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Takeovers Proving Toxic for Arbitragers as Higher Bids Disappear: Real M&A

By Tara Lachapelle and Joseph Ciolli

Ralcorp Holdings Inc. (RAH) and Temple- Inland Inc. are losing more money than ever for traders betting on higher takeover offers.

Ralcorp, the biggest U.S. maker of store-brand foods, lost $470 million last week, falling below an unsolicited proposal from ConAgra Foods Inc. (CAG) for the first time since June 13, according to data compiled by Bloomberg. Corrugated cardboard maker Temple-Inland plunged last week by the most since International Paper Co. (IP)’s $3.4 billion hostile bid was announced in June, wiping out $350 million in market value.

Merger arbitragers are getting whipsawed as targets from Dollar Thrifty Automotive Group Inc. to M&F Worldwide Corp. (MFW) fell below the value of their offers amid speculation a faltering U.S. recovery will limit financing and reduce the appeal of equities. E*Trade Financial Corp. dropped 21 percent and Walter Energy Inc. (WLT) plummeted 40 percent last week, removing any advance since investors pushed for sales. The declines came as stocks lost their gains for the year and the U.S. had its AAA credit rating downgraded by Standard & Poor’sfor the first time.

“Arbs probably got killed” on those bets, David Abella, a money manager at Rochdale Investment Management LLC in New York, which oversees $4 billion, said in an Aug. 5 telephone interview. “There is a risk that the deals don’t get done or don’t get those higher offers. The appetite for doing deals goes down in a weak market. Even for the deals that are still likely to happen, traders are going to have more risk for holding a position.”

Slim Jim
ConAgra, the Omaha, Nebraska-based maker of Chef Boyardee and Slim Jim, boosted its offer for Ralcorp to $86 a share in cash in May after saying Ralcorp rejected a proposal for $82 in cash and stock. When Ralcorp adopted a so-called poison pill to help prevent a takeover, ConAgra Chief Executive Officer Gary Rodkin signaled that he intended to take his $4.9 billion proposal directly to shareholders. Ralcorp then announced plans to spin off its Post Foods business.

Matt Pudlowski, a spokesman for St. Louis-based Ralcorp, declined to comment on the proposal. Teresa Paulsen, a spokeswoman for ConAgra, didn’t respond to a phone call or e- mail requesting comment.

Ralcorp had traded above the offer price since June 13 until the shares slipped below the bid on Aug. 2. The stock declined 9.1 percent last week, the biggest weekly drop since it was announced.

Ralcorp closed at $78.66 on Aug. 5, 8.5 percent lower than ConAgra’s proposal, indicating traders are less convinced of a successful deal, said Scott Rostan, a former M&A banker at Merrill Lynch & Co. and president of Training The Street, which trains new hires at firms from Credit Suisse Group AG to Blackstone Group LP.

Reevaluating Higher Bids

“Arbs may have to reevaluate their strategy,” Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York, said in a phone interview. “M&A will be relatively quiet as people wait to see a little more certainty. They’ll have to really consider whether or not a higher bid is going to come.”

The prospect of boosted offers dimmed as U.S. stocks fell the most in 32 months last week. The S&P 500 slumped 7.2 percent to 1,199.38, the biggest weekly drop since November 2008 and the lowest level since Nov. 30, 2010. About $1.87 trillion has been erased from the value of U.S. equities since July 22, including the S&P 500’s 4.8 percent plunge on Aug. 4 that was the biggest one-day drop since February 2009.

S&P stripped the U.S. of its AAA credit rating after financial markets closed Aug. 5, cutting it one level to AA+. President Barack Obama, who signed the U.S. debt-ceiling compromise into law Aug. 2, has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates.

‘Giving Pause’

“Anyone that has to tap the financing markets certainly is going to be giving pause because there’s been a disruption in the credit markets, to say the least,” Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access, said in an Aug. 5 phone interview.

Temple-Inland, an Austin, Texas-based producer of cardboard shipping boxes, has twice rejected bids from International Paper of as much as $30.60 a share in cash. That values the company at $3.4 billion, plus net debt, data compiled by Bloomberg show.

The stock, which has traded as much as 83 cents above the offer on speculation International Paper may raise the bid to negotiate a friendly transaction, tumbled 10 percent last week for the biggest weekly drop since the approach was disclosed June 6. Temple-Inland closed at $26.95 Aug. 5, 12 percent below the bid from the world’s largest paper and pulp producer.

International Paper

“The current tensions in the market could make IP less willing to up their offer, while Temple is saying they’re grossly undervalued,” Ed Sustar, a Toronto-based credit analyst at Moody’s Investors Service, said in a phone interview. “Given the more negative tone of the market, maybe the perception is that IP may be less willing to increase its offer price.”

Temple-Inland had no comment, said Donald Cutler, a New York-based outside spokesman for the company.

“We are committed to the current offer, for now,” Tom Ryan, a spokesman for Memphis, Tennessee-based International Paper, said Aug. 5 by e-mail. “International Paper has secured committed financing from UBS Investment Bank, and the offer will not be conditioned on financing.”

Bets on richer takeover prices reversed last week for targets from car-rental companies to makers of licorice and checkbooks.

Ron Perelman

After speculation traders would be able to extract the biggest price increase of any U.S. deal from billionaire Ron Perelman, M&F tumbled below the June offer for the first time last week to $23.41. That’s 2.5 percent lower than the chairman’s $24-a-share offer for the maker of licorice, checkbooks and standardized test forms.

Christine Taylor, a spokeswoman for M&F of New York, declined to comment.

Dollar Thrifty Automotive Group Inc. (DTG) was expected as recently as May to garner the largest bid increase of any pending deal in America over $1 billion as Hertz Global Holdings Inc. (HTZ) and Avis Budget Group Inc. (CAR) vie for control. The Tulsa, Oklahoma-based car-rental company dropped below Hertz’s cash- and-stock bid on Aug. 4 for the first time since it was announced in May. Hertz of Park Ridge, New Jersey, extended the approximately $2.1 billion tender offer to Sept. 9 from Aug. 5.

Richard Broome, a spokesman for Hertz, and Andrew Siegel, a spokesman for Parsippany, New Jersey-based Avis, declined to comment on the bidding for Dollar Thrifty. Stephanie Pillersdorf, an outside spokeswoman for Dollar Thrifty, didn’t respond to an e-mail requesting comment.

‘Clouds of Uncertainty’

“They’re seeing clouds of uncertainty, which is causing them to be a little more cautious,” said Rostan of Training The Street. “Given the uncertainty in the markets, targets’ share prices are falling and the downward effect will hurt merger arbs. The merger arb world is a very dangerous game.”

Premiums on companies that were perceived to be “in play” were wiped out last week as investors lost confidence that buyers would emerge in a slowing economy, Bill Kavaler, a New York-based special situations analyst at Oscar Gruss & Son Inc. said in a phone interview.

Walter Energy, the southern Appalachia producer of steelmaking coal, surged 6.9 percent July 18 after shareholder Audley Capital Advisors LLP sent a letter to the board saying it should explore a sale following the resignation of CEO Keith Calder. The shares plunged 40 percent last week, leading the decline in energy stocks in the Russell 1000 Index, according to data compiled by Bloomberg.

Appetite ‘on Ice’

Michael Monahan, a spokesman for Walter Energy of Tampa, Florida, didn’t respond to a phone call or e-mail seeking comment.

E*Trade’s largest shareholder Citadel LLC pushed for the online brokerage to explore a sale in a July 20 letter from billionaire Ken Griffin’s hedge fund. Susan Hickey, a spokeswoman for New York-based E*Trade, declined to comment on deal speculation.

After climbing to $16.52 on July 25, E*Trade fell 21 percent to $12.59 last week, erasing all of the stock’s gains since Citadel’s letter was disclosed, data compiled by Bloomberg show. The brokerage’s decline last week was steeper than 98 percent of S&P 500 companies, data compiled by Bloomberg show.

“All of the premiums for those stocks just vanished because in this environment it just becomes much less likely,” said Rochdale’s Abella. “Some of that appetite will come back, but at least for now it’s on ice.”