Doral shares slide; Omni firms; BCE off; ISE soars; Dominion weaker; Atmel slips; Riviera up

By Ronda Fears

Memphis, April 30 - Doral Financial Corp., the largest mortgage lender in Puerto Rico, said Monday it may be forced out of business unless negotiations with private equity investors result in a cash infusion of at least $700 million. The stock took a plunge, however, as a deal for the troubled bank is anticipated to come at a big discount to the current market.

International Securities Exchange Holdings Inc.'s buyout by Deutsche Boerse AG for $2.8 billion, or $67.50 per share - a 47.6% premium to Friday's market - sent the stock higher, and as it would create the world's largest options exchange, it rekindled interest in other exchange deals. ISE shares (NYSE: ISE) gained $20.97, or 45.87%, to $66.69 after trading up to $67.45.

"There is a lot of noise that there will be a competing bid [for ISE]. Maybe, but we'll pass because of the risk," said one risk arbitrageur. "These exchange mergers are hotly contested."

Intercontinental Exchange Inc. has bid $9.6 billion for CBOT Holdings Inc., the Chicago Board of Trade, but there is a rival $8.2 billion offer by the Chicago Mercantile Exchange Holdings Inc. The LSE Group plc, or London Stock Exchange, fought off several bids, including a hostile one from the Nasdaq Stock Market Inc., which is now its largest shareholder.

Elsewhere, Omni Energy Services Corp. engaged Citigroup as financial advisers to explore strategic alternatives, which typically means the company is in play for a merger type transaction. The Carencro, La.-based oilfield services company said, however, "There are multitudes of ways to potentially enhance shareholder value." The stock (Nasdaq: OMNI) gained 31 cents, or 3.33%, to settle at $9.61.

In another oilpatch deal, Dominion Resources Inc. confirmed that it has agreed to sell its offshore oil and gas production operations to an affiliate of the Italian energy firm Eni for $4.76 billion. Outside of its remaining production assets, Dominion said it expects to grow consolidated operating earnings per share at an average annual rate of 4% to 6%. All oil and gas operations are expected to be divested by year-end.

The fact that it was a partial sale of Dominion's oil and gas operations and at a disappointing price tag - versus previous rumors that these assets could fetch upward of $15 billion - led to some exits out of the story, one trader said. The stock (NYSE: D) slipped 35 cents to $91.20, but he noted a bounce after-hours. When the rumors began circulating in January, the trader noted that Dominion shares were around $82, but without that overhang he said the stock may find more buyers.

More time for a BCE Inc. deal also put some pressure on that stock, a trader said. The Canadian telephone giant said it has targeted third quarter to complete a strategic review process, which it said may include privatization of the company. Several pension funds, some with private equity backing, are said to be interested in making a bid to take the company private. BCE shares (NYSE: BCE) fell 99 cents, or 2.85%, to $33.75.

Amid a blazing proxy fight, Atmel Corp. reported the audit committee investigation of historical stock option practices found irregularities, and the stock went lower. The stock (Nasdaq: ATML) closed off 3 cents at $5.32.

Doral stock to be diluted

Doral did not identify the potential private investors it is in talks with, but many thought it was some of the bondholders to whom it owes money. The company did say the deal in the works would result in "very significant dilution" to current shareholders; thus, the stock took a dive, but traders said some were adding to positions on the slide while others sat on the sidelines.

The common shares (NYSE: DRL) lost 32 cents on Monday, or 18.6%, to settle at $1.40.

San Juan-based Doral acknowledged that it doesn't have enough money to repay a $625 million floating-rate bond due in July. Rumors of refinancing negotiations with bondholders have circulated for nearly six months in the markets. But those efforts have been overshadowed by lawsuits, financial restatements and the threat of delisting the stock from failing to file financials on time.

Doral also said it reached a settlement of the class action lawsuit for $129 million, including $34 million from insurers and $1 million in cash or stock, contingent on a capital infusion by Sept. 30. The company also filed 2006 results showing losses of $34.5 million on mortgage-loan sales, $42 million for inaccurately valuing interest-only derivatives it sold to other banks and $27.7 million on the sale of securities. Provisions for loan and lease losses rose 78% to $39.8 million.

Market rumors earlier this year put holders of the floaters negotiating for cash and stock to refinance or extinguish the bonds. The stickler in those negotiations, according to markets sources, had been where to value the stock; bondholders wanted to value the stock at around $1 per share.

Doral players add, wait

As for the stock action Monday, traders said there was some buying into the slide, with the stock coming off the day's low of $1.33 to trade as high as $1.68. One trader said that signaled to him that there were people adding to their positions.

"Doral is going to issue equity below the market, but at the market price at the time the deal prices. Assume they raise just $600 million; the company would then have $1.06 billion and be in no danger of failing. It should trade at least 1.3 times book, or be worth $1.3 billion," the trader said.

"Or, if you figure Doral will have $1.6 billion of Tier 1 capital with 6% leverage ratio for $26 billion in assets, with an ROA [return on assets] of 1.00% - remember DRL has tax rate of only 5% - this would be earnings of $260 million. If you give them a low P/E [price to earnings ratio] of 9, market cap would be worth $2.4 billion."

It might take a year or two to achieve this, he continued, so the stock would be at a trough right now. On the heels of the capital infusion being discussed, he figures the stock could be worth $2.55 to $4.75.

Some Doral players were simply sitting on the sidelines until there is more visibility.

"I haven't been through everything yet, but besides the issue of dilution, the news has been as expected. The loss included many one-time items and was at the level expected. To this was added the settlement amount. The settlement is significant good news," another trader said.

"Hidden in the one-time costs is also a lot of good news I suspect. I'm not scared at this point. Last time we went down hard, we immediately went back up. If private equity is interested to get in, it is only to get a very significant multiple on investment - more than the 2 or 3 times. If they cover the $625 million debt, this means much more of the enterprise value goes to stockholders, even if diluted, and interest expenses go down quite a bit. I'm holding until I've been through all, for now."

Doral bondholders happier

Conversely, Doral's floating-rate notes at the heart of the refinancing needs were said to have traded up as much as 1.25 points on the news to the 96.25 area on thinking that the $625 million of bonds will be paid in full with a $700 million deal.

The Doral 4.75% preferreds, however, which have been a sweet spot in the capital structure, saw no action, standing pat at 125.25. Three other preferred issues were unchanged or slightly lower on the day.

"The bonds may just get paid off in cash at 100, although many of the bondholders are part of PE [private equity] group, I think," said one trader in the bond market.

"I think this selloff today [in the common stock] is knuckleheads who thought Doral still had value. They are now reading 'going concern' comments and seeing the facts finally."

Moody's Investors Service analyst Gregory Bauer said, however, that should Doral fail to reach an agreement with the private equity firm to raise the necessary capital within the next few weeks, a downgrade is likely and that would in turn trigger defaults on other debt in the capital structure.

Riviera rises on proxy fight

Late Friday, Riv Acquisition, an investment group that has been trying to buy out Riviera Holdings Corp. for a year, said it will nominate five independent directors to the casino operator's board at the board election slated May 15 - a move expected to push the buyout group's agenda forward.

Riviera (Amex: RIV) added 50 cents, or 1.7%, to $29.93.

One trader said he reckoned Riviera holders were adding to their positions and noted heavy volume in the stock.

In March, Riviera's board rejected a $27-per-share buyout offer from Riv, citing collusion between two major shareholders. The offer was boosted from a $17 bid last year by the group.

Riviera said that its board was not in a position to consider the bid, because Riv signed a lockup and option agreement to buy 9.2% of Riviera's outstanding stock without prior approval by the board. That, the company said, triggered Nevada law prohibiting it from considering the buyout, or any other offer from the group for three years.

But officials for the buyout group argued that the lockup agreement was contingent on board approval.

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