Six Flags selling on upswing from Snyder's move; Northwest, Delta drift higher, Charming Shoppes up

By Ronda Fears

Nashville, Aug. 18 - Six Flags Inc. as a takeover play - a much anticipated, or at least hoped for, event - finally came across the tape Thursday as Washington Redskins owner Daniel Snyder, the biggest shareholder in the Oklahoma City-based amusement park operator, made a move for a bigger stake in the company with an underlying caveat of ousting management to take the reins himself.

On the news, the Six Flags convertibles, as they have takeover protection, took a ride north, and traders said there was a lot of selling into the strength.

Airline paper also got a lift as buyers stepped in. Delta Air Line Inc.'s convertibles bounced up around 1.5 points to the mid- to high teens on short-covering after the bonds' recent pounding, traders said, and Northwest Airline Corp.'s convertibles moved up 7 to 8 points, while the straight junk bonds also rose, as the stock zoomed on upgrades and players positioned for the possible mechanics strike this weekend.

Sellsiders said flow picked up Thursday in convertibles overall, and many issues were gaining steam. In the biotech space, Par Pharmaceutical Cos. Inc.'s convertible bonds moved up as players position on acquisition hopes and Cephalon Inc.'s new 2% convertibles saw some action, firming a bit but still underwater at 97 bid, 97.5 offered.

Charming Shoppes Inc.'s 4.75% convertible due 2012 continued to trade up on earnings released Wednesday, adding 3 points to 131.5 bid, 132.5 offered, while the underlying stock gained 41 cents, or 3.5%, to $11.94. The retailer posted a second-quarter profit of $39.6 million, or 30 cents per share, up from $27.1 million, or 21 cents per share, a year ago, and revenue rose 13% to $688.4 million. Also, the company forecast raised its earnings per share outlook for the year to 73 to 75 cents, up from the previous forecast of 69 to 73 cents.

Halliburton Co., 3M Co. and Roper Industries Inc. also were mentioned in the context of some big blocks of bonds trading.

"It just seems whippy," said a fund manager at a big convertible shop. "I like to think there is some rotation out of oil/oil services/consumer discretionary and into tech/some biotech/airlines - seeing large blocks of bonds again but no real panic going around."

Some sellsiders have mentioned finding a volatility play here and there this week, but the fund manager indicated he's finding more typical summer figures and he sees that trade a bit premature.

"I am noting that the VIX is higher on the month but gamma hedging days are still far away," the buysider said. "Credit continues tighter - in spite of rates and oil headwinds. I'm not sure how to interpret this. Also, the CPI was in line and a PPI is worsening. If this condition continues, then profit margins have to erode - but what do I know?"

Six Flags holders bail on uplift

Snyder made a tender offer through his Red Zone LLC investment firm to buy up to 34.9% of Six Flags shares at $6.50, up from his current 11.7% stake, and that pushed the stock up about 18% Thursday to around that spot. But there were lots of sellers on the upswing, traders noted, particularly convertible holders.

"There was the choice of selling into the rally, or hold and, assuming Snyder will be successful, sell to him at $6.50 under the tender, or you could wait to see if Snyder will raise his offer or another competing bid comes along," said a sellside trader at one of the bulge bracket investment banks.

Much like the stock, Six Flags' convertibles have made a run this year, after dipping to around the $4.00 level a year ago and lower still earlier this summer, on chatter that a buyout offer of some sort was in the works, the trader said. The dive last year followed weak results at the amusement park operator, which sparked concern about bankruptcy and the like.

The Six Flags convertibles on Thursday took a northbound ride, gaining as much as 12 points outright to 120 bid, 121 offered, and the 7.25% convertible preferreds added 0.625 point to 23. As both have takeover protection, traders said there was a lot of selling into the strength. The Six Flags junk bonds were seen up 1 point with the 9.625% issue due 2014 at 99.5 bid, 100.5 offered. Six Flags shares gained $1.00 on the day, or 18.21%, to $6.49.

"The Six Flags story underlines the LBO [leveraged buyout] and/or deleveraging theme," said a buyside market source. "Of course, it took a long time for this name to do something! Fortunately, these [convertible] bonds have takeout protection - any takeover > 50% triggers increased adjustment in conversion feature."

Snyder switch-back applauded

Synder, the biggest shareholder in amusement park operator Six Flags, said in an interview with CNBC on Thursday that he was calling for the removal of Six Flags' top management because he believes the company "needs to be fixed."

He has been spouting such sentiment for months now, however, and in fact his latest decision is a reversal of a decision to sell out of Six Flags in April, which reversed a previous move in January to pressure Six Flags management into a turnaround that hinted at asset sales and/or a complete sale of the company.

His tender is dependent on Snyder capturing three board seats, including one for himself and one for Red Zone chief executive Mark Shapiro - former programming and production executive at Walt Disney Co. He also is seeking to oust Six Flags chief executive Kieran Burke and chief financial officer James Dannhauser.

Snyder said in the CNBC interview that Six Flags is an underperformer and said problems include a "boatload of excess real estate" that's not being used by the company.

Six Flags, indeed, has been viewed for months now as a real estate play of sorts among holders of the convertibles, in part because of previous remarks by Snyder.

"I think the news is a positive step, but the company has already made some progress in a turnaround," said the sellside trader for Six Flags. "Maybe none of that is really credit to the management, maybe somebody could argue a better economy or weather patterns helped them out this year, or whatever, but it seems so to me they have come a long way."

After adding attractions at 13 of its 18 theme parks in the last year, Six Flags reported a second-quarter profit of 6 cents a share, reversing a year-ago loss of 13 cents. The company is forecasting 2005 revenue growth of 8.5% with attendance, guest spending and season-pass sales all above year-ago levels.

Northwest flies in face of strike

Northwest Airlines rallied with its bonds taking off alongside the stock, which gained on a couple of upgrades, although a mechanics strike this weekend still clouds its horizon.

Moreover, though, convertible traders said the strike is a non-issue, and there was progress in those talks reported Thursday, as the figure involved represents a mere drop in the bucket toward what Northwest is hoping to achieve in the way of cost savings.

The airline's tough stance with the mechanics union is encouraging, traders said, as there are negotiations pending with three other employee groups. In short, Northwest has snubbed the mechanics' offer, which one trader said amounts to savings of around $176 million for the airline. There were reports late Thursday, however, that the union was saying some progress in the talks had taken place.

"This is not enough to save them, or hurt them. The mechanics contract and/or strike is a non-issue," said one sellsider. "We're talking about $176 million and they are looking for $1 billion in cost cuts, so that leaves another $800-plus million, and there are three other union contracts hanging out there."

Northwest's convertibles gained 7 to 8 points, in tandem with its straight junk bonds, as players position for the mechanics strike, one trader at a sellside boutique said. He pegged the 7.625% issue at 42.5 bid, 43.5 offered and the 6.625% issue at 49.5 bid, 50.5 offered, both with the underlying stock at $5.50. He noted the 6.625s are worth more because the strike price is lower.

Northwest shares ended Thursday at $5.48, up 48 cents on the day, or 9.6%. Upgrades by Bear Stearns and Morgan Stanley were largely credited for that rise, traders said, along with some likely short-covering. The Northwest junk bonds rose on the short end with the 7.875% issue due 2006 up 9 points to 64.5 bid, 66.5 offered and the 7.875% issue due 2008 gaining 6 points to the 46 area.

Delta's bonds went along for the ride, although the underlying stock dropped a nickel, or 3.14%, to close Thursday at $1.54. Delta's bonds followed Northwest upward, with the 10% 2008s up 2 points to 19 bid, 20 offered.

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