Knight Capital up on merger news; Navistar lower after huge loss; Ciena exchange deal eyed

By Rebecca Melvin

New York, Dec. 19 - Knight Capital Group Inc.'s convertibles traded up a point to 99 on news Wednesday that the Jersey City, N.J.-based electronic trading company has agreed to be acquired by rival Getco Holdings Co. LLC in a cash and stock deal that values the company at $1.4 billion.

The purchase price represents a 51% premium to Knight's closing share price Nov. 23, when the potential deal first came to light, and equals a 15% premium to Knight's tangible book value as of Sept. 30, according to the companies' news release.

Navistar International Corp.'s convertibles were lower in line with underlying shares after the Lisle, Ill.-based truck and engine maker posted a fourth-quarter loss of $40.13 per share, due primarily to a one-time $2 billion tax expense. Revenue was down 24% to $3.28 billion, which edged estimates to the upside.

Ciena Corp. was in focus after the Linthicum, Md.-based telecom equipment maker said it would exchange half of its outstanding 4% convertibles due 2015, or $187.5 million principal amount, for a new 4% convertible with a longer maturity of 2020.

The Ciena deal was favorable to investors that bought into the new paper, an East Coast-based buysider said.

The convertibles of Alcatel-Lucent SA, which bumped up Monday on the heels of news the French-American telecom equipment maker secured $2.1 billion in needed funding, edged higher Wednesday, along with shares.

Equities, which were flat to lower for much of the session, turned lower late in the day, with the Dow Jones industrial average closing down 99 points, or 0.74%, at 13,251.97.

"It was one of those weird days where [stocks] came off, but I have a lot of green on my screen," a West Coast-based trader said, adding that sectors like retail and software were in positive territory.

Knight Capital up on takeout

Knight Capital's 3.25% convertibles due 2015 traded up 1.25 points to 99, according to Trace data. And a trader also said the convertibles were at 99.25.

Knight shares closed Wednesday up 18 cents, or 5.4%, at $3.51, which was below the $3.75 per share at which Knight shareholders can cash in under the deal.

Getco made an unsolicited bid for Knight in late November, and that was followed by an unsolicited bid from Virtu Financial LLC.

Daniel Coleman, Getco's chief executive, will become chief executive of the combined firm. Thomas M. Joyce, chairman and chief executive of Knight Capital, will serve as executive chairman of the board. Steve Bisgay, Knight's chief financial offer, will continue in that role for the combined company.

The transaction is subject to shareholder and regulatory approvals and is expected to be completed in the second quarter of 2013.

The last time Prospect News reported on the trading of Knight Capital convertibles was Oct. 31, in the aftermath of Hurricane Sandy. The company had released a note to clients saying it was taking no new orders that day due to a generator issue that caused the company to lose power.

Knight's post-Sandy issue was reminiscent of its summer trading debacle that cost the firm $440 million and sent the underlying shares into a free fall temporarily.

On Oct. 31, the Knight convertibles were seen little changed at 91.875 bid, 92.25 offered.

Navistar lower with shares

Navistar's 3% convertibles due 2014 were seen at 92.25 on Wednesday, which was lower in line with the underlying shares, a New York-based trader said.

"It was probably a fair nuke," the trader said, referring to how the convertibles would trade on a dollar-neutral, or hedged, basis, given the move down in the underlying shares.

Navistar shares fell $1.83, or 8.5%, to $20.92.

Navistar posted a fiscal fourth-quarter loss of $2.77 billion, or $40.13 per share, compared with net income of $255 million, or $3.48 a share, in the year-earlier quarter. The $2 billion, or $28.59 per share, tax expense accounted for more than 70% of the per-share loss. In addition, Navistar cited pretax charges totaling $252 million for warranty expenses linked to big bore engines, cost cuts, restructuring and engineering integration and non-conformance penalties.

Revenue fell 24% to $3.28 billion on lower sales, adjustments to pre-existing warranties and charges tied to cost reduction linked items.

Analysts had expected a loss of $1.54 per share, excluding charges, on revenue of $3.15 billion.

Ciena exchange 'cheaper'

Ciena's old 4% convertibles due 2015 were seen at 112 bid, 112.75 offered on Wednesday versus an underlying share price of $15.65, according to an East Coast-based buysider.

The new Ciena 4% convertibles due 2020 were seen at 114 bid, 115.25 offered versus an underlying share price of $15.65, the buysider said.

"It's definitely cheaper, so not a bad deal for investors," he said.

But an analyst, based in Connecticut, noted that the exchange deal has accruing interest.

The new 2020 notes have the same coupon and 49.0557 conversion rate, which is equal to an initial conversion price of $20.385 per share, as the old ones. But unlike the 2015 notes, the principal amount of the 2020 notes will accrete at a rate of 1.85% per year.

The accreted portion of the principal is payable in cash upon maturity, but does not bear cash interest and is not convertible into Ciena common stock. Accretion of principal will be reflected as a non-cash component of interest expense on Ciena's statement of income during the term of the 2020 notes.

"By extending the maturity of half of our outstanding 2015 convertible notes to 2020 we have strengthened our balance sheet and enhanced our financial flexibility, said Ciena chief financial officer Jim Moylan. "Further, we have accomplished this without increasing our annual cash interest expense or adding incremental share dilution relative to the 2015 notes being retired.

The 2020 notes have contingent conversion if the trading price of Ciena's stock exceeds $26.50, or 130% of the conversion price, for a required period.

If the company converts, the holders receive a make-whole premium payable in Ciena common stock, or its cash equivalent at the election of the company.

Alcatel Lucent adds outright

Alcatel-Lucent's 2.875% convertibles due 2023 were seen at 92.125 bid, 92.625 offered on Wednesday, which was up from near 92 on Monday when they popped on news that Alcatel-Lucent has secured a $2.1 billion financing package from Goldman Sachs & Co. and Credit Suisse.

Alcatel's 2.875% convertibles of 2025 added 0.25 point on Wednesday to 100.5, a New York-based trader said.

Alcatel-Lucent shares were up 7 cents, or 5%, at $1.45 in active trade on Wednesday.

The telecom-equipment company is trying to pay down and refinance debt.

Funds will be used to push out its debt maturity profile and to provide additional flexibility to finalize its previously announced restructuring program, including cost-cutting moves.

Alcatel-Lucent's U.S. subsidiary is the borrower for the financing, which will have maturities of three and a half to six years. The deal is expected to be secured by the company's portfolio of intellectual property.

Mentioned in this article:

Alcatel-Lucent SA NYSE: ALU

Ciena Corp. Nasdaq: CIEN

Knight Capital Group Inc. NYSE: KCG

Navistar International Corp. NYSE: NAV

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