management, Perry Capital, the D. E. Shaw group, Tennenbaum Capital Partners, Eton Park Capital Management, Canyon Capital Advisors and GE Asset Management.

The Bear Stearns group is offering to buy a 90% stake in the company for $610 million, or roughly 63 cents per share. Last month, a rival bid was withdrawn by FBOP Corp., which had proposed to buy 80% for $610 million, or $1.41 per share.

Doral shares have hovered between the two previous bids and one trader said he is considering Doral post-recap, after having sold out some eight or nine months ago when trouble at Doral began to come to light.

The stock (NYSE: DRL) dropped 3 cents to $1.14 on Monday and in after-hours activity was seen off another 2 cents at $1.12.

"I thought about rebuying but decided that the volatility and risks just didn't match my upside potential at this point. Once the deal is done, I may very well buy back in since the risks should be mitigated considerably," the distressed equities trader said.

"The FBOP counteroffer supports that and I still think Doral will be a very strong company in the long run. We'll see what happens from here and whether I get back in or not, but right now I am probably more focused on looking for opportunities to exploit the weak dollar."

The Bear Stearns buyout, announced May 16 at a discount to the then-market for Doral shares, was intended to help Doral repay debt that matures on July 20 and avert possible bankruptcy. For the past seven months at least, there have been market rumors that the company was trying to negotiate a refinancing of the bonds, which this deal amounts to in many observers' opinion.

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