Citigroup, Credit Suisse weaker; New Plan Excel gains; Time Warner Cable, Cablevision up; TXU off

By Ronda Fears

Memphis, Feb. 28 - While several subprime lenders were rebounding somewhat Wednesday from the deep gashes cut the day before when the broader market collapsed, traders noted most of the investment banks with a lot of exposure to the industry were still getting taken down.

Traders remained very skeptical of a bottom in the subprime lending group, as well as the exposure risk to several of the investment banks, but some said the market selloff created some buying opportunity in regional banks and thrifts.

The big focus, however, remained subprime lenders, and to that end one trader watching the Ameriquest Mortgage Co. situation said the banks with the biggest exposure there, particularly Credit Suisse Group, continued to see downward pressure. In addition to "serious" bankruptcy risk in the private company, he said Ameriquest is on the auction block and Citigroup Inc., rumored to be interested in buying the Orange, Calif., mortgage company, was lower Wednesday, too.

On a broader scale, however, the relief Tuesday for players in short positions was short-lived and they hustled to cover shorts when the bulls were unleashed on the markets Wednesday. Traders have remarked for weeks now that players in short positions were getting extremely frustrated with the markets persistent ebullience, with the Dow Jones Industrial Average hitting a string of new highs before Tuesday's big slide.

"The shorts will not get their due," said John Heppe, head of equity sales and trading at Cohen & Co.

"People were looking for a reason to sell and they got it yesterday [Wednesday]. Everyone was happy to make a little loot. There was a lot of short covering today. The market doesn't need to spike, but the next direction is up. The economy is still looking good.

"You have to remember that it's election year. The market never makes a big correction in an election year. As for the Chinese influence, that was way, way overblown."

Outside of the widespread rebound Wednesday, which also lifted the power sector on buyout speculation except for TXU Corp., news flow was beginning to slow in terms of deal announcements. TXU continued to flag on angst about regulatory approvals in the wake of the record $45 billion buyout announced Monday despite the buyers trying to assuage investors in a call Wednesday.

The only notable deal on the tape was Australia's Centro Properties Group agreeing to buy New Plan Excel Realty Trust Inc. for $6.2 billion in cash, or $33.15 per share, in cash to advance its push into the United States real estate market. New Plan Realty shares went slightly past the takeover price, which one trader said exhibited hope that a rival bid might emerge.

Cable names were mostly higher as well, including Time Warner Cable Inc., which many onlookers expect will be on the hunt to buy cable assets this year. The company forecast Wednesday that its revenues and pretax income would be roughly 30% higher in 2007. Charter Communications Inc. is seen as a prime candidate for a Time Warner Cable asset purchase.

Cablevision Corp. was better Wednesday, too, on speculation that its controlling owners, the Dolan family, could in fact boost their previous offer to take the company private - which in January was declared a best and final offer at $30 per share, or $8.9 billion. That offer could be raised to $33 per share based on the company's 2006 numbers and 2007 projections.

Mortgage buyout buzz a boost

Buyout chatter was attributed to much of the rebound in several subprime mortgage lenders, such as New Century Financial Corp. and Novastar Financial Inc., but several traders were as skeptical of a nice premium in the sector as they are of calling a bottom.

"I would be running away from this sector as fast as I could," one trader said.

"It seems we are seeing some short covering on speculation that there could be some massive buyout thesis under way. I think there will be a lot of these independent subprime lenders getting bought, but certainly not at a big premium, in fact probably at a huge loss from where most people bought."

New Century (NYSE: NEW) regained 35 cents, or 2.33%, to close Wednesday at $15.43 while Novastar added back 17 cents, or 2.18%, to end at $7.98.

Meanwhile further losses were seen at Fremont General Corp., one of the largest U.S. mortgage lenders for people with poor credit histories, after it said Tuesday that it will delay releasing fourth-quarter results, and not file its 2006 annual report by the March 1 deadline.

Fremont shares (NYSE: FMT), which have lost more than 50% in the past year, fell another $2.84, or 24.38%, to $8.81 on Wednesday, extending an 18% slide the day before on widespread speculation that Fremont might be on the verge of bankruptcy.

Citigroup pals with Ameriquest

A rumor of an impending bankruptcy at Ameriquest, one of the largest subprime mortgage lenders, put extreme pressure Tuesday on the sector as well as banks with exposure to the company, identified by traders as Credit Suisse and JPMorgan Chase & Co., and there was more pressure Wednesday on Credit Suisse but JPMorgan was recovering a tad.

In addition, market chatter that Ameriquest parent ACC Capital Holdings Inc. was in advanced negotiations with a potential partner, widely speculated to be Citigroup, put pressure on the latter's stock. Citigroup shares (NYSE: C) were off Wednesday by 23 cents to $50.37.

ACC Capital announced Wednesday that it has secured additional working capital from Citigroup and ACC's majority shareholder "to strengthen its financial position as the company repositions to adapt to the current market environment." Citigroup also has agreed to become ACC's primary warehouse lender.

As part of the deal, Citigroup also has an option, in the form of a conditional purchase agreement, to acquire ACC's wholesale mortgage origination and mortgage servicing platforms, subject to certain requirements such as achieving business milestones and satisfaction of regulatory filings and approvals.

Meanwhile, Credit Suisse (NYSE: CS) lost another 57 cents, or 0.92%, to close Wednesday at $69.26 after plunging 5% the day before. But JPMorgan (NYSE: JPM) added back 17 cents to $49.39 following a loss of 3% on Tuesday.

Compounding the matter for investment banks, a Merrill Lynch & Co. analyst downgraded virtually all stocks in the entire group on Wednesday, one trader noted. Merrill shares (NYSE: MER) added 25 cents on Wednesday to close at $83.68.

Onlookers say investment banks have so far led the charge in snapping up mortgage lenders, but there is growing interest in the sector by private equity and hedge funds on the idea of turning them around and reselling them at a higher price when the market turns.

Centro takes on New Plan

Centro Properties Group's deal to buy New Plan for $33.15 per share - a 13% premium to Tuesday's market - was a doubled-edged sword, as one trader put it, because of the tax issues involved. But New Plan shares went slightly past the takeover price, which he attributed to hopes that a rival bid would come.

Another kink, the trader said, is questions surrounding the transaction as it relates to Galileo Shopping Group, a joint venture partner with New Plan going back to 2005. He said Galileo has intimated that the acquisition would trigger certain rights under the joint venture management agreements with New Plan.

New Plan Excel shares (NYSE: NXL) advanced $4.05 on the day, or 13.8%, to close at $33.39 after trading in a band of $33.31 to $33.88. The trader said the tax issues involved, along with some level of concern that another bid would not be forthcoming, kept the stock trading in a narrow range.

Centro shares (Australia: CNP) ended unchanged at A$9.83 after trading in a band of A$9.73 to A$9.97.

The purchase marks Centro's third U.S. purchase after buying Kramont Realty Trust and Heritage Realty last year. The transaction is valued at $6.2 billion including debt.

"The market believes another suitor could emerge," the trader said.

"I am not looking very kind at a cash deal" because of tax issues, he added. "My thinking is you have to do something with the proceeds. Getting into Centro Properties Group might be a good choice but doing due diligence on foreign stocks is not easy. Personally, I think they are a sharp, acquisition oriented company worth looking into."

TXU players still jittery

The private equity group seeking to take giant Texas electric utility TXU private pledged Wednesday to stick by the terms of the planned takeover at $69.25 per share, including cutting electricity rates by 10%, but it failed to encourage players in the stock.

TXU shares (NYSE: TXU) dropped 40 cents to $66.19 in the session and was seen in after-hours action lower to $66.

"There is a lot of headline risk and the sort," said one risk arbitrage trader. He said there was heavy selling in April contracts for $70 calls and buying in April contracts for $55 puts to limit risk in the play.

"Utility deals just make you more nervous than any other type of deal."

Texas Energy Future Holdings LP, the holding company formed by Kohlberg Kravis Roberts & Co., Texas Pacific Group and other investors, to acquire TXU, issued a press release Wednesday to address concerns in the market, which sent the stock lower by 1.32% on Tuesday.

The buyers said they have made firm commitments about price cuts, the length of time it will hold its interest in the company, the impact of the consummation of the transaction on rates and debt levels and continuing a dialogue with regulators.

"As a result of this merger, the newly privatized TXU has committed to deliver price cuts and price protection benefits to electric customers, strengthen environmental policies and make significant investments in alternative energy, conservation and efficiency measures to ensure the reliability and sustainability of the Texas power supply."

The group also reiterated a commitment to own TXU for at least five years.

The statement was issued after Texas regulators and legislators questioned whether the proposed $45 billion takeover would serve the best interests of consumers.

Dynegy leads power group up

But power generators and utilities with power capacity to burn, so to speak, were rebounding from the previous day's losses as players saw the declines mostly as a buying opportunity in the face of remaining optimistic that they are prime takeover targets.

Dynegy Inc., Reliant Energy Inc., NRG Energy Inc. and Calpine Corp. were all higher Wednesday and traders said there was heavy buying interest on the weakness seen Tuesday when the broader markets took a dive. The biggest gain Wednesday was by Dynegy (NYSE: DYN), moving up 22 cents, or 2.75%, to $8.22.

Perpetuating the thesis that power is prime for takeovers right now, as many onlookers suggest, one trader noted that two private equity firms who own power plants in the Northeast announced a $5 billion merger Wednesday that would create a company with enough power generation to serve 20% of the electricity load in New York City and 50% of the load in the Boston metropolitan area.

Astoria Generating Holdings LLC and EBG Holdings LLC will combine to form US Power Generating Co., which will own and operate eight power plants with a capacity of more than 5,000 megawatts. The plants will sell power to the New York Independent System Operator and Independent System Operator-New England electricity markets.

Chicago-based private equity firm Madison Dearborn Partners LLC owns a majority interest in Astoria Generating, created from the purchase of power plants from Reliant Energy in February 2006. EBG is majority-owned by New York-based K Road Power, a company created by former executives of Sithe Energies Inc. to invest in independent power generating facilities.

Charter players cover shorts

St. Louis-based cable operator Charter posted a wider quarterly loss Wednesday, further alienating some traders although they acknowledged considerable short covering in the stock based on thinking that the company is poised to turn out better results and might engage in future asset sales.

Charter (Nasdaq: CHTR) ended off by a penny at $3.01 but traded as low as $2.92 before short covering propped it up, according to one trader. The stock traded as high as $3.14 in the session with 18 million shares changing hands versus the norm of 12.5 million shares.

"More debt and they keep losing subscribers," said one trader who admitted he is not a big fan of Charter.

"Management keeps giving the old story of blaming the programming costs but I don't see DirecTV or EchoStar giving these excuses every time. Cable has dominated the industry for many decades and why do they blame most of their costs for obtaining new and existing customers? Because those customers switched to a competitor for better TV service, customer service and lower rates. This company lost $4.4 million per day last quarter."

The upshot of his take on Charter: "You can find a better stock to invest in under $3 with a better balance sheet."

Another trader, who said he was content to "buy a little" Charter on the dip, sees encouraging signs of the company's turnaround.

"Fifty cents of Charter's loss was due to build-out costs that should end in the next year to year and a half," he said. "This company is heading for a complete turnaround and the telcos can't keep up. They also gave much better forward looking guidance this time. The Street should be impressed in the long run."

Charter posted a fourth-quarter net loss of $396 million, or $1.08 per share, compared with a loss of $336 million, or $1.06 per share, a year earlier. Revenue rose 9.8% to $1.4 billion, while costs and expenses climbed 10.8% to $910 million.

Charter said it boosted spending on advertising and other efforts to sign up new customers and retain existing ones in the quarter. Higher programming expenses also contributed to results, it said.

Adjusted for acquisitions and asset sales, revenue rose 11.7%, the company said. On a pro forma basis, video revenue rose 4% to $829 million, while broadband revenue jumped 23% to $278 million and telephone revenue more than tripled to $49 million.

Long-term debt, always a key concern for Charter investors, stood at $19.1 billion at year-end 2006.

Time Warner Cable rises

Time Warner Cable garnered lots of interest, however, on Wednesday with its projections for 2007. The company said it expects revenue and operating income before depreciation and amortization profit growth in the mid-to-high 30% range this year.

The company, resulting from the purchase of bankrupt Adelphia Communications Corp. assets last year by media conglomerate Time Warner Inc. and big cable company Comcast Corp. for $17 billion, said the increases would be from a base of $11.8 billion in revenue in 2006.

Time Warner Cable shares (Pink Sheets: TWAC) gained 95 cents on the day, or 2.51%, to close at $38.76. When the stock began trading on a when-issued basis in early January, it started at $43 and has since come sharply off that. The stock is still expected to begin trading on the New York Stock Exchange as early as March 1 under the ticker symbol "TWC."

The company also is one many onlookers expect will be looking to bolster its operations with acquisitions of cable assets, and those of Charter are seen as the best fit.

Cablevision players hopeful

Following Cablevision's results, which showed a larger-than-expected net loss, traders said there was considerable buying on the weakness but also renewed hope that the controlling Dolan family would consider another, higher bid to take the company private soon.

One trader's snapshot of the view after Cablevision's results was, "Don't give up, yet."

Cablevision (NYSE: CVC) rose 92 cents on Wednesday, or 3.22%, to close at $29.46.

In January, Cablevision's board rejected a $30 per share bid from controlling holders Charles and James Dolan to take the company private, which they had described as their best and final offer. Yet, there has been considerable speculation that the ongoing merger and acquisition frenzy in the markets could make Cablevision a private equity or hedge fund target.

Following Cablevision's results, Pali Capital analyst Richard Greenfield said that estimated 2007 and 2008 free cash flow may have been short and he now believes the company could pay $14 per share in special dividends between now and year-end 2008, while maintaining leverage around 6 times. Previously, he pegged the dividend estimate at $12.

Cablevision shares fell 1.9% on Tuesday after the company reported results and forecast 2007 basic subscribers growth of 1% to 2% - a reduction from its projection last year for growth of 2% to 2.5%.

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