Biomet, Icos merger deals spur action in Telik; Harrah's bets cagey; Caremark rival bid pushes Medco up

By Ronda Fears

Memphis, Dec. 18 - It was a steamy day of ménage à trois deals, with the trio theme extending into the number of big merger deals showing three-way action: Harrah's Entertainment Inc. with two bids under consideration; Biomet Inc. opting for a private equity offer over a competitor's bid; and, Caremark Rx Inc. getting a surprise rival bid.

Several biotech names were finding action, too, on merger speculation, such as Telik Inc., that gained steam on the Icos Corp. situation where Eli Lilly & Co. boosted its takeover bid under stockholder pressure. Such chatter has spurred both biotechs in recent months, but traders said Telik is getting very expensive on this activity.

In other deal action, Parsippany, N.J.-based property management firm Realogy Corp. announced an agreement to be acquired by Apollo Management LP in a $9 billion all-cash transaction, including the assumption or repayment of $1.6 billion of debt and legacy liabilities of about $750 million. Terms would give Realogy stockholders $30 per share, a 17.65% premium to Friday's close. Realogy shares (NYSE: H) gained $4.90, or 19.22%, to $30.40.

Bucyrus International Inc. also was on the rise after the Milwaukee-based heavy equipment maker announced it is acquiring DBT GmbH, a subsidiary of RAG Coal International, for $732 million - $710 million in cash and 471,476 shares with a market value of $21 million. Bucyrus shares (Nasdaq: BUCY) rose $5.75, or 13.46%, to $48.48.

Elsewhere, ElkCorp gained after announcing it will be acquired and taken private by The Carlyle Group in an all-cash transaction for $38 per share for a total deal value of $1 billion, including the assumption of $173 million of debt. The $38 per share price for the Dallas-based roofing materials maker was a 6% premium to Friday's close for ElkCorp shares (NYSE: ELK), which on Monday added $2.96, or 8.26%, to $38.81.

In distressed stocks, bankrupt names Delphi Corp., Delta Air Lines Inc. and Northwest Airlines Inc. fell Monday as Delphi unveiled its framework for a reorganization plan that would make a distribution and rights offering to existing shareholders - a remarkable event in bankruptcies - but not enough to support where the stock has been trading. Northwest and Delta shares, which have been on a tear since a proposed buyout of Delta from US Airways Group Inc. emerged last month, fell for similar reasons.

Harrah's bets heavily hedged

The board of Harrah's Entertainment was reportedly considering two bids, each offering around $16 billion, on Monday, and traders said options activity in the stock showed players were heavily hedging their bets. After the close, there were rumors that the Las Vegas casino had accepted a bid from a private equity group, over a competing off from Penn National Gaming Inc., but that was not confirmed.

Harrah's shares (NYSE: HET) gained $2.68 on the day, or 3.37%, to $82.18.

An options trader said, however, there was heavy action in the $85 calls, countered by heavy activity in the $75 and $80 puts.

"We've got the ballpark figures, I think, at somewhere between $80 and $90, but if everything falls apart, the stock could drop back to $75," the trader said. "That's my comfort level."

According to media reports, private equity firms Apollo Management and Texas Pacific Group have submitted an increased joint offer that may be worth up to $90 per share, or $16.7 billion. More than two months ago, Las Vegas-based Harrah's said Apollo and TPG had offered to buy it for $81 a share, which was reportedly raised soon thereafter to $83.50 per share on reports of Penn National's interest.

Harrah's also has received an offer of $87 per share - $71 in cash and $16 in stock - from Wyomissing, Pa., casino operator Penn National, according to The Wall Street Journal. Penn National operates mostly riverboat casinos and pari-mutuel horse racing tracks. Harrah's is best known for its Las Vegas casinos but has moved into riverboat gaming as well as horse and dog racing.

Harrah's board reportedly is meeting this week to consider the offers. The board could also consider a leveraged recapitalization as an alternative, some have speculated.

Harrah's has so far acknowledged only the bid from Apollo Management and Texas Pacific Group.

Penn National shares (Nasdaq: PENN) gained $3.08 on the session, or 8.07%, to $41.24.

Biomet bombs on PE deal

Biomet shares oscillated wildly Monday as peer medical devices maker Smith & Nephew plc bowed out of merger negotiations on Biomet's acceptance of a $10.9 billion buyout offer from a private equity group made up of The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts and Texas Pacific Group.

Aside from the PE offer coming in with such a slim premium to where the stock has run up to since the company went on the auction block in April, players said there was considerable risk that an options accounting problem aired by the company separately Monday could be a snag in any deal for the Warsaw, Ind.-based maker of orthopedic prosthetics and devices.

Biomet shares (Nasdaq: BMET) ran up to $42.50 on Monday before pulling back to settle the day with a loss of 41 cents, or 0.98%, to $41.59.

Smith & Nephew shares (NYSE: SNN) gained on the development, adding $3.43, or 7.27%, to $50.58.

"The consensus is that Smith & Nephew pulled out because of the options accounting problems, that the backdating of options grants played a role in that merger falling apart," said a trader. "That could cause a problem with this other bid, so there is a lot of risk being assigned to the deal right now."

Under the merger agreement, Biomet shareholders will receive $44 per share, a mere 4.8% premium over Friday's close but a 27% premium to the stock's price on April 3 - the trading day before the company went into play. Biomet started looking for a buyer by hiring Morgan Stanley on April 6.

Separately, Biomet said Monday it would be delaying its fiscal second-quarter earnings report "due to developments related to the review of historical stock option practices." The company went on to say that a special committee created to look into stock option grants from 1996 to the present found problems related to the documentation of certain stock options, including evidence of backdating.

Biomet said it was unable to determine at this time what impact the findings would have on past financial statements. But, despite the delay in second-quarter earnings, the company said preliminary second-quarter sales are $520.3 million, below the analyst consensus of $525.2 million.

Lilly sweetens bid for Icos

Eli Lilly bumped up its bid Monday for Icos by more than 6% to a "final offer" of $2.3 billion, up from a previous offer of $2.1 billion, but there were still players unhappy with the price tag as well as the prospective merger, as reports of trouble with Lilly's schizophrenia drug Zyprexa surfaced.

Icos shares (Nasdaq: ICOS) added 50 cents, or 1.5%, to $33.85.

The revised price of $34 per share follows objections from big Icos shareholder HealthCor Management and advisory firms such as Institutional Shareholder Services to the previous $32-per-share offer announced in mid-October. HealthCor argued that Icos was worth more than $40 per share.

Icos shareholders had been scheduled to vote on Lilly's offer at a meeting Tuesday, but that meeting has been postponed until Jan. 25.

"This new offer is a joke. I think this company is worth a fortune. Just look at the revised outlook from a couple weeks ago," one trader said.

"Given Lilly's trouble with Zyprexa, I am not sure people think this is such a good deal anymore, at all, at any price."

Last week, Icos projected fourth-quarter net earnings per share of 26 to 34 cents, with full-year EPS of 49 to 57 cents. For 2007, Icos is expecting net EPS of $1.17 to $1.41. Icos and Lilly are partners in the development of erectile dysfunction drug Cialis.

Separately, a report in The New York Times on Monday said that Lilly has played down the health risks of its schizophrenia drug Zyprexa linked to obesity and a tendency to raise blood sugar. Zyprexa is Lilly's best-selling drug with $4.2 billion in sales in 2005.

Lilly shares (NYSE: LLY) fell $1.29, or 2.37%, to $53.23.

Telik options off, still rich

In another biotech name, traders noted aggressive unwinding in biotech concern Telik, particularly call options, which were described by one trader as still "very rich." Takeover speculation has fueled the sharp uptick in the stock and options in recent weeks, but players now see the buying overdone.

Telik shares (Nasdaq: TELK) managed a gain Monday of 8 cents, or 0.48%, to $16.77. But in options, there was a sharp pullback, particularly in the $17.50 and $20 calls. The $17.50 calls fell 65 cents on the day to $2.85 while the $20 calls, which saw the most volume at 2,796, dropped 50 cents to $3.60.

But the most notable movement in the option, one trader said, was the $30 calls, which fell back 20 cents to 85 cents on volume of 2,309.

"These options have got very, very, very expensive," said one options specialist. "Even after today I'd say they are very rich. I don't know who in their right mind was willing to bet the stock is going to $30."

Telik, a Palo Alto, Calif., biotech focused on cancer drugs, may indeed be a prime takeover candidate, another options specialists said, but "even with a drug in phase 3 development, it doesn't have a Big Pharma partner as of yet."

The company's most advanced drug candidate, Telcyta, is a tumor-activated small molecule product candidate in four phase 3 registration trials in advanced ovarian and non-small cell lung cancer.

Caremark suddenly in trio

In a surprise move Monday, Express Scripts Inc. threw in an offer for Caremark valued at $26 billion - $29.25 in cash plus 0.426 share of Express Scripts - challenging a previous deal Caremark inked with CVS Corp. In the CVS deal announced in early November, then valued at $21.2 billion, Caremark agreed to accept 1.67 shares of CVS for each share of Caremark.

"It just got interesting," one stock trader said.

On the news, Caremark shares (NYSE: CMX) gained $5.28, or 10.5%, to $55.58.

Express Scripts shares (Nasdaq: ESRX) added $1.31, or 1.91%, to $69.97.

CVS shares (NYSE: CVS) dropped 51 cents, or 1.67%, to $30.01.

Based on the Express Scripts closing stock price Friday, the offer has an equivalent value of $58.50 per Caremark share. If the deal goes through, Maryland Heights, Mo.-based Express Scripts would emerge as the largest pharmacy benefit manager in the United States.

Nashville-based a pharmacy-benefits manager Caremark said it plans to review the Express Scripts offer but said it "continues to be bound by the terms" of its merger agreement with Woonsocket, R.I.-based CVS, the second-largest domestic drugstore chain.

In addition to topping the CVS bid, Express scripts said its merger with Caremark would generate annual synergies of $500 million, versus CVS' estimate of $40 million in synergies from a merger with Caremark.

Medco may go into play

The Express Scripts situation also pushed other pharmacy benefit managers, such as Franklin Lakes, N.J.-based Medco Health Solutions, Inc. higher on Monday, as traders said the speculation was that chances were greater for Medco to go into play than CVS to match a richer bid for Caremark.

"Trust me, if they keep the [Caremark] price below $50, majority shareholders (90% owned by institutions) will not approve the deal. CMX earning grew almost 25% from last year. CMX should be $55 stock without the CVS merger, and The Street knows that," said one trader.

"If CVS wants CMX there's two ways to go about it: 1) If they want to stick with 1.67 offer, then CVS has to explain why this merger is so great and push CVS to $33, which will move CMX to $55; or, 2) add more premium - instead of 1.67 use 2.2 of CVS shares, which will most likely bring CVS down to the $25-$26 range, and put CMX at $55. I already spoke with two large funds, and both had similar comments. This merger is an excellent deal for CVS. Wal-Mart and others can hurt CVS, but they cannot touch the PBM [pharmacy benefits manager] businesses (CMX, ESRX and MHS)."

Medco shares (NYSE: MHS) zoomed on the Caremark development Monday, gaining $1.09, or 2.09%, to $53.15.

"It would stand to reason that Medco would be the next target," said one options trader, who added that the options activity in Medco suggested the majority of speculators would be looking for a $55 price tag for a Medco deal.

But, traders said hope appeared slim for CVS raising its bid.

"This was for CVS long term survival. Long-term, it would make sense for CVS to acquire ESRX on the same basis as CMX. What a behemoth! ESRX and CMX both have tremendous earnings power."

Delphi shares short-changed

In Delphi's preliminary bankruptcy reorganization plan that came to light Monday, existing equity holders will get a distribution of new shares and a rights offering for more, but traders said the payout doesn't support where the stock had been trading ,so it pulled back sharply. Yet, there were buyers, which traders attributed largely to buy-ins and Delphi bondholders covering short positions.

Delphi shares (Pink Sheets: DPHIQ) fell 63 cents on the day, or 19.09%, to $2.67 with nearly 49.5 million shares traded. On Friday the stock settled at $3.30, close to surpassing the 52-week high of $3.39 that goes back to the days just following the Troy, Mich., auto parts supplier's bankruptcy filing on Oct. 8, 2005.

"It looks like they [Delphi stockholders] are getting up to 60 million shares but there is over 500 million outstanding, so that's not much," a stock trader said, saying it appeared that the plan puts a current value on the stock of about $2 per share.

Under the preliminary plan filed by Delphi, current stockholders would receive $135 million of common stock, or 3 million out of a total of 135.3 million shares, in the reorganized Delphi, at a deemed value of $45 per share, and rights to purchase another 57 million shares of reorganized Delphi stock for $2 billion, at a deemed exercise price of $35 per share.

Delphi said backers of its plan - Appaloosa Management, Cerberus Capital Management, and Harbinger Capital Partners Master Fund I, as well as banks Merrill Lynch and UBS Securities - have committed to invest up to $3.4 billion in preferred and common equity - $1.2 billion of convertible preferred stock and about $200 million of common stock, plus any unsubscribed shares in connection with the estimated $2 billion rights offering.

There is a bankruptcy court hearing set for Jan. 5 to consider approval of the plan investment agreement, the plan support agreement and a debtor-in-possession refinancing. Objections are to be filed by Jan. 2.

Northwest, Delta off in tandem

Northwest Airlines shares pulled back sharply after the Delphi plan details emerged, following a succession of gains that last week had pushed the stock to three consecutive new 52-week highs.

"This [Northwest shares] had just got way ahead of itself," said a stock trader. "It has been sheer lunacy driving this. There could very well be an equity distribution, the Delphi situation proved that could happen, but it also proved that the market has over-shot the mark."

Northwest shares (Pink Sheets: NWACQ) fell 97 cents on the day, or 20.68%, to settle at $3.72, after having run-up last week to a new high of $6.55.

The stock has been on tear alongside Delta ever since US Airways' bid for Delta emerged last month, then it heated up when Northwest asked for bankruptcy court approval last week to hire Evercore Group LLC to actively seek a deal - either with Northwest as the acquirer or acquired.

Airline mergers, while generally described as a good thing for the industry, have come under fire as a panacea for the financial woes of the big carriers, however, and traders said that sentiment "has certainly taken the wind out of their sails."

Delta plan filing seen this week

Delta shares fell back, as well, but to a lesser extent as the markets expect the Atlanta-based carrier will file its stand-alone reorganization plan - designed to prove an exit plan without a merger as proposed by US Airways - as early as Tuesday.

Delta shares (Pink Sheets: DALRQ) lost 11 cents on the day, or 6.96%, to close at $1.47.

"This is more of a long-shot," said the afore-mentioned stock trader. "The stock could very well be worthless in the case of Delta, and you see that in the price."

No mention of an equity distribution to existing stockholders has been made with regard to Delta, he noted. Delta has said it will file a stand-alone plan by the end of the year. The company has made presentations to bankers and creditors, as has US Airways, and market sources have said that there is support on both sides of the argument.

US Airways has offered $8 billion, including $4 billion in cash and the remainder in US Airways shares, which also have run up since the bid was made. On Monday, US Airways shares dropped 70 cents, or 1.24%, to $55.80, pegging the Delta offer at $8.4 billion. The stock has traded as high as $62.50 since the Delta merger proposal aired, pushing the Delta deal to $8.7 billion. US Airways stock was about at $51 at the time of the hostile bid in mid-November.

"The [news] reports say that Delta will value the company at $10 billion to $12 billion, and that the market expects US Airways to sweeten its offer," the trader said. "I think most people are taking a skeptical view and waiting to see what their plan says."

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