Time Warner Cable cools off; Gap surges on sale speculation; Rotech better; Caremark higher

By Ronda Fears

Memphis, Jan. 8 - Clothing retailer Gap Inc. spiked more than 10% Monday but came off the day's high as optimism based on speculation that the company was going on the auction block was nipped by a pessimistic view of where the stock is trading.

"A sale would be good except that the stock is over-valued in our view," said a risk arb trader.

Gap shares (NYSE: GPS) settled with a gain of $1.27, or 7.25%, at $20.26 after trading in a band of $18.69 to $21.04 on volume of 29.3 million shares versus the norm of 6.8 million shares. The risk arb trader noted heavy volume in January and February options, especially buying in $20 calls and selling in $17.50 and $20 puts.

He noted reports that Gap has hired Goldman Sachs to help it look at strategic alternatives for the San Francisco-based retailer also included "the little detail that they supposedly did this last month." Gap officials did not comment on the speculation, but last week the company reported that same-store sales fell 8%, short of expectations, during the 2006 holiday period.

Gap also warned that its full-year profit would likely fall short of expectations and said it is considering a shift it its branding strategies at the Gap and Old Navy stores. The company also operates Banana Republic stores.

A buyout by the Fisher family, which owns roughly 37% of Gap shares now, would be the best alternative, the trader said, but there has been no indication that such a move is being considered.

"We are taking a very conservative position with regard to Gap," the trader said.

"Gap has had a run on this speculation and we don't see much of a premium left right here."

Time Warner Cable cools off

There was cooling also in Time Warner Cable's when-issued stock Monday, and market sources said the pullback, in price and particularly volume, was attributable to action in the Adelphia Communications Corp. bonds falling as arbitrage players began to run into resistance because of a tight borrow.

Time Warner Cable shares (Pink Sheets: TWCAV) ended Monday with a 50 cent loss at $40.50 after opening at $41. Traders said the 1.62 million shares that traded compared with about 2.7 million shares changing hands on Friday.

Arb players who wanted to short the stock were being required to hold the Adelphia bonds, which is somewhat unusual and put a damper on the trading action, traders said, as there were hardly any Adelphia bonds offered for sale. Adelphia bondholders will be getting a Time Warner Cable stock distribution as part of the Adelphia reorganization plan and will own roughly 85% of the company.

After some five years in bankruptcy, the defunct cable company has estimated its reorganization plan could become effective Jan. 17.

TWC seen worth $38 a share

Part of the reason the arb traders could not get a short on the Time Warner Cable stock, one trader said, is because it has opened at a level seen way out of bounds.

"We have a $38 target on TWC," the trader said.

The Time Warner Cable stock is the result of the $17 billion sale of its cable assets to Time Warner Inc. and Comcast Inc., which took place in July 2006 and creates the biggest domestic cable company. Time Warner Cable will be the second-largest cable company in the United States.

On Friday, the when-issued stock opened at $43 and traded as low as $40.50 before climbing back to settle at $41, and the decline was described as a result of many Adelphia bondholders looking to quickly cash out of their Time Warner Cable shares.

Time Warner and Comcast bought the Adelphia cable assets for $17 billion in July, but Adelphia's exit plan was only approved last week, clearing an exit path after a five-year stint in bankruptcy. The effective date of Adelphia's plan is now expected to be Jan. 17, according to the company.

Rotech rises on renewed rumors

Renewed rumors of a merger for Rotech Healthcare Inc., coupled with better Medicaid reimbursement projections, pushed the stock up by more than 8% on Monday, traders said.

Rotech shares (Nasdaq: ROHI) gained 19 cents on the day, or 8.05%, to close at $2.55.

There has been speculation of a merger with American Homepatient Inc. for several weeks, it was noted. American Home shares (OTCBB: AHOM) were unchanged Monday at $1.60 amid light volume.

One trader said Highland Capital Management LP is a big player in both companies, and it was speculated that the company might propose a merger between the two home health care providers. Highland Capital did not return calls about the speculation.

"This has been circulating for a good while now and nothing has come of it, except for a nice appreciation in both stock prices," an equity trader said, noting that Rotech shares were trading at about $1.60 about six weeks ago.

"It could be that Highland just cashes out now that the stocks have risen so much."

Orlando, Fla.-based Rotech provides home medical equipment and related products and services in the United States. It offers respiratory therapy, and durable home medical equipment and related services. Brentwood, Tenn.-based American Homepatient is focused on products consisting primarily of respiratory and infusion therapies, and home medical equipment and home health care supplies.

A long-awaited Medicaid report that pushes tax breaks for long-term care also was cited as cause for the improvement in Rotech shares, according to the trader.

Caremark hedges hover at $55

A proxy fight for Caremark Rx Inc. fully erupted Monday with rival pharmacy benefit management concern Express Scripts Inc. refusing to give up even as Nashville-based Caremark continues to favor a merger with drugstore chain CVS Corp. Caremark shares were very active but little changed, however, and traders noted a decided boundary at $55.

"The hedge is cuffed around the $55 level," one strategist said.

Caremark shares (NYSE: CMX) settled Monday at $56.64, better by 29 cents, or 0.51%, on the day.

Meanwhile, Express Scripts shares (Nasdaq: ESRX) lost 8 cents on the session to close at $68.78 while CVS shares (NYSE: CVS) added 18 cents to $31.35.

Caremark continues to stand behind its previous decision to accept an all-stock offer from CVS worth $21 billion, or roughly the equivalent of $52 per share, over a bid from Express Scripts for cash and stock worth an estimated $26 billion, or the equivalent of $58 per share.

In response to the ongoing snub, Maryland Heights, Mo.-based Express Scripts said Monday it would launch an effort to get four nominees on the Caremark board of directors. The merger with Woonsocket, R.I.-based CVS is slated to go to a shareholder vote and be completed by the end of March.

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