Advanced Medical falls on recall; Medtronic climbs on results; Continental gains on merger hopes

By Kenneth Lim

Boston, Nov. 21 - Advanced Medical Optics Inc. fell in convertible trading Tuesday after the company cut its outlook and announced a recall of a contact lens solution while the market overall had a slow session on Tuesday with the Thanksgiving holiday approaching.

But Advanced Medical's convertibles held up on a dollar-neutral basis, giving hedge investors a bonus for the holidays.

Outright investors turned to Medtronic Inc. for good news, with its convertible rallying with the stock after the company posted better than expected results and guidance.

Continental Airlines Inc., meanwhile, rose with the stock on new speculation that the company could be looking for merger opportunities in the wake of U.S. Airways' bid for Delta Air Lines.

Meanwhile, Acquicor Technology Inc. launched a $100 million offering of five-year convertibles, a deal that raised some eyebrows over the blank-check company's intention to use to proceeds for its first acquisition.

The market in general slowed down considerably from Monday, when a large buyout bid for Equity Office Properties sent real estate investment trusts climbing. Without a major catalyst to drive activity, Tuesday's pace came down a notch.

"It's really slow," a sellside convertible bond trader said. "It's a holiday week. It's pitiful."

Advanced Medical drops outright

Advanced Medical's convertibles fell outright, dragged by a stock that crumpled after the company announced a product recall and lowered its profit forecast by about 30%.

The company's 2.5% convertible due 2024 dropped about 4 points outright, quoted at 97.75 bid, 98.125 offered against a stock price of $35.50. Its 3.25% convertible due 2026 also lost about 4 points outright, trading at 92.25 against a stock price of $36. Advanced Medical stock (NYSE: EYE) closed at $35.75, down by 8.92% or $3.50.

"I know what the company said in terms of their earnings per share is big, but from a credit standpoint it doesn't look like it might be that big of a deal," a sellside convertible bond analyst said. "Hedge guys did pretty well, I would imagine."

Advanced Medical said it is recalling 18 lots of its Complete MoisturePlus multipurpose contact lens solution and Active Packs after it found three lots that had bacterial contamination in Japan. Santa Ana, Calif.-based Advanced Medical, which makes eye care products and devices, said it has not received reports of "adverse health event" associated with the recalled products, but is taking a conservative approach.

Advanced Medical cut its 2006 adjusted earnings forecast to between $1.30 and $1.40 per share, from the earlier guidance of $1.85 to $1.90 per share. Its revenue forecast for the year was also reduced to between $985 million and $1 billion, from between $1.01 billion and $1.02 billion previously.

For 2007, Advanced Medical now expects adjusted earnings per share of $1.85 to $2, from the earlier range of $2.25 to $2.35.

A sellsider said Advanced Medical's short-term credit profile deteriorated slightly because of the recall, noting that the credit "pushed out a little."

"If you were outright you got hit," the sellsider said. "But on swap you did OK, because the vol pick-up more than compensated for the credit."

Medtronic higher on results

Medtronic's convertibles gained about 5 to 6 points outright on Tuesday after the company beat expectations for its second-quarter profit and gave a robust forecast.

Medtronic's 1.5% convertible due 2011 traded at 105.25 versus a stock price of $52.25, while its 1.625% convertible due 2013 traded at 105.75 versus the same stock price. Medtronic stock (NYSE: MDT) climbed 9.4% or $4.60 to close at $53.55.

"The market freaking loves them," a sellside convertible bond trader said of the stock. "The stock was beaten up for quite a while, there was a lot of concern about how they were going to do. Apparently these earnings cleared up a lot of that."

Minneapolis-based Medtronic, a maker of medical devices, said its fiscal second-quarter net profit fell to $681 million, or 59 cents per share, from $817 million, or 67 cents per share, a year ago. The Street was expected 56 cents per share. Sales of implantable cardioverter defibrillators rose to $764 million, well above analysts' expectations of $690 million. Medtronic maintained its fiscal 2007 earnings forecast of $2.30 to $2.38 per share, but expects the U.S. ICD market to continue growing into fiscal 2008.

A convertible bond analyst said Medtronic's convertibles do not trade as a credit story, but added that the stock story got a big boost from the results.

"There was a lot of doubt about defibrillator sales, but in fact defibrillator sales were up and could do even better, according to them," the analyst said.

A sellside convertible bond strategist said the results were welcome for many outright investors.

"Those were definitely better outright with the stock move," the strategist said. "These are a core outright holding for a lot of funds. It's a big issue, and they did move up with the equity."

Continental gains on merger talk

Continental Airlines' 4.5% convertible due February 2007 improved about 1 point outright, as its stock rose on reports that the company may consider a merger in the face of possibly larger rivals.

The convertible was quoted at 111.75 offered, 112.25 bid versus a stock price of $44.15. Continental Airlines stock (NYSE: CAL) closed at $44.38, rallying 4.35% or $1.85 mostly in the afternoon.

"Continental was pretty active, they came out with a rumor today that they may merge," a buyside convertible bond trader said.

A sellsider added that there was "buy interest in the name."

Larry Kellner, chief executive of Houston-based Continental told employees on Nov. 17 that the air carrier would consider a merger if it was necessary to remain competitive, according to reports published on Tuesday. His comments came after U.S. Airways offered to buy Delta Air Lines for $8.8 billion.

The hostile bid by U.S. Airways still needs various levels of approval to be completed. Delta said Tuesday it has not received any other offer.

"It's not that far-fetched," a sellside convertible bond trader said. "Everyone in the sector's had consolidation on their minds for some time, and that's why all the airlines have gone up since the U.S. Airways-Delta deal. Even if that deal doesn't go through, it's put the issue on the table and it's going to be on everyone's minds."

Acquicor plans deal

Acquicor Technology on Tuesday announced plans to price $100 million of five-year convertible senior notes.

There is an over-allotment option for a further $15 million.

Acquicor did not disclose who the bookrunners were for the Rule 144A offering.

Several market sources on Tuesday said they had not seen price talk for the deal, and a sellside convertible bond trader speculated that the deal may be distributed to a small number of investors

Acquicor, is a Newport Beach, Calif.-based blank-check company formed to acquire technology businesses. It is buying specialty wafer maker Jazz Semiconductor for $260 million, and will use the proceeds of the offering to help fund the acquisition.

"We're calling it the deal by a company that doesn't exist," a buysider said of the offering.

A sellside convertible analyst was surprised that a blank-check company would try to raise funds using a convertible when it does not have a firm business yet.

"Boy, this has got to be the bottom," the analyst quipped.

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