EGL, WCI, Affiliated Computer higher on hopes of rival offers; Palm, Friendly deals seen soon

By Ronda Fears

Memphis, March 20 - Speculated rival deals spurred EGL Inc., WCI Communities Inc. and Affiliated Computer Services Inc. higher Tuesday, while rumors of impending deals for Palm Inc. and Friendly Ice Cream Inc. gave those stocks a boost. Meanwhile, a deal to take Claire's Stores Inc. private by Apollo Management at a disappointing 7% premium sparked profit taking, according to traders.

Otherwise, the subprime mortgage sector continued to trade in mixed fashion.

Closely held People's Choice Home Loan Inc., a California-based subprime mortgage lender, filed for bankruptcy Tuesday. The news sent a new ripple through the publicly traded sector with New Century Financial Corp. taking the brunt of the blow as it was cut off from Fannie Mae and cease-and-desist orders mounted against it, causing its bankruptcy speculation to escalate. New Century (Pink Sheets: NEWC) fell 48 cents, or 22.12%, to close at $1.69.

A rumor also was circulating Tuesday that New Century was talking with Miller Buckfire & Co. LLC, a New York restructuring and merger focused investment bank, according to one trader.

"The vultures are definitely circling," remarked the trader, who added the market expects New Century will file bankruptcy at least by the end of the month.

New Century did not return phone calls Tuesday but disclosed in a Securities and Exchange Commission filing that Fannie Mae terminated its mortgage selling and servicing contract, alleging breaches of that contract and others. Additionally, cease-and-desist orders from banking regulators continue to roil New Century; at least 13 states have required it to halt lending.

On the flipside, Accredited Home Lenders Holding Co. got a big shot in the arm as hedge fund Farallon Capital Management lent $200 million to the flagging mortgage company with a fat 13% coupon. Accredited Home (Nasdaq: LEND) advanced by $1.82, or 20.34%, to close at $10.77.

Traders said that event bolstered the psychology for investing in some subprime lenders, such as Novastar Financial Inc. and Fremont General Corp., along with news Friday that Newcastle Investment Corp., which is managed by hedge fund giant Fortress Investment Group, was buying a $1.7 billion subprime mortgage portfolio. Fremont shares (NYSE: FMT) added 71 cents on the day, or 8.8%, to $8.78.

Fremont General was the most frequent name mentioned with buyout or bailout potential behind its advance in Tuesday's session, another trader said.

He noted volume in Fremont stock was "not off the charts or anything like that," however, and one of the top speculated buyers of Fremont, Wells Fargo & Co., came off that list as the bank announced Tuesday it would cut 500 jobs in its subprime unit. Wells Fargo shares (NYSE: WFC) rose 36 cents, or 1.05%, to end at $34.61.

Claire's tepidly higher on deal

Costume jewelry and fashion accessories retailer Claire's agreed to be acquired by Apollo for about $3.1 billion, or $33 per share - a mere 7.3% premium to Monday's market - and selling into the rally on the news held the stock well below the offer price, one trader observed.

"Basically it's a take under and when the stock ran up to $32.25 there was a lot of selling," the trader said. "The price was disappointing, but I don't think a lot of people believe they could do better. Apax partners [another private equity firm] was supposedly involved recently and stepped back, so it looks like there wasn't a lot of interest."

Claire's shares (NYSE: CLE) traded in a band of $31.10 to $32.25 in the session before settling at $31.88, a gain of $1.12, or 3.64%, on the day.

Pembroke Pines, Fla.-based Claire's, with stores mostly in malls, last year retained Goldman, Sachs & Co. to assist in a search for buyers. The Schaefer family, which owns a majority of the company stock, has entered into a separate agreement to vote in favor of the merger.

Affiliated takeout seen higher

Affiliated Computer traded past the level of a management-led buyout offer by founder Darwin Deason and Cerberus Capital Management of more than $8 billion, including debt, at $59.25 - a 15.5% premium to Monday's close - on thinking that it could be topped, according to another trader.

"It was pretty slim," remarked one trader of the buyout offer price.

Affiliated Computer shares (NYSE: ACS) gained $8.66 on the session, or 16.88%, to settle at $59.95, and the trader said the stock traded slightly over $60 in after-hours activity but was last seen unchanged from the close.

The buyout price of "only $59.25 per share is considerably below the company's true inherent value," the trader continued. "I have heard that several shareholder groups are joining together to force the board to either put the company up for auction and engage in a fair bidding process and/or prevent this takeover at this unfair price."

Other big holders, at Dec. 31, include Capital Guardian Trust Co. with a 6.37% stake, Capital Research & Management Co. with a 5.38% stake, Pzena Investment Management LLC with a 4.0% stake, OppenheimerFunds Inc. with a 4.18% stake and Vanguard Group with a 4.01% stake.

"I look for the board to push Deason to raise his offer and/or to invite other buyout firms in. The board will not let itself be seen as caving to the initial offer by its chairman," the trader said.

"My guess is that we will see the offer sweetened or exceeded with the final buyout price in the $63 to $66 range."

Dallas-based Affiliated Computer, an outsourcer of information technology services, has been exploring strategic options for two years. Late in 2005, the company considered an unsolicited $8 billion offer from a group of buyout firms led by Texas Pacific Group, Bain Capital and Blackstone Group. After rejecting that offer, though, the company said it was no longer considering a transaction. In late 2005, the stock was trading at about $47.

Palm rises handily on deal buzz

Another round of takeover talk targeting handheld device market Palm propelled the stock Tuesday. Potential buyers continue to be Nokia Corp. and Motorola Inc. with up to three other potential bidders speculated and a deal for as much as $2 billion, or roughly $20 per share, firming up as soon as Thursday.

Palm shares (Nasdaq: PALM) advanced 63 cents, or 3.47%, to close at $18.77 with a whopping 19.6 million shares traded versus the norm of 5.7 million shares.

A trader said the industry web site Unstrung.com quoted unidentified sources close to the situation as saying Palm's management preferred a private equity buyer. It speculated that Texas Pacific Group and Silver Lake Partners were among the private equity firms interested. Palm also is rumored to have hired Morgan Stanley to facilitate a transaction.

Sunnyvale, Calif.-based Palm has been viewed as a buyout target for years, but since the end of January the chatter has intensified.

WCI building solid base

Activist hedge fund SAC Capital Advisors said it had reviewed public information about billionaire investor Carl Icahn's planned tender offer for luxury homebuilder WCI and might hold talks with the company's shareholders and management, which another trader said was translated into thinking the Icahn bid might be sweetened or bested.

WCI shares (NYSE: WCI) gained 36 cents, or 1.61%, to $22.76.

Icahn said last week that he would launch a tender offer for WCI, in which he already has about a 14.6% stake, at $22 per share. SAC's comments appeared Tuesday in SEC documents where it declared a 9.5% stake in the Florida homebuilder; SAC said it had no present plan or proposal for a major transaction, however.

"I don't see what Icahn and Cohen [SAC founder Steve Cohen] see in WCI, but that's just me," the trader said. "But the good news, I think, is that if two people are interested in WCI it decreases the possibility of the company going private at a low price."

Friendly talks seen solidifying

Rumors that a buyout offer for Friendly Ice Cream was near sent the stock up by around 5% by midday, according to another trader. But, he said there were a good number of holders "itching" to sell into the rally and that brought it off the day's high.

Friendly shares (Amex: FRN) closed higher by 52 cents, or 3.48%, at $15.48.

Earlier this month, Friendly 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.

At that time, the trader speculated Friendly could fetch $18.30, and he said Tuesday he was standing behind that estimate, which would be about an 18% premium to Tuesday's market. On March 7 when Friendly announced the move, the stock gained 16.5% to $13.79.

"I believe the strategy of Lion Fund is to grow through equity ownership. By purchasing 25% of a company they are able to win majority voting power on the board. Having that luxury they are able to borrow 100% of the company to purchase a larger company for 25% ownership. This is what seems to be the plan of the Lion fund," the trader said.

Biglari took control of restaurant chain Western Sizzlin Corp. in 2005.

"This is the same thing," the trader continued.

Wilbraham, Mass.-based Friendly has 514 company and franchised restaurants throughout the Northeast.

EGL up as Apollo bid remains

EGL continued to gain ground Tuesday on the heels of accepting a $38-per-share management-led LBO offer as a $40-per-share rival offer from Apollo Management was thought to remain on the table, another trader said.

The stock (Nasdaq: EAGL) added another $1.45, or 3.9%, to close Tuesday at $38.61, following a 6% advanced on Monday's news.

"By all indications the Apollo bid is still on the table," the trader said. "We don't know yet what the board is going to do with that, though."

Houston-based shipping company EGL agreed to a boosted management-led LBO offer of $1.7 billion from chief executive and chairman James Crane, who owns 18% of EGL shares, and affiliates of Centerbridge Partners and The Woodbridge Co.

The latest offer was boosted from a March 1 offer from that group of $36 per share, which had been boosted from $35 per share in January from a group that included Crane and General Atlantic LLC. In early February, General Atlantic dropped out of the transaction due to an expected shortfall in EGL fourth-quarter 2006 results.

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