Harrah's, ServiceMaster, Dollar General up on buyout buzz; Altria unwind near; Winn-Dixie spikes

By Ronda Fears

Memphis, Nov. 28 - As rumors circulated Tuesday about the takeovers of Harrah's Entertainment Inc. and Dollar General Corp. and as ServiceMaster Co. put itself on the auction block, players were scrambling to take positions, but one risk arbitrageur said the odds were too steep.

"Some deals just are too much a long shot, like Harrah's. That bet is a long shot," the risk arb trader said.

"There have been lots of deals done. The private equity firms are rolling in the dough. But people forget that just because it's a mega merger doesn't mean it's for certain. There was Phelps Dodge [and its failed acquisition of Inco Ltd. and Falconbridge Ltd. earlier this year], and Harrah's has flopped, too."

A group led by Penn National Gaming Inc. and hedge fund D.E. Shaw is considering making a cash and stock offer for Harrah's, CNBC reported Tuesday, citing unnamed sources it said were familiar with the matter. This chatter comes almost two months after private equity firms Apollo Management and Texas Pacific Group offered to buy Harrah's for roughly $15 billion, which have since raised their offer to about $15.5 billion.

Las Vegas-based casino operator Harrah's has said only that it is reviewing the Apollo/Texas Pacific bid. Harrah's shares (NYSE: HET) shot up $1.91 on the day, or 2.5%, to $78.46. Penn National shares (Nasdaq: PENN) dropped on the news by 58 cents, or 1.5%, to $38.16.

Winn-Dixie shares zoom 10%

Elsewhere of note, the when-issued shares of Winn-Dixie Stores Inc. shot up Tuesday by more than 10%, fueled by strong buying the day before.

The Jacksonville, Fla.-based grocery chain, which emerged bankruptcy last week, plans to distribute roughly 54.5 million new shares per the reorganization plan in three to four weeks, and the stock will trade on the Nasdaq under the symbol "WINN." The company will have authorization for up to 150 million shares of stock, less the stock distributed in the bankruptcy.

Meanwhile, the when-issued shares are trading on the Nasdaq under the ticker "WINNV."

After starting slow in the when-issued market two weeks ago in the $11 neighborhood and dipping from there, the stock got a big buyer Monday that moved it back to the $11 area. Some 2.3 million shares of the when-issued stock traded Monday, which traders said was a remarkable number for a when-issued stock.

"That big buy was enough to really push this," said a sellside trader. "Volume was nothing today like it was yesterday, but the price was up big."

The stock on Tuesday spiked up $1.13, or 10.28%, to $12.12. Volume dropped to 876,319 shares versus an average of 897,933 shares established over the past week or so when the stock emerged.

Another sellsider said one line of thought among the buyers is that Winn-Dixie could be a real estate play, thinking that the company's remaining properties are valuable.

Since going into bankruptcy, Winn-Dixie has closed 326 stores, aiming at a restructured operation of about 587 units in its core market areas in the Southeast United States.

Winn-Dixie filed bankruptcy in February 2005 in part blaming tough competition from the likes of Wal-Mart Stores Inc., which has in recent weeks said it would cut grocery prices by as much as 20%.

But Winn-Dixie said it expects to emerge with only a minimal amount of long-term debt on its balance sheet. In connection with its emergence from Chapter 11, Winn-Dixie has a new $725 million exit financing facility.

NextWave at good entry point

In another when-issued name, NextWave Wireless Inc. shares continued to climb as players see anything under $10 as a good entry point, according to one sellside market source.

The NextWave shares (OTCBB: NXWVV) added 35 cents on Tuesday, or 3.61%, to $10.05 with heavy volume of 278,490 versus the established average of 222,200 since it began trading a couple of weeks ago.

"Under $10 is seen as a great entry point," the sellsider said earlier in the day, when the stock was at about $9.75.

"They have a management team with a track record of success, and it doesn't appear like there will be a lot of float."

The shares began trading on a when-issued basis at $6, but spiked up to the $9 area last week and have since found plenty of buyers. The company is awaiting a conversion from the old NextWave Wireless LLC corporate structure into a publicly traded company. The stock is scheduled to trade on the Nasdaq with the symbol "WAVE" once the conversion is completed, which onlookers estimate within the next 30 days or so.

NextWave Telecom, predecessor to NextWave Wireless, was formed in 1995 by a group led by Allen Salmasi, former president of Qualcomm's wireless telecom division. The upstart firm attracted a number of prominent backers, including Qualcomm and investment group Cerberus Partners. It also got financing commitments from Lucent, Hughes and Nortel to build its service.

Burdened by billions of dollars of debt borrowed to buy wireless spectrum, the company filed for bankruptcy in 2004, blaming a flooded market of spectrum following the Federal Communications Commission auction. San Diego-based NextWave exited bankruptcy in April 2005. A cornerstone of the reorganization plan was the sale of NextWave Telecom and its subsidiaries, excluding NextWave Wireless, to Verizon Wireless for about $3 billion, which after paying claims left it with roughly $550 million in cash on its balance sheet.

At July 1, 2006, the company said it had $340.4 million of cash and equivalents.

Following the corporate conversion, the company said it will have 82.2 million common shares outstanding held by roughly 1,400 holders of record. There will be 17.3 million shares reserved for future issuance, of which 14.87 million are linked to options and warrants. Salmasi, executive officers and others members of the board of directors will beneficially own or control around 49.3% of the company.

ServiceMaster spikes

Risk arbitrage players were scrambling Tuesday to establish positions in home maintenance company ServiceMaster Co., as the stock soared more than 10% after the company said it has hired Morgan Stanley and Goldman Sachs to explore the possible sale of the company, along with other options.

"Finally, a strong external hand that can do something positive for this company. We are taking a very conservative position," said one risk arb trader, who declined to be specific on how he is setting up the situation.

"Selling off SVM is tantamount to admitting they are incapable of overcoming their many problems themselves, and they are finally throwing in the towel for good. It is probably not one of the easiest deals to orchestrate, but if it happens, finally getting rid of this current management will be great news."

He noted that rumors of a deal of some sort emerged Nov. 15 and had pushed the stock higher, and as a result, the appreciation "erased a lot of the premium you could have seen."

ServiceMaster said it does not plan to release additional information about the status of its review until it completes the process. The company operates Merry Maids, Terminix, Rescue Rooter, TruGreen ChemLawn and other chains providing home maintenance services.

The company posted $4 billion in sales last year, but earlier this month reported a 17% decline in third-quarter profits to $68 million, or 23 cents per share, from $81.6 million, or 27 cents per share, a year before, while revenue increased 5% to $971.4 million from $925.5 million.

"Our board is open-minded with respect to our future path and committed to maximizing value for our shareholders," said J. Patrick Spainhour, chief executive of ServiceMaster. "If the exploration of strategic alternatives creates the probability of a transaction that would deliver value to shareholders that is superior to what the company could achieve with its updated business plan, then the board will pursue that transaction."

Spainhour said the company expects revenue to increase in the mid to high single-digit percentages and EPS growth in the low double digits in 2007. Its target by 2009 is high-single-digit revenue growth and earnings per share progressively increasing to the mid-teen level.

Dollar General off after close

Amid the slump in retailer stocks ahead of this week's wrap up of November sales figures, Dollar General Corp. got a bounce of more than 5% on Tuesday on another round of takeover rumors, but several traders said the noise was largely dismissed, noting a 3% pullback in the stock in after-hours activity.

Dollar General shares surged as much as 6% midday amid speculation that the deep discounter was a takeover target. The stock (NYSE: DG) settled the day with a gain of 82 cents, or 5.16%, to $16.71 with some 11.5 million shares traded versus the norm of 3.5 million shares. In after-hours trade, the stock was seen giving back 51 cents, or 3.05%, to a last trade of $16.20.

"A lot of traders just jumped in, but this was not news," said a sellside trader.

"There has been chatter on this name for two weeks, over two weeks, and the stock has gotten ahead of itself. Since I first recall hearing about a Dollar General buyout, around Nov. 13, the speculators have pushed the stock up something like 17% by our count. I don't know that even now there is anything to this. People sometimes plant information, you know."

Goodlettsville, Tenn.-based Dollar General is slated to report November same-store sales on Thursday, he said, and many analysts are expecting a miss.

Golds cashing out of 99 cents?

As for a discount retailer with prospects of a buyout, the Dollar General trader said his pick would be 99 Cents Only Stores and he saw the stock's gain Tuesday related to a positive view in light of the Dollar General speculation.

99 Cents shares (NYSE: NDN) gained 10 cents, or 0.91%, to settle at $11.10.

"Right now, we're bullish on NDN. That one has a board member that came from a private equity shop. She just got on the board and the shop she used to work for loved buying cash flow winners that the market was not recognizing: NDN fits that criteria, we think," the trader said.

"NDN has had some issues with its Texas operations - and it was late in reporting some filings - but we think it's a $14 stock, conservatively (on a price/cash flow basis). NDN has a clean balance sheet and the Gold family - which owns most of the stock - has considered taking the firm private or pursuing 'strategic alternatives.' If a deep discount retailer will be bought out, it's NDN."

City of Commerce, Calif.-based 99 Cents on Nov. 13 released preliminary fiscal second-quarter results but delayed filing its 10-Q for the period due to an internal investigation into its stock option grant practices. The company also said it would continue to delay filing its first-quarter results and 2006 results. The options accounting errors were estimated by the company at $2.2 million.

On a preliminary basis, however, the company said second quarter ended Sept. 30 should be a break-even period compared with a profit of 2 cents per share a year before. Net sales are expected to increase 6% to $261.1 million from $246 million last year.

Time to unwind Altria close

One risk arbitrageur trader said Tuesday that based on where he pegs the value of Altria Group, Inc. without a major stake in Kraft Foods Inc. he is just about ready to unwind his position. Another, however, said he is standing pat as it looks like Altria's sale of its Kraft stake is going to take place in early 2007.

Altria shares (NYSE: MO) on Tuesday gained 23 cents, or 0.28%, to $83.65. Kraft shares (NSYE: KFT) dropped 17 cents, or 0.49%, to $34.38.

Altria shares were buoyed by news late Monday that the Supreme Court has refused to review a lower court ruling throwing out a $10.1 billion verdict against Altria's tobacco unit Philip Morris USA over "light" cigarettes.

"It is getting pretty close to where we will unwind our position in Philip Morris," said one risk arb trader in New York, declining to elaborate on how he has the situation set up.

But another risk arb trader in New Jersey said, "We are set up on call spreads and they keep talking about getting this Kraft sale in early 2007. We're just going to wait to see how it all plays out."

Shares of Altria have rocketed higher in recent months with anticipation of the restructuring, including the sale of its roughly 87.6% stake in Kraft and possibly the spinoff of the Philip Morris unit. Resolution of the tobacco litigation could accelerate those plans, the trader in New York said, but he sees the stock "coming under some pressure toward the end of the year as investors remove themselves from controversial stocks."

Late last month, Kraft chief executive Irene Rosenfeld said the timing is uncertain but Kraft is ready for a full spinoff when Altria makes its move.

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