IKON jumps on Ricoh buyout news; Quiksilver gains on asset sale; Michaels Stores slides after numbers

By Paul Deckelman and Paul A. Harris

New York, Aug. 27 - IKON Office Products Inc.'s bonds shot up dramatically Wednesday on the company's announcement that it had agreed to be acquired by Japanese office machines giant Ricoh Co. Ltd.

In other deal news, Quiksilver Inc.'s paper firmed smartly as the Huntington Beach, Calif.-based maker of athletic apparel, footwear and sporting equipment announced that after months of shopping its Rossignol ski equipment unit around it had received an offer to buy the business.

A trader saw what he termed "an usual level" of activity in Vitro SA de CV's bonds, possibly on the news that the Mexican glassmaker will buy out its partners in a joint venture.

Michaels Stores Inc.'s bonds were lower across the board, as the Irving, Tex.-based art supply store chain reported continued losses in the latest quarter, even though there was less red ink on a net basis.

Primary activity remained non-existent during yet another quiet session leading towards Friday's scheduled half-day and the three-day Labor Day holiday weekend after that.

Market indicators edge upward

The widely followed CDX index of junk bond performance was little changed on the day, a trader said, quoting it at 92 7/16 bid, 92 11/16 offered. The KDP High Yield Daily Index meantime rose 12 basis points to end at 70.36, while its yield narrowed by 2 bps to 10.67%.

In the broader market, advancing issues continued to lead decliners by a narrow margin. Activity, represented by dollar volume, rose nearly 11% from the weak levels seen on Tuesday, although by any objective standard, volume remained limited.

"Nothing was going on," a trader said, who added that everything that he normally watched "was about the same."

Another saw "a fair amount of buying going on today," particularly in credits which had news attached to them such as IKON, which he called "clearly the biggest news of the day."

He said "it's a quality market right now, with buying going on in names like El Paso Corp.," although he could not provide specific trading levels for the Houston-based natural gas pipeline and electric power plant company's paper. Another market source said that its 6¾% notes due 2009 were up around a point, trading at just over par.

A third trader said that as has been the case over the last few sessions, names which had news developments attached to them would be trading around - but everything else was dying on the vine for lack of attention.

"There are a few players around," he acknowledged, in commenting on the activity Wednesday in such names as IKON and Vitro, "but there wasn't your typical widespread-type activity because so many people are out on vacation, and even those [that who are in] are reluctant to pull the trigger."

Given the generally reduced trading levels seen over the past week, "with people out, you may not have a true sense of what the market is doing." The old saw, "like I've heard on CNBC all the time with equities this week, how it's easy to move markets when fewer players are in," certainly held true for the junk market, he said.

"The few players that are in are reluctant to take on excessive risk, so it's easier to either have an issue trade multiple points lower or higher, on less volume."

Big buyout boost for IKON

Among specific names, a market source said that IKON's 7.30% bonds due 2027 were probably the most active junk issue of the day, getting a big boost on the news that Ricoh, a maker of office copiers, printers and fax machines as well as digital cameras and other electronic devices, has agreed to buy Malvern, Pa.-based IKON, which sells office equipment by various manufacturers as well as other products and services that aid companies in document management and workplace information processing.

The source quoted those bonds at about the 108.5 level, calling that a rise of more than 28 points on the session from previous levels around 80.

Another trader saw an even more astonishing move in IKON's 6¾% notes due 2025, seeing those bonds get as good as 108.5 before going out at 108 - still up from last week's levels around 61 bid, in active dealings.

He saw IKON's 7¾% notes due 2015, on the other hand, up a more normal 8 points on the session versus last week's levels, also to the 108.5 area.

Another trader called those latter bonds 10 point gainers on the day. Noting that all of the bonds had converged around the 108-108.5 neighborhood from their previous trading levels, he suggested that it might be "because they are being acquired by a single-A credit," with the expectation that IKON's own ratings (the bonds are at Ba3/BB-) would likely be raised to that higher level upon completion of the sale. He also said that it was possible that there might be some kind of change-of-control transaction for the bonds.

One of the other traders - noting that the press release announcing the planned IKON acquisition by Ricoh made no mention of what would happen to the U.S. company's debt, which includes the approximately $640 million of outstanding bonds - said "it all depends on what will happen to that debt - is it being assumed, is it being taken out, is it being tendered for?"

He noted that the 7.30s have a make-whole call at 15 bps over Treasuries, "which would mean that there's still upside on that particular issue."

IKON, which describes itself as "the world's largest independent channel for document management systems and services," said that it had signed a definitive agreement with Ricoh to be acquired for $17.25 per share, or approximately $1.6 billion in cash.

IKON's chairman and chief executive officer, Matthew J. Espe, said in the company's press release announcing the planned sale that "following an extensive review of our strategic opportunities, our board conducted a formal process to evaluate alternatives for the company" before deciding on the Ricoh transaction.

Espe said that the offer represents a 33% premium over his company's trailing 60-day average stock price as of the close of trading on Tuesday, the last trading day before the deal was officially announced. The transaction is not contingent upon financing - Ricoh plans to fund it with "a mix" of internal and external financing - and is expected to close sometime during the fourth quarter. It has already been approved by the boards of directors of both companies, and is subject to approval by IKON's shareholders, as well as regulatory approvals in the United States, Canada and Europe, and customary closing conditions.

IKON's New York Stock Exchange-traded shares shot up as high as $17.23, or 10.73%, in intraday dealings, just under the Ricoh offer price, before finishing up $1.46, or 9.38% on the day at $17.02. Volume of 37.2 million shares was almost 52 times the average daily turnover.

Quiksilver turns golden on asset sale

Another big deal making news was Quiksilver's announcement that it had found a buyer for its Rossignol ski equipment division, which the company considers to be not a core operation.

That helped boost its 6 5/8% notes due 2015 to around 81, which one of the traders said represented a 3½ point boost from its prior round-lot trading level, seen last week. Another market source saw those bonds going home at 80 bid, up as much as 6 points on the session, against the previous closing odd-lot price of 74, on Monday. Activity in the credit was brisk.

Quiksilver's NYSE-traded shares zoomed 18.5% in intraday dealings, to a high of $9.20 per share, before coming down from that peak to close at $8.64, up 88 cents, or 11.34%, on the session. Volume of 5.97 million shares was almost three times the norm.

Quiksilver - which designs, produces and distributes apparel, winter sports equipment, footwear, accessories, and related products - said that it had agreed to sell it agreed to sell its Rossignol business, which includes skis and related equipment and winter sports apparel, to Chartreuse & Mont Blanc, a group majority-owned by the Australian financial services company Macquarie Group and led by Rossignol's former CEO, Bruno Cercley, for €100 million, or about $147.6 million. The deal is subject to a financing condition and is expected to close in the fall. Quiksilver will use the proceeds from the sale to pay existing debt.

The deal price - which consists of €75 million in cash and a €25 million seller's note - is far less than the $560.8 million that it paid for Rossignol just three years ago - but Wall Street never liked the deal in the first place, believing that Rossignol did not fit in with the company's other product lines.

The unit struggled, and proved to be a drag on the overall company, whose stock price fell by more than half over the last three years. Finally running up the white flag at the beginning of the year and putting the once-valued unit back on the auction block, Quiksilver beat the bushes for a buyer, although there was a general consensus that getting a deal done at any kind of a decent price would be very tough, and some in the marketplace doubted it would get done at all.

Citigroup analyst Kate McShane said in a research note that even at the almost fire-sale price that it will get for Rossignol - which she called "roughly in line" with market expectations - the transaction is a positive for Quiksilver, since it lets the company finally rid itself of a costly white elephant of a "negative margin business" and instead focus on its core apparel and footwear lines like Quiksilver, Roxy and DC Shoes.

Vitro very active

Elsewhere, a trader said that he saw "unusual activity" in the bonds of Mexican glassmaker Vitro SA, whose 9 1/8% notes due 2017 traded at least $17 million of bonds, which he said "would be excessive volume on any day for an issue like this," but particularly so on a relatively quiet session like Wednesday's. In contrast, only $5 million out of the approximately $700 million issue had traded on Tuesday.

He saw the bonds at 77.125, down in round-lot trading from 77.5 on Tuesday and 78 on Monday. "The trend is lower," he said.

Another market source also noted that there was a relatively busy level of trading in the bonds, saying Vitro made the list of the most actives despite a relatively small price movement.

The first trader noted that the only fresh news out about the company was its announcement that it plans to buy out its partners in a joint venture, although he expressed skepticism that such a development would be enough to encourage active trading in the bond, since "we're talking small dollars."

Monterrey-based Vitro said Wednesday that it would buy the remaining stake in its 60%-owned Vitro Cristalglass joint venture for €31 million euros, or about $45.6 million.

It said that it would buy out the 40% stake in the company owned by partners the Prado family and Invergar Participaciones Inmobiliarias SL by Jan. 10.

Vitro had previously said that it might buy out its JV partners by Sept. 10, but did not explain why it had pushed its timetable back.

Michaels bonds get mauled

In the retail sector, a trader saw Michaels Stores' 10% notes due 2014 at 74.5 bid, down 2½ points on the day, on brisk volume of $11 million, which he said a was a sizable amount in a relatively quiet market, while its 11 3/8% notes due 2016 lost 2 points to 63.5 on volume of $12 million, following the company's quarterly numbers.

Another trader called the 11 3/8s down 3 points post-numbers at 63 bid, 64 offered, and said that was down 6 points from Tuesday's close before the release of the quarterly results.

For the second quarter, the company reported a net loss of $25 million, versus a $44 million loss for the second quarter of 2007. Net sales for the quarter increased 1% to $796 million from $788 million last year, with same-store sales declining 2.6%.

Operating income for the quarter was $27 million.

However, adjusted EBITDA for the second quarter declined approximately $17 million to $73 million, or 9.2% of sales, from $90 million, or 11.4% of sales, for the same period last year.

Second-quarter debt levels totaled $4.034 billion, down $64 million from last year's second quarter balance of $4.098 billion. During the quarter, the company made a $5.9 million amortization payment on its senior secured term loan.

Company officials blamed the overall "soft" economic environment for the performance.

Looking ahead, they said that low consumer confidence and increased economic volatility are expected to have a continued adverse effect on the business for the remainder of the year. Michaels expects the first half trends for same-store sales, adjusted EBITDA, net income and cash flow from operations to continue for the second half.

Fat yield continues to boost GM 7.20s

In the autosphere, a trader saw General Motors Corp.'s benchmark 8 3/8% bonds due 2033 down 1 point at 48 bid, and its GMAC LLC automotive financing affiliate's 8% bonds due 2031 also a point lower, at 52 bid.

Another trader saw the GM benchmarks up ¼ point at 49.5 bid, while the GMAC bonds dipped nearly a full point to around the 53.25 level, although he saw its 6 7/8% notes due 2012 up 1¼ points at 58.75. He saw GM domestic arch-rival Ford Motor Co.'s 7.45% bonds due 2031 down 1.4 points at 51.25 bid.

Apart from those long bonds, he saw GM's recently active 7.20% notes due 2011 continuing to gain, up 3/8 point to 64.25, its recent rise propelled by the bonds' fat yield at current price levels - about 29%, considerably wider than the 8 3/8s' yield in the upper teens.

At another desk, a market source saw the bonds going home even higher, quoting them up nearly a point at 66.25 bid - which left the yield at a still-swollen level north of 27% - in very busy dealings.

Morris seen lower after downgrade

A trader said that Morris Publishing Group LLC, which he described as being "like a smaller version of [Chicago-based media giant] Tribune Co., was considerably lower versus recent levels, particularly after the Augusta, Ga.-based newspaper publisher's ratings were downgraded by Standard & Poor's earlier in the session.

"Even though the bonds haven't traded for a while, they're now being quoted." He said that after having previously traded in the 60s - although the last prior official trade recorded by the Trace bond-tracking system marked them at 53, back on June 30 - they were now being quoted at 48 bid, 52 offered.

Morris reported second-quarter earnings on Aug. 13, and most measures showed a substantial deterioration from a year ago. Its second-quarter operating income of $8.6 million was down $7.5 million, or 46.8%, from $16.2 million for the same period in 2007. Total operating revenue was $82.2 million, down $13.4 million, or 14%, although total operating cost of $73.6 million was also down $5.9 million, or 7.4%. Total advertising revenue was $65.2 million, down $13.5 million, or 17.2%, with retail down 12.4%; classified down 24.6%; and national down 4.4%.

Company president and chief executive officer William S. Morris IV said at that time that the company's ad results "continued to be affected by the weak economy and the secular trends impacting our industry."

Against that somber backdrop, S&P said Wednesday that it had cut the company's corporate credit rating to CCC+ from B- previously, with a negative outlook, citing its concern about "the pace of revenue and EBITDA declines at Morris' newspaper publishing assets and the challenges in rightsizing its cost structure to meaningfully stem near-term EBITDA declines."

The agency warned that even with an amendment to its financial covenants from its lenders, the company - which had a 7x debt-to-EBITDA ratio as of June 30 - "will be unable to sustain its current capital structure over the next several quarters without a significant improvement in the operating environment."

Testing the primary temperature

As the Wednesday session came to a close, the picture that was shaping up of the post-Labor Day week in the high-yield primary market was a quiet one.

So far in the final week of August, sell-siders have specified that when the market resumes on Sept. 2, following the three-day holiday weekend in the United States, primary market activity is unlikely to resume quickly.

On Wednesday one investment banker said that no new issue business was slated for the first week in September.

"The first week back we're going to be taking the temperature," the source said, and added that the month of September - and indeed the remainder of 2008 - could remain extremely quiet.

"The right kind of deal can get done, as we saw earlier in the year when the market was open for energy names," the official added.

Pushing a string

Meanwhile a money manager from a high-yield mutual fund, asked about expected September new issue activity, said: "There will be stuff.

"Right now it's pretty hard to price anything, so I don't think anyone is too optimistic," the source added.

"But if the market is there, there is stuff to do."

The buy-sider said that at least some of the Clear Channel Communications, Inc. $2.31 billion of guaranteed senior unsecured notes (Caa1) will come.

The LBO financing includes $980 million of 10¾% senior cash pay notes due 2016 and $1.33 billion 11% senior PIK toggle notes due 2016.

"But that's like pushing on a string," the investor said.

"They couldn't get the loan done, so why do they think they can sell bonds?"

The buy-sider also is expecting SunGard Data Systems Inc. to bring its $700 million of bridge refinancing senior unsecured notes in September.

"The bottom line is that spreads are too wide right now to print new issues," the money manager said, "especially when the new issue is not nearly as good as the stuff people already own."

Stephanie N. Rotondo contributed to this report.

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