Alcan shines; Alcoa on the run; Huntsman slides; Lyondell up; Abbott off; ImClone declines

By Ronda Fears

Memphis, July 12 - Mining giant Rio Tinto plc has inked a friendly buyout offer with aluminum major Alcan Inc. for $38.1 billion in cash to counter a hostile $28 billion cash-and-stock bid by aluminum giant Alcoa Inc., which many said increased the spotlight on Alcoa as a takeover target.

Meanwhile, as many traders expected, the bidding war for Huntsman Corp. seems to have been short-lived with it walking away unfettered from a $9.6 billion deal struck last month with Russian-born billionaire Len Blavatnik's Dutch-based Basell, which is controlled by Access Industries, in favor of the boosted $10.6 billion offer from Apollo Management LP's Hexion Specialty Chemicals Inc.

Several traders have been betting that since the Hexion bid for Huntsman emerged, it would drop that pursuit to make a play for Lyondell Chemical Co., which advanced on that line of thought along with rumors that Occidental Petroleum Corp. has sold its entire share stake in Lyondell to Access.

Elsewhere in another hostile situation, diagnostic cancer testing firm Ventana Medical Systems Inc. continued to climb in the wake of rejecting Roche Holding AG's $3 billion, or $75 per share, takeover offer and speculation that Roche will bump up its bid or a higher rival offer will emerge. The stock (Nasdaq: VMSI) continued on a tear, vaulting $3.44, or 4.17%, to $85.97. A couple of hedge fund traders said most players are set up to be OK so long as Ventana gets $80 per share.

There have been a spate of diagnostic testing deals and it is a hot area, but Abbott Laboratories Inc. announced that the $8.13 billion buyout of its diagnostics business by GE Healthcare, a unit of General Electric Co., has been abandoned because they could not agree on final terms. The development, while a big surprise, was not seen as a debilitating event for Abbott, and the stock managed a gain on the session.

In another medical situation, ImClone Systems Inc. and Bristol-Myers Squibb Co. announced that phase 3 trials for Erbitux failed as a co-therapy in first-line treatment for metastatic non-small cell lung cancer. Both have been the subject of widespread takeover speculation, but some players think the decline in ImClone shares on the news might be a case for Bristol-Myers making a move for ImClone.

MedQuist Inc., a medical transcription and document services provider, also has officially gone into play with the hiring of Bear Stearns to explore strategic alternatives, but traders said the situation amounts to Dutch-based electronics giant Philips Electronics NV dumping its 70% stake. MedQuist shares initially surged on short covering, traders said, but before day's end the stock was getting shorted again.

Sterling Financial Corp. was on the rise again amid another round of takeover speculation. A week ago, it saw strong gains as traders speculated a deal could be imminent, possibly at a hefty premium for the Lancaster, Pa., regional bank, with Manufacturers & Traders Trust Co., which has provided it with an $80 million credit line. The company began exploring strategic alternatives in June. Sterling shares (Nasdaq: SLFI) saw a gain of 11 cents, or 1.01%, to $11.04.

Alcan rivalry steels players

Many who were tepidly playing Alcan on a rival bid because of the rumors swirling around the name in recent weeks began to increase their positions as the chatter became reality with Rio Tinto's bid on Thursday.

Still, Alcan shares were hanging well back from the bid of $101 per share, which traders said was a matter of pricing in antitrust risk to the deal along with a hefty breakup fee if the deal should fall through - both of which had been a factor in the Alcoa deal.

Alcan shares (NYSE: AL) added $8.80, or 9.88%, to $98.45.

"I had bought a small January call spread. Now I will look to get bigger today [Thursday] because it is no longer a rumor," said a risk arbitrage trader at a hedge fund.

As for the potential of a wider call spread in this situation as the result of deal closings becoming more risky, due to SLM Corp. announcing its $25 billion private equity buyout may be in jeopardy, he continued, "SLM is very unique; Alcan now has a credible strategic buyer (Rio Tinto), not an LBO. They are very different deals."

The gap between Alcan's close and the Rio Tinto offer amount was explained by traders as a case of profit takers keeping the stock from making a big run, and one trader said it was proof that the current climate in takeovers has investors "just a little jumpy."

Rio Tinto's offer is a 65.5% premium to the closing price for Alcan before Alcoa's May 4 hostile bid emerged, and an almost 33% premium to that offer, Alcan and Rio Tinto said in a joint statement. Alcan, obviously, has recommended stockholders approve the Rio Tinto deal, whereas it has been opposed to a linkup with Alcoa, its former parent.

Rio Tinto (NYSE: RTP) lost $6.71 on the news, or 2.07%, to $317.71.

The offer is subject to conditions including gaining the support of 66.67% of Alcan's shareholders and a breakup fee of $1.05 billion payable by Alcan to Rio Tinto if Alcan pulls out.

Alcoa now seen in play

It had been widely speculated that Alcoa made its hostile bid for Alcan in an effort to ward off unwanted advances from potential buyers, so market sources said now Alcoa seems to be back in the spotlight as a hot takeover candidate. The stock roared higher with Alcan, which virtually spurred the entire steel sector yet higher.

Alcoa (NYSE: AA) advanced $2.86, or 6.74%, to $45.29.

Alcoa said it was reviewing the Rio Tinto offer and planned to issue a response sometime Thursday.

Speculation puts BHP Billiton Ltd. and Companhia Vale do Rio Doce as suitors for Alcoa and CVRD said it had not given up the idea of making a play for Alcoa. BHP (NYSE: BHP) bounced $2.64, or 4.08%, to $68.62 while CVRD (NYSE: RIO) climbed $2.92, or 5.91%, to $52.29.

"Everyone figured Alcoa had been approached and did not want to be the hunted; they wanted to be the hunter," said one sellside trader.

"I think they are going to be involved in some sort of transaction, everyone seems pretty sure of that. It would be better for them, I think, if they would change their attitude, but for investors a hostile bidding scenario could be very profitable."

He said he thought Alcoa shares were undervalued before the takeover fray began in earnest and he had pegged the stock worth $45 at the first of the year; now, he thinks the stock has an intrinsic value of at least $50 but expects that a bidding war scenario could push a takeover price to the $60 neighborhood.

Huntsman retreats

With the view that there will be no lingering bidding war for Huntsman prevailing, traders said the stock pulled back sharply on frustration with the lengthy time frame for the Hexion deal.

Huntsman agreed to the boosted offer from Apollo Management LP's Hexion, which last week bested Basell's $25.25-per-share offer last week with a $27.25-per-share offer and then was upped earlier this week to $28.

Basell let pass a deadline of Wednesday to trump the latest Hexion bid; thus, a rival to Hexion's offer is not widely anticipated.

On the news, Huntsman shares (NYSE: HUN) fell $1.18 on the session, or 4.28%, to $26.39.

"They are holding it back quite a bit," one trader commented. "The time line is pretty onerous."

Hexion and Huntsman have 12 months, with a three-month extension built in, to close their transaction, which meant a good deal of time loss value had to be priced into the stock.

Lyondell rises

Several traders have been betting that since the Hexion bid for Huntsman emerged, it would drop that pursuit to make a play for Lyondell. Before the Hexion bid emerged, however, many thought a deal for Lyondell with Access would not transpire because Basell was going for Huntsman.

On the news Thursday, Lyondell took off again with the stock (NYSE: LYO) advancing $1.20, or 3.12%, to $39.68.

Last month, Blavatnik's Access disclosed a purchase of an 8.3% stake in Lyondell from Occidental Petroleum Corp. and there was a rumor circulating Thursday that Oxy had sold its remaining stake to Access, as they also last month inked a forward contract for Oxy's entire 21 million share position in Lyondell.

"We are hearing Occidental divested itself of its remaining 14 million shares of Lyondell today [Thursday]," a trader said. "They said they sold in the open market, but everyone figures it goes back to the forward contract with Access."

Building its position in Lyondell, he said, would be a strong signal that Access is preparing to make a move for Lyondell.

Abbott news not devastating

Abbott's loss of the $8.13 billion sale to GE Healthcare was first seen as a big negative, and the stock was lower early in the day, but analyst remarks helped bring buyers in to close it with a decent gain.

Some onlookers said the deal, inked in January, was scrapped because Abbott received a warning letter from the Food and Drug Administration in late March citing compliance issues at its Dallas manufacturing plant, so the chances of finding another buyer may be slim.

RBC Capital Markets analyst Phil Nalbone said, however, that he doesn't think the Dallas plant was a deal-breaker as Abbott is addressing the FDA issues. And, he doesn't see the collapse of the GE deal as a performance-buster for Abbott.

The market seemed to agree that the development was not serious, but Abbott shares (NYSE: ABT) took a slight hit early only to settle with a gain of 55 cents, or 1.03%, at $53.76.

"This news is certainly going to be disappointing for investors, since it stymies Abbott's long-standing strategy of shedding its slowest-growing and least-profitable business units and also slows down the company's debt repayment abilities," Nalbone said.

"But we also do not see the thwarted diagnostics division sale as a game-changer for Abbott. The company's earnings outlook for 2007 and 2008 does not change, and the strong new product pipeline in pharma and the vascular division is intact."

ImClone dead without deal

Sans a takeover deal for ImClone, which many onlookers think is a likely possibility, the stock is dead money, remarked a buyside trader. But with ImClone shares sinking on the Erbitux news, he said it might present a perfect opportunity for a takeover bid; if not, he is a buyer on the decline.

ImClone shares (Nasdaq: IMCL) traded down to $33.57 before climbing back to end the day with a loss of $1.17, or 3.26%, at $34.73 - near the intraday high.

"What does this mean? There are no real lung cancer sales [for Erbitux] anytime soon. On the other hand, with options expiring in a week, the pressure is on the put guys at $35 and $40. The bad news is out and likely they will take quick profits before they are eroded away," the buysider said.

"The bad news, however, means ImClone, other than a buyout, is now officially dead money until at least late fall. The market cares not that they are growing sales in colorectal cancer [for Erbitux]. That we already know. Barring a buyout bid, the stock will be range-bound for months would be my guess."

Because of the other successes with Erbitux and other factors, however, he said the downswing in ImClone shares on the latest news might be just the catalyst for a takeover bid to emerge and most likely from its partner Bristol-Myers.

"I think this is what Bristol-Myers has been waiting for to make an offer for ImClone," he continued. "With both Crystal and Lung trials [for Erbitux] disappointing, Bristol-Myers can probably get Carl [investor Carl Icahn, a major holder in ImClone shares] to sell for about $42 to $45 a share."

In mid-February, Bristol-Myers reportedly was in merger talks with Sanofi-Aventis SA that were called off before a transaction. Bristol-Myers merger speculation kicked up again in late April when it inked a partnership with peer Pfizer Inc. to co-develop the anticoagulant apixaban.

Since Bristol-Myers won a patent fight to block a generic version of its blood-thinning drug Plavix in mid-June, the chatter has been rekindled, and many players think it might be proactive with an acquisition of its own, such as ImClone, in order to avoid being taken over.

Bristol-Myers (NYSE: BMY) advanced 40 cents on the session, or 1.27%, to close at $32.02.

Philips dumping MedQuist

Traders said the MedQuist news essentially was a means for MedQuist to accommodate its biggest stockholder, Philips, which said last week that it would be looking to divest its position in the company because of losses in the investment.

MedQuist going into play initially sent the stock higher by more than 5%, trading up to $12.35, on short covering because of the day's news. By noon, however, one trader said short selling began in earnest again on doubts the company will be able to attract a big premium.

"You mention this name [and] the guys who are involved in the sector just groan; no one wants it," said a bulletin board stock trader.

MedQuist (Pink Sheets: MEDQ) traded in a band of $11.95 to $12.35 on Thursday before settling at $12.02 for a gain of 22 cents, or 1.86%.

Last week, Philips said it will take a second-quarter impairment charge of $47.55 million on its stake in Medquist and that it "may consider possible transactions or other changes in its ownership stake in MedQuist." In 2000, Philips paid $1.2 billion for roughly a 60% stake in Medquist and later bumped that to 70%.

The stock trades on Pink Sheets as the result of being delisted because of delinquent financial filings, litigation and investigations by the Securities and Exchange Commission as well as the U.S. Justice Department into accounting practices. The company recently filed its results for 2003 to 2005, but in May the company lost two top executives, unrelated to the probes.

"They are just a mess," the trader said. "It's a sloppy story, and there are not a lot of people who think they can get any deal, much less at a big premium."

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