Advanced Medical Optics eyes Bausch & Lomb bid race; Topps gets rival bid; nerves sink metals

By Ronda Fears

Memphis, May 24 - Advanced Medical Optics Inc. on Thursday said it was considering a bid for Bausch & Lomb Inc. during its so-called "go shop" period to find a better buyout bid than the $4.5 billion offer it agreed to last week with private equity firm Warburg Pincus. The news sent Bausch & Lomb sharply higher but Advanced Medical Optics was hit by the development.

In another emerging bidding war, Topps Co. Inc., maker of baseball cards and Bazooka gum, soared after getting an hostile takeover bid from Upper Deck Co. for $10.75 a share to rival the $9.75 per share buyout by Tornante Co. and Madison Dearborn Partners, which the company agreed to on March 5. The original bid has been hotly contested by dissident stockholders.

Otherwise, "a bad case of nerves," as one trader put it, given the weakness in the broader markets, sparked profit taking in many takeover speculation names such as MGM Mirage Inc., Alcan Inc., Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. Several other developing situations also lost ground, he said, mentioning Dow Jones & Co. Inc. and Trump Entertainment Resorts Inc.

"Not only are the stocks lower but oil is falling and all the metals," the trader said.

"It's just a temporary blip, a little profit taking; most of these names will head back up."

In particular, he said the consolidation in the metals market "is forged in steel. These deals are going to get done, like it or not."

Freeport-McMoRan's dive Thursday (NYSE: FCX) to $72.29 for a loss of $1.46 on the day, or 1.98%, following a 3% advance the day before, was largely attributed by this trader to the slump in copper and gold prices. The June contract for gold settled at $653.30 an ounce for a loss of $9.30, or 1.4%, hitting a 10-week low on the New York Mercantile Exchange. Copper futures fell 12 cents, or 3.6%, to $3.1805 a pound, the biggest drop since Feb. 2 and the lowest price since April 2.

"FCX's management is not hedging against drops in the price of copper. This is probably the reason why this stock reacts to a greater degree when the price of copper drops," the trader said. "I believe it is the lack of hedging that is the root of the problem."

Bausch & Lomb

Bausch & Lomb agreed last week to be acquired by Warburg Pincus for $65 per share, but the deal included a 50-day "go shop" period in which it can solicit a better offer, which showed signs of happening on Thursday and sent the stock surging.

"This is a tricky one," said a risk arbitrage trader at a hedge fund in New York. "Everybody thinks now there will be another party get involved, somebody like J&J [Johnson & Johnson]. I've heard people saying it could go to $73 or $75. I think you are out there on a limb if you play it that way."

Indeed, a sellside equity trader noted volume in July call options were heaviest for the $75 strike price. And, he noted that last week even as the Warburg Pincus deal was announced, players were anticipating a bidding war with some expecting the bids to go as high as $70.

Advanced Medical Optics said Thursday it was considering entering the process and while it did not specify a figure, the Santa Ana, Calif., maker of cataract and lens implant products said, "We believe that the current transaction with Warburg Pincus undervalues Bausch & Lomb."

The news pushed Bausch & Lomb (NYSE: BOL) higher by $3.76, or 5.66%, to $70.21; it had traded as high as $70.85 before easing back.

Bausch & Lomb, which makes contact lens cleaning solutions and the like, has suffered from several product recalls over the past year that also has delayed its financial reports.

Advanced seen using stock

Advanced Medical Optics, which makes laser eye surgery devices, did not show its hand on any potential bid amount or deal structure, but traders said most onlookers expect it would be a mostly cash deal and that sent its stock reeling.

"They'll have to do it with equity. They can't do a debt deal; they've already loaded up," one trader said.

"They've been on an acquisition spree, really, for a couple of years, but now we are at the top of the market. Then, there's the dilution from such a transaction."

Advanced Medical Optics (NYSE: EYE) traded in a band of $40 to $41.40 before settling at $41.10 for a loss of $1.34 on the session, or 3.16%.

In April, Advanced Medical Optics completed the acquisition of IntraLase Corp. for $808 million in cash, and tapped a new $900 million bank facility to do so; in January, it bought WaveFront Sciences Inc. for $20 million in cash. Those follow its acquisition of VISX Inc. in May 2005 in a cash and stock deal valued at $1.25 billion.

Following the IntraLase deal, Advanced Medical Optics lowered its guidance saying the transaction would be dilutive to 2007 adjusted earnings per share. For 2007, the company said it expects adjusted EPS of $1.40 to $1.55 versus its previous projection for $1.85 to $2. For 2008, though, the company said it would be accretive and forecast adjusted EPS of $2.25 to $2.40.

Topps rival bid in doubt

There was a lot of antitrust risk and time value loss factored into the rise in Topps shares Thursday as a rival bid emerged, traders said. While some think that the Upper Deck offer of $10.75 will force the Eisner group to up their $9.75 bid, traders said others think it will not pass antitrust muster and thus the stock will be snapping back hard.

The stock (Nasdaq: TOPP) closed out at $10.26 for a gain of 48 cents, or 4.91%, after trading as high as $10.57.

"This has antitrust violation written all over it. The cost of doing the requisite antitrust research will likely be in the millions, therefore even though Upper Deck has made an unsolicited bid to buy Topps at a higher rate, in the end the bid is probably worth less than the Eisner group's bid because of the problems associated with it," one trader remarked.

"At worst right now, it looks as if Upper Deck is trying to raise the price on the Eisner group, but since a deal was already done it's hard to see the parties moving on the price. The offer by Upper Deck may or may not be in good faith, and that opens up another can of worms, but from an antitrust perspective, this deal cannot be done, I don't' think."

When the maker of baseball cards and Bazooka bubble gum accepted the $385.4 million takeover offer from Madison Dearborn and Tornante in March it drew immediate opposition from one of its own board members, and the stock went past the offer on speculation that it would have to be sweetened or a rival bid would emerge, as the company had a 40-day "go shop" period.

The company also inferred some doubt about the veracity of the Upper Deck bid in a statement Thursday, noting the go-shop period expired April 14.

Topps said Upper Deck had indicated its interest in acquiring Topps but Topps had concerns about the suitor's ability to finance the deal, regulatory risks such as antitrust issues and other matters. Upper Deck's offer contains no financing commitments but includes a "highly confident" letter from a commercial bank that put many conditions on any potential funding, Topps said.

Thus, one market source said he reckoned the Upper Deck bid would not entice the Eisner group to bump up their bid, so he was a seller into the rally.

"Lehman Brothers could not find a buyer for Topps over a two-year period, even when the stock was at $7.50 a share. The $9.75 a share that was accepted by Topps is more than fair for a company in an industry that has been shrinking for a dozen years," he said.

When the Madison Dearborn bid was announced it was a 9.4% premium to the then-current market. It drew immediate opposition from Topps director Arnaud Ajdler and his Crescendo Partners II, which owns a 6.6% equity stake, and Timothy Brog of Pembridge Capital Management LLP, and another board member John Jones.

Ambac, MBIA slide on risk

Surety and title insurance firms Ambac Financial Group Inc. and MBIA Inc., which provide financial guarantees for municipal bonds, asset-backed and mortgage-backed securities among other things, were hit hard Thursday amid the broader market pullback on economic anxieties.

These companies, and others in the same sector, are perceived as likely to be left holding the bag for higher defaults and traders said the market was assigning a considerably higher risk to the group, namely the big ones like MBIA and Ambac.

One market source also said the market was likely reacting to a presentation by Pershing Square Capital Management at a high yield conference in New York during which MBIA and Ambac were specifically referred as vulnerable to the higher risk coming down the pike because of widening credit spreads across the capital spectrum as a fallout of the collapse in the subprime sector in February.

Ambac (NYSE: ABK) fell $2.94, or 3.12%, to $91.31.

MBIA (NYSE: MBI) fell in tandem, losing $2.14, or 3.12%, to $66.81.

"I am sure folks reacted to this [Pershing presentation,} the market source said. "Both would seem like something to short."

Ambac's exposure to sub-prime mortgages, both direct and through CDOs, is considered significant relative to book value and reserves, while MBIA's structured finance guarantees as a percentage of total guarantees have more than doubled over the past 10 years - a period of rapid innovation and lower lending standards.

MBIA's exposure is greatest in mezzanine CDOs, where the spreads have widened as much as 500 basis points just in the time frame from February to May, according to the presentation cited by the market source.

Pershing Square could not be reached for comment.

Subprime mortgage lenders, which had been skyrocketing earlier in the week on Fremont General Corp.'s sale of its commercial real estate lending business to iStar Financial Inc. for $1.9 billion, took a big hit Thursday, as well. Fremont and Novastar Financial Inc. were two of the hardest hit.

Fremont (NYSE: FMT) lost 37 cents, or 2.92%, to $12.30. Novastar (NYSE: NFI) fell 42 cents, or 5.65%, to $7.01.

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