XO firms on Microsoft deal, buyout buzz; energy firm, Kaiser falling

By Paul Deckelman and Paul A. Harris

New York, Oct. 18 - Rumors that XO Communications Inc. might be the object of a buyout initiative by long-distance giant Sprint Corp., plus the very real news of a big deal it had inked with Microsoft Corp. helped to push the former NEXTLINK's shares and bonds up Thursday, although they finished off their highs.

Meanwhile in the primary a steady stream of deals emerged with hope for more. Four pricings now look set for next week with the possibility of others emerging at short notice.

Reston, Va.-based XO, which provides telecom services in 63 markets across the U.S., had announced Wednesday that it will provide Web-hosting services to Microsoft's bCentral unit, which provides software services and information to about 1.6 million small business customers.

The two companies did not provide any estimates of the dollar-value of their arrangement. But the fact that the 800-pound gorilla of the software industry chose XO as its partner is seen in some quarters as a significant vote of confidence in the company. It comes at a time when a number of upstart high yield-issuing telecommunications companies have gone bankrupt, while the financial markets have given negative assessments of most of the rest - including XO - by knocking their bonds and stocks down to distressed levels.

XO's junk bonds currently trade for under 30 cents on the dollar while its shares have fallen to under $2 from their year-ago high around $35.

News of the Microsoft-XO deal, however, caused XO's several issues of senior notes to push up to 26 after opening in the morning bid around 22-23.

A trader said they were also given a boost by market rumors that Sprint, one of the U.S. Big Three long-distance carriers along with AT&T and WorldCom's MCI operation, had expressed interest in buying XO. Investment-oriented Internet bulleting boards buzzed all day with speculation about such a deal, although the general consensus seemed to be that it was unfounded. While CNBC noted the sharp rise in XO shares over the past two sessions, it attributed this to the Microsoft developments rather than to the takeover talk.

"In this market, people will take any kind of false rumor and run with it," the trader scoffed, noting that after the bonds had pushed up to 26, "offers came out of the woodwork, and they ended bid around 24-25," particularly as skeptical voices about the possibility of such a merger were being heard. Another desk saw the company's 9% notes due 2008 as having firmed about four points during Wednesday's session to 20, and having added on another three points to 23.

The trader said the XO speculation helped to "give a bid" to the whole of the telecommunications sector, "but then the market heard about the latest anthrax developments, and there was no good news anywhere on that (several more cases of exposure to the bacteria, including at CBS News in New York, and the U.S. House of Representatives remained closed while investigators examined its half of the Capitol complex). "After that, the overall market was just drifting."

The drift was definitely downward for Kaiser Aluminum, whose debt has been sliding over the past two sessions. The Houston-based metals company's 9.875% notes were quoted at the end of the session offered around 90, with bid levels about a point or lower, after having fallen two points to 90 bid Wednesday. Its 10.875% notes due 2006, down three points Wednesday to 75 bid, fell through the 70 level Thursday, while its 12.75% notes, down three points Wednesday to 59 bid, fell as low as 45 bid around midday Thursday.

Late in the session, another trader quoted them as offered at 54 with no bids, which he termed "a ridiculous level."

Kaiser this week said it would delay reporting its third-quarter earnings data and the companion conference call with company executives until Oct. 30, citing the changes in senior management which took place just on Oct. 11, when Kaiser elected a new chairman of the board and appointed a new chief executive officer.

Kaiser also indicated that it does not believe an earnings warning will be required for third-quarter financial results (excluding the impact of special items and adjustments). The current third-quarter consensus for Kaiser as reported on First Call, is a per-share loss of 26 cents to 31 cents.

And the company further said it has extended its existing $300 million credit agreement to Dec. 15 from the previous expiration date of Nov. 2, a move which it says will provide additional flexibility while it continues its ongoing work on a longer-term solution for its near-term debt maturities.

But apart from those relatively benign developments, the company also had some more sobering news - it said that it will lay off more than half of the 212 workers at its Mead and Tacoma, Wash. smelters in December - the second round of job cuts at its Washington state facilities in two weeks, prompted by low metal prices and soft demand. The layoffs demonstrate continued uncertainty about when Kaiser will be able to restart its idled primary aluminum output in the Northwest.

The trader noted that Kaiser, up until now, "has actually been making more money selling electricity (which it had arranged to buy for its subsequently idled plants) than it ever made making aluminum" - but now, that cash cow is about to be slaughtered, with Kaiser and other metals producers with operations in the Northwest signing new contracts with the Bonneville Power Administration, which will forbid them from selling their surplus electric power on the wholesale market. That now-closed loophole in the contracts made it more profitable for companies like Kaiser and other industrial producers to keep their factories closed and sell off the power than to remain open.

With the loophole closed and Kaiser now forced to go back to making aluminum to make money, the trader said, "nobody wants the Kaiser paper, especially the subordinated issues."

He said Kaiser was also being hurt by the overall malaise in the U.S. metals industry, particularly among the steelmakers.

"We really don't have a steel sector any more. With the exception of AK Steel and U.S. Steel, everybody else is either in bankruptcy or seems headed there" - particularly in the wake of this week's Chapter 11 filing by the once-mighty Bethlehem Steel Corp.

AK's bonds continue holding in the 90s, as befits a company considered the best run and most financially sound U.S. steelmaker. Even the industry's biggest name, U.S. Steel, doesn't look all that attractive these days, the trader said - its new 10.75% notes, which were issued over the summer at par, are now well down from that, bid in the 88-90 level, although that is still well above the levels seen for Bethlehem and other depressed steel names.

Back on the upside, the trader said "we are for the first time seeing some real sector rotation," with oil and gas names being bid up "regardless of what commodity prices are doing." He saw energy names bid up to "the highest level they've been at in months," helped by an influx of crossover players. The sector's attractiveness, he said was enhanced by the fact that energy "seems to be about the only sector not on some kind of a downgrade watch."

Biggest beneficiaries, he said, have been "high quality names in the sector" such as Pride International, Pogo Producing, Newfield Exploration and Chesapeake Energy, the latter credit "bid up almost as high as it was since its bonds were issued" despite its status as a single-B credit.

In the primary, volume may be below what investment bankers would like to see but no fewer than four new deals now appear lined up to price next week - and possibly more, with talk on the sell side of "fly-bys" and "shadow-deals."

"The other side has a lot of cash and they need to use it," opined one banker Thursday.

Indeed, the buyside now has a modest assortment of offerings to consider as the calendar wends its way toward Halloween. Prospect News learned details of four separate deals that either emerged or firmed up on Thursday.

--Petco Animal Supplies, Inc.'s $200 million of 10-year notes (B3/B), an offering sidelined by the cataclysmic events of Sept. 11, figures to price Tuesday, Oct. 23.

--One source disclosed to Prospect News that InSight Acquisition's $200 million of 10-year notes (B3/B-) will price sometime next week, possibly Friday Oct. 26;

Petco and InSight join the Advance Auto Stores, Inc. $150 million add-on, and tobacco merchant Dimon Inc.'s $175 million of 10-year notes, which are also set to price during the week of Oct. 22.

--Prospect News also learned Thursday that Tesoro Petroleum, as rumored, will come with a high yield offering of $215 million seven year notes, on Nov. 2.

--Finally, a syndicate source confirmed that the sidelined Global Auto Logistiques SA offering of €125 million eight-year notes are now in "pre-launch," via CIBC.

Add to those the vaguer rumors: an exploration and production company deal in the $200-$300 million range; $175 million in new forestry and paper paper.

And there are whispers even more ghostly, still: deals so secretive that they can only be designated as credits: "There's a double-BB coming," said one banker, who, when pressed for another clue, insisted he could say no more.

One syndicate source who spoke to Prospect News Thursday seemed to be taking the day's developments in stride. There is demand for new paper, that banker allowed, provided that it's quality paper.

"There is pent-up demand, but limited demand," said the banker. "Throughout 2001 investors have been very selective. They've really targeted highly-defensive non-cyclical sectors such as health care, energy, cable, consumer products, and food-related (issues).

"That's why Smithfield did so well," the banker added, referring to Smithfield Foods upsized $300 million that priced Wednesday, via J.P. Morgan and Goldman Sachs.

"It's not only high quality credits, it's also safe sectors," the banker stipulated. "Last year you saw telecom, which was down in the single B range. Now you'll see more double B credits successfully pricing their issues.

"In the wake of Sept. 11, what you saw was a lot of uncertainty. And investors did what they could, in terms of the secondary market-bottom fishing.

"But they are running out of ideas. So a lot of them now are waiting for the new issue market. And when a deal comes in that's relatively safe - like Smithfield, for example - they'll jump in. There is pent-up demand for that."

End

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