February 22, 2010 / 7:34 PM / 8 years ago

Commercial Metals shares surge on takeover speculation

* Stock up about 14 pct

* Potential acquirers likely to be Nucor, Gerdau Ameristeel

* ArcelorMittal also seen as possible bidder

By Doris Frankel and Antonita Madonna

BANGALORE/CHICAGO, Feb 22 (Reuters) - Shares of Commercial Metals Co (CMC.N) rose about 14 percent and its call volume surged on Monday as takeover speculation swirled around the steel and metal products maker.

Commercial shares rose $1.53 to $16.64 in afternoon trade, after notching a high of $17.20 earlier in the session, on the New York Stock Exchange.

The base of the rumour could be the cancellation of the company’s presentation with Morgan Stanley, scheduled for later this week, said analyst Michelle Applebaum of Michelle Applebaum Research.

“Eventually Commercial Metals will be part of a larger organisation, three years, four years down the road. So, whether or not anything is happening right now, it does look as though the speculation is fuelled out of them cancelling a presentation,” she added.

Commercial Metals said in a statement it does not comment on unusual market activity.

In the options market, volume was explosive as traders gravitated to near-term March calls in anticipation of extended near-term gains in the stock.

“This (takeover) rumor seems to be pretty credible judging by the volumes and the block side of options trades,” said Jon Najarian, a founder of Web information site optionMonster.com.

Option participants named steelmaker Nucor Corp (NUE.N) and Canadian steel producter Gerdau AmeriSteel Corp GNA.TO GNA.N as possible suitors.

While a spokesperson from Gerdau Ameristeel told Reuters the rumours were unsubtantiated, Nucor did not immediately return a call seeking comment.

“We heard that Nucor could be one of the interested parties,” Najarian said.

The strong interest in Commercial Metals call options, which give investors the right to buy the company’s shares at a fixed price within a specified time period, send its overall option volume to 12 times the recent average daily turnover in early afternoon trading.

According to option analytics firm Trade Alert, about 24,000 calls and 4,775 puts changed hands in Commercial Metals.

“They have been purchasing the March $15 and $17.50 calls in big blocks of up to 500 contracts,” Najarian said.

The volume in those call contracts exceeded the number of existing positions held by investors, indicating new opening positions were initiated.

The demand for Commercial Metals options was accompanied by a sharp rise in the stock’s option implied volatility, a key component of an options price.

Paul Foster, options strategist at Web site theflyonthewall.com who also cited the takeover speculation, noted that Commercial’s March option implied volatility stood at 61 percent, April was at 55 percent while June had a reading of 50 percent, all above its 26-week average of 47 percent.

This rise in volatility suggests traders are taking positions for upside share price movement, Foster said.

Implied volatility measures as a percentage expectations of share price movement. A sudden rise in implied volatility often indicates the options market is pricing in expectations or speculation about a fundamental event, such as a merger that could jolt the stock.

Analyst Nat Kellogg of Next Generation Equity Research said the company’s valuation and diverse operations do not imply the rumour can be dismissed easily.

“It’s big enough to move the needle for most of the guys who might acquire it... but it’s small enough that one of the larger players could buy them,” Kellogg said.

Kellogg said ArcelorMittal ISPA.AS, the world’s top steelmaker, could be a possible bidder for Commercial Metals which has its operations internationally and has seen its stock cut in half from its levels in 2006 through 2008. (Editing by Jarshad Kakkrakandy)

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