Doral gets rival bid; Accredited deal pushes Novastar; Cadence climbs; Solectron drives Sanmina

By Ronda Fears

Memphis, June 4 - Troubled Puerto Rican bank Doral Financial Corp. surged Monday after receiving a rival buyout bid from FBOP Corp. of $610 million at $1.41 per share for 80% of the company, which traders said appeared to be far superior to that of a Bear Stearns-led group in mid-May, also at $610 million but which at the time worked out to $0.63 per share, for 90% of the bank.

Accredited Home Lenders Holding Co. also took a leap Monday on buyout news at $15.10 per share - a 9.7% premium to Friday's market - by Lone Star Fund V LP, and one trader said there was a rumor that a foreign bank was considering launching a rival bid at a substantially higher price. But there was considerable doubt of another bid, sources said, and the stock came well off the day's high.

Novastar Financial Inc., another subprime lender up for sale, saw its stock (NYSE: NFI) add 42 cents, or 5.63%, to $7.88 with some enthusiasm by the activity in the sector.

Smartphone maker Palm Inc. announced the sale of a 25% stake to private equity firm Elevation Partners for $325 million, in the form of a convertible preferred PIPE that converts at $8.50 per share, and that the former technical guru behind Apple Inc.'s iPod will become chairman. While some thought the news puts Palm out of circulation as a takeover target, one trader said that isn't so. The big draw to the stock on the news was a $9 per share special dividend that will be paid with a new debt arrangement.

Several other technology names also were moving on buyout news - old and new - on Monday.

Cadence Design Systems Inc. is rumored to be talking with at least two buyout firms, and the stock hit a new 52-week high. Cadence shares have almost doubled year to date, one trader noted, adding that the renewed chatter also pushed Magma Design Automation Inc. (Nasdaq: LAVA) higher by 48 cents, or 3.19%, to $15.53. "Magma is a cheaper target that some folks think might be on a radar screen somewhere," the trader remarked.

Solectron Corp. is being acquired by Flextronics International Inc. in a cash-or-stock deal valued at $3.6 billion - roughly a 15.4% premium to Friday's market based on the cash offer of $3.89 per share. Solectron holders also could choose to take 0.3450 shares of Flextronics, subject to the limitation that no more than 70% and no less than 50% choose to take Flextronics shares. Solectron (NYSE: SLR) traded up 51 cents, or 15.13%, to $3.88.

Sanmina-SCI Corp. was higher on the Solectron news as a potential takeover target, the trader continued. It (Nasdaq: SANM) gained 20 cents, or 5.63%, to $3.75. "We're finally seeing the start of consolidation in this industry with Flextronics buying Solectron," he said. "I look for someone to take out Sanmina. Unfortunately, Sanmina is not going to see any large price premium from where it's trading today, maybe something similar to Solectron's premium."

Rackable Systems Inc. was another tech name moving up on renewed takeover speculation, he noted. The stock (Nasdaq: RACK) advanced 53 cents, or 4.36%, to $12.69, largely taking a cue from the options market, he added.

There were a few leisure names on the tape, with Marriott International, Inc. also surging on takeover chatter beginning in the options market, another trader said. Marriott (NYSE: MAR) shot up $1.27, or 2.72%, to $47.88.

Sonesta International Hotels Corp. rocketed on its announcement that it had hired Goldman Sachs to explore strategic options. Boston-based Sonesta operates, owns or leases hotels in the United States, Cairo, Luxor, Port Said, Taba, Egypt; and Qatar, and franchises in Peru, St. Maarten and Brazil. It also operates five Nile River cruise vessels in Egypt. The stock (Nasdaq: SNSTA) climbed $7.738, or 33.28%, to $30.988, but one trader noted that the stock is not very liquid as 45% of the float is held by insiders.

Bally Total Fitness Holding Corp. shares doubled Monday on rumors that there was a private equity firm interested in making a buyout offer before the company files bankruptcy, as it announced last week. The rumored buyout would pay stockholders $1.50 per share, whereas they would get nothing in a bankruptcy scenario, but traders said there was some skepticism that the company could avoid Chapter 11 altogether because of its high debtload.

There were a handful of medical-related deals on the tape, too.

In a stock-and-cash deal, Digene Corp. rallied in response to Dutch rival Qiagen NV's move to acquire the molecular-diagnostics company for $1.6 billion - $61.25 per share and 3.545 shares of Qiagen with 55% in cash and 45% in stock, for a roughly 36.8% premium - but the stock lingered well under the price tag, either way you look at it, as players pocketed profits, traders said.

1-800 Contacts announced a buyout by private equity firm Fenway Partners for $340 million, or $24.25 per share - a 21% premium over Friday's close and a 34% premium over the 30-day trading average. The stock (Nasdaq: CTAC) gained $3.92, or 19.52%, to $24. A trader said 1-800 Contacts had made a run on speculation as a possible takeover target following Bausch & Lomb Inc. takeover news in mid-March by private equity firm Warburg Pincus at $4.5 billion.

Advanced Medical Optics, Inc., which had expressed an interest in putting a rival bid to the standing $65-per share offer for Bausch & Lomb, has suffered a setback in those plans due to a new product recall Friday, the trader added. Advanced Medical Optics is hosting a conference call for investors and analysts to provide an update on its eye care business at 9 a.m. ET on Tuesday. Ahead of that call, the stock (NYSE: EYE) on Monday advanced 58 cents, or 1.66%, to $35.42.

Bradley Pharmaceuticals Inc. said a special committee of its board of directors has retained Deutsche Bank Securities as its financial adviser, in part to assess the management-led buyout offer at $21.50 per share. One trader said there was "huge opposition" to the group of investors led by Daniel Glassman, founder and CEO, so "they are back-tracking to try to cover some bases, hoping to get some other bids, I imagine." Bradley shares (NYSE: BDY) slipped 15 cents, or 0.67%, to $22.11.

Doral interest surprises

Doral's competing bid was a pleasant surprise, traders said, who categorized it as superior to the Bear Stearns group's offer. It was met with open arms by the stock market, which pushed the shares (NYSE: DRL) up by 58 cents, or 44.62%, to $1.88 on thinking that the Bear Stearns group, which also consists of some big Doral bondholders, would consider upping their bid.

Additionally, Doral's preferred issues - long considered the sweet spot in the credit structure - were sharply higher with three issues gaining as much as 6% while the 4¾% convertible preferreds, with a par of $250, were active but ended unchanged at $139.0313.

"The new bid wins hands down," remarked one trader. "There isn't a way where the Bear Stearns group can match it and not volunteer their first bid [as] way low. The board of directors has to go with new bid - it takes away the risk of bond defaults, gives an additional credit line [and there is] no need to wait for FDIC approval of the bank holding company."

FBOP is a private bank holding company based in Oak Park, Ill. Until 1990, its holdings consisted solely of First Bank of Oak Park but it has since expanded into California, Texas, and Arizona.

On May 16, Doral inked the below-market buyout by Doral Holdings, a group of investors led by Bear Stearns Merchant Bank and Goldman Sachs, as a means to pay off its $625 million floating-rate notes that come due in July, which has been roiling the company for the past six months. The trouble actually goes back around five years involving "phony financials," as one trader put it.

According to a Securities and Exchange Commission filing, the rival bid from FBOP includes a $150 million line of credit and a provision to deposit funds into an escrow account to be used to pay off the floaters in the event that the deal has not closed by the maturity date.

FBOP also noted that its offer is subject to financing contingencies, whereas the Bear Stearns group still had to raise $215 million as of the deal announcement date, May 16.

The Bear Stearns group announced it had procured the additional funding Monday just as the rival bid emerged. The group also said in a letter to Doral filed at the SEC that there was more "upside" in their deal than the FBOP bid, such as not taking the company private.

Accredited interest rumored

Accredited Home's takeout by private equity firm Lone Star for $400 million could see a competing bid, as well, another trader said. He said there was a report Monday out of Lisbon that Banco Comercial Portugues was planning to launch a takeover bid for Accredited Home at $28.15 to $28.85 per share.

"I don't know where the rumor started but this is a major bank in Portugal and they would have the means, but honestly it doesn't make sense," the trader said.

"What I think was really holding the stock back was that this deal with Lone Star is a tender offer, there are a lot of things that could go wrong with that."

Hence, he said there was heavy profit taking on the news.

Accredited Home shares (Nasdaq: LEND) traded in a band of $15.07 to $15.44 before easing back to close at $15.12 for a gain of $1.36, or 9.88%. Accredited's 9.75% preferred stock traded up by $1.44, or 6.76%, to $22.75 on heavy volume.

Matt Howlett, analyst with Fox-Pitt Kelton, said he doesn't foresee another bid surfacing.

"I don't think we're going to see any late bids pop up," Howlett said. "I figure all the bidders have been involved already."

The transaction values Accredited Home at $15.10 per share, a 9.7% premium over its Friday closing price. It is 72% below the 52-week high of $53.45, struck a year ago, but four times the March 13 trough of $3.77.

The acquisition is structured as an all-cash tender offer for all outstanding shares of Accredited Home common stock to be followed by a merger in which each remaining untendered share of Accredited Home will be converted into the same $15.10 cash per share price paid in the tender offer. The preferred stock will remain outstanding.

"A higher offer is unlikely, I agree, since Accredited Home was on [the] auction block for a while," the trader said. "Farrallon made a quick buck, and few others."

In March, Accredited Home received a $200 million loan from Farallon Capital Management LLC following the sale of $2.7 billion of mortgage loans.

During the routing of the subprime market in February, Accredited Home cut 1,300 of its 4,200 jobs in first quarter as lending volume sank 47% and delinquencies tripled.

The sale comes two months after San Diego-based Accredited Home said it was exploring a merger and that auditor Grant Thornton LLP had resigned.

Bear Stearns & Co., Friedman Billings Ramsey Group Inc., Houlihan Lokey Howard & Zukin and the law firms Dewey Ballantine LLP and Morris, Nichols, Arsht & Tunnell LLP advised Accredited Home. Piper Jaffray & Co. and the law firm Sullivan & Cromwell LLP advised Lone Star.

Cadence chatter continues

Cadence Design talking with buyout firms is not new, but the new high in the stock price sparked heavy profit taking amid some doubt about a deal, one trader said. The New York Times reported the company is talking with Kohlberg Kravis Roberts and the Blackstone Group, the trader noted, but Citigroup analyst Terence Whalen said in a research note he thought a buyout is unlikely.

The stock (Nasdaq: CDNS) shot up $1.32, or 5.76%, to $24.22 after trading as high as $24.90; some 21.35 million shares changed hands versus the norm of 3.55 million shares.

"It has been moving up and up on this chatter. Supposedly the company has made some sort of acknowledgement but with the kicker that a deal may not get done," the trader said.

"I was seeing a lot of folks sell on today's gain, moving on to the next kill. Pocketing some gains now was too tempting."

Cadence, which makes computer chip design software, is regarded as one of the most innovative and aggressive companies in its field. Since 2004, it has acquired four companies, invested heavily in other Silicon Valley firms, and repurchased $1 billion of its shares. Cadence says it will introduce a new approach to chip design this year.

But Intel recently pulled support from Cadence in favor of Magma Design, which the trader said may make it a better takeover target.

Digene players pocket profits

Digene holders were pocketing profits, too, on its acquisition by Qiagen at $61.25 in cash or 3.545 shares of Qiagen stock, subject to pro-ration so that the total consideration is 55% cash and 45% stock. The cash price is a 36.8% premium to Friday's market, and many holders were taking the money right away.

"We were saying that if you own Digene you should sell to Qiagen. It's a fair price," one trader said, speculating there were a lot of sellers on the bounce from the news.

"I imagine a lot of people were happy to take 13 points and run."

Digene (Nasdaq: DIGE) gained $12.05 on the day, or 26.92%, to close at $56.82 after trading up to $60.19. About 7.1 million shares traded versus the norm of 454,642 shares. The trader said he expects the stock to slowly drift up to the acquisition price once the deal clears hurdles like antitrust.

Qiagen said it anticipates the combined company will have more than $350 million of molecular-diagnostics revenue and generate more than $800 million in revenue overall in 2008. The combination is expected to be accretive to Qiagen's adjusted EPS by $0.02 to $0.04 in 2008 and significantly accretive thereafter.

The deal is expected to close sometime in August or September, subject to shareholder and regulatory approval.

Bally banter pushes stock

Bally shares doubled Monday on rumors that there was at least one private equity firm interested in buying the fitness company before it files bankruptcy, according to a distressed equity trader. He said buyout firms involved in the chatter include noted outfits such as Texas Pacific Group, Leonard Green & Partners and KKR with the price tag speculated at $1.50 per share, or roughly $1 billion.

The stock (Pink Sheets: BFTH) gained 31 cents to close at 62 cents with 5.65 million shares traded.

The pre-packaged Chapter 11 announced last Thursday by the company would wipe out the equity.

"It's all a bit sketchy but I could foresee a deal going down before the filing," the trader said. "But, and this is a big but, I think they will still put them in bankruptcy; it may just be a little farther down the road. They have all this debt to consider."

Bally said it planned to file a pre-packaged bankruptcy that would swap $150 million of 9.875% senior subordinated notes maturing this year for new subordinated notes, common equity and the right to participate in a $77.5 million rights offering. It said holders of more than 80% of the 9.875% notes have agreed in principle to the swap.

Sources in the debt markets criticized the plan, saying it falls far short of deleveraging the company. One bond analyst went so far as to refer to it as a "disaster."

Palm buyout not impossible

Palm's news of selling a 25% stake to private equity firm Elevation Partners for $325 million took a lot of the thunder out of the takeover noise surrounding the company over the past year, but one trader said the latter scenario is not totally out of question. He figured, however, such an event would not take place until toward the end of the year.

Under the Elevation Partners deal, Elevation will buy preferreds which convert into common shares at $8.50 each, a 16% premium to the post-distribution stock price over the 10 trading days ended June 1. In addition, Palm has received commitments for $400 million in new debt and a $40 million revolving credit facility. JPMorgan and Morgan Stanley are the joint bookrunners for those facilities.

Proceeds from the placement and from the debt and credit facilities will be used for a planned $9-per-share cash distribution for Palm's shareholders. The amount of the cash distribution is expected to be $940 million. The $8.50 price for the convertible preferreds and the $9 dividend account for the 16% premium to Palm's stock price.

The last bit of news - the dividend - propelled Palm shares (Nasdaq: PALM) higher by $1.48, or 9.2%, to close at $17.57.

Palm has been the subject of extensive buyout speculation, with a range of firms from the worlds of telecommunications - namely, Motorola Inc. and Nokia Inc. - as well as private equity rumored as suitors. Palm acknowledged talks with rivals but there also has been resistance to giving up control of the company.

"This is a damn good deal," said one trader, adding that "Palm has some exciting products on the hardware and software side in the pipeline. Elevation Partners is very visionary and recognizes that this company has some products coming out that could revolutionize."

Another trader, who said he was previously close to the talks between Palm and Motorola, thinks a private equity deal could still be in Palm's future.

"It's not totally out of the realm of possibility. There are some PEs [private equity firms] still swooping around Palm. Motorola won't make a move until Palm management takes it seriously, launches a process to take in bids or explore strategic alternatives," he remarked.

"I think PE could pay $25 to $30 and get a deal. Will they? That's another question. Some of it will be answered if they deliver on the new products, and that will probably take until third or fourth quarter."

Last week, the company introduced a new laptop-like device, the Foleo, designed to work with smartphones. However, it was roundly criticized by analysts and some in the technical press.

In another part of the deal with Elevation Partners, Palm, best known for the Treo line of phones, said two board members - former CEO Eric Benhamou and D. Scott Mercer - will resign. Elevation partners' Fred Anderson and Roger McNamee will join Palm's board, and former iPod guru Jon Rubenstein will join the board as executive chairman.

Anderson, the former chief financial officer of Apple, recently agreed to settle Securities and Exchange Commission charges related to a stock options backdating probe at Apple. He also agreed to pay about $3.5 million in fines, without admitting wrongdoing. Anderson also serves as a director of eBay and Move Inc.

Among Elevation's five partners, besides Anderson and McNamee, is the rock star Bono, lead singer of U2.

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