XM, Sirius up; EMI, Warner up; Vulcan lifts Rinker; Shire, New River rise; Tessco up, Sirva up

By Ronda Fears

Memphis, Feb. 20 - Traders coming off of the Presidents Day holiday on Monday packed two days of work into one on Tuesday as more merger news hit the tape. Overall it was a busy session amid general ebullience as the Dow Jones Industrial Average hit yet another record high.

The much-anticipated merger news from XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc., announced Monday, grabbed the attention of many players, pushing those stocks higher despite speculated antitrust hurdles it is likely to face; thus, traders said much of the lift was from short covering, especially in Sirius.

Vulcan Materials Co. also announced Monday it had agreed to acquire Florida Rock Industries Inc. for $4.6 billion in a cash and stock deal at a 45% premium to Friday's market, and traders said that lifted Rinker Group Ltd. shares on hopes that it would spur Cemex SAB de CV to relent and up its hostile bid for the Australian cement concern. Vulcan's shares (NYSE: VMC) lost 69 cents, or 0.6%, to close at $111.14 and were lower by another $1.04 to $110.10 in after-hours action.

In a drug deal linking United States and United Kingdom concerns, Shire plc's move Tuesday for New River Pharmaceuticals Inc. at a 10% premium to Friday's market pushed the latter higher, but traders said players in New River were disappointed with the price tag and are hoping for a better bid to emerge.

Several other global deals were announced, and one bulge bracket firm trader remarked that Japanese steel stocks advanced Tuesday, led by Nippon Steel Corp., on speculation they will join the consolidation theme in the industry.

Otherwise, hedge fund traders were largely sitting tight on the risk arbitrage play in Altria Group Inc. and Kraft Foods Inc., related to Altria's spinoff of Kraft coming later this year, although news in both sent both stocks lower. Altria failed to gain from an appeals ruling to overturn a judgment won by a smoker's widow in Oregon, while Kraft failed to gain on a stock buyback plan unveiled Tuesday. While some players in the spinoff are siding with Altria saying that the litigation risk is overblown, others are siding with Kraft saying that shedding the tobacco liability frees it to move forward.

In distressed stocks, Winn-Dixie Stores Inc. snapped back in a big way Tuesday after reporting its first financial results since it emerged bankruptcy in November. For fiscal second-quarter ended Jan. 10, including about four weeks of operations while in bankruptcy, Winn-Dixie posted a profit of $286.8 million versus a profit of $237.5 million a year before, with a 9% gain in total sales to $1.16 billion. But one trader noted that same-store sales in the quarter were off 0.5% and that sparked a selloff in the stock (NYSE: WIN), which lost $1.07, or 6.07%, to close at $16.56 and was seen in after-hours trade down by another 42 cents to $16.14.

Sirva rises on MLF stake

Trucking firm Sirva Inc. was gaining on an article that pegged it as a buy from the likes of MLF Partners LP, an activist hedge fund run by Feshbach brothers Matt, Kurt and Joe, according to one trader, but he was leery of the situation.

Sirva shares (NYSE: SIR) gained 18 cents, or 4.4%, to $4.27 on Tuesday.

The article in a trade publication, according to the trader, highlighted MLF's double-digit success in 2006 and noted that one of its investments was Sirva. The Westmont, Ill., firm, which provides relocation services to corporate, military and government agencies, saw its shares lose more than 50% in 2006 despite turnaround efforts such as a new independent chairman, several new board members and a new chief financial officer.

According to a Feb. 9 filing at the Securities and Exchange Commission, MLF owns a 14.3% stake in Sirva.

But the trader said the fundamentals needed for the company's turnaround efforts to gain traction are lacking.

"There is more debt then originally stated, the numbers are still unaudited and might have to be restated again," said the trader.

"The real estate market is not improving so who is buying this stock? I would be a seller into any bounce." The trader added that volume was light in the stock at 348,200 shares versus the norm of 402,213 shares.

Brightpoint highlights Tessco

Back to deals, in another pan-European transaction Plainfield, Ind.-based cell phone distributor Brightpoint Inc. said Tuesday it will buy Danish counterpart Dangaard Telecom A/S, a private company, for 30 million new shares and $100,000 in cash.

Brightpoint (Nasdaq: CELL) shot up $1.43, or 13.91%, to $11.71. Volume was 4.3 million shares compared with the norm of 1.6 million shares.

Brightpoint said the deal will be accretive in two quarters after it closes, which is expected in June or July. It said the combined company will have $4.6 billion in annual sales and 25,000 customers in 25 countries, and save $8 million to $10 million a year. Dangaard Telecom is Europe's largest mobile phone and accessories vendor.

That news, one trader said, supported buying speculation in Hunt Valley, Md.-based Tessco Technologies Inc., a wholesale electronics vendor for and to wireless mobile, fixed and in-building communications testing and maintenance systems, as a possible takeover target.

"This [Tessco] is an under-the-radar stock," said one trader.

"It's a great acquisition target, I think, and the Brightpoint deal underscores that possibility."

Tessco shares (Nasdaq: TESS) jumped by $1.17, or 4.25%, to $29 with heavy volume of 72,030 shares versus the norm of 29,185 shares.

Warner going for EMI again

In yet another deal to link an American company with a British one, London-based EMI Group plc acknowledged it has received another "approach" from New York-based Warner Music Group Corp. and both stocks were higher.

"I think the feeling is that the stocks have dropped to a point where private equity might get a deal done. I don't think there is necessarily a better feeling that Warner could entice EMI to the table," said one trader, who noted that Warner's pursuit of EMI began in 2000 and EMI has rejected offers from private equity as well.

The trader noted, too, that EMI said in a statement that there was no firm proposal on the table.

EMI shares (London: EMI) gained 18.5p, or 8.35%, to 240p.

Warner (NYSE: WMG) advanced 90 cents, or 4.93%, to $19.15.

Last week, EMI cut its revenue forecast for its recorded music division for the second time in five weeks, blaming weak U.S. sales, and warned it will miss annual profit forecasts, sending its shares plunging as much as 13%.

Some analysts say a merger will pass regulatory scrutiny because of the profit warnings from EMI and ongoing market difficulties for the music industry, the trader said.

XM, Sirius finally signal a deal

Antitrust regulatory scrutiny is expected to be massive in the XM linkup with Sirius, but traders said the bets getting placed seemed to suggest that a deal is more likely than not, and at a much higher premium for XM holders. Meanwhile, traders said there was heavy short covering in Sirius shares.

XM shares (Nasdaq: XMSR) rose $1.43, or 10.23%, to $15.41 with 81 million shares moved versus the norm of 9.7 million shares.

Sirius (Nasdaq: SIRI) added 22 cents, or 5.95%, to $3.92 with 260.5 million shares traded compared to the norm of 44.85 million shares.

A risk arb trader said there was "serious unwinding" in XM call options. He said a lot of players long that stock were betting it would go to $20. The typical risk arb trade is a long position in XM and short Sirius, as traders have said for some time now. Many players began setting up for the merger months ago.

At Friday's market, the trader noted that XM is down about 25% from recent highs and Sirius is close to its 52-week low.

Lots of the hedge fund players were setting up the merger on call spreads and many also were playing the spectrum of the capital structure of both companies, traders said. Similar to the stocks, XM and Sirius bonds firmed on the merger news with heavy activity in both names.

In the all-stock deal inked Monday, holders of XM shares would get 4.6 Sirius shares for each XM share they own - valuing XM shares at $17.02, or a 22% premium to Friday's close. The tax-free, all-stock deal would create a company valued at $13 billion, including $1.6 billion in debt.

The risk arb trader said the premium was "decent," and he speculated the deal will get done. He said he does not expect a bidding war to ensue, either. He anticipates that the antitrust "debate" will be interesting, and likely a watershed decision, but the merger will win out in the end.

New River price disappoints

Shire's deal to buy New River, its partner in a new attention deficit hyperactivity disorder drug to replace its Adderall XR that could face generic competition in April 2009, was a disappointment in terms of price, but traders said there may not be enough muscle from stockholders to oppose it.

The $2.6 billion deal pays $64 per share for New River shares - a 14.4% premium to the four-week average of $55.92 per share and a 10% premium to Friday's close of $58.35. New River shares (Nasdaq: NRPH) gained Tuesday by $4.84, or 8.29%, to $63.19.

While the price tag was a disappointment, according to one trader, he noted that Shire already owns a big stake in New River and New River chief executive Randal Kirk has pledged to tender his 50.2% stake. The acquisition will be effected by means of a cash tender offer expected to start March 2 and close early in second quarter.

Otherwise, the trader said the biggest New River holder is Pequot Capital Management Inc. with a 9.88% stake. Pequot did not respond to an inquiry about its opinion of the Shire deal by press time.

The trader said the best thing would be a bigger bid, which he thinks has a good possibility given the market for ADHD drugs.

As for the deal, it is a smart buy for Shire, the trader said, and an acquisition that many biotech players have been anticipating for a while. New River began developing the ADHD drug Vyvanse at least two years ago, he said, and Shire became its partner as Shire will be facing generic competition for Adderall XR in two years. Vyvanse is much like Adderall, but New River has asserted it is designed to be abuse resistant; it has been called a potential "blockbuster" with peak annual sales in the neighborhood of $1 billion.

Vyvanse is scheduled to be launched in 2007. New River is waiting to hear from the Food and Drug Administration on how strictly it will be controlled. If the Vyvanse drug gets a schedule III or IV designation, physicians will be able to write prescriptions with monthly refills for up to six months, which is thought to give it preference over Adderall XR.

Shire said it plans to raise about $800 million through an equity PIPE to help pay for the acquisition. Shire stock (Nasdaq: SHPGY) gained $3.33, or 5.26%, to $66.61 but in after-hours activity gave back 89 cents to $65.72.

Vulcan steels Rinker players

Vulcan's $4.6 billion purchase of Florida Rock was largely applauded, another trader said, and mostly from afar as players involved in Rinker said it provided some hope that Cemex will yield to calls for a higher bid for the Australian cement concern.

The Vulcan deal values Florida Rock shares at $68.03 - to be paid 70% in cash and shares in Vulcan on a pro-rated basis. The acquisition is expected to close mid-year. The news sent Florida Rock (NYSE: FRK) up by $19.58, or 41.7%, to $66.54 on the news.

Vulcan was punished by the news with heavy selling, which the trader said was largely due to the deterioration in the construction industry in Florida. Vulcan (NYSE: VMC) lost 69 cents, or 0.6%, to close at $111.14 and were lower by another $1.04 to $110.10 in after-hours action.

But the trader said the 45% premium price for Florida Rock sharply boosted the shares of Rinker, which has been haggling with hostile takeover suitor Cemex since October. Rinker shares (NYSE: RIN) gained $2.30 on Tuesday, or 3.12%, to $76.10.

In the Australia market, however, Rinker shares pulled back Tuesday after having run up sharply on the Cemex situation. Cemex has bid $12.8 billion, or A$13 per share, for Rinker, but Rinker has repeatedly declined it as unfit. In its home country, Rinker shares (Australia: RIN) slipped by A$0.12, or 0.62%, to A$19.36.

A Cemex combo with Rinker would create the world's largest supplier of aggregate for concrete construction. The trader said his firm's analyst estimates Vulcan is paying around 11.3 times forecast EBITDA for Florida Rock, well above the multiple of 8.8 that Cemex has offered for Rinker, and could set a new precedent.

Rinker's board has told shareholders to reject Cemex's bid, first announced last October, and said it has held preliminary talks with other industry players. Cemex has extended its offer, awaiting a decision from U.S. antitrust authorities on whether it can go ahead with a takeover.

Altria wins appeal, off in trade

Altria, parent of cigarette maker Philip Morris, won an appeal Tuesday, but the stock was slightly weaker as the decision was not seen as a sweeping one that will affect other lawsuits. Still, one player in Altria said the discount assigned to the stock because of the cigarette liability is too severe and he sees the stock worth $95 to $110 with a one-year horizon.

"We are short Kraft to hedge out the Kraft risk and isolate the MO tobacco/litigation risk," the New York hedge fund manager said.

"We're not hedging out the litigation risk, we're long that risk. We think it's one of the best risk/rewards out there. The class action litigants don't have a prayer of winning."

The U.S. Supreme Court on Tuesday threw out a $79.5 million punitive damages award given in 1999 to the wife of an Oregon smoker whose husband died from lung cancer after decades of smoking Marlboros. The Oregon Supreme Court had upheld the award against the Altria Group last February. Philip Morris had argued the judgment was excessive.

The ruling also is expected to have ramifications on other pending product liability cases, even beyond the tobacco industry, but the Kraft spinoff is an overhang for the stock, traders said.

Altria stock (NYSE: MO) was basically unaffected by the news, dropping 25 cents to $85.88, a notably flat performance compared to its gains after previous legal victories. Altria shares rose more than 5% in July after the Florida Supreme Court rejected damages awarded in a class-action and climbed 4% in an August session after a judge declined to impose penalties for violating racketeering laws.

However, those previous cases were eagerly watched by investors for their effect on Altria's plans to divest Kraft. Altria announced the long-awaited spinoff of Kraft last month in which shareholders will get 0.7 share of Kraft for every Altria share they hold.

Kraft crafts revival plan

Another hedge fund manager is playing Kraft on the spinoff, asserting too much headline risk has been attributed to dilution from the spinoff and lackluster turnaround efforts to date. On Tuesday, Kraft announced a new phase of its turnaround plan aimed at boosting organic revenue by 3% to 4%, but the company's forecast for 2007 earnings per share fell short of analysts' projections.

Kraft shares (NYSE: KFT) fell $1.09, or 3.12%, to $33.86 on the news.

Kraft estimates the company's 2007 earnings per share at $1.50 to $1.55 and excluding restructuring charges at $1.75 to $1.80, short of Wall Street's latest consensus of $1.92.

"A lot of people are expecting that a flood of stock for sale - from the Altria distribution (spinoff) - will cause a notable decline in Kraft shares, which are already down about 5% in the last six months or so," said the hedge fund manager.

He is buying put options on Kraft but would not disclose at what strike price.

"I'm glad to own Kraft because, for one thing, I think there probably will be some pressure but overall I think it's a good stock long-term."

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