Seagate slumps; First Data off; Blockbuster slips; Digital surges; Horizon rises; Calpine dives

By Ronda Fears

Memphis, June 12 - Disc drive maker Seagate Technology surged early Tuesday, and there was heavy activity in options, as the name became infected by takeover talk. But by the end of the day, Seagate, like many others with activity related to takeover speculation, fell victim to the remarkable sell-off in U.S. Treasuries, which on Tuesday pushed the yield on the 10-year Treasury note to a five-year high.

"There is a lot of pain right now related to Treasury yields," one trader remarked.

"Risk is skyrocketing in these situations, far worse than when the stock market took a dive. This has the markings of something very serious. There is still a lot of private equity money, or a perception of that, but we see the big ones, Blackstone Group for instance, looking to raise money, big money. And there's more every day about KKR's First Data deal falling apart. So the euphoria is waning."

Kohlberg Kravis Roberts & Co.'s $26 billion buyout of the electronics payments processor First Data Corp. has been rumored to be in trouble, but there have been reports that KKR is merely looking for new partners in the deal. There was scuttlebutt last week that the $8 billion of bonds being issued in the deal are finding resistance from potential buyers, according to one trader, but that has yet to be obvious since the roadshow has not even begun.

First Data shares are holding well below the takeover price of $34 per share on the "enormous risk" in the deal, the trader said. The stock (NYSE: FDC) on Tuesday slipped 15 cents to $32.50.

In addition to Seagate, most speculation names were trading down with the broader market, like Blockbuster Inc., which cut subscription prices for online subscribers and put pressure on online movie retailer Netflix Inc. as well as traditional movie rental peer Movie Gallery Inc.

Netflix also was downgraded, and the market was more skeptical of recent chatter that online book retailer Amazon.com Inc. was looking at snapping up Netflix. Rather, one trader said he thinks Blockbuster is the one that has targeted Netflix as an acquisition candidate, and he was a buyer on the weakness in both stocks. Amazon (Nasdaq: AMZN) fell $1.10, or 1.55%, to $70.07. Netflix (Nasdaq: NFLX) fell $1.85, or 8.44%, to $20.08.

But another trader said he thinks Blockbuster making a play for Netflix has "no shot." Blockbuster shares (NYSE: BBI) lost 12 cents, or 2.95%, to $3.95.

Online brokerages and electronic payments names involving deal speculation were active Tuesday, also, and lower. eFunds Corp., which had been propped up by rumors of a handful of bidders in the wings, saw its stock (NYSE: EFD) slip 17 cents to $35.40.

E*Trade Financial Corp. was off, one trader said, as it has apparently won the auction to acquire privately held fund firm Rydex Investments for $1 billion; bids were thought to be in the neighborhood of $800 million to $1 billion. E*Trade (Nasdaq: ETFC) lost 28 cents, or 1.13%, to $24.41. E*Trade also had been seen as a likely merger candidate with TD Ameritrade Holding Corp., which has had stockholder pressure to look for a deal. But Ameritrade was off with the market as well, with the stock (Nasdaq: AMTD) losing 86 cents, or 4.07%, to $20.29.

Amid the jitters caused by the sell-off in Treasuries, traders said more special situations players were looking at options to make their moves.

NRG Energy Inc., one with repeated takeover speculation, saw heavy call options activity, one trader said, and the stock (NYSE: NRG) advanced 59 cents, or 1.38%, to $43.41. But another power producer, bankrupt Calpine Corp. continued to see investors head for the door on concern that it will not get, or even welcome, backers for its bankruptcy reorganization plan, another trader observed.

SunTrust Banks Inc. was sharply lower with the banking sector, another trader said, but he said the name was seeing options activity on lingering chatter that it is a nice takeover candidate despite measures last month by the bank to quell such speculation. This trader mentioned $90 calls as well as $85 and $90 puts. The stock (NYSE:STI) fell $1.32, or 1.48%, to $87.63.

There were some gainers in the session, however.

Ford Motor Co. got a bounce on confirming that it is considering options for its profitable luxury division, including a possible divestiture of Jaguar and Range Rover but not Volvo. But the automaker said that, contrary to rampant speculation, there's no announcement on tap anytime soon. So, what with the broader market weakness, Ford (NYSE: F) added 8 cents to close at $8.32 after trading as high as $8.49.

Horizon Offshore Inc. was a big gainer, having one of the few deals announced Tuesday. It is being acquired by Cal Dive International Inc. in a cash-and-stock deal valued roughly at $650 million, or an equivalent of about $19.25 - a 14% premium to Monday's close and an 18% premium to the 30-day average. Horizon stockholders will get 0.625 share of Cal Dive and $9.25 in cash. Horizon (Nasdaq: HOFF) gained $1.69, or 9.97%, to $18.64; Cal Dive (NYSE: DVR) fell 18 cents, or 3%, to $15.52.

Digital Recorders surges

Digital Recorders Inc. was another strong advancer Tuesday after announcing several measures under consideration to boost shareholder value, including the possibility of a merger or acquisition.

The stock (Nasdaq: TBUS) gained 18 cents, or 7.96%, to $2.44.

Dallas-based Digital Recorders is a communications equipment company specializing in information and surveillance technology products for law enforcement, military and surveillance.

The company said it is investigating several measures, such as retaining an investor relations firm to assist management in educating the investing public about its products and services, as well as in initiating coverage by financial analysts, in addition to a possible deal.

Further, the company said it expects 2007 to be profitable, but one trader said previously loyal investors in the stock have already bailed out.

"They lost $4 million per year and they are down to $4 million in tangible value. They have almost no cash left. Their options are limited now," the trader remarked.

"Shareholders are lucky to have shares way up here, at $2.50 Perhaps that is why the company is hoping to sell near this level. Looks to me like the stock could go to $1 this year if they don't shape up."

The stock traded in a band of $2.19 to $2.50 on Tuesday; the 52-week range is $1.01 to $2.59.

Seagate rises

Seagate rose Tuesday morning amid moderate takeover talk, and one trader said there was a noticeable uptick in the July call options at $22.50 with huge volume. But the broader market's downturn put a damper on any confidence behind the speculation, he said.

"There was [a] huge amount of calls on the $20s and $22.50 this morning," he said.

"But it really lost steam this afternoon when the market went south. It takes an enormous amount of guts to stick with something like this, where there has not been anything on the tape about a deal."

Seagate shares (NYSE: STX) traded up to $21.16 but closed the day with a loss of 3 cents at $20.83.

Scotts Valley, Calif.-based Seagate Technology, which makes hard disk drives for devices like notebook and desktop computers and the current hard drive for the iPod, acquired rival Maxtor Corp. last year. Now, the company employs 60,000 workers and had sales of more than $11 billion last year.

"The Street has really been sort of bearish on Seagate, so this is somewhat of a surprise, the chatter this morning about it being a takeover target," the trader said.

But, he noted that Seagate got a sympathetic lift from an upgrade in rival Western Digital Corp. on Monday related to an analyst's opinion that there would be strong sales and a seasonal upturn in PC demand.

Calpine campers shift gears

Speculators who have been in Calpine on rumors that a private equity firm will step forward to backstop a rights offering for its emergence from bankruptcy have been backtracking in a zigzag fashion in recent sessions, with a big drop Tuesday, according to one distressed equities trader.

Calpine (Pink Sheets: CPNLQ) lost 16 cents, or 4.72%, to settle Tuesday at $3.23.

"It tanked a week ago with a lot of selling, a lot of volume sellers, and then crawled back up until today when there was another sell-off but a much smaller amount," the trader said.

The shift in sentiment, this trader said, stems from comments by chief executive Robert May at the Reuters Global Energy Summit in New York last week. There, he said, May said that Calpine had been approached by possible buyers but had rejected them as "bottom feeders."

Rumors of big PE investors coming to fore in Calpine has propped the stock up as well as its bonds for more than six months. Now, time is running out, as Calpine is scheduled to submit its bankruptcy reorganization plan by June 20.

But the trader said he will stay involved in Calpine, perhaps to a smaller degree than six months ago, on hope that the company will produce a plan that pays something to common stockholders. He said he might add to his position, however, if the stock drops below $3.

"It looks like they will keep this down right up to the wire. Mr. Market did turn up at 1:15 - a buyer - but then split," the trader said.

"I think most people are holding out thinking there will be some pay-out on the stock. I, for one, am going to just sit on my shares until the cows finally come home June 20."

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