Harley higher; Openwave dives; Crocs rocks; Kraft slides; Delphi firms; China Security interest up

By Ronda Fears

Memphis, June 22 - Motorcycle icon Harley-Davidson Inc. was driven up sharply Friday as speculation of the American symbol synonymous with freedom and individualism - and, yes, sometimes a rebel-without-a-cause attitude - as a takeover target gained traction. A surge in options activity largely spurred the stock's spike, traders said, further suggesting a strong belief in Harley as a buyout story.

A trader told Prospect News earlier in the week that there was speculation of a Harley merger with Italian motorcycle maker Ducati Motor Holdings SpA, which he gave strong credence to, but he said there was chatter Friday that Japanese motorcycle maker Honda was looking at a linkup with Harley, which he panned as a "nightmare venture if they tried it."

Unum Group also might be getting looked over as a takeover target, according to one trader who noted that such speculation has been swirling around the accident and health insurance firm since last fall. But, he said there have been comments recently from rival MetLife Inc. executives that revived the story.

On a broader scale, traders said short positions remain very high but there was some relief this week. And, while the sell-off in Treasuries coupled with expectations of rising interest rates caused some concern about the takeover frenzy cooling off, the Blackstone Group LP's sizzling initial public offering and rumors of plans by Kohlberg Kravis Roberts & Co. to follow suit gave rise to renewed optimism that "the takeover train is still running fast and hard," as one trader put it.

"The more the merrier is the catchphrase when it comes to PE raising money," this trader continued. "If they can raise money, that is good for us."

Crocs Inc., maker of the faddish casual shoewear by the same name, also was seeing another surge of buying on speculation that it could catch a takeover bid now that its 2-for-1 stock split has taken place. One trader noted consolidation in the footwear industry, with Finish Line Inc.'s acquisition of Genesco Inc. on June 18, makes Crocs a prime target because "it has very strong fundamentals." The stock (Nasdaq: CROX) traded up to $47.23 before easing back to close at $46.91 for a gain of 99 cents, or 2.16% with 8.97 million shares traded versus a norm of 5.66 million shares.

Investors were jumping out of Openwave Systems Inc., however, on thinking that Harbinger Capital Partners will be exiting the story now that its tender offer to capture a roughly 49% stake in the internet software firm has failed - it expired Thursday - and the company is proceeding with a stand-alone turnaround plan. "Everyone is scared Harbinger will dump Openwave now, so they wanted to get ahead of that," remarked an equity trader on the West Coast.

Sentiment that Openwave might have other bidders on the hook, namely Sybase Inc., Oracle Corp., International Business Machines Corp., Hewlett-Packard Co. and Siemens AG, has "totally dissipated," the trader said. Openwave shares (Nasdaq: OPWV) on Friday fell 35 cents, or 4.99%, to $6.66 but traded in a band of $6.47 to $6.80 on heavy volume of 3.52 million shares.

Kraft Foods Inc. pulled back on Friday from a big surge the day before on reports that activist investor Nelson Peltz had been buying stock to gain a position and press for changes as faith in that effort's success waned.

Elsewhere of note, Time Warner Cable Inc. took a hit after defunct Adelphia Communications Corp. said its has completed the so-called "True-Up" mechanism under its bankruptcy reorganization plan that will release some 23 million more shares of Time Warner Cable with a recalculated value of $37.8038. When the stock was initially distributed Feb. 13, a value of $34.63 per share was used, but the stock has since run as high as $44. Time Warner Cable shares (NYSE: TWC) eased Friday by 22 cents, or 0.56%, to $39.40.

In another bankruptcy story, Interstate Bakeries Corp. saw a surge of buying that one observer attributed to three straight months of positive EBITDA from the bankrupt maker of baked bread and sweets, plus zero cash burn. "There's been an excess supply of the stock in the market," he remarked. "Now there's an uptick of interest in the stock on the positive [results]." The stock (Pink Sheets: IBCIQ) shot up by 55 cents, or 23.4%, to $2.90 on volume of 1 million shares. The company has an extension to file its plan of reorganization through Oct. 5 but has said it plans to make the filing by July 1.

Auto parts supplier Delphi Corp. was another bankrupt stock seeing big volume, although little price movement, on inking a tentative agreement and memorandum of understanding with the United Auto Workers union and former parent General Motors Corp. covering site plans, workforce transition as well as other comprehensive transformational issues. Those points are seen as critical to the company forming a plan of reorganization - which is rumored to be backed by private equity firm Highland Capital Management with several possible partners, and from which stockholders largely expect some payout. Delphi (Pink Sheets: DPHIQ) traded up to $2.82 intraday but ended the session unchanged at $2.67 with some 12.6 million shares changing hands versus the norm of 6 million shares.

"There is more recovery for equity players in bankrupt stocks now than ever before in history. We have seen several cases in the past year, big ones like Calpine, for example, and that used to never be the case," said one distressed equities trader.

"Private equity's interest in bankrupt names is at an all-time high, too."

Independent power producer Calpine Corp. filed its reorganization plan mid-week and estimated a $1.80 per share payment to stockholders. That could rise to as much as $3.50 if disputed claims of bondholders are resolved at the low end of the company's estimated range of $20.1 billion to $22.3 billion, onlookers say. Calpine shares (Pink Sheets: CPNLQ) were little changed with a 6-cent gain to $3.39 on Friday but continued to see strong volume with 18.76 million shares traded versus the norm of 8.66 million shares. The stock hit an intraday high of $3.47.

There is a widespread view that Calpine will be a private equity target once it emerges from bankruptcy, which traders said has boosted interest in the stock since the company filed its reorganization plan.

HOG noise boosts stock

Speculation of a Harley linkup with Ducati was first mentioned to Prospect News by a trader Tuesday, but the stock did not really take off until Friday, when this trader said "the buzz finally got filtered through the market."

After roaring up to $63.99, Harley-Davidson shares (NYSE: HOG) settled Friday at $62.84 for an advance of $2.72, or 4.52%. Volume hit 5.77 million shares compared with the norm of 2.11 million shares.

Huge volume in July options also was noted by the trader, pointing out that the $70 call options moved up on heavy volume Friday. He also observed a big price spike in January 2008 $75 and $80 call options with "very decent volume and open interest."

By all appearances, the trader said Harley-Davidson and Ducati appear to be working on or talking about a merger. Ducati chief financial officer Enrico D'Onofrio has been cited in European press outlets as saying Harley-Davidson officials have visited Italy as recently as within the past two months, the trader said.

There also has been speculation regarding a Harley-Davidson linkup with Piaggio, another Italian motorcycle maker, and on Friday the trader said speculation began circulating that private equity firms also might be looking at Harley-Davidson.

A merger with Honda would be a nightmare, however, the trader surmised.

"Harley riders hate Honda riders," he remarked. "I don't think they could pull that off in a million years. I don't even know how someone would give any credibility to that."

Unum catching MetLife's eye?

Unum and MetLife were both off in trade Friday, but a trader said there is renewed interest in Unum as a takeover candidate because of remarks from a MetLife official at a recent conference.

Unum (NYSE: UNM) ended Friday off by 32 cents, or 1.22%, at $25.85.

MetLife (NYSE: MET) lost $1.11, or 1.71%, to close at $63.73.

The trader said a MetLife official said his company could make acquisitions, and Unum might be a target, speaking mid-week at an investors conference.

William J. Wheeler, chief financial officer of MetLife, said the company is interested in buying companies that are active in the same markets as the New York-based insurer, according to the trader.

"Unum has been mentioned before as a possible acquisition target. Last fall there was a flood of activity in the options, and that really stoked takeover speculation," the trader said.

At that time, he said Canadian insurance firm Sun Life Financial Inc. was rumored to be the buyer for Unum. On Friday, Sun Life (NYSE: SLF) added 60 cents, or 1.28%, to end at $47.33.

Kraft rally melts down

As Kraft pulled back Friday from a big surge the day before, Bear Stearns analyst Terry Blevins seemed to agree with a trader Thursday that on the takeover angle investors would do better to wait in the wings.

Kraft (NYSE: KFT) dropped 38 cents, or 1.03%, to close at $36.36, following a 7% advance the day before.

On Thursday, Kraft was a big gainer on a report in the online version of the Wall Street Journal about activist investor Nelson Peltz accumulating a 3% stake with a plan to urge Kraft to sell the Maxwell House coffee and Post cereal brands and possibly push for more share buybacks. Kraft was spun off from Altria Group in March and has a $5 billion stock buyback plan in place.

"Peltz, and possibly other investors, are clearly attracted to Kraft by its underleveraged balance sheet, with debt/EBITDA standing at a low 1.76x as of year-end," Blevins wrote in a research note Friday.

"His plan would appear as an obstacle to CEO Irene Rosenfeld's strategies, which we believe include a major acquisition. We expect further details to emerge. In the meantime, with the shares now trading at almost 21x our $1.76 estimate for this year, we would remain on the sidelines."

China Security rises

China Security & Surveillance Technology Inc. gained after hitting the radar of special situations players on a boosted stake in the company reported Friday by New York hedge fund Clinton Group and the possibility of pursing a going-private effort, according to one trader.

The stock (OTCBB: CSCT) gained 45 cents, or 3.03%, to $15.30 after trading in a wide band of $14.50 to $15.80. But volume was light at 110,235 shares versus the norm of 218,550 shares.

The trader cited a 13D filing Friday in which Clinton disclosed a 5% stake in the Shenzhen, China-based company and a letter to the CEO expressing support of management and excitement about the company's growth prospects, but disappointment in the stock price and a suggestion that if the stock remains depressed the company should look to going private.

"To the extent your stock price continues to fail to reflect a valuation appropriate for the company's growth prospects, we believe that China Security represents an attractive privatization candidate at a valuation well north of $20 per share," Conrad Bringsjord, Clinton Group senior managing director, wrote in a letter to the company.

"We believe that private equity firms are looking to increase exposure in Asia in partnership with companies with strong growth prospects. If after proceeding with all of the measures we have previously outlined and if there is not a significant appreciation in your stock price to levels appropriate for the company's growth prospects, we would be happy to introduce to you several private equity firms to evaluate a management buyout transaction. We would welcome the opportunity to invest in a private equity transaction with you and a selected partner."

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