Aug. 20 (Bloomberg) -- Pedro Alves started buying SLM Corp.'s shares at $41.60 in February and sold them for a 35 percent gain four months later after the largest U.S. student- loan provider became a takeover target.

Now, the fund manager at Braga, Portugal-based Spot Gestao Financeira is looking to profit on the stock again. A global rout in equities helped send SLM, or Sallie Mae, 20 percent below the $60 a share offered by J.C. Flowers & Co., the buyout firm led by former Goldman Sachs Group Inc. partner Christopher Flowers. Despite the tumble, Alves is convinced the deal will go through.

``The alarm went off in this case'' when SLM started falling, said Alves, who manages $120 million. ``I don't recall having bought the same stock after a takeover in the past.''

Investors like Alves are finding rare opportunities to buy shares of takeover targets as expectations grow the transactions may fail. The potential profit for the 227 U.S., European and Asian companies set to be acquired more than quadrupled to an average 6.2 percent since July 19, Bloomberg data show.

The average premium stood at 11.9 percent for the 22 private-equity U.S. deals over $5 billion that haven't yet closed, Birinyi Associates Inc., the Westport, Connecticut-based research and money-management firm, said in a note on Aug. 14.

That's almost four times the gap at the time of the announcements, on average. When an acquisition closes, the difference automatically disappears.

Unduly Punished

The Federal Reserve's surprise discount rate cut Aug. 17 only bolsters prospects that more deals will get done by making financing cheaper. For some investors, it's a chance to ``double dip'' shares of companies they bought before, said John Wilson at Morgan Keegan & Co. in Memphis, Tennessee.

U.S. Xpress Enterprises Inc. is a takeover target whose shares have been unduly punished, said Wilson, co-director of equity strategy at Morgan Keegan, which oversees $120 billion. U.S. Xpress President Patrick Quinn and Chief Executive Officer Max Fuller made an unsolicited bid June 22 to buy the Chattanooga, Tennessee-based trucking company for $20 a share.

U.S. Xpress's closing price of $16.40 on Aug. 17 would enable buyers to reap a 22 percent profit should the deal go through. On the same day, the stock was upgraded to ``buy'' at Stifel, Nicolaus & Co.'s John Larkin, who said the deal has a greater than 50 percent chance of closing, even though ``the market thinks the deal will fall apart.''

Probabilities

The Morgan Stanley Capital International World Index of 23 developed markets had slumped 9.5 percent since its record close on July 19, in part on concern some of the deals will unravel as a global credit crunch makes it more difficult for companies to raise financing. The index advanced 0.2 percent to 1501.42 as of 12:16 p.m. in New York today.

David Kostin, Goldman Sachs & Co.'s New York-based chief sector strategist, on July 27 recommended buying into the leveraged buyouts because the likelihood they will be completed is ``much higher'' than the 62 percent probability assigned by the market.

Univar NV jumped 5.9 percent to 51.75 euros today after CVC Capital Partners Ltd. said it will proceed with the 1.52 billion euro ($2.1 billion) buyout of the world's largest chemicals distributor announced on July 9. The company, based in Rotterdam, traded at a discount of 8.7 percent to CVC's 53.50 euros-a-share offer price on Aug. 17, before rebounding today.

Return on Equity

Investors are hedging their bets for Reston, Virginia-based Sallie Mae on speculation the U.S. government will cut subsidies more than SLM has anticipated, prompting the J.C. Flowers-led buyout group to scuttle the takeover. Sallie Mae said Aug. 6 it doesn't expect the proposed reductions by Congress to stop the transaction, predicting the deal will close in October. Last week, SLM's shareholders approved the $25.3 billion buyout.

Harris Private Bank's Jack Ablin said he expects many of the deals will still be completed because the cost of financing is cheap relative to potential returns.

Companies in the Standard & Poor's 500 Index returned about 17 percent on equity in the second quarter, compared with about 9 percent for the cost of equity capital, estimates by Strategas Research Partners LLC showed. The New York-based firm used the yield on the 10-year Treasury note plus 4 percentage points of equity risk premium as a proxy for the cost of equity capital.

``The basic tenets for putting these private equity deals together is still sound,'' said Ablin, who oversees $52 billion as chief investment officer at Harris Private Bank in Chicago.

Tribune, Penn National

The planned takeover of Tribune Co., the second-largest U.S. newspaper company, by billionaire Sam Zell also is likely to be completed, Ablin said. Chicago-based Tribune's shares ended last week at $25.67, a 25 percent discount to its $34 a share offer. Shareholders vote on the agreement tomorrow, and terms of the deal prevent Zell from backing out if Tribune misses forecasts.

For lenders to renege, adjusted earnings for Tribune would have to plunge further than the 22 percent drop it posted in the first half, according to Barclays Capital.

Penn National Gaming Inc., which agreed to be bought for $6.1 billion in June, offers the ``biggest opportunity'' among deals that have yet to close, said Penn Capital Management's Eric Green. The Wyomissing, Pennsylvania-based gaming company's shares have fallen 5.3 percent since July 19 and are now trading at a discount of 16 percent to the offer price of $67 a share.

Penn National, the owner of 18 casinos and horse-racing tracks, agreed to be taken private by buyout firms including Fortress Investment Group LLC on June 15. New York-based Fortress in February completed the first initial public offering by a U.S. manager of private-equity and hedge funds. That limits the possibility the firm will walk away from the deal, Green said.

Arbitrage

``There's one that I can put my mom in,'' said Green, who helps manages about $5 billion in Cherry Hill, New Jersey.

Green's firm sold 385,435 shares of Penn National in the second quarter as the deal was announced, leaving it with 737,911, Bloomberg data showed. He said Penn Capital, which has no connection to Penn National, has added to its holdings of the casino owner in the last month as the shares declined.

Schroders Plc's Andrew Lynch says the widening arbitrage premiums indicate increasing concern the acquisitions won't go through. Kohlberg Kravis Roberts & Co.'s banks failed last month to lure investors to finance 9 billion pounds ($18.5 billion) for the acquisition of Alliance Boots Plc, a U.K. drugs retailer. KKR co-founder George Roberts said Aug. 15 that private-equity companies may struggle to offer attractive premiums.

``There is always timing risk, regulatory risk and now add financing costs that are rising a lot,'' said Lynch at London- based Schroders, which oversees $276 billion globally. Lynch said he doesn't own any takeover stock.

The drop in stock prices has been ``indiscriminate and you're throwing out the good with the bad,'' said Joseph Quinlan, New York-based chief market strategist at the investment strategy group at Bank of America Corp., whose investment-management unit manages $566 billion. ``It creates opportunities. Once you start doing that analysis, the cream rises to the top.''

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.

Last Updated: August 20, 2007 12:26 EDT