AK Steel spikes; Florida East Coast zooms; Peerless retreats; Movie bounces; Delta Air slips

By Ronda Fears

Memphis, May 8 - AK Steel Holding Corp. soared early Tuesday, largely on short covering after rumors hit the wires that Arcelor Mittal, the world's largest steel company, was considering a takeover bid at around $4.5 billion, or $40 a share.

"The same thing that is happening to the steel stocks is happening to the railroads," said an equity trader at one of the bulge bracket firms. "The prices will just keep going up. Everybody wants their hands on them because of their cheap transportation costs. I think we're still early to the party here."

Railroad Florida East Coast Industries Inc., indeed, announced Tuesday it will be acquired by Fortress Investment Group in an all-cash transaction valued at $3.5 billion. Higher in sympathy were Burlington Northern Santa Fe Corp., Canadian National Railway Co., CSX Corp., Kansas City Southern, Norfolk Southern Corp. and Union Pacific Corp.

CSX was one of the biggest gainers, with rumors revived from six weeks ago of a potential buyout. In mid-March, CSX shares spiked 7%, and traders noticed unusually aggressive option activity in April calls with a strike price of $40 and $45. CSX shares (NYSE: CSX) on Tuesday traded in a band of $45.65 to $47.38 before settling at $46.50 for a gain on the day of 60 cents, or 1.31%.

Countrywide Financial Corp. also was back in the circle of names with buyout speculation pushing stocks upward. Chatter at the first of the year that Bank of America Corp. was looking to buy the mortgage firm fizzled when the subprime mortgage sector imploded in February, but with the space calming down in recent weeks, traders said the chatter began anew. Countrywide shares (NYSE: CFC) on Tuesday advanced $2.77, or 7.19%, to $41.28.

Reuters Group plc retreated in the United States but was higher in London as it confirmed Tuesday talks with Canadian financial data company Thomson Corp. of a buyout at $17.5 billion, or 352.5p ($7.03) per share in cash plus 0.16 Thomson share. Analysts were optimistic while players were hesitant because of antitrust concerns. Reuters shares in the U.S. (Nasdaq: RTRSY) lost $1.09, or 1.42%, to $75.41 while advancing abroad (London: RTR) by 21p to 630p. London's markets had been closed Monday. Thomson shares in the United States (NYSE: TOC) fell $1.53, or 3.57%, to $41.30; in Canada (Toronto: TOC) the stock lost C$1.46, or 3.09%, to C$45.77. No deal has been inked, however.

Activist shareholders also continue to spark several stock movements.

Peerless Systems Corp. aired a counter campaign against the proxy fight launched last week by two dissident hedge funds - Pembridge Value Opportunity Fund and Whitehall Capital Investors - but the stock took a downturn on the session. The investors want the company to explore strategic alternatives, including a possible sale, while the company argues it already has taken many aggressive steps.

Riviera Holdings Corp. also is in the midst of a proxy battle with investors that have failed in attempts since last year to make a successful takeover of the Las Vegas gaming operation - the last at $27 per share on March 26. Riviera on Tuesday urged a vote against the dissident director nominees at its annual meeting May 15 by Riv Acquisition Holdings Inc. Riviera shares (Amex: RIV) have soared from around $20 just before the latest offer to close Tuesday at $32.34, a gain of 19 cents on the day.

Movie Gallery Inc. took off Tuesday after hedge fund Schultze Asset Management, its largest shareholder with a 14.4% stake, said it planned to press the movie rental chain to take steps to improve value through a rights offering, in part to pay off bank and bond debt and obtain lower interest expenses. Movie shares (NYSE: MOVI) shot up 33 cents, or 9.82%, to $3.69. The Dothan, Ala.-based company, which has struggled since making the acquisition of Hollywood Entertainment Corp. in 2005, is slated to report earnings May 11.

Universal Power Group Inc., which also has come under pressure from big stockholders to explore ways to improve its stock price since going public in December, was steady after reporting first-quarter results Tuesday; market sources said talks with investors appear to be positive.

Elsewhere, Delta Air Lines Inc. shares took a dive Tuesday to below where the stock debuted last week as the Atlanta-based carrier exited bankruptcy. Nearly 400 million new shares were distributed to unsecured creditors for recovery rates of 62% to 78%. The new stock (NYSE: DAL) lost 73 cents, or 3.59%, on Tuesday to close at $19.63. It had opened on May 3 at $21.75 and drifted mostly lower. But traders noted volume was light Tuesday at 4.2 million shares versus the average of 5.4 million shares since it began trading.

"We haven't seen the move up everyone expected," said one Delta equity trader, but there hasn't been a big dumping, either.

AK Steel shorts scramble

AK Steel was mum on the rumors of Arcelor Mittal making a move for it at $40 per share, but the noise sparked panic in those with short positions. The stock (NYSE: AKS) opened at $37.65 and traded up to $37.70 before drifting back for most of the session to close still with a hefty gain of $2.96 on the day, or 9.23%, at $35.02.

"All day it was fading from the open. It flew out of the gate. People were covering shorts; they are not doing great but did the best they could in the midst of the panic," said one trader.

"It was very choppy. I was in and out in a range of $2.50. The target is supposed to be $40 so where it closed makes me think someone thinks there will be some opposition."

AK Steel chief executive James Wainscott has repeatedly said on earnings conference calls that the company wants to remain independent. AK Steel executives have been grilled about the matter because of recent consolidation in the steel industry, including Mittal Steel Co. NV's $41 billion hostile bid for Arcelor SA and then Tata Steel Ltd.'s purchase of Corus.

Arcelor Mittal shares (NYSE: MT) fell $1.08, or 1.88%, to $56.40 on Tuesday.

Alcan falls on bid opposition

Opposition surfaced from activist hedge fund JANA Partners LLC about Alcoa Inc.'s hostile bid at $27 billion for Canadian peer Alcan Inc. Rather, JANA said Alcoa should consider other alternatives, even the sale of Alcoa.

In the face of that development, Alcan shares (NYSE: AL) fell $1.83, or 2.23%, to $80.28.

Alcoa is offering an equivalent $73.25 per share, in cash and stock. On speculation of a bidding war, Alcan shares were pushed up 34.5% on Monday.

Alcoa shares (NYSE: AA) gained 87 cents, or 2.25%, to $39.50, following an 8% advance the day before.

"Given Alcoa's long history of failing to generate shareholder value through acquisition, we believe that its greatest value can be realized through a sale or break-up of the company," said JANA managing partner Barry Rosenstein in a letter to Alcoa chief executive Alain Belda.

Belda had said Alcoa launched the hostile bid for Alcan after two years of talks between the two aluminum producers failed to lead to a deal. The move took Wall Street by surprise and many saw it as a defensive move by Alcoa, which has been speculated as a takeover target itself.

"Since Alcoa was undervalued, and discounted due to senior management bozos, this is an exciting development that they would get pressured to go on the auction block," said a trader.

"I am guessing if Alcoa gets a bid, the bid will be $48.50."

Alcan, which was split off from Alcoa in the 1920's because of antitrust concerns, said it plans to consider the proposal and advised shareholders to wait until it has fully reviewed the offer.

Armor slips on convert trade

Armor Holdings Inc. also was lower in the wake of a deal announced Monday - a buyout of the military vehicles and bulletproof vests maker by British defense contractor BAE Systems plc for $3.37 billion, or $88 per share, in cash.

An equity trader said the decline in Armor shares was likely related to convertible players selling the stock short, per a research report off the Lehman Brothers Inc. convertible research desk Tuesday.

Armor shares (NYSE: AH) traded down to $85.75 before getting lifted to settle the session at $86.02, a loss of 58 cents, or 0.67%, on the day. The stock had gained 5% on the news Monday, following a 6% advanced on rumors of the deal Friday.

Lehman analysts said convertible-based trades are clearly expected to outperform plain stock-based trades.

Armor Holdings has a 2% convertible due November 2024 at an outstanding face amount of $345 million and market value of $618 million, the analysts said.

Lehman's convertible analysts said in a report out Tuesday that the long convertible, short stock trade yields an upside annualized unlevered return of 11.8% versus 11.2% for the long convert trade and just 4.57% for the long stock trade.

Florida may get higher bid

Florida East Coast zoomed on news it will be bought out by Fortress Investment Group in an all-cash transaction valued at an equivalent of $84 per share, which is a $62.50 per share cash payment plus a $21.50 special dividend. Some saw the call spread trading too tight and passed on getting involved, traders said, and the stock also went past the price tag on thinking there could be a rival bid in the neighborhood of $90 per share emerge.

The stock (NYSE: FLA) traded in a band of $81.90 to $85.75 before close with a gain of $10.78 on the session, or 14.54%, at $84.91.

"There was no spread on FLA. It was trading tight because another bidder may come in," said one risk arbitrageur.

"It's insane." Observing that folks see all M&A deals as openers, that a rival bid or better bid is expected, he continued, "Until rates go up when everyone gets their head out of the sand and realizes there's an inflation problem. It's what I call the ostrich market."

But a sellside trader said many think Fortress, which bought RailAmerica Inc. in November, may be forced to pay a similar premium to that deal, which would put it "closer to $90." He said there was chatter that the Blackstone Group might step up with a higher bid, as well.

Fortress bought RailAmerica on Nov. 13 for $16.35 per share in cash - a 32% premium to the previous day's close and a 49% premium to the 60-day average.

Under the deal announced Tuesday, Florida East Coast will pay a special dividend of $21.50 per share in cash and in the merger shareholders will receive $62.50 in cash for total consideration equal to $84 per share - a 13.3% premium to Monday's close and a 31% premium to the 60-day average.

Florida East Coast's quarterly earnings conference call is scheduled at 10 a.m. ET on Wednesday.

UPG holder optimistic

Universal Power Group, a provider of third-party logistics and supply chain management services and distributor of batteries, security products and related portable power products, reported first-quarter sales increased 13.5% to $23.5 million and that net income rose to $368,000, or 7 cents a share, from $338,000, or 11 cents a share, a year ago.

The stock (Amex: UPG) traded in a band of $5 to $5.33 but settled unchanged at $5.20 on heavy volume of 52,300 shares versus the norm of 16,517 shares.

UPG is being watched closely by many special situations players because of recent activist developments. 3V Capital Management LLC, which emerged as its second largest shareholder in April, is seeking board representation, expressing disappointment with its stock performance since going public in December.

But the latest results are encouraging.

"The fact that the company delivered a solid quarter in the face of rising lead prices is a testament to the quality of the management and the business. We're encouraged the company has won some business from Monotronics, the first Brinks competitor to become a client," 3V portfolio manager David Bullock told Prospect News on Tuesday.

"We were also pleased the company qualified its guidance by noting that it represents organic growth from existing customers and excludes any potential growth from new business or the investment of proceeds from the IPO. In addition, I had a very pleasant and productive meeting with UPG's chairman yesterday [Monday] and am comforted that the company is receptive to our involvement. We look forward to presenting our views and specific action items to the board when we meet in June."

UPG said revenues from sources other than Brinks rose 43%, driven by increases in high volume products, as well as price increases implemented by UPG to offset higher cost of goods sold. The strength in these sales was partly offset by a modest decline in Brinks revenues to $12.5 million, compared to $13 million, the company said.

The company said it continues to expect 10% growth for 2007 in net sales and operating income.

Peerless profit takers roll

Peerless Systems was taken down by profit taking, however, after acknowledging Tuesday that Pembridge Value Opportunity Fund and Whitehall Capital Investors are attempting to nominate three directors to its board at the upcoming 2007 annual meeting on June 11.

The stock (Nasdaq: PRLS) lost 15 cents, or 4.08%, to close at $3.53 after trading in a band of $3.52 to $3.70 amid light volume on Tuesday.

A trader said there was some profit taking in the name but added that there "seems to be a lot of support for a change."

Richard L. Roll, chief executive of Peerless, said in a prepared statement Tuesday, "Peerless is always willing to engage in constructive dialog with its stockholders regarding maximizing shareholder value." But, he added that the company recently "undertook a thorough, bottom-up review of Peerless' business and operations" that resulted in terminating several underperforming programs to focus on more promising operations.

The company said that, "over the past several months, management has conducted a rigorous internal review of potential strategic acquisition, partnership and joint venture candidates, has contacted candidates that appeared most promising and has engaged in preliminary discussions.

"Management expects to be in a position soon to present to the board of directors those opportunities which it believes will best maximize shareholder value, although there can be no assurance that these efforts will result in an acquisition, joint venture or strategic relationship. The company believes the uncertainty created by a change in control of the board and the subsequent actions of the three dissident directors would jeopardize those efforts."

Pembridge and Whitehall announced its nominations a week ago, noting Peerless went public over 10 years ago with an IPO priced at $11 a share and on March 14 sank to a 52-week low of $1.86. Peerless' book value per share over the same time period also dropped 65% from $2.68 per share to $0.94. Pembridge said that dilution has been rampant as Peerless' board has issued equity without restraint and thereby reducing value.

"I'll vote for Pembridge and Whitehall," said a buyside market source. "I like the company and think they are way undervalued right now. I love the idea of a dividend, there is lots of cash, the days of bridge loans are way gone, lets reward little old me."

In addition to a potential dividend, Pembridge said last week that Peerless should explore the full range of strategic alternatives, including a sale of all or part of the company, or a stock buyback program.

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