Merrill recommends Akamai 5.5% convertible holders tender at par to slightly higher

By Ronda Fears

Nashville, March 11 - Merrill Lynch convertible analyst Tatyana Hube recommends holders of Akamai Technologies Inc.'s 5.5% convertible notes tender in the modified dutch auction at par to slightly higher, as the value of the bonds will drop dramatically once the tender is over.

Akamai's original tender offer failed to garner much participation at 100 to 100.5. By Wednesday, when it was set to expire, only $5 million of the $101 million in bonds targeted to be taken out had been tendered. Thus, Akamai extended the offer to March 24 and bumped the price to a maximum of 101.25.

The 2007 notes ran up to around 102.5 just before the modified dutch auction commenced Feb. 10, on speculation that a call of some sort would be made, but the analyst said the fair value of the notes is more like 87.25 to 89.25 without any improvement in the credit.

The runup in the 5.5% notes began in December when Akamai sold $200 million of 1% convertibles, with proceeds earmarked for the possible repayment of debt. Before then, the 5.5% issue was trading around 96. It was perpetuated when in January Akamai announced that it repurchased about $99 million of the 5.5% notes, or 33% of the total outstanding at that time, in several privately negotiated transactions.

"Based on our fair value analysis and the likelihood of no further repurchases by the company due to operating cashflow constraints, assuming that the company does not raise further cash in the capital markets, we recommend investors participate in the tender offer, bidding 100 or a touch higher," Hube said.

Prior to the initial offer on Feb. 10, Hube estimated the theoretical value of the 5.5% convertible was 87.3, using 55% volatility and a credit spread of 786 basis points over the three-year Treasury. She noted the 5.5% issue is currently callable at 103.14, and the call price drops to 102.36 after the coming July 1.

The price of the notes dropped from 102.5 before the tender auction was launched to 101.375 immediately afterward.

"The trading price of the convertible notes did not fall all the way down to the offer range, likely on speculation that the company would sweeten the offer before its expiration," Hube said.

"Interestingly, that trading price was very nearly in the middle between the old maximum offer price and the new call price after July - the average of the two gives about 101.4."

After the tender offer, assuming there is no substantial improvement in the company's credit, the analyst said the theoretical value of the 5.5% convertible is 87.26 using a spread of 800 basis points or 89.24 using a spread of 700 basis points.

"Thus, the current tender offer of between 100 and 101.25 is quite attractive to the holders," she said. "Assuming everyone tenders at the lowest price, and the company prorates evenly, investors can lock in a minimum price of 100 for half of their tendered notes."

Akamai had about $199 million in cash and cash equivalents at year-end 2003, and assuming the tender offer is fully subscribed, only $98 million would remain on the balance sheet. Given that the company has historically had negative operating cash flows, she said it is not likely to use remaining cash for any more extensive repurchases of the 5.5% notes before their maturity in 2007.

Therefore, it is more likely that the remaining unredeemed $100 million of 5.5% notes would continue to be outstanding until maturity.

Since the issue does not appear to be sufficiently concentrated in the hands of only a few investors, with about 40% of the issue in the hands of the top five holders, Hube recommended holders bid a minimum price of 100 or a touch higher as bidding higher might result in exclusion.

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