Encysive up on hedge as FDA rejects drug; Cadence off as buyout falters; VeriFone, Panda quiet in gray

By Kenneth Lim

Boston, June 18 - Encysive Pharmaceuticals Inc. slipped outright but surged on a dollar-neutral basis on Monday after the company failed to get approval for a key drug.

Cadence Design Systems Inc. was lower with its stock after reports said buyout talks fizzled after private equity groups in the discussions could not agree on price.

The gray market was quiet for the two deals expected to price after the market closed Monday. VeriFone Holdings Inc.'s planned $275 million offering was seen to be slightly too aggressive amid mixed sentiments on the company's potentially insufficient capital authorization.

Panda Ethanol Inc. also attracted no bids in the gray market with its unusually structured deal, seen as cheap but highly risky and tied to a little understood business.

Meanwhile, Brazil-based Companhia Vale do Rio Doce announced a $1.9 billion offering of three-year mandatory exchangeable notes expected to price Tuesday after the market closes.

Encysive firms against rejected drug

Encysive's 2.5% convertible due 2012 eased 4 points outright but gained on a hedged basis on Monday after the U.S. Food and Drug Administration declined to approve the company's key drug Thelin for the third time.

The convertible was marked at 71.75 bid, 72.25 offered against a stock price of $2.30 on Monday. Encysive stock (Nasdaq: ENCY) fell 43.41% or $1.78 to close at $2.32.

"I was short the stock, long a lot of puts," said a hedged buysider. "Not a surprise at all, so we were set up for something like this."

Encysive said before the weekend that the FDA again gave an approvable letter for Thelin, a pulmonary arterial hypertension drug. The approvable meant that the FDA could still approve the drug if Houston-based Encysive, a biopharmaceutical company, provided more information. The FDA in its letter urged further clinical trials, citing concerns about the effectiveness of Thelin.

Encysive said it may have to significantly scale back its workforce and business, and it will review its strategic options.

The buysider said one major problem for Encysive is that a competing drug by Gilead Sciences Inc., Letairis, received approval from the FDA also last week.

"They're losing a ton of ground to Gilead's drug," the buysider said. "Now they're not going to get any headstart and there are other products coming to the market that's going to increase the competition."

But Encysive will probably continue to explore every option on the table, the buysider said.

"I'll hold on to it [the convertible] for a while," the buysider said. "They've got a bunch of approvals waiting around the world, and they have enough to continue tests for a while. Ultimately they can't live without a product in the U.S. market, but if they can turn them around they might be able to continue chasing the dream for a while more."

Cadence falls with stock

Cadence's zero-coupon convertible due 2023 lost about 9 points outright on Monday after reports said the company is no longer in buyout negotiations with private equity because of pricing issues.

The convertible ended at 141 against a stock price of $22.60. Cadence stock (Nasdaq: CDNS) closed at $22.60, lower by 3% or 70 cents.

"They took a hit because of the buyout stuff," a convertible trader said. "Not good for outright guys but I think it didn't matter much for the hedge guys. These were in the money before all this speculation anyway, so I don't think people are thinking too much about it."

Discussions with private equity firms Kohlberg Kravis Roberts and the Blackstone Group fizzled out after the companies could not agree on a price, the New York Times reported on Monday. None of companies commented on the article. Cadence is a San Jose, Calif.-based developer of electronic design automation systems.

"I'm not surprised that it has broken up," a convertible analyst said. "I was more surprised that they were ever in LBO talks. It's a volatile sector and Cadence kind of pushes it a little bit on what's going to work for private equity. They are the best for that business. In terms of profitability and cash flow I think they're probably the best in the sector, but there's still a lot of risk there and they probably couldn't agree there."

Potential private equity buyers like KKR and Blackstone that depend heavily on debt to finance their acquisitions, may also be turning more cautious with their money with the possibility that interest rates may not decline and may even rise.

"With rates maybe going up, I would think private equity will be less willing to spend on this," the analyst said.

"I guess from the action today it's off about 5%," the analyst said. "Clearly the market thinks a deal may be less likely or if there's a deal it's probably going to be at a cheaper price."

VeriFone quiet in gray

VeriFone's planned $275 million of five-year convertible senior notes did not see any action in the gray market on Monday after its deal got mixed reviews.

The deal was expected to price after the market closed and was talked at a coupon of 0.875% to 1.375% and an initial conversion premium of 20% to 25%.

The convertibles were offered at par. VeriFone stock (NYSE: PAY) gained 0.74% or 27 cents to close at $36.68.

There is an over-allotment option for a further $41.25 million.

Lehman Brothers and JPMorgan are the bookrunners of the Rule 144A offering.

VeriFone, a San Jose, Calif.-based provider of electronic payment systems, said it will use the proceeds to fund convertible note hedge and warrant transactions, and to partly repay a senior secured bank debt of VeriFone Inc., VeriFone's principal operating subsidiary.

VeriFone said in a preliminary offering document that its current authorized capital allows it to issue only another 3.25 million shares of its common stock for the convertibles, which will limit the potential upside participation of the net share-settled convertibles unless the company can secure shareholder approval to increase its authorized capital. If the company cannot get that approval within a year of issuance, the convertibles will bear an additional 200 basis points in interest. The coupon will increase by 25 bps per year after that until the company can get approval.

"The thing I had a heard is a little of the confusion here is the share authorization not being enough," said a sellside convertible analyst, who reckoned that the company may need to increase its authorized capital if the common stock exceeds around $68, based on week-ago prices.

The analyst said such a problem has been seen before.

"This isn't the first time that there haven't been enough authorized shares to get it done," the analyst said. "Like with mergers too sometimes they need to go to a shareholders' meeting to go ahead with that. Unless there's some reason to believe that they wouldn't get that approval, that's the question."

A sellside convertible trader said the deal looked "OK" and did not think the insufficient authorized capital would be a major roadblock for investors.

"That's going to be an issue but it's not a big deal," the trader said. "I would think the shareholders would approve it. This is extremely cheap financing. You can borrow all that money at 1% interest, why not?"

But a hedge fund analyst said the deal looked unattractive.

"I'm not going to play it," the buysider said. "I don't think it's priced very well. It's too rich. You have to be compensated for having such a small coupon, and then to take the risk of this company not having to issue shares, God forbid you need shares for your borrow, if there aren't enough shares you're going to crash. It's a bad deal."

Panda raises questions

Panda Ethanol's planned $140 million of seven-year convertible senior notes also remained silent in the gray market with its deal leaving a number of analysts scratching their heads.

The deal was talked at a coupon of 6% with an initial conversion price of about $5 per share. The convertibles will be offered at par, but the company will pay $1,500 per note at maturity. The initial conversion price range is about 13% below Panda common stock's (PDAE) closing price of $5.75 on Tuesday.

Morgan Stanley is the bookrunner of the Rule 144A offering.

The coupon may be increased if certain operational milestones are not met. The company may choose to pay the coupon in kind, in which case the principal will accrete at a 7% rate.

The company may call 25% of the convertibles at any time at a redemption price that varies depending on when the call is made, and the exercising of this option will prevent holders from converting the notes.

All the convertibles are callable after the third year at a price that will let holders realize a 15% rate of return.

All the convertibles are also callable if either six months have lapsed since a qualified public offering or if the common stock is trading at double the conversion price and meets a certain liquidity threshold. If the notes are called under such circumstances within the first three years, the redemption price will let holders realize a 15% rate of return. After the first three years, a call under such circumstances will pay the principal.

Panda Ethanol, a Dallas-based ethanol refining company that specializes in using cattle manure as a thermal energy source, said the proceeds of the deal will be used to fund its Yuma ethanol facility and general purposes.

"It's priced OK, but it's an interesting company and we need to take a closer look and try to understand its business to see if it's a real business or is it completely hokey," a buysider said. "It's not bad if you can believe that it's a legitimate company."

CRVD launches deal

Companhia Vale do Rio Doce plans to price about $1.9 billion of three-year mandatory exchangeable notes on Tuesday after the market closes, talked at a coupon of 5.25% to 5.75% and an initial exchange premium of 22% to 28%, market sources said.

The exchangeables will be issued by Companhia Vale do Rio Doce finance subsidiary Vale Capital Ltd. and will be exchangeable into Companhia Vale do Rio Doce's common stock or American Depository Receipts.

There is no over-allotment option.

JPMorgan and Citigroup are the bookrunners of the registered offering.

Companhia Vale do Rio Doce, a Rio de Janeiro, Brazil-based diversified metals and minerals mining company, said the proceeds of the deal will be used for general corporate purposes.

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