Cleveland-Cliffs moves higher, possibly signaling arbs' expectation of sale

By Paul A. Harris

St. Louis, July 25 - Shares of Cleveland-Cliffs Inc. (NYSE: CLF) gained 5.39%, or $5.01, to close at $98.01 on Friday.

A special situations equities analyst pointed to a Friday story in the Wall Street Journal reporting that Cleveland-Cliffs, less than 10 days after reaching an agreement to acquire Alpha Natural Resources, Inc. in a cash and stock deal worth $10 billion, will be wearing a "for sale" sign if Harbinger Capital, which owns a 16% stake in Cleveland-Cliffs, has its way.

The special situations analyst, who spoke on background, recounted that Harbinger came down against Cleveland-Cliffs' acquisition of Alpha Natural Resources for $22.23 in cash and 0.95 shares of Cleveland-Cliffs stock.

Block and sell

The analyst said that although Harbinger's stake is only 16% it would be a potent force in both blocking Cleveland-Cliffs' acquisition of Alpha Natural Resources and agitating for Cleveland-Cliffs to put itself up for sale.

In terms of the Alpha Natural Resources acquisition, Ohio law requires approval by two-thirds of Cleveland Cliffs' shareholders.

And in terms of agitating for a sale of the company, if Harbinger could actually produce a buyer Cleveland-Cliffs shareholders could prove malleable, the analyst said.

The source added that two factors, strong steel prices and a weak U.S. dollar, could help propel Cleveland-Cliffs into play, and noted that the Wall Street Journal mentioned two offshore companies that could make bids: Russia's OAO Severstal and Luxembourg-based ArcelorMittal.

Late Friday the special situations analyst reasoned that Friday's significant percentage move in Cleveland-Cliffs' shares signals that arbitrage investors find the "for sale" scenario plausible.

Meanwhile the surfacing of an alternative scenario to Cleveland-Cliffs' acquisition of Alpha Natural Resources saw the latter company's (NYSE: ANR) shares also trade significantly higher, closing up 5.42%, or $4.55 per share, at $88.45.

Based upon Cleveland-Cliffs' $98.01 close on Friday, the cash and stock bid for Alpha Natural Resources would come to approximately $115.34 per share, rendering an arbitrage spread of slightly more than 23%.

Meanwhile shares of ArcelorMittal (NYSE: MT) finished 3.17% higher on Friday, up $2.40, to close at $78.02.

Genentech mulling bid from Roche

Elsewhere on Friday, shares of Genentech, Inc. (NYSE: DNA) closed 1.43%, or $1.35, higher at $96, $7 above the $89 per share unsolicited cash bid from Roche Holding AG.

In a Thursday press release Genentech announced that it has formed a special committee composed of the company's three independent directors to assess the proposal.

The release noted that Genentech has no obligation under the Affiliation Agreement between Genentech and Roche to agree to a transaction.

Meanwhile on Friday shares of Roche (VTX: ROG.VX) gained 3.51%, or €6.40, to close at €188.90.

Iberdrola decision by end of month

Elsewhere, according to a special situations source, the Albany Times Union reported that counsel for Spain's Iberdrola SA sent a letter dated July 14 to the New York State Public Service Commission requesting that the commission vote on Iberdrola's proposed $28.50 per share acquisition of Energy East Corp. by the end of July.

The letter stated: "The joint petitioners respectfully submit that there is no reason for any further delay in decision-making in this proceeding and, therefore, request that the commission undertake to render its decision before the end of July 2008, including through a special session if need be".

Shares of Energy East (NYSE: EAS) ended the Friday session 8 cents, or 0.32%, lower at $24.72.

Iberdrola (Frankfurt Stock Exchange: IDRO)'s shares also closed lower, down 1.72%, or €0.14, at €8.

EDS, HP get approval from Europe

The special situations analyst also noted that European Union regulators have approved Hewlett-Packard Co.'s acquisition of Electronic Data Systems Corp. for $25 per share, or approximately $13.9 billion, and added that shareholders will vote on the deal in the coming week.

Electronic Data Systems (NYSE: EDS) shares closed 0.57% higher on Friday at $24.85, up $0.14.

Hewlett-Packard (NYSE: HPQ) gained 0.76%, or $0.33 per share, to close at $43.71.

Friday's situations took place as share prices strengthened on the three major U.S. stock indexes.

The Nasdaq turned in Friday's strongest performance, gaining 1.33%, or 30.42 points, to close at 2,310.53.

Gains in the S&P 500 and the Dow Jones Industrial Average were much more modest.

The S&P 500 ended the day 0.41%, or 5.15 points, higher at 1,257.69.

The Dow gained 0.18%, or 20.36 points, closing at 11,369.64.

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