Openwave falls, Sybase surges; Avaya trades tight; Inter-Tel off; Whole Foods off, Wild Oats up

By Ronda Fears

Memphis, June 5 - Downgrades weighed on Openwave Systems Inc. after its board on Tuesday rejected a partial tender offer from Harbinger Capital Partners to buy 49% of its outstanding shares, but traders said there were buyers on the downswing thinking the internet software firm has other bidders on the hook, namely Sybase Inc., Oracle Corp., International Business Machines Corp., Hewlett-Packard Co. and Siemens AG.

Meanwhile, news of telecommunications processing equipment firm Avaya Inc.'s much-anticipated buyout sparked a big "sell on the news" phenomenon. Avaya agreed to a buyout by private equity firms TPG Capital LLP and Silver Lake Partners at $8.2 billion, or $17.50 per share - a 4.7% premium to Monday's market. While the company has a 50-day "go shop" period to solicit a better proposal, traders said the market wasn't expecting anything further and, in fact, a considerable amount of risk to the deal held the stock below the deal price.

Elsewhere in the telecom equipment group, Inter-Tel Inc. took a hit after it announced private equity firm Vector Capital Corp. has decided not to make a buyout offer. The stock (Nasdaq: INTL) lost 73 cents, or 2.76%, to $25.75.

Whole Foods Market Inc. also took a hit on news that the Federal Trade Commission will oppose its acquisition of rival health food retailer Wild Oats Markets Inc., while the latter marked a slight gain. Traders said all the risk was shifting to Whole Foods now that the antitrust obstacle has manifested.

In another seemingly scuttled deal, Cott Corp. was lower Tuesday on news that Cadbury Schweppes plc had sold three units for $397 million - its Australian jams unit to H.J. Heinz for A$70 million, its Allan Candy unit for up to C$22 million and Cadbury Italia to Leaf Italia SRL for €9 million. In mid-April, Cott confirmed talks with interested parties in merging it with the beverage arm of Cadbury Schweppes. Sources said that while many saw the news as a negative for Cott, some believe it will get a takeover bid soon.

Speculation that online software firm Salesforce.com Inc. was being wooed as a takeover target by online search engine giant Google Inc. was derailed Tuesday when the two announced a joint venture. The news sent Google shares (Nasdaq: GOOG) to a new 52-week high of $518.84 with an advance of $11.77, or 2.32%, while it only sparked a small bounce in Saleforce.com (NYSE: CRM), which added 40 cents to $47.46.

True Religion Apparel Inc. was another disappointment, saying Tuesday that it has concluded the exercise in which Goldman Sachs was employed to evaluate various strategic options for maximizing shareholder value. The company said True Religion has decided to remain independent and focus on growth. "It's actually good news," one trader said. "First of all you got the part where they said that they feel their stock is undervalued, right. Well, that means there is more probability for them to buy back shares." True Religion shares (Nasdaq: TRLG) lost 50 cents, or 2.55%, to $19.14.

Feldman Mall Properties Inc., however, got a lift from going on the auction block by hiring Friedman Billings Ramsey to explore strategic alternatives to enhance shareholder value. Great Neck, N.Y.-based Feldman is a shopping mall real estate investment trust.

But, overall retailers and restaurants were groups "overshorted like crazy," by one trader's account, noting a big hit from Bed Bath & Beyond Inc. results Tuesday. Many names in those groups have languished amid takeover rumors that have persisted for months with no deal - such as Under Armour Inc. - and some even have been actively pursuing deals to no avail - such as Wendy's International Inc. For those latter two, this trader said he thinks most of the bad news has been priced in and they may be ripe for a deal.

Crocs Inc., maker of the faddish casual shoewear by the same name, however, could be ahead of them in a takeover deal, by the reckoning of a buyside source, who also noted the stock has been surging ahead of an upcoming split and pleasing results.

Openwave players believe

At least three analysts downgraded Openwave as the company announced its board rejected Harbinger's offer to buy 49% of the company, boosting its stake from 13%, at $8.30 per share. But traders said there were lots of buyers on the downswing thinking the company had other bidders on the hook, with the market seeming to lean toward Sybase.

"We already knew Harbinger's $8.30 offer was insufficient and would have to be sweetened to at least around $9.50, but the official rejection sent a lot of weak players out the door," a trader said.

"That said, there were a lot of folks adding to their positions on the downswing because they see the rejection of $8.30 to mean Openwave has other bidders on the hook."

Openwave shares (Nasdaq: OPWV) traded down to $8.35, but strong buying lifted it to close at $8.72 for a loss of $1.65 on the day, or 15.91%. It traded as high as $8.84 on volume of roughly 15 million shares versus the norm of 2.7 million shares.

Over the past week, the trader said, speculation has surfaced that business software vendor Sybase was eyeing a takeover of Openwave and further speculation has put Oracle, IBM, Hewlett-Packard and Siemens as interested parties.

Sybase appears to be the market's top choice to link up with Openwave, he said. Sybase (NYSE: SY) gained 55 cents, or 2.31%, to close Tuesday at $24.40. Oracle, IBM, Hewlett-Packard and Siemens were all lower with the broader market, he noted.

Harbinger has been haggling with Openwave for months, beginning with a failed proxy battle around the first of the year and numerous attempts to force the company onto the auction block, culminating in the current attempt by the hedge fund to gain a major chunk of the company.

"There was an analyst who thinks Openwave has lost the chance to sell at a premium. We don't agree," said a buyside market source. "We think they could get a $13 bid. That would be about a 25% premium to yesterday's [Monday's] close. That's not so outrageous."

Avaya players walk away

Avaya announced late Monday a takeover by private equity firms Silver Lake and TPG Capital for $8.2 billion, or $17.50 per share - a 4.7% premium to Monday's market and a 28% premium from May 25, the last day before speculation of a potential sale sent the stock skyrocketing.

One trader said that while the company has a 50-day go-shop period, most players who had bought in last week were happy to walk away with the 28-point gain. Furthermore, he said the market doesn't really expect Avaya to get a better bid.

"I had a guy saying he thought they would get a $19 offer within four weeks, but I don't think that is a mainstream view of this story," the trader remarked. "These particular PE firms are heavy-duty and I would bet they have done their homework."

Avaya has previously been in talks with Cisco Systems Inc. and Nortel Networks Corp., the trader added, "and I don't think they will butt heads with these [PE] guys."

In addition to profit taking on the news, he said the market was, however, pricing in considerable risk to the deal. Avaya (NYSE: AV) traded in a tight band of $17 to $17.15 in the session, settling out the day at $17.03 for an advance of 31 cents, or 1.85%.

Avaya said its board has approved the merger agreement with Silver Lake and TPG and is urging shareholders to adopt the deal. Pending normal closing conditions, Avaya expects the transaction to be completed in the fall.

Whole Foods smacked with risk

The burden of risk shifted sharply Tuesday to Whole Foods regarding its attempt for a combo with Wild Oats in light of the antitrust obstacle, traders said, even as both companies said they would fight the antitrust objection by the FTC.

Whole Foods (Nasdaq: WFMI) lost $1.21, or 2.9%, to $40.48 while Wild Oats (Nasdaq: OATS) added 25 cents, or 1.48%, to $17.16.

Austin, Texas-based Whole Foods offered in February to acquire Boulder, Colo.-based Wild Oats for $18.50 per share in cash, or $565 million, and said it would assume about $106 million in debt as part of the deal.

On the development, Whole Foods said it extended its tender offer to June 20, the third extension, and said it would likely extend it again if the antitrust issue is not resolved by then. The agreement also must be approved by shareholders of Wild Oats if Whole Foods acquires less than 90% of Wild Oats' outstanding stock in the tender offer.

"There has been a lot of risk priced into this one for a long time, but it shifted a little today toward Whole Foods," a trader said. "We feel like Wild Oats is the stronger name of the two, so that's where I would be sitting this one out."

The FTC has sought information from the two companies two times previously, indicating they might challenge the merger, he pointed out.

Crocs eyed for split, takeover

Crocs introduced its fall 2007 footwear line with 13 new styles, all of which will be released at the Fashion Footwear Association of New York tradeshow that opened Tuesday in New York City. The stock moved up sharply against the tide of negative moves in the sector, but market sources said the fashion show had nothing to do with it.

In addition to a 2-for-1 stock split coming up July 15, some think it could be a takeover target, noting Foot Locker Inc.'s repeated failure at negotiating a link-up with Genesco Inc.

The stock (Nasdaq: CROX) shot up $2.88 on the day, or 3.5%, to $85.05.

"This is the kind of company they look for. The obvious question is whether Crocs will be able to maintain a durable competitive advantage. Maybe it is too early to give a definitive answer to this question, but it seems there is a realistic chance at least. Crocs is a quick and easy and friendly name. Management seems exceptionally good, and people just seem to like the feel and looks of the shoes," a buysider said.

"The chemistry seems to command some product charisma. I doubt that any company can overtake them [from a competitive standpoint]. My only concern is if the field somehow becomes too crowded, and everybody is selling at a loss. However, Crocs seems to be protecting their turf pretty vigorously. Logically it seems that they should remain way dominant for the foreseeable future."

A sellside trader said he liked the name, but not necessarily as a takeover candidate.

"Despite the terrific run [in Crocs' stock price], short-term upside isn't exactly capped out. To give a better indication of where this might go in the next week or so, we could look to the June options to see that there is a positive bias toward the call options with a strike price of $85 and $90. The forward stock split on June 14 will also help keep the interest and momentum strong," the trader said.

"But as with all stocks that have spiked to new 52-week highs, there are a bunch of short sellers that are bearish, holding nearly 8.87 million shares short - a large percentage of the company's publicly traded float of 31.37 million shares. I think that creates a buying opportunity"

Crocs surged a month ago by 20% to $68.85 after reporting that first-quarter earnings almost quadrupled as demand for its colorful line of casual shoes increased. The shoemaker also boosted its earnings forecast for the full year.

Cott seen catching an offer now

While the status of Cott's position in snagging the beverage arm of Cadbury Schweppes was unclear in light of the three confectionary type units getting sold, a buyside source and a trader agreed that the company stands to catch a buyout offer soon. Cott shares took a dive on the news but there were a few buyers.

Cott (NYSE: COT) lost 27 cents, or 1.69%, to $15.71 amid light volume.

In mid-April, Canada-based Cott confirmed it was in talks with interested parties in merging it with the beverage arm of British beverage concern Cadbury Schweppes, which would create a stronger rival to Coca-Cola and Pepsi.

"A couple of weeks ago it was rumored that a total of 12 private equity firms expressed an interest in buying Cadbury Schweppes' U.S. drinks business," the buysider said.

"You could put two and two together and make a reasonable assumption that at least some of those were also talking with Cott. The wrench in this is whether they are interested in Cott alone or only if it gets the Cadbury Schweppes beverage group. I think it's a good buy at today's level anyway."

Cadbury shares (NYSE: CSG) were weaker despite the news, losing 70 cents, or 1.22%, to end at $56.60.

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