Andrew adds; Guitar gains; eFunds, Chittenden higher; Trump falls; Impac crashes

By Ronda Fears

Memphis, June 27 - A handful of deals totaling $8.4 billion on the tape pushed Andrew Corp., Guitar Center Inc., Chittenden Corp. and eFunds Corp. higher, but reports of troubled buyout talks for Trump Entertainment Resorts Inc. led many to walk away from the story.

On a broader scale, one trader said there are several special situations players cashing out of certain "shaky" names, but he said the overall tone in the strategy "is still very positive." The broader markets rebounded Wednesday ahead of the Federal Reserve's interest rate decision, which he said gave many speculators reason to "breathe a sigh of relief."

But another trader said there still is a great deal of angst about interest rates and widening credit spreads, as those could affect the pace of buyouts; he said many players with short positions also are still feeling "a little pain" and believe there will be further "capitulation down the pike." Moreover, he said there continues to be concern about the subprime mortgage fallout, noting mortgage applications slipped 3.9% last week.

Still, the first trader said there was huge buying opportunity in "the right names" within the mortgage group. His favorite was Impac Mortgage Holdings Inc., which took a big hit Wednesday after saying it would not pay a common share dividend for second quarter. The company also said that its loss levels were more than expected in relation to auctioning its real estate owned portfolio but that ultimately it would mitigate losses and preserve capital over the long run.

Another finance name, Puerto Rico-based bank W Holding Co. Inc. continued to bleed after announcing Tuesday that one of its larger asset-based loans is impaired, with an estimated collateral deficiency of at least $80 million. The bank hasn't yet determined its ultimate financial impact. The stock (NYSE: WHI) lost 34 cents, or 10.9%, to close at $2.78, following at 37.3% plunge the day before.

Logistics and power products supplier Universal Power Group Inc. was traded up Wednesday but closed unchanged after saying its board met on June 18 with David Bullock, managing director of 3V Capital Management LLC, it second-largest shareholder, to discuss several recommendations and had offered him a board seat. Bullock has declined saying it was unnecessary, but he is bullish on the stock.

"We were very pleased with the receptivity of the board to all of our recommendations which ranged from personnel matters to capital structure issues. We were also impressed with the board's depth and grasp of the business issues and, consequently, did not feel it necessary to join the board in order to have our concerns addressed at this time though we did reserve the right to revisit the board seat issue if and when circumstances change," Bullock said.

"The company is trading at less than half the multiple of the low end of the valuation comp range yet has better prospects and higher growth." Universal Power shares (Amex: UPG) closed Wednesday unchanged at $4.55 after trading in a band of $4.39 to $4.70.

In another positive move, Netflix Inc. surged Wednesday after Blockbuster Inc. said it had settled a patent dispute between the two movie rental companies. Netflix sued Blockbuster in April 2006, accusing Blockbuster of copying its methods for online home video rental orders. Although terms of the settlement were not released, one trader said it might make Netflix a more appealing takeover target. Blockbuster (NYSE: BBI) lost 2 cents to $4.20. Netflix (Nasdaq: NFLX) rose $1.26, or 6.45%, to $20.78.

Trump players walk away

Trump has seesawed over the past week as reports pegged a buyout deal close, and now with new reports that the talks are in dire trouble, traders said many players are simply "walking away from the table."

The stock (Nasdaq: TRMP) slumped to a fresh 52-week low Wednesday of $12.60, marking a loss of $1.27 on the day, or 9.16%. It traded in a band of $11.58 to $13.49 on volume of 6.36 million shares versus the norm of 854,178 shares.

"I'd say from what I saw today all bets are off," said one trader.

"There are a few holding out for something, but a lot of guys were just walking away from the table."

Another trader agreed with that characterization, but added, "Most of them made some money on the situation. The stock had a pretty good run in first quarter when a lot of the speculation was swirling around and then they made their announcement around March and, basically, it's tanked ever since.

"There's been some money made, but at this point a lot of them were cutting their losses in case a deal doesn't happen," the second trader continued. "If Trump doesn't get a deal, the concern is that they will be looking at another bankruptcy."

Of course, the snag in talks is price. Trump is in talks with a group led by former Atlantic City casino executive Dennis Gomes and real estate developer Morris Bailey's JEMB Realty.

One trader said he has heard Trump was asking something like $22.50 and there had been widespread speculation of an $18 price tag, which he thought both sounded "way too high." According to a report in The Philadelphia Inquirer, the Gomes-led group has offered more than $11 per share, but Morgan Stanley, which had a 17.85% stake in Trump at March 31, wants something north of $17 per share.

Another setback came when the New Jersey Casino Control Commission last week imposed conditions on five-year license renewals for the Trump Plaza Hotel and Casino, Trump Marina Hotel Casino and Trump Taj Mahal Casino Resort that require the company to submit monthly financial reports comparing its financial projections with actual performance. It also said the company had to notify the commission of any new refinancing of its $1.4 billion in debt.

If the casinos are sold, the licenses would remain in effect, but the new owners would have to qualify as casino operators.

Earlier this month, Trump chief executive James Perry's retirement was announced, effective July 1, which sparked rumors that he was forced out because he opposed a sale to the Gomes group.

Impac a buy on sell-off

In addition to nixing its dividend, Impac Mortgage said that as a result of its previously disclosed strategy to accelerate the liquidation of its real estate portfolio, it is experiencing higher-than-expected loss levels, but the company believes that will reduce losses and preserve capital over the long run.

Impac did not say if or when it might reinstate the quarterly dividend, but the stock (NYSE: IMH) plunged by $1.27, or 21.67%, to $4.59 after trading as low as $4.43 and as high as $5.26.

One trader said he saw the sell-off as a big buying opportunity and suggested several agreed given the wide band the stock traded in Wednesday. He also noted heavy volume of 5.5 million shares compared with the norm of 1.15 million shares.

"IMH is really oversold and presents a rare buying opportunity," he said.

Largely, he said his bullish position comes from remarks by Impac chief executive Joseph R. Tomkinson on May 10 when the company bought the retail and wholesale lending platform of prime and Alt-A residential mortgage lender Pinnacle Financial Corp. At that time, Impac described the transaction, which created a new subsidiary, as a means for it to diversify its Alt-A and wholesale lending franchise.

This trader recalled Tomkinson remarking that Impac expects to reduce loan volume compared to 2006, but that current market conditions created other opportunities. Specifically, he liked that the CEO said, "To take advantage of what we believe will be attractive returns in the distressed loan market, we have also invested in an asset management group that will purchase and liquidate distressed assets."

"I see them diversifying and taking advantage of what's going on in the market," the trader said.

A buysider said he is holding - not selling or buying - Wednesday but, however, has some concerns.

"The way I see it, we are in the neutral zone. Inflation is still the primary risk. The slowdown in the economy is enough to be noticed and watched, but is nowhere near enough to cause the Fed to take any action to lower rates," he said.

"I think the Fed will still raise rates before year-end, but not probably this week. The increase in the 10-year bond is actually helping to slow down the economy so that the short-term rate doesn't need to be changed - yet."

He expects mortgage data will start showing that prepayments are dropping so portfolios will be steady, but originations will be close to flat, and with submissions down, approval rates will probably improve. And, he expects there will continue to be a move to refinance adjustable-rate mortgages to fixed rates; thus, refinancings will stay strong. The housing market is flattening, as he sees it, with prices dropping in some of the more high-end markets.

"Some recent data indicate [house] prices are stabilizing, and the huge inventory of homes working its way through. I expect long-term rates to creep up to 7% by year-end. Most areas of the country are doing OK. The sky-high boom areas for the last few years are going to continue to be hammered for several more months," the buysider said.

"I am seriously concerned with the new [subsidiary via Pinnacle] that was set up for disposing of foreclosed and impaired mortgages. It seems to me that IMH could unload anything from their own portfolio at any price they wanted, blend them with any other foreclosed and impaired acquisitions, and average out losses from their own portfolio with gains from the acquisitions. If they show a profit, who is going to look too closely? We won't discover what they are doing until mid-August, at best."

CommScope, Andrew rise

Traders liked both sides of Andrew being bought by CommScope Inc. for $2.6 billion, or the equivalent of $15 per share - a 15.6% premium to Tuesday's close - in a stock-and-cash transaction, but they were factoring in some risk as the final pay out details are not yet defined.

Andrew (Nasdaq: ANDW) gained $1.42, or 10.94%, to close at $14.40.

CommScope (NYSE: CTV) added 71 cents, or 1.29%, to end at $55.87, but the above trader said there was some sell-off in that name as many players took profits.

"We just don't know the exact numbers, so no one wanted to put it up to $15," the trader said.

Communications equipment firm Andrew is being bought by CommScope for "at least 90% in cash," as the companies put it, but the exact amount of stock involved in the deal has yet to be specified.

The two companies said their union would create a global leader in infrastructure solutions for communications networks. Based on their respective results for 2006, on a pro forma basis, the combined companies would have had pro forma sales $3.8 billion - 35% in wireless antenna and cable products, 29% in carrier and network solutions, 21% in enterprise products and 15% in broadband/cable television.

The combined company expects to generate substantial annual pretax cost savings, excluding one-time transition items, of about $90 million to $100 million in the second full year after completion of the transaction, of which some $50 million to $60 million are expected in the first full year after completion.

Andrews makes cable equipment and software to locate wireless E-911 calls, among other things. CommScope provides infrastructure solutions for communications networks worldwide, including cables and for wireless and other broadband applications.

Guitar plays to deaf ear

Guitar Center's buyout by private equity firm Bain Capital Partners LLC for about $2.1 billion, including assumed debt, or $63 per share - a 26% premium to Tuesday's market - seemed nice on the face of it, but traders at several shops said many players were disappointed. One went so far as to say the "deal is a dog."

The stock (Nasdaq: GTRC) was held well below the buyout price, closing at $59.98 for a gain of $9.92, or 19.82% on the day. It only traded as high as $60.35.

"Some guys think the deal was a big disappointment," another trader said.

"I guess it depends on where you are in the trade."

In late May there were speculations in the market that the company was exploring a possible sale and had hired an investment bank to explore strategic alternatives. Since then, the above trader said the stock had run up from about $47.

The transaction is expected to close in the fourth quarter, the company said.

Goldman Sachs was financial adviser to the company on the deal.

Chittenden climbs on deal

Chittenden climbed on its $1.9 billion buyout, in cash and stock, for an equivalent of $37 per share - a 31% premium to Tuesday's close - by People's United Financial Inc., but the latter slipped on the event. People's said it will pay 55% of the purchase price, or roughly $1 billion, in cash.

"The thinking was that People's was forking up too much cash," one trader said.

Chittenden (NYSE: CHZ) gained $6.91, or 24.47%, to $35.15.

People's (Nasdaq: PBCT) slipped 54 cents, or 2.89%, to $18.17.

Chittenden shareholders will receive $20.35 plus 0.8775 times the average closing price of People's stock in the five days prior to closing.

The transaction is expected to close in the first quarter of 2008 and add immediately to earnings. People's said it expects a 13% internal rate of return, which it noted is higher than its cost of capital.

eFunds snags Fidelity deal

Electronic payments processor eFunds' buyout by Fidelity National Information Services Inc., for $1.8 billion in cash, or $36.50 per share - a 5.5% premium to Tuesday's market - was another deal finding applause on both ends of the transaction.

Fiserv Inc., which had been rumored to be in the running for eFunds, also was higher, and one trader said it is now considered to be a takeover target.

eFunds (NYSE: EFD) gained 73 cents, or 2.11%, to $35.33. The stock has surged 24% since May 9 when eFunds disclosed unidentified parties "expressed a desire to explore possible strategic alternatives" and it was seeking advice from Goldman Sachs Group Inc. and BlackRock Inc. on the matter.

A trader told Prospect News in early June that there were rumors that there were at least four bidders in the wings, two of which were Fidelity National and Fiserv, each said to have bid north of $1.5 billion.

Fidelity National (NYSE: FIS) gained $1.31, or 2.47%, to $54.41 on the news Wednesday.

Fiserv (Nasdaq: FISV) added 32 cents, or 0.56%, to $57.19.

The trader above said Fiserv is now considered to be a takeover target, perhaps of online brokerages TD Ameritrade Holding Corp. or E*Trade Financial Corp., which also have been mentioned in the rumor mill as potential takeover targets or likely candidates for a merger.

Fidelity National and eFunds said their deal, which is expected to close by the end of September, will help trim $65 million from the combined company's annual costs.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.