Take-Two takes off; Friendly Ice Cream rises; Conseco chokes; Jupitermedia jolted; Fremont flies

By Ronda Fears

Memphis, March 7 - Video game maker Take-Two Interactive Software Inc. rose sharply Wednesday after an investor group including OppenheimerFunds, D.E. Shaw, SAC Capital and Tudor Investments said it will launch a proxy battle, prompting buyers on hopes the company will go into play.

One trader said there is some speculation that life and health insurance firm Conseco Inc. will shop the company or be forced to consider a sale by its big investors, as well, but the stock took a hit on poor fourth-quarter results.

Friendly Ice Cream Corp., meanwhile, was scooped up after the restaurant chain and ice cream distributor said it has hired Goldman Sachs to explore strategic alternatives for enhancing shareholder value under pressure from key investor Sardar Biglari of The Lion Fund LP, Biglari Capital Corp. and Western Sizzlin Corp.

As Chicago-based hedge fund Citadel agreed to purchase the assets of ResMae Mortgage, the most recent subprime mortgage lender to file bankruptcy, for $22 million, traders said there is ongoing concern about further failures in the sector. However, Fremont General Corp. got a lift from rumors that it has six interested buyers for its subprime mortgage unit. Fremont shares (NYSE: FMT) gained $1.75, or 25.81%, to $8.53.

A failed transaction for Jupitermedia Corp. from acquisition talks with Getty Images Inc., however, which had been going on for at least two weeks, sent that stock tumbling. The online media company said on Feb. 23 that it was in talks with Getty Images to be acquired at $9.60 per share, and on the news Wednesday the stock dropped well below the $8 area where it had been trading before the talks were aired. Jupitermedia (Nasdaq: JUPM) fell $1.53, or 17.73%, to $7.10.

Elsewhere, beleaguered movie rental chain Movie Gallery Inc. got a lift from news that it has acquired video-on-demand at-home movie rental service MovieBeam, but one trader said he did not see the addition being enough to sustain a higher price for the stock.

And, distressed stock players are watching for a decision in the Northwest Airlines Corp. bankruptcy about equity holding disclosures that could put a damper on interest in bankrupt stocks. Meanwhile, Northwest shares continue to lose ground.

Take-Two ends off day's high

Take-Two Interactive shares gained nearly 20% at one point Wednesday after an investor group that owns nearly half the outstanding shares said it plans to launch a proxy fight to take control of the troubled video-game maker and possibly oust the chief executive - a move perceived to signal the company going onto the auction block.

One trader in the stock said there was "serious" short covering in the stock, which he attributed to it closing at the session low. He said there had been short selling since it hit a new 52-week high of $21.06 on Feb. 14, which was getting covered on the news Wednesday. Some 42% of the float, or 30 million shares, was short as of Feb. 12, he noted.

The stock (Nasdaq: TTWO) ended better by $1.34 on the day, or up 7.61%, at $18.95 - the day's low. It had opened at $19.74 against Tuesday's close of $17.61 and went as high as $20.88 before easing back. Some 20 million shares traded versus the norm of 2.3 million shares.

OppenheimerFunds, D.E. Shaw, SAC Capital and Tudor Investments said in a Securities and Exchange Commission filing that they plan to nominate six directors to Take-Two's board and potentially oust chief executive Paul Eibeler as well as review the employment status of chief financial officer Karl Winters. The group, which also includes ZelnickMedia Corp., owns more than 45% of Take-Two stock.

"I think the big investors have been more than patient with this management, and the CFO has not done a good job. This may or may not be his fault but he's lost the confidence of the Street. The CEO, while seemingly doing a good job with strategic planning, is also responsible for this management team and is not articulate enough to communicate his vision and strategy for the company's future to Wall Street. It's like someone has to take the fall," said the trader.

"This company should be earning north of $2 a share, if not more. They have some of the world's best development studios, the top IP [intellectual property] in the industry, a major presence in the sports market and as long as new management can understand and promote the value of this company, things should be fine.

"This is great news; this signals to the shorts that SAC is there to stay, same for other big money because a lot of people were scared the big money would make an exit to cash out. I think if they are successful at unlocking the value here, the stock could look cheap at $20 in few months."

Take-Two, maker of the Grand Theft Auto game series, has suffered from a series of high-profile stumbles during the past two years, including the release of a game title with hidden pornographic scenes, the departure of several board members, disappointing financial results and a stock-option accounting scandal.

Last week, the company also posted more disappointing results for the third and fourth quarters and issued a profit forecast that was well below Wall Street expectations. In January, the company said it would have to restate financial results for the past 10 years due to backdating stock options that it blamed on founder and former chief executive Ryan Brant.

Brant last month settled securities fraud charges stemming from the backdating and agreed to repay $4.1 million in ill-gotten gains plus a $1 million civil penalty. He also pleaded guilty in New York to a felony criminal charge of falsifying business records. The internal probe found no evidence of wrongdoing by the current management team, including Eibeler and Winters.

Friendly could fetch $18.30

If Friendly Ice Cream hits the auction block, one trader said he thinks it could bring a premium upwards of 30% to Wednesday's market, which advanced the stock by 16.5%, because evidence of a turnaround is already showing. Biglari, with a 14.9% stake in the company through several entities, has been pushing for changes for months but urged a sale in a letter to the board Tuesday.

The stock (Amex: FRN) closed higher by $1.95, or 16.47%, at $13.79.

Wilbraham, Mass.-based Friendly, which has 514 company and franchised restaurants throughout the Northeast, announced it has retained Goldman Sachs as financial adviser and Weil, Gotshal & Manges, as legal adviser to explore strategic alternatives to enhance shareholder value, including a possible sale of the company.

Also Wednesday, the company reported fourth-quarter net income of $100,000, or 2 cents per share, compared with a net loss of $30.2 million, or $3.82 per share, in fourth-quarter 2005, while revenues slipped to $122.4 million from $123.5 million. Comparable sales increased 1.8% for company-operated restaurants and 0.5% for franchised restaurants.

The trader said the results show signs that the company is moving in the right direction, augmented by a new chief executive, George Condos, in January.

"I think it's fair to calculate a 30 [times] price to earnings ratio, and on 2006 earnings per share of 61 cents, that puts you at a possible $18.30 buyout. That would be a 32.7% premium to today's close, by the way. But, based on last year's earnings, you could argue the stock is worth $18.30 on a 30 PE, although some would say its well known name brand is worth that alone," the trader said.

"Other restaurant chains that are in the Northeast like Friendly are Wendy's, which trades at 37 PE on last year's earnings, while Burger King trades at 47 PE on last year's earnings. So I don't think that's out of line."

For 2006, Friendly said Wednesday it recorded net income of $4.9 million, or 61 cents per share, compared with a net loss of $27.3 million, or $3.49 per share, in 2005, while revenues edged up to $531.5 million from $531.3 million. Comparable sales gained 1.4% for company-operated restaurants and decreased 0.9% for franchised restaurants.

The trader said despite signs of a turnaround, Biglari, who he noted took control of restaurant chain Western Sizzlin Corp. in 2005, appears to be impatient with the process. Biglari on Tuesday sent a letter to shareholders saying Friendly at least should sell some of its company-owned stores to franchisees.

Biglari said in the letter that shareholders have given Friendly chairman Donald Smith and the board "plenty of time, that is, a decade, to create shareholder value ... Clearly, they have failed. It is time that we join the board and begin creating value for you - and with a sense of urgency."

Conseco cures seen scarce

Conseco swung to a fourth-quarter loss amid higher expenses, and the company said it won't offer financial forecasts until it irons out problems in its business, which one trader speculated could lead its majority stockholder to call for a measure like exploring a sale, but he only sees a slight premium possible.

The shares (NYSE: CNO) fell 91 cents on the day, or 4.63%, to $18.75.

"The quarter was just another in the line of lame, be patient, la da da," the trader said. "New buyers, i.e., Franklin and Hotchkis, will demand management to sell company. I see them getting slight premium to book value of around $30."

Hotchkis & Wiley Capital Management has a 9.67% stake and Franklin Resources Inc. a 6.16% stake as of Dec. 31 records.

Conseco, which offers Medicare supplement, long-term care and cancer insurance, recorded a fourth-quarter net loss of $3.7 million, or 2 cents a share, compared with a profit of $67.6 million, or 42 cents a share, a year earlier, while revenue rose to $1.14 billion from $1.08 billion in the period. The results were reported Tuesday after the market closed.

It was what analysts called a "worst-case scenario," largely the result of Conseco putting more than $54 million into reserves to pay future claims. The company had forecast a break-even quarter.

"I'm disappointed with our poor overall financial results," said Conseco chief executive Jim Prieur in a statement. "But we are taking the necessary steps that will fundamentally change Conseco for the better."

Conseco said it has begun raising premiums at a faster pace and is trying to improve its care-management and claim-adjudication practices. It is also trying to bring in better managers and increase accountability, while using better technology. The company emerged from bankruptcy in September 2003.

Movie skeptics pan deal

Movie Gallery, which has been struggling to compete with Blockbuster Inc. and Netflix Inc. as well as Apple Inc. and Wal-Mart Stores Inc. in the transition to online movie rentals, announced Wednesday that it is buying MovieBeam. While terms were not disclosed, onlookers were estimating the price tag in the neighborhood of $10 million.

The stock (Nasdaq: MOVI) gained 23 cents on the news, or 5.05%, to $4.78, but one trader said he didn't think the advance would hold water.

"This is a joke, in my opinion. Give these guys money and they spend it like a sailor on shore leave. MovieBeam only has 100 movies to choose from. That says it all. Forget that you have to buy a piece of hardware and then pay for each download. Are these guys for real?" the trader remarked.

"You can just throw $10 million out the window. A retail company isn't going to know how to run a technology, a bad technology at that. Probably the best news is that they are in a position to be able to spend some money and are not hamstrung like they have been over the past year."

Dothan, Ala.-based Movie Gallery said the MovieBeam content delivery network, which is available in 31 major metropolitan areas across the United States, uses over-the-air datacasting technology to provide instant access to an ever-changing lineup of new releases and popular favorite movies on demand from virtually every major Hollywood studio.

Northwest ruling eyed closely

The strategy of players in bankrupt stocks is getting further attention from the Northwest Airlines case, a distressed stock trader advised Wednesday, pointing to a battle in the case for full disclosure of holdings in the carrier's equity.

Meanwhile, Northwest shares (Pink Sheets: NWACQ) continued to dive, on Wednesday losing 7 cents, or 5.43%, to $1.22.

U.S. Bankruptcy judge Allan Gropper was slated on Wednesday to make a final decision after ruling last week that a group of 13 investors must disclose information about the size of their equity stakes in Northwest, when they bought and sold, and what they paid. A decision had not been filed by press time Wednesday, however.

The outcome has the potential to deter hedge fund involvement in companies in bankruptcy, the distressed trader said.

Owl Creek Asset Management LP is leading the campaign to get the judge to reconsider the decision to force disclosure of their trading activity. In a Jan. 19 filing, Owl Creek said it held claims worth an estimated $264.3 million and more than 19 million shares in Northwest, some acquired after the airline filed bankruptcy.

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