Clear Channel off; H&R Block up; Aeroflex rises; Genesco, Foot Locker gain; SLM slides

By Ronda Fears

Memphis, April 20 - Clear Channel Communications Inc. skidded Friday after announcing it will sell its television group to private equity firm Providence Equity Partners Inc. for roughly $1.2 billion in a separate transaction to the going-private bid for the company by Thomas H. Lee and Bain Capital, which was upped to $39 per share from $37.60 earlier in the week.

Genesco Inc. handily trotted past a hostile takeover bid of $1.2 billion from Foot Locker Inc., but traders said some players were selling into the rally, thinking the stock had gotten ahead of the game.

H&R Block Inc. also was a strong riser Friday after announcing the sale of its troubled Option One Mortgage Corp. subsidiary to an affiliate of Cerberus Capital Management LP at a discount to net assets, but one trader said the stock may decline in the aftermath of the transaction.

Subprime mortgage lenders, however, were widely mixed because of terms of the H&R Block transaction. Bankrupt New Century Financial Corp., Accredited Home Lenders Holding Co., Novastar Inc. and Fremont General Corp. posted gains on the session but were lower for much of the day. Countrywide Financial Corp. (NYSE: CFC) declined 86 cents, or 2.25%, to $37.36.

With earnings on the tape in many cases, there also was pressure among several regional banks and credit card companies, but a trader in the banking sector said the beating was unwarranted. "They are throwing the baby out with the bath water," he remarked.

Defense electronics contractor Aeroflex Inc. received a rival takeover offer, which was not a huge surprise, according to one trader, and the stock tracked beyond the bid on hopes of a counter offer. Veritas Capital has proposed a leveraged recapitalization in which holders would receive a cash dividend of $14 a share plus retain 21.2% ownership of the company. That bests a March 5 bid of $13.50 from General Atlantic and Francisco Partners.

Going into the weekend, traders also noted that SLM Corp., the student loan company better known as Sallie Mae, was lower Friday and continues to trade well below the $60-per-share takeover offer accepted earlier in the week from private equity firms J.C. Flowers & Co. and Friedman Fleischer & Lowe, and investment banks JPMorgan Chase & Co. and Bank of America Corp. SLM (NYSE: SLM) lost 97 cents on the day, or 1.76%, to close at $54.

"We are waiting for headline risk to subside, if that ever comes," said a trader at a hedge fund. "I say you have to be very careful with this one; Ted Kennedy's involved." Sen. Edward Kennedy, D-Mass., last week asked the Securities and Exchange Commission to open an investigation into the student loan scandal. Kennedy chairs the Senate education committee.

Biosite Inc., however, moved a little higher as Inverness Medical Innovations Inc. submitted more financial support documentation for its $90 per share buyout offer, a rival bid to the $85 offer accepted from Beckman Coulter Inc. One trader said the market expects there will be pressure for Biosite to take the higher offer or force Beckman Coulter to pony up a higher bid. Biosite (Nasdaq: BSTE) gained 23 cents to settle Friday at $93.65. Inverness and Beckman Coulter also closed higher.

Aeroflex gets rival bid

Aeroflex players were not altogether surprised by a rival bid for the defense electronics contractor, but the structure of the Veritas Capital caused some hesitation, one trader said.

Under the Veritas Capital proposal, Aeroflex shareholders would receive a cash dividend of $14 per share and would retain 21.2% of the fully diluted common equity in a "significantly leveraged Aeroflex," he said. While that beats the previous offer from General Atlantic and Francisco Partners, which remains in effect so far, the trader said some players would rather "take the cash and move on."

There is some uncertainty, he added, as to which offer a proxy advisory service would judge as better. But, he said there were new buyers who stepped in on the development.

Aeroflex shares (Nasdaq: ARXX) gained 79 cents, or 5.95%, on the day to close at $14.07.

On March 5, Aeroflex accepted the General Atlantic and Francisco Partners cash offer of $13.50 - then a 23% premium - which allowed the company to solicit a better deal through April 18.

Genesco goes past offer price

Foot Locker went public Friday with its hostile offer to buy Genesco, which had been rumored in a trade publication for the past month, and the stock hit a new 52-week high, but one buyside source said it had gotten way ahead of where he sees Foot Locker being prepared to pay. A sellside trader said there was heavy selling into the 15% spike.

Rumors of an imminent takeover bid for Nashville-based Genesco by New York-based Foot Locker in Women's Wear Daily in mid-March sparked a string of gains in Genesco shares that wavered recently because Genesco has been adamant about remaining independent when the subject of an acquisition has been raised at industry conferences, the buysider said.

He noted that the report a month ago pegged the buyout price at $44 to $46 per share.

Genesco shares (NYSE: GCO) advanced by $6.57, or 15.13%, to close Friday at $49.98.

Foot Locker shares (NYSE: FL) also were higher, gaining 59 cents on the day, or 2.5%, to $24.21.

Foot Locker has been vocal "for some time" about pursuing an acquisition, the buyside source said. The company said in a press release Friday that it sent a follow-up letter Thursday to Genesco after getting no response to a letter set April 4 that contained an acquisition proposal to buy Genesco for $46 per share.

The price is a 6% premium to Thursday's market, and Foot Locker said it would give Genesco shareholders a 26% premium to the average share price over the previous one-year period.

But with the spike in Genesco shares over the past month, the buysider said the shares have gotten ahead of the game and were bowing out.

"It's just too expensive," he said, adding that he doesn't believe Foot Locker is prepared to pony up much more than $46, much less $50.

Clear Channel continues slide

Players continued to bail out of the Clear Channel story, a hedge fund trader said, as the sale of the broadcasting assets - leaving the advertising assets - still doesn't seem to bring the buyout offer to where the market thinks it should be.

Clear Channel announced plans to sell the 56 television stations as well as 448 of its 1,150 radio stations to Providence Equity. The company said it continues to pursue the divestiture of 287 radio stations, having already reached agreements to sell 161 radio stations for a total of $331 million.

The buyside trader said it appeared Clear Channel got a good price for the broadcasting assets, but the $39 per share buyout offer, boosted earlier in the week from $37.60, was still looking "slim." He said the Lee/Bain deal "is doomed if you ask me."

Clear Channel shares (NYSE: CCU) slipped 21 cents, or 0.58%, to end Friday at $35.75.

Shareholders will vote on the $19.5 billion buyout on May 8.

It has been met with opposition from large shareholders as well as an independent proxy advisory firm.

H&R Block booms on sale

H&R Block sold its subprime mortgage unit for a $300 million discount to the $1.27 billion of assets, determined at Jan. 31, and traders said that seemed to be a pretty "decent" deal, but it might not be so good for smaller mortgage firms.

As for H&R Block, one sellside trader said the stock may be headed for a beating once the "froth" dies down from the news of divesting its subprime mortgage unit. He noted that the sale didn't include H&R Block Mortgage Corp., which the company said it will shutter before the Option One deal is closed. Also, he said H&R Block expects a full-year loss because of charges related to the mortgage units.

H&R Block shares (NYSE: HRB) gained 3 cents on the session, or 3.34%, to $22.56.

"OK, they get rid of the money-losing mortgage business. Now this is gone, another revenue stream is gone; the company even said it had been a cash cow for them in years past," the trader said.

"Now, H&R Block is stuck with tax filing business - slow growth and low margin. It doesn't look promising to me."

The final price for Option One has yet to be exactly determined. H&R Block said it will receive an earnout, representing half of Option One's loan origination sales for 18 months after the deal closes, capped at $300 million. The deal is expected to close in fiscal second quarter ending Oct. 31.

Terms ill-boding for others

Even at a discounted price tag, H&R Block chief executive Mark Ernst intimated on a conference call that the company was just glad to be rid of the Option One unit. But that is not such good news for companies with a greater percentage of their total operations in subprime mortgages, the trader remarked.

"The reason H&R Block is up is because the bleeding has stopped. They sold their assets for mortgages at a loss. Basically the business went worthless. But it's good news because they are done losing money there," the trader said.

"This is not good news for LEND, FMT or other subprimers. This shows shareholder equity is worth zero."

Accredited Home Lenders (Nasdaq: LEND) added 8 cents to end Friday at $10.94.

Fremont (NYSE: FMT) edged up a penny to $8.28.

This trader pointed to the Option One deal being based on assets as of Jan. 31 as cause for subprime mortgage lenders that are on the auction block, like Fremont, to have concern.

"The [Option One] deal was announced with Jan. 31 figures; huge loses have come in February and March," he commented. "Figuring the losses from the past two months, the discount grows even bigger."

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