Lucent up on Alcatel merger; General Motors' 4.5% convertible gains on GMAC sale

By Kenneth Lim

Boston, April 3 - It was a quiet start to the week for the convertible bond markets, with Lucent Technologies Inc. drawing the most activity after it agreed to be acquired by French rival Alcatel in a highly anticipated move.

"There were very few broker markets today," said a sell-side trader. "I guess a lot of customers were busy with their month-end marks."

General Motors Corp.'s shortest-term convertible, the 4.5% convertible due 2032 putable in March 2007 (NYSE: GXM), gained slightly despite the underlying stock's 5.31% plunge after the Detroit auto maker said it was selling 51% of financing arm General Motors Acceptance Corp.

"That shows a sign of confidence that this sale is going to be better for the GXMs," the trader said.

The newly priced convertibles of Boston Properties Inc. had a lackluster debut, barely making par after getting a poor response in the primary market.

Another real estate investment trust, Annaly Mortgage Management Inc., also announced plans for a $100 million convertible perpetual stock offering slated to price Thursday. But an analyst said the deal could meet the same reservations investors had on the Boston Properties deal - a yield disadvantage on the convertibles against a high dividend-paying common stock.

Also launching a deal was Rentech Inc., an alternative fuel technology developer planning a $50 million convertible bond offering to help pay for an acquisition. But a buy-side analyst was unenthusiastic about the deal, saying an investment in the company may be highly risky.

Lucent up 2 on Alcatel merger

Murray Hill, N.J.-based Lucent and Paris-based Alcatel said Sunday that the French telecom equipment maker would acquire its U.S. rival in a $13.4 billion stock swap.

Lucent's 2.75% convertible due 2023 were seen trading about two points higher in line with the stock at 108.5 versus a stock price of $3.09, while the 2.75% convertible due 2025 also changed hands about two points higher at 113.5 versus the same stock price, said a buy-side trading source. The 7.75% convertible preferreds were seen at 103 at the same stock level.

Lucent shares (NYSE: LU) rose 0.98% or 3 cents to close at $3.08 on Monday.

"I'm delighted about this, to be holding a large position in the 7.75s," said a New York-based buy-side convertible fund manager.

Lucent and Alcatel on Sunday said they had agreed to merge and expect the deal to close within the next six to 12 months. Lucent chief executive Patricia Russo will head the new company, which will be based in Paris, while Alcatel chairman and chief executive Serge Tchuruk will remain as non-executive chairman.

The combined company will cut 8,800 jobs, or about 10% of its workforce, and the companies expect $1.7 billion in merger-related savings within three years.

Merrill Lynch & Co. equity analyst Tal Liani wrote in a report that the merger was positive, and would "enable the two companies to derive significant cost synergies and exploit economies of scale, allow the combined company to effectively compete with Chinese companies Huawei and ZTE, and finally improve margins."

"The combined company will also have a much stronger position in growth areas of access, IP, optical and wireless," Liani wrote.

"We think the deal is first a transfer of value from Alcatel's to Lucent's shareholders," the analyst added. "The deal was consummated at nil premium despite Alcatel's broader success, lower valuation multiples and higher margins."

A buy-side analyst said the credit strength of Lucent bonds is probably going to improve with the deal because Alcatel has better ratings than Lucents. But the preferreds were trading at about 8.6% yield-to-call, the analyst pointed out.

"Looking at the yield to call, it doesn't appear to me that there's a lot of conviction that there's going to be a buyback," the analyst said of speculation that the combined company would tender for the high-interest debt.

The analyst said the caution about the possibility of the preferreds being bought back was partly founded on the fact that Lucent and Alcatel have more pressing operational issues to address at the moment.

"Historically, European-U.S. mergers haven't worked too well," the analyst said.

The companies have to iron out cultural differences, and there could be internal jostling over where the layoffs are going to come from. "It's not as simple as some people think," the analyst said.

But the New York-based fund manager said the 7.75% preferreds "will have to go... even if Lucent were not becoming a better credit in a takeover."

There are "virtually no 7.75% dividends" these days, the fund manager said, and coupons lower than that level have been refinanced recently. That dividend rate was "just a leftover from when Lucent seemed to be distressed," and when they were "screaming buy at 95 [points] or so just two weeks ago," he said.

"It certainly wasn't distressed two weeks ago, and it isn't now," the buysider said.

The preferreds are considerably less attractive now than a fortnight ago, but still look good, he said.

"If I didn't have them, I suppose I would be buying some," he said.

General Motors sell 51% of GMAC

General Motors said Monday it will sell a 51% stake in GMAC to a group led by hedge fund Cerberus Capital Management for about $14 billion to boost its own liquidity, while analysts saw the move as positive for GMAC's credit rating.

The sale helped General Motors' 4.5% convertible gain 0.14 point, or 0.6%, to close at 23.35 on Monday against the closing stock price of $20.14, bucking the slide in the underlying share and General Motors' other convertibles. The 5.25% convertible due 2032 (NYSE: GBM) dropped 0.24 point, or 1.48%, to close at 16, while the 6.25% convertible due 2033 (NYSE: GPM) retreated 0.92%, or 0.16 point, to end at 17.19. General Motors stock (NYSE: GM) was down 5.31%, or $1.13.

General Motors said it will receive $7.4 billion from the Cerberus consortium, which includes Citigroup and Japan's Aozora Bank Ltd. It will also get $2.7 billion from GMAC under the deal due to a tax change, and another $4 billion from GMAC auto lease proceeds over three years. General Motors expects to close the deal in the fourth quarter of 2006.

A sell-side trader said the divergence between the 4.5% convertible and the 5.25% security was unusual. The 4.5% convertible are putable next March, so the gain in that security suggests that investors are betting that struggling General Motors will not go bankrupt by then, the trader said

"It's a positive development for the GXMs," he said.

But other onlookers were more cautious. "It's really difficult to be favorably disposed to the company [General Motors] in terms of most of the converts," said a buysider who said the security was "barely a convertible."

Another buysider, who is based in California, said that even though the yields are attractive on the General Motors convertibles he was worried about the threat of strikes after former subsidiary Delphi Inc. asked the courts to release it from its obligations to meet union contracts. Strikes at Delphi could significantly disrupt General Motors production and potentially push the company closer to bankruptcy.

"I think any good news is already gone," the California buysider said.

Boston Properties sees dull debut

Boston Properties' 3.75% convertibles due 2036 were poorly received on Monday after the deal was priced at the cheap end of talk after the market closed on Friday.

A buy-side trading source said the convertible was bid at par and offered 0.125 point higher versus a stock price of $92.40. Boston Properties stock (NYSE: BXP) closed lower by $1.70, or 1.82%, at $91.55.

"It wasn't a well-subscribed-for deal, and barely made par," the buysider said.

Boston Properties' $400 million offering was talked at a coupon of 3.25% to 3.75%, with an initial conversion premium of 20% to 25%. The initial conversion premium was set at 20% on Friday.

Boston Properties is a Boston-based real estate investment trust with a portfolio of mainly office property.

Annaly to launch $100 million deal

Despite the market's cool response to Boston Properties, mortgage-backed securities real estate investment trust Annaly is also planning its own convertible offering.

Annaly plans to offer $100 million of perpetual convertible preferred stock talked at a dividend of 5.75% to 6.25% with an initial conversion premium between 17.5% and 22.5%. The preferreds are expected to be priced at $25 apiece, and the final terms are slated to be set on Thursday after the market closes. There is an over-allotment option of a further $15 million.

Merrill Lynch and Co. is the bookrunner of the off-the-shelf deal.

Annaly is also planning a concurrent offering of common stock worth $300 million plus a further $45 million for over-allotment.

A buy-side analyst said his firm usually does not participate in too many REITs because the high dividend yields on the common stock tend to put the convertibles at a yield disadvantage. Also, the current rising interest rate environment "historically hasn't been a good time to invest in REITs," the analyst said.

Nevertheless, Annaly has performed very well, and has a management reputed to be "first class." The terms of the convertible also look "pretty good" at first glance and could be attractive. Investors may also be interested in REITs because of expectations that merger and acquisition activity could increase in the sector, the analyst said.

Annaly is a New York-based real estate investment trust that invests mainly in mortgage-backed securities. It plans to use proceeds from the stock and convertible offerings to buy MBS, and then borrowing against the newly acquired securities to buy more MBS.

Annaly stock (NYSE: NLY) close at $11.68 on Monday, down 46 cents or 3.79%.

Rentech offers $50 million deal

Rentech Inc. plans to offer $50 million of seven-year convertible senior notes with a greenshoe option of a further $7.5 million, but an analyst said the company could be a risky investment.

The unsecured convertibles are being offered at par. No details were given regarding price talk.

Credit Suisse is running the books.

Rentech is also offering 12.5 million shares of common stock with a greenshoe option of a further 1.875 million shares in a concurrent shelf issue. It said the combined offerings could raise gross proceeds of about $102 million. That values the stock offering at $52 million if over-allotment options are excluded.

Rentech, a Denver, Colo.-based developer of alternative fuel technology, said it will use the proceeds to pay for its pending purchase of Royster-Clark Nitrogen Inc., to fund working capital at Royster-Clark and for general corporate purposes. Royster-Clark owns and operates a natural gas-fed nitrogen fertilizer plant in East Dubuque, Ill.

A buy-side analyst said the convertible deal was a "very, very risky proposition," saying Rentech's technology has not been proven to be successful. Rentech, which currently specializes in turning gas into liquid fuel, requires a lot of capital and needs natural gas prices to be very high for its products to effectively compete, the analyst said. And the Royster-Clark acquisition, which is essentially a diversification into fertilizers, suggests that even Rentech may have doubts about its own core products.

"It's a signal that they may not think they may survive on gas-to-liquid only," the analyst said.

Rentech shares closed at $4.25 on Monday, down 10 cents or 2.3%.

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