Delta bonds soar on buyout bid, Northwest also; upsized GNC deal prices

By Paul Deckelman and Paul A. Harris

New York, Nov. 15- Delta Air Lines Inc.'s bonds shot skyward on Wednesday after the bankrupt Atlanta-based Number-Three U.S. airline carrier got an unsolicited takeover offer from smaller rival US Airways Group Inc. That Delta rise also brought the bonds of bankrupt carrier Northwest Airlines Corp. higher as well, as analysts and other airline industry watchers speculated that US Air's gambit could kick off a consolidation binge in the battered airline industry which could include the Eagan, Minn.-based Number-Four U.S. carrier as well.

Outside of the airlines, traders saw the bonds of Movie Gallery Inc. rising solidly for a second straight session, even though the Dothan,. Ala.-based video rental chain operator said Tuesday that it would delay release of its quarterly financial results while it addressed an accounting question.

In the new-deal market, one issue junk bond issue priced.

GNC upsizes

GNC Corp./GNC Parent Corp. priced an upsized $425 million issue of six-month Libor plus 675 basis points senior floating-rate PIK notes at 99.00.

The issue, which was upsized by $100 million, came on top of the price talk.

JP Morgan and Goldman Sachs & Co. were joint bookrunners.

Proceeds, together with cash on hand, will be used to redeem GNC's outstanding Series A preferred stock, to repay some of the term loan debt of General Nutrition Centers, Inc., a wholly owned subsidiary of GNC, and to pay a dividend to the common stockholders of GNC Parent Corp.

An informed source told Prospect News that the Pittsburgh-based nutritional supplements company's deal had been comfortably oversubscribed.

Talking the deals

The primary market anticipates seeing well in excess of $8 billion of bonds issued during the Thursday and Friday sessions.

News circulated Wednesday on several of the pending deals.

The Mosaic Co. set price talk for its $950 million two-part offering of senior notes (B1/BB+).

The Plymouth, Minn.-based phosphate and potash crop nutrients producer talked its $475 million tranche of eight-year notes, which come with four years of call protection, at 7 3/8% to 7½%.

Meanwhile Mosaic talked $475 million tranche of 10-year notes, which come with five years of call protection, at 7 5/8% to 7¾%.

The JP Morgan and Merrill Lynch-led deal is expected to price mid-day on Thursday.

Elsewhere Rental Services Corp. talked its $620 million offering of eight-year senior notes (Caa1/B-) at a yield in the 9¾% area.

The deal, which is being led by Deutsche Bank Securities and Citigroup, is expected to price Friday.

And finally Elan Finance Corp. set price talk for its $500 million offering of seven-year notes (B3/B) in two tranches.

A tranche of fixed-rate notes with four years of call protection is talked at the 9% area.

Meanwhile a tranche of floating-rate notes which come with two years of call protection is talked at Libor plus 400 to 425 basis points.

Elan is also expected to price Friday via Goldman Sachs.

Freescale for Thursday

Of course the those three deals, which were talked on Wednesday, are unfolding against the backdrop of the massive LBO financing from Firestone Acquisition Corp. (Freescale Semiconductor Inc.)

On Tuesday the market heard price talk on the $5.95 billion equivalent six-tranche offering, which is expected to price mid-day on Thursday, via Credit Suisse.

Across the divide

In years past sell-side sources have counselled Prospect News that it is better not to have a deal in the market, with final terms pending, during the extended four-day Thanksgiving holiday break.

The deals, those sources have explained, can be overtaken by financial news and front page headlines, in which case a lot of hard work on the part of originations workers and sales forces goes for naught.

This year, however, at least two offerings are heard to be bridging the Thanksgiving break.

One was announced on Wednesday.

Complete Production Services, Inc. is currently in the market with a $600 million offering of 10-year senior notes (B2).

The Credit Suisse-led debt refinancing deal is expected to price during the post-Thanksgiving week.

That deal joins the previously announced deal from Momentive Performance Management (General Electric's silicone products business), a $1.95 billion two-part notes offering that is expected to price on Nov. 29, via JP Morgan, GE Capital and UBS Investment Bank.

More floaters from Eircom

One other roadshow start was heard on Wednesday.

BCE IPE Ltd. (Eircom Group plc) will begin a roadshow on Thursday in London for a €425 million offering of floating-rate PIK notes.

The notes will mature in February 2017, which is six months after the company's existing floating-rate notes mature.

Credit Suisse, Deutsche Bank Securities, JP Morgan and Barclays Capital are joint bookrunners for the dividend deal from the Irish telecom.

Eircom priced the above-mentioned €350 million issue of senior floating-rate notes due Aug. 15, 2016 (B2/B at the time of issue) at par to yield three-month Euribor plus 500 basis points on Aug. 10, 2006.

GNC up slightly on break

When the new GNC floaters due 2011 were freed for secondary dealings, a trader saw them trading at 99.5 bid, par offered. The bonds had priced earlier in the session at 99.

A trader saw HCA Inc.'s recently priced notes all trading in a 104 bid 104.25 context, which he called up ¼ point on the day. The Nashville-based hospital giant priced a three-part offering of $5.7 billion senior secured notes a week ago.

Delta zooms on US Air offer

Back among the established issues, the most widely followed name of the day was Delta Airlines, whose various bonds boomed more than 20 points, with its 8.30% notes due 2029, for instance, seen ending the day at around 62 bid, about a 23-point jump from its closing price at 39 on Tuesday. A trader said the company's other bonds, such as its 7.90% notes due 2009, also rose to around that same 62ish area from around 39-40.

Delta's shares were meantime up a nickel (3.40%) to end at $1.52, although volume of 27 million was about nine times the norm.

The bonds and shares headed for the wild blue yonder after US Air offered to acquire Delta for $8 billion in cash and stock. The unsolicited offer envisions paying Delta's unsecured creditors $4 billion in cash and 78.5 million US Air shares, whose estimated value as of Tuesday, the day before the merger was announced, was $4 billion.

Delta said that it would consider the offer - but the bankrupt carrier has said in the past that it is not interested in being acquired, preferring to restructure and emerge from Chapter 11, which it entered over a year ago. Delta has said, for instance, that it had received expressions of interest in a possible merger a year-and-a-half ago from the second-largest U.S. carrier, United Airlines, a unit of UAL Corp., but had rejected them.

Delta's chief executive officer, Gerald Grinstein, reiterated Wednesday that "Delta's plan has always been to emerge from bankruptcy in the first half of 2007 as a strong, standalone carrier."

In a memo sent to Delta's employees, Grinstein declared that "while Delta is obligated to review this proposal carefully, we remain skeptical that it would make sense to deviate from our plan."

Delta was not the only one expressing skepticism about the plan, in view of the fact that US Air - created just last year when America West Airlines acquired US Airways out of bankruptcy, taking the larger carrier's more familiar name - has still not finished fully integrating its own two component parts.

A trader opined that he would "expect that thing [i.e. a Delta-US Air merger] to go belly up in 14 months - if they're even allowed to do it."

A combination of the two carriers would produce the largest U.S. air carrier by sheer gross revenues, vaulting it ahead of the current top-spotter, AMR Corp.'s American Airlines, although the combination would likely have to divest some routes and other parts of its operations to not run afoul of regulators from such agencies as the Federal Aviation Administration, the Federal Trade Commission and the Justice Department's anti-trust division. The combination would likely also come under hostile scrutiny from the incoming Democratic-controlled Congress, suspicious that such a combination would likely lessen competition, push up air fares, and could result in many employees of the two companies losing jobs as they seek to realize merger synergies by cutting overhead costs.

The trader said that he could see a merger possibly succeeding "if it were Southwest Airlines or JetBlue," since both of the low-cost carriers seem to have established a more efficient business model than the old-line carriers like Delta, US Air, United, Northwest and American. All of the latter, with the exception of American, are either currently bankrupt or have emerged from reorganization in the last year or two. And American avoided bankruptcy only by winning substantial concessions from its employees to allow the carrier to keep operating in an unfavorable environment.

"Something that large" and combining two such old-line operators like Delta and US Air "is bound to fail," the trader said, while he noted that Delta bondholders didn't share that view.

The bonds "rallied all day and didn't stop until the market closed down." He saw the Delta 8.30s going home at 61.5 bid, 62.5 offered, up 20 points on the day.

Northwest also flies high

And the trader saw Northwest's bonds also stowing away on that upside ride, with the carrier's 8 7/8% notes that would have come due this year at 76 bid, 77 offered, a 12 point gain on the session. Another trader saw its 7 7/8% notes due 2009 jump a full 13 points on the session, to closing levels around 79 bid, 80 offered.

Published reports said that some industry-watchers believe that US Air's move on Delta might encourage other industry players to step up, including United. In such an environment of consolidation - which has long been predicted by analysts who say the industry has too much capacity and that one or more of the weaker existing companies must "go away" in order for the rest to survive profitably - Northwest, which filed for Chapter 11 on the same day in October 2005 as Delta did, might also be a takeover target.

'Very firm' market seen

A trader said overall, the market was "very firm," with "buying pretty much across all sectors." He said that his understanding was that the Merrill Lynch investment conference which had been going on earlier in the week in Las Vegas and which was cited as a reason for the relatively quiet dealings over the previous several session "was pretty much over. Some of the guys that were out there were back."

He said that between the conference, the huge Freescale Semiconductor deal expected to price Thursday and some of the other calendar deals expected Thursday or Friday, and the Delta/US Air storyline, "I think that just all conspired" to push everything else to the back burner.

"If you had a good offering, or something cheap, you'd get someone's attention. But there were no sellers and, we're hearing that there's still people with lots of money around looking to work, particularly since the [new deal] calendar is not coming" over the past several sessions, which saw a fall off in activity from last week's record-setting primary pace.

Hawaiian Telecom notes lower

He saw Hawaiian Telecom Communications' 12½% notes due 2015 fall to 106.5 bid from prior levels around 108 bid, 108.5 offered.

"Their numbers were a little softer than people were anticipating," with the Honolulu-based company having trouble with access line losses, and with its back office operations, which it took over from Verizon Communications, the former incumbent provider, after it bought Verizon's operations in the Aloha State last year for $1.6 billion.

"They missed on EBITDA and their revenues were softer," he said, and margin pressures continued because of the difficulty with the access line losses.

The back-office problems, he continued led the company "to indicate that there could be some errors in their financial statements. That sort of rattled some people."

The 121/2s "reacted very negatively - but as soon as the thing ticked off a couple of points, there were buyers in who chased it right back up" from the lows, so the bonds only ended down 1/4.

More applause for Movie Gallery

Movie Gallery's 11% notes due 2012 - which on Tuesday had jumped to 66 bid, 68 offered, up 4 points on the session - continued to head upward on Wednesday, with those bonds seen pushing up another 5 points on the day to 71 bid, 73 offered.

The notes rose even though Movie Gallery said on Tuesday that it would delay filing its results, citing possible accounting issues, specifically concerning the treatment of its store lease obligations. The company is reviewing end-of-lease requirements on about 5,000 stores with an independent auditor to ensure it is appropriately accounting for them.

In the interim, it did release some preliminary figures which showed stronger performance. Total revenue in the quarter hit $583 million, up from $572.4 million a year ago. On a same-store basis, revenue declined 0.4% - with a 3% increase in same-store sales at its eponymous Movie Gallery stores, partly offset by a 1.9% drop at its Hollywood Video outlets.

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