AK Steel gains jumps on optimistic forecast; Jean Coutu plans mega-deal to fund purchase of Eckerd

By Paul Deckelman

New York, July 6 - AK Steel Corp. bonds were quoted solidly higher Tuesday after the Middletown, Ohio-based steelmaker said that it expects to report an operating profit of about $55 million for the second quarter - a sharp turnaround from its year-ago operating profit of just a million.

In the primary sphere, Canadian drugstore operator Jean Coutu Group was heard by syndicate sources to be getting ready to take a $1.2 billion offering of 10-year notes on the road, for pricing around July 19 or 20. The giant Rule 144A offering will be brought to market by joint bookrunning managers Deutsche Bank Securities and Merrill Lynch & Co., with National Bank of Canada also part of the underwriting team.

Jean Coutu plans to use the proceeds of the mega-deal to help fund its $2.375 billion purchase of part of the Eckerd drugstore chain from J.C. Penney Co. Inc. Plano, Texas-based Penney is selling the other part of Eckerd to CVS Corp.

Another drugstore chain operator figuring in primaryside activity - albeit a little down the line - is Duane Reade Inc., which is heard bringing a $195 million Rule 144A offering of seven-year notes to market via Banc of America Securities, Citigroup, Credit Suisse First Boston and UBS Securities.

The offering is expected to emerge late in the month. Proceeds will be used, along with the proceeds from a new term loan and other available cash and credit, to fund the buyout of New York-based Duane Reade - certainly the dominant pharmacy operator in Manhattan - by Oak Hill Capital Partners LP.

Also on the new-deal front, Arlington Texas-based homebuilder D.R. Horton announced that it is selling $200 million of new senior notes in a registered offering via Citigroup Global Markets under a shelf registration statement previously filed with the Securities and Exchange Commission. The company said it planned to use proceeds of the deal to repay revolving credit facility debt.

And Forest Oil Corp. said that it would issue an additional $100 million of 8% senior notes due 2011 in a private placement add-on.

The Denver-based independent oil and gas exploration and production company said it would use the deal proceeds to pay credit facility debt. There was no immediate word on likely underwriters.

Out of Europe came word that German machine tool manufacturer Gildemeister AG will sell €175 million of seven-year notes, via lead managers Bayerische Hypo- und Vereinsbank and Westdeutsche Landsbank.

The deal is being marketed via a roadshow that began Monday and is expected to end on Friday, with pricing expected soon afterward, probably on Monday of the coming week.

The company is using the deal proceeds, as well as those from a recent recapitalization, to stabilize its balance sheet by getting rid of short and medium term maturities.

AK Steel shines in secondary

In the secondary market, AK Steel was clearly the star of the day after the company released positive guidance, with its bonds "up a lot," in the words of one trader. He quoted AK's 7 7/8% notes due 2009 as having pushed up to 96 bid, 97 offered from prior levels around 93.25 bid, 94.25 offered.

It was, he said, "a pretty aggressive move upward. I didn't see any other steel names following along."

Another trader quoted AK's 7 7/8% notes as having risen to around 95 bid, 97 offered - and even at that higher level, he said, "their bonds look cheap by three points compared to where Allegheny [Steel] 8 3/8s, a comparable company, are trading."

At another desk, the AK 7 7/8s were seen as high as 96.5 bid, 07.5 offered, up three points from where they were before the long Independence Day holiday weekend (which sent everyone home early on Friday and which shuttered the market entirely Monday). AK's 7¾% notes due 2012 were meanwhile at 93.5 bid, 94.5 offered, well up from 89.5 bid, 90.5 offered last week, so, "they were up nicely," a trader said.

AK's New York Stock Exchange-traded shares got an even bigger boost from the earnings projections than the bonds did, rising 51 cents (9.83%) to close at $5.70. Volume of 3.3 million shares was about triple the usual turnover.

In forecasting its expected income levels, AK said it expects to announce an as-yet undetermined amount of net income - its first, after eight straight quarterly net losses - and that would be without even including an anticipated gain on the sale of the company's Houston industrial park, which was completed in April. Wall Street has been looking for the company to lose about 10 cents per share in the quarter.

AK said that the earnings data, to be released on July 20, reflects stronger-than expected shipments, improved spot market pricing, including alloy and scrap surcharges, and continued operating and administrative cost reductions, which AK said had enabled it to overcome a portion of the impact of higher raw material and energy prices.

Since the 2003 third quarter, when it went through a sharp executive management shakeup that saw then-CEO Richard Wardrop and then-president John Hritz resign, to be replaced by James L. Wainscott, who took over both positions, AK said that its operating income had improved by about $117 per ton of steel poured and sold. The switch was seen having ushered in a less frosty relationship between the company and its unions. Since that time, aided by what Wainscott called "measurable" progress in bringing down its labor costs - a key component of its overall cost structure - AK estimates that operating income has improved on an annualized basis to the tune of about $700 million, based on 6 million tons of shipments.

The AK announcement touted in detail the progress that the company has recently been making in an effort to bring its labor costs down. Wainscott said that in the last six months AK had negotiated new labor agreements with the unions that represent its plants in Mansfield, Ohio, Coshocton, Ohio and Rockport, Ill. - labor pacts which allow for "a smaller and more flexible hourly workforce, consistent with, or better than, other recently negotiated contracts in the steel industry," Wainscott said.

The company also said its efforts to keep labor costs competitive got a boost last Thursday when an arbitrator ruled that it could continue its suspension until at least May 2005 of a provision in its contract with its largest hourly union, the independent AEIF in Middletown, that calls for a minimum base workforce.

The ruling further allows the company to continue reducing the Middletown hourly workforce by attrition and through layoff of employees with less than two years of seniority. AK has already reduced Middletown's hourly workforce by about 125 employees, or 4%, since January, and said it will continue to trim the Middletown hourly workforce through layoffs and attrition.

Looking ahead, AK said it expects continued improvements in its operating profitability for the third quarter and for the 2004 second half, due primarily to fewer planned maintenance outages and continued cost reduction efforts.

Secondary mostly quiet

Elsewhere, things were pretty much "freakin' dead," a trader fumed. "With little commitment and no concern. It's generally an apathetic environment."

He said that the $2.15 million inflow to high yield mutual funds in the week ended last Wednesday, reported by AMG Data Services, "hits it exactly on the head. There's billions of dollars in the mutual funds - and they have [just] a $2.2 million swing. Unbelievable."

"I don't even know why I came in today," another trader said, "I couldn't get anything done."

Another trader suggested that "a lot of people are still on vacation, or just now straggling back in after the big holiday weekend.

Level 3 lower, Nextel higher

He saw the bonds of Level 3 Communications Inc. "under pressure," despite a lack of fresh news about the Broomfield, Colo.-based fiber optic telecommunications network operator.

Its bonds were "off a couple of points," with the benchmark 9 1/8% notes due 2008 dipping to 76 bid, 77 offered from last week's levels around 79 bid, 80 offered, while its 11% notes due 2008 fell to 82.5 bid, 83.5 offered, down from 84 bid, 85 offered.

At another desk, a trader saw telecoms such as Nextel Communications Inc. "upgusting," with the Reston, Va.-based wireless operator's 6 7/8% notes due 2013 firming to par bid, 100.25 offered from 98.75 bid, with the 8 1/8% notes due 2011 of the company's Nextel Partners affiliate were a point better at 103 bid, 104 offered.

News that British aerospace company Dunlop Standard is to be sold to Meggitt plc and The Carlyle Group in a $1.44 billion deal that includes the redemption of its $350 million of 11 7/8% notes due 2009 didn't give those bonds much of a lift; they remained grounded around 106 bid.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.