Mirant boosts power producers; Dow Chemical, Devon higher; Herbalife slides; Affordable up

By Ronda Fears

Memphis, April 9 - Atlanta-based power producer Mirant Corp. said Monday it was considering a possible sale and other moves to boost shareholder value as it wraps up several asset sales over the next few months.

The news bolstered other power names with deal-related developments pending, like TXU Corp., and other power producers like Calpine Corp., NRG Energy Inc., Reliant Energy Inc. and Dynegy Inc.

Even though doubts of the $45 billion takeover of TXU have crept into the market recently, traders said there were a few players adding to their positions Monday. A group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group plans to take over TXU for $69.25 per share. TXU shares are lingering well below that level. One trader said the market is pricing in risk of the deal falling through; he surmised downside of "up to 45%" weighs against an upside of around 10% at the current price. On Monday, the stock (NYSE: TXU) edged up 9 cents to $64.30.

Bankrupt Calpine shares (Pink Sheets: CPNLQ) shot up 4.42%, or 10 cents, to $2.36. Speculation about private equity bids for the company, including the likes of GE Energy Financial Services and AES Corp. with backing from the Carlyle Group, have propelled the stock for weeks. Last month, Calpine got court approval to hire Miller Buckfire and begin the process of trying to find a buyer for the company or sponsor for an equity rights offering. AES (NYSE: AES) gained 59 cents on Monday, or 2.72%, to $22.28.

Revived takeover rumors pushed Dow Chemical Co. higher Monday following a report in a British tabloid that a consortium was preparing a $50 billion bid, or somewhere between $52 and $58 per share, for the company. Renewed remarks from Dow Chemical that the conglomerate has no interest in a buyout and ongoing skepticism from analysts, however, held the stock "in check," as one trader put it. After trading as high at $47.60, the shares (NYSE: DOW) ended higher by $2.16, or 4.86%, at $46.63.

Devon Energy Corp. also spiked higher on comments in an upcoming April 16 edition of Business Week suggesting Exxon Mobil Corp. may be interested in acquiring the independent oil and gas producer in the context of more mergers and acquisitions are thought to be likely in the energy industry. But one trader said there was heavy profit taking in Devon shares amid the speculation with the stock (NYSE: DVN) coming off the day's high of $74.08 - which flirted with the 52-week high of $74.75 - to settle at $72.96 for a gain of $1.07, or 1.49%.

Mortgage lenders were taking another beating Monday as American Home Mortgage Investment Corp. slashed its dividend and 2007 profit forecasts, citing a lack of buyers for its loans as well as rising delinquencies. The stock (NYSE: AHM) came off the day's low of $21 to close at $21.92 for a loss of $3.92, or 15.17%. "This one is probably headed for lot more pressure," said one trader.

Mirant price tag hedged

Mirant shares gained sharply on news it was considering a possible sale, but traders said players were "definitely hedging their bets," given the company's track record with deals. Having a history with trying to arrange a deal - its failed play for NRG Energy last year - meant that there wasn't a lot of surprise attached to the announcement.

The stock (NYSE: MIR) traded up to $45.99 but eased off that to settle at $44.08, an advance of $3.44 on the day, or 8.46%. Some 9.9 million shares traded versus the norm of 2.8 million shares, but one trader also noted heavy buying in April, May and June calls at $40 and $42.50.

"Ideas on a buyout price started pretty optimistic - like I heard $60 tossed around, but that seemed too high. There have been some rich deals, and it [a buyout premium] could be a lot better than 15% [from where it closed last Thursday], but that seems to be where more people are comfortable right now at the end of the day," the trader said.

Still, in a buyout scenario, another trader said he thinks there is an awful lot of risk in a Mirant deal but a buyout premium could be more in the range of $50 per share - a premium of about 22% to Thursday's market or around 13% to Monday's market.

"I'd cap it at $50; that's where I'd be willing to hold," he said. "I think that's about as good as I would say they would do."

The first trader also pointed to the failed NRG Energy deal, which was largely nixed by pressure from Pirate Capital LLC, an activist hedge fund that owns a stake in Mirant, which ironically perhaps has been hounding the company to go on the auction block for nearly a year now, or practically ever since it exited bankruptcy.

This trader said that he was "concerned that the sale of some of Mirant's power plants, while yielding a one-time capital gain, would decrease future earning power and growth, and it is this future earnings growth that is a large part of the stock's price." Thus, he said a lot of players were backing off their expectations of "a high-end buyout premium."

The Atlanta-based power company said that it has made significant progress in implementing the program it announced in July and August 2006 to sell its Philippine business and six U.S. natural gas-fired plants - which are expected to close in second quarter - and its Caribbean business, which is expected to close around mid-year.

A buyout is not the sole aim of the exercise, either, the trader noted. Mirant said it is also considering returning excess cash from sale proceeds to stockholders, or signing a deal with another company, including a possible merger.

"We are commencing this exploration of alternatives in order to provide our stockholders with the greatest possible value," said Mirant chief executive Edward R. Muller in a news release.

J.P. Morgan is Mirant's financial adviser.

Mirant filed bankruptcy in July 2003 and emerged in January. The reorganization plan called for converting more than $6 billion of debt and liabilities into equity, and Mirant planned to issue 300 million shares of common stock to its creditors and existing equity holders.

Last month, the company reported net income of $1.86 billion, or $6.28 per share, for 2006 on revenue of $3.1 billion.

NRG wearing the shoe now?

The shoe may be on the other foot now, in terms of a potential deal between Mirant and NRG, another observer remarked.

"Mirant was looking to buy NRG, but I always thought Mirant was more of a takeover target, and now NRG could very well be one of the bidders," the market source said.

NRG shares have made a huge run since the Mirant fiasco, he noted, so the company could be in a position to be the hunter rather than the hunted.

On Monday, NRG shares (NYSE: NRG) added $2.65, or 3.58%, to $76.63. When Mirant was making a play for Princeton, N.J.-based NRG in mid-2006, its bid was for $57.16 per share - a 33% premium to where the stock had been trading.

"Certainly, I think that among the independent power names - Mirant, Calpine, Reliant, Dynegy - NRG has the most going for it," the source said. "I could also foresee a merger of equals, so to speak, between Mirant and, say, Dynegy. Dynegy seems like the best fit under those circumstances."

Dynegy shares (NYSE: DYN) gained 26 cents on Monday, or 2.58%, to $10.35.

This market source also noted that NRG shares are trading richer to book value - at about 2 times - than NRG - at 1.9 times - and Reliant - at 1.8 times - which would likely mean that private equity would have to have some sort of role in a transaction with any of those so-called peers.

Reliant (NYSE: RRI) also was better on the day, adding 74 cents, or 3.52%, to close at $21.76.

Affordable dealing

Affordable Residential Communities Inc., a real estate investment trust specializing in manufactured home communities, on Monday said it signed an exclusive agreement with Farallon Capital Management LLC regarding the possible sale of its manufactured home assets for $1.84 billion.

The stock got a little bounce, according to one trader, but there was some concern about a transaction structure. Affordable shares (NYSE: ARC) traded in a band of $12.17 to $13.05 but closed the session at $12.45 for an advance of 41 cents, or 3.41%.

If the deal goes through, Affordable Residential Communities will retain ownership of NLasco insurance operations, which it recently acquired. Therein lies the confusion among players in the stock, the trader said.

"How much is NLasco worth? What does the remaining business provide in EPS?" the trader commented. "Those are the questions everyone is asking and no one knows."

Affordable said the exclusive negotiations, which extend through April 16, don't bind either company to a definitive agreement. Under terms of the proposed deal, Affordable would receive proceeds of about $1.84 billion, or between $520 million and $545 million after expenses, taxes and debt repayment, or between $9 and $9.40 per share.

The company said it would pay off debt associated with the assets being sold but will retain about $125 million of series A preferred stock, $96.6 million of senior exchangeable notes due 2025 and $25.8 million of trust preferred securities due 2035.

Herbalife deal shelved

Herbalife Ltd. said Monday buyout talks with its biggest shareholder, Whitney V LP, collapsed, sending shares of the vitamin and diet aide distributor into a tailspin. Last week speculation of a boosted bid from Whitney, after the company rejected its $38 per share offer, pushed the stock 4% higher.

On Monday, the shares (NYSE: HLF) dropped $1.96, or 4.87%, to $38.61.

One trader said he expects more "gradual" declines in the stock over the next month or so, unless another bidder emerges. But he said hopes of that were somewhat dampened by the company disbanding the special committee of its board of directors now that discussions with Whitney have ended.

In the $38 area, the trader said one might expect Whitney to be a buyer on the open market. But it would be tricky to keep the price stabilized in that range, he added. Whitney owns about 27% of Herbalife stock.

Whitney's $2.7 billion offer, or $38 per share, was withdrawn March 30 after Herbalife said it was too low. But Herbalife had said it would consider an improved proposal from Whitney, which sparked speculation that it would submit a new offer.

On Thursday, Whitney said it was in talks with Herbalife after being contacted by advisers to the company's special committee; so, the news Monday was a big blow.

Biosite mum on Inverness bid

Biosite Inc. so far remains taciturn regarding a rival $90 per share takeover bid from Inverness Medical Innovations Inc. to its accepted bid of $85 per share from Beckman Coulter Inc. Biosite shares, were lower Monday, however, remain above both offer levels and traders said they expect pressure will be exerted on Biosite to take the higher offer, which could prompt Beckman to bring it even higher.

Biosite (Nasdaq: BSTE) dropped 85 cents on the session, or 0.91%, to close at $92.26.

On Monday, Inverness echoed remarks of traders and said Biosite has failed thus far to respond to its proposal.

"We are dismayed by Biosite's silence and disturbed by its continued disregard of its fiduciary duty to the Biosite stockholders," said Inverness chief executive Ron Zwanziger in a prepared statement.

"We are confident that as Biosite stockholders review the proposed Beckman transaction, they too will have serious concerns regarding the integrity of Biosite's supposedly competitive bidding process and will apply pressure to the Biosite board to respond favorably to our superior proposal. Our superior proposal is clear and bona fide."

Covington Associates and UBS Investment Bank are acting as financial advisers to Inverness. Goodwin Procter LLP is serving as legal counsel to Inverness.

On Thursday, Inverness also had suggested it had been rebuffed by Biosite and went public with a rival bid for the diagnostics firm. As of April 5, Inverness said it owns 4.7% of Biosite shares.

Amid the turmoil, Inverness shares on Monday (Amex: IMA) closed with a loss of 36 cents at $41.46 while Beckman shares (NYSE: BEC) added 27 cents, or 0.43%, to $63.78.

Waltham, Mass.-based Inverness Medical develops rapid diagnostic products for the consumer and professional markets. San Diego-based Biosite is a medical diagnostic company that provides immunoassay diagnostic products for cardiovascular disease, drug screening and infectious diseases. Fullerton, Calif.-based Beckman Coulter, which has developed a test known as B-type natriuretic peptide with Biosite, said when announcing its offer last week they would create a company with a leading position in cardiac diagnostic tests known as immunoassays.

Biosite said last week its board of directors is evaluating the Inverness letter, with the assistance of financial adviser Goldman Sachs & Co. and legal advisers Cooley Godward Kronish LLP and Potter Anderson & Corroon LLP.

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