CANTV crashes; Pfizer falls; Gap gapes; Movie Gallery whipsawed; Swift driven up; Citigroup cheered

By Ronda Fears

Memphis, Jan. 22 - Shares of Compania Anonima Nacional Telefonos de Venezuela, or CANTV, tanked in trade Monday following news over the weekend that Venezuela president Hugo Chavez was accelerating his move to nationalize the country's telecommunications industry with overtures of an immediate takeover of CANTV. The move followed a recent run-up in the shares since the president's re-election earlier this month.

Meanwhile, drug giant Pfizer Inc. took a dive Monday on a massive layoff of 10,000 employees. The news sparked increased interest in generic drug makers, but traders said small biotechs were lower on mixed reactions as the perception of Pfizer's role in potential mergers in those groups is shifting as well as the value of target names. Pfizer shares (NYSE: PFE) dropped 27 cents, or 0.99%, to $26.95.

"Pfizer had been perceived as really the best candidate to effect the biggest takeovers in the biotech sector," said a trader at one of the bulge bracket firms. "Their role in this consolidation is not so clear now. I think there will be deals, but I think some of the valuations are now severely in question."

Elsewhere, after the market closed trendy apparel retailer Gap Inc. announced its chief executive would be stepping down amid disappointments in the company's performance and speculation that the company hiring Goldman Sachs means that it is going on the auction block. Despite the measures, traders said they see the stock headed farther south because of valuation concerns. The stock (NYSE: GPS) was halted in the after-hours market, after closing off by a dime at $19.90.

"We are seeing some pretty heavy unwinding in Gap," said one risk arb trader, noting a pullback in $20 and $22.50 calls for February and March contracts. "That tells you folks are thinking the stock has more negative pressure coming down the pike."

There was more selling into the rally of ElkCorp on Monday, traders said, as The Carlyle Group matched a higher bid for the roofing and building supplies company by rival Building Materials Corp. of America. On Friday, Carlyle launched its tender at $40 per share, but Building Materials promptly upped its bid to $42, and on Monday Carlyle matched that offer. Carlyle began the bidding war for Dallas-based ElkCorp in early November, when ElkCorp shares were at about $25. ElkCorp shares (NYSE: ELK) gained 93 cents, or 2.18%, to $43.61.

In bankrupt stocks, Calpine Corp. tracked upward Monday close to where traders saw it going ahead of the weekend. The rise is still largely attributed to buy-ins ahead of impending news on the San Jose, Calif.-based independent power company's search for an equity sponsor in its bankruptcy exit plan. Calpine shares (Pink Sheets: CPNLQ) gained 14 cents on the day, or 9.79%, to close out at $1.57.

CANTV falls nearly 17%

Venezuela president Chavez on Sunday said that the government will not pay a market price for the fixed-line and wireless-services telecom provider CANTV, a reversal of his previous assurance that shareholders would be fairly compensated. CANTV shares crumbled, but majority owner Verizon Communications Inc., which owns a 28.5% stake in CANTV, ended steady on the session.

CANTV shares (NYSE: VNT) fell $2.27 on the day, or 16.83%, to $11.22. Verizon shares (NYSE: VZ) traded in a band of $37 to $37.40 before settling unchanged at $37.25.

Chavez announced the plans for the nationalization earlier this month when he was sworn into his third term that runs through 2013. He had said earlier that the telecommunications, power and energy sectors would be nationalized by the end of the year, but on Sunday inferred the takeover of CANTV should occur right away. CANTV was privatized in 1991.

Traders had been warning recently that the rebound in CANTV shares, after having plunged to a new 52-week low on Chavez's re-election to a third term running through 2013, was overly optimistic about a payoff from the government. The Chavez agenda also jeopardized a deal Verizon had struck in April to sell its stake in CANTV to a joint venture of Telefonos de Mexico, SAB de CV and America Movil SA de CV controlled by Mexican billionaire Carlos Slim for $677 million.

Onlookers said the weekend's development probably nixed the deal with Slim.

Movie shorts frantic to cover

In the wake of a warning about defaulting on bank covenants in its late-filed quarterly report, Movie Gallery Inc. shares were violently whipsawed amid heavy selling on the news coupled with short covering, traders said.

Movie Gallery shares (Nasdaq: MOVI) traded in a band of $2.82 to $3.17 before closing the session better by 12 cents, or 3.97%, at $3.14 with 1.47 million shares traded versus the norm of 1.34 million shares.

When the curtain is lowered, though, as one trader put it, "The show will be over."

He reckons there will be a fair amount of Movie Gallery bondholders continuing to hedge with the stock.

"It's my guess that prior to the deadline, April 1, some new debt restructure will take place," the equity trader said. "The stock value becomes dependent on these new restructures. My current position is long options and I hope to add more."

Movie Gallery on Friday filed its delayed third-quarter earnings report, showing a wider quarterly loss, and warned of credit facility covenant default danger, saying it would need alternative financing soon. In addition, Movie Gallery said its trade claims vendors were imposing stricter terms.

Market participants have been anxious about the covenants virtually since the company was able to negotiate waivers back in August.

Dothan, Ala.-based Movie Gallery also said in its filing that it has retained turnaround firm Alvarez & Marsal, LLC to immediately fill several accounting and finance leadership vacancies and assist with remediation of deficiencies in its internal controls over financial reporting. The company had delayed the quarterly report due to an ongoing review of its accounting for store lease obligations.

The company cited ongoing integration issues from its acquisition of Hollywood Entertainment Corp. in 2005, but onlookers have said Movie Gallery's real pain comes from the emergence and proliferation of online movie rentals by bigger rival Blockbuster Inc. and newcomer Netflix Inc.

In the report, Movie Gallery said it still plans to open about 120 stores for fiscal 2006 but anticipates closing 230 for a net reduction of 110 stores.

Swift drives trucking firms up

Trucking names had been on the watch list as an area of potential further consolidation going into 2007, largely due to rising fuel prices, according to traders, and the sector was advanced for the most part Monday by news that Swift Transportation Co. directors agreed to an increased bid from the trucking company's founder and former top executive to take it private.

Some overloaded with risk, however, like YRC Worldwide Inc. were on a southerly path, one trader said.

Jerry Moyes, along with some family members, have boosted their bid to $31.55 per share of Phoenix-based Swift in a deal valued at roughly $2.74 billion, including the assumption of $332 million in debt. In November, Swift rejected a $29-per-share bid from Moyes, who stepped down in 2005 amid an insider-trading investigation. The Moyes family currently owns 40% of Swift shares.

Swift shares themselves (Nasdaq: SWFT) soared $2.52 on the day, or 9.08%, to $30.26.

While several trucking names were higher, there were several lower as well, which the trader said reflected considerable aversion to risk in "some of these firms that could be in danger of bankruptcy."

Along for the ride to northern territory the trader mentioned were JB Hunt Transport Service Inc. and Werner Enterprises Inc. Headed in the opposite direction, however, were Landstar System Inc. and YRC Worldwide.

The trader said YRC Worldwide, previously and better known as Yellow or Yellow Roadway, is still reeling from previous acquisitions - Roadway in 2005 and US Freight in 2003 - and many investors are steering away from it. YRC stock on Monday (Nasdaq: YRCW) lost 52 cents on the day, or 1.23%, to $41.87.

Many trucking companies have warned of lower earning expectations, and trucking stocks have been weak with the run-up in diesel fuel prices, the trader noted, and "it seems fairly obvious that there will be some more consolidation, or something more drastic, like bankruptcies."

Citigroup bull sees window

As market rumors suggested a month ago, banking giant Citigroup Inc.'s chief financial officer vacated the post at the big bank - one of three events investors had been hoping for - and, given the stock has run up 12% to 15% since the chatter began in mid-December, traders said there was some selling into the bounce Monday.

But there were some more bullish players figuring on a little more upside over a nine-month horizon.

Citigroup shares (NYSE: C) advanced 18 cents on the day to $54.68.

"People were hoping for a restructuring, some management changes, and/or a slow down in their rate of investment, because of negative operating leverage at the bank," said one head trader.

"They got one of those in December with Robert Druskin named chief operating officer and today Sally Krawcheck was moved laterally from CFO to wealth management. Investors were mildly happy with this."

There was some selling into the bounce in this trader's view Monday, because Citigroup stock "is fully valued" with the 12% to 15% run-up over the past month. That said, he added that further operational restructuring at the bank might lead him to tag a higher target onto Citigroup stock. Meanwhile, he would be a seller on any gains.

Last month, Citigroup speculation was rampant on Wall Street about an imminent departure of Krawcheck, and the bank said she would be remaining with the firm, but amid a solid conviction that something dramatic would take place at the bank, such as a break-up of business lines, Citigroup shares made a series of strong gains.

Another market source said going forward he expects further changes at Citigroup to boost the stock, so as a long-term holder he would hold on at current levels.

"Citigroup, in my opinion, is a strong hold for a bit longer, maybe nine months," he said. "There could be a dividend play with huge potential upside after nine months."

Doral preferreds, stock spike

Buyers showed up in force for securities of troubled Puerto Rico mortgage bank Doral Financial Corp. on optimism that the troubled company could find interest in its assets, which would help along its efforts to refinance a $625 million floating-rate note coming due in July.

One trader cited reports that Reliable Financial, a subsidiary of Wells Fargo & Co. with auto finance operations in Puerto Rico, wants to expand into the mortgage business, and that sent minds wondering if some accounts of Doral might be under consideration.

Doral shares (NYSE: DRL) gained 10 cents on the day, or 4.1%, to $2.54 but gave it all back and then some in after-hours activity. After the close, the stock was seen lower by 13 cents at $2.40, which one trader merely attributed to taking profits on the day's advance.

In any event, the big move of the day was in Doral's 4¾% preferred shares, (Pink Sheets: DORLL), which spiked up 17% to $117, after trading as high as $118. Par on the issue is $250.

The buyers' ebullience largely stemmed from a report Monday by Santiago publication BNamericas. In that report, the Wells Fargo & Co. unit Reliable Mortgage said it recently launched operations with the aim of grabbing a 3% to 5% share of the Puerto Rico mortgage market by year-end 2008.

Doral Financial has been rumored to be in refinance discussion with holders of the floating-rate notes for a couple of months now and at times has seemed close to inking a transaction. Market sources have said the refinance package will almost assuredly consist of some debt-for-equity swap but also cash raised largely from asset sales.

In the negotiations, bondholders have been said to want the value of the equity distributed to be based on a stock value of roughly $1, although two weeks ago one party said that holders were willing to take a convertible bond with a strike price of $1.75. Those details have not been ironed out in a formal agreement, however, and the final transaction may look markedly different, one source stressed Monday.

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