Bally bonds jump on Branson takeover talk; Duane Reade lower on earnings; primary quiet

By Paul Deckelman and Paul A. Harris

New York, March 21 - Bally Total Fitness Holding Corp. bonds strengthened Tuesday on a news report that British billionaire Sir Richard Branson is considering acquiring the Chicago-based fitness center chain operator and combining it with the Virgin fitness center operations that he already owns.

Duane Reade Holdings Inc. bonds were seen on the downside after the New York-based drugstore chain operator announced less-than-robust 2005 fourth-quarter and full-year results, and announced initiatives to try to turn the underperforming business around.

Primary market activity was meantime extremely limited, with Eschelon Telecom Inc. heard planning to sell an add-on tranche of 8 3/8% notes due 2010, perhaps as soon as Wednesday.

A buy-side source said Tuesday that high-yield held up well against a backdrop of softer Treasuries.

"The 10-year was down half a point but high-yield was unchanged to down maybe an eighth," the source said.

Back among the established issues, a trader saw Bally's 10¼% notes due 2011 up two points at 104.25 bid, 105.25 offered.

At another desk, a market source pegged its 9 7/8% notes due 2007 up two points at 99 bid.

However, a trader at another shop said that although the 101/4s got as good as 105 bid, 106 offered in intra-day action, they eased a little later on to end at 104.75 bid, 105.75 offered, which he called up 1½ points. He saw the 9 7/8s at 97.75 bid, 98.75 offered, a gain of 1¼ points.

In the equity market, Bally's New York Stock Exchange-traded shares jumped $1.15 (14.67%) to close at $8.99, although the shares finished well down from their intra-day peak at $9.45. Volume of 2.25 million shares was about 6½ times the norm.

The company's bonds and shares firmed after Tuesday's editions of the New York Post said that executives at flamboyant financier Branson's Virgin Active health club unit have been examining Bally's financial reports and have received a pitch book on the company put together by J.P. Morgan and The Blackstone Group. It attributed the information to unidentified sources.

The paper quoted investment bankers who have worked on other health club deals as saying that Bally could fetch more than $12 a share, or $1.2 billion including assumed debt.

Bally's, despite its industry-leading position as the largest U.S. fitness center operator in terms of total members, and with more than 400 clubs coast-to-coast, has struggled with profitability and accounting problems in recent years. Last year, it sold off its upscale Crunch Centers fitness chain in order to concentrate on its mass-market operation.

While Bally's turnaround efforts over the past six months have boosted its share price to around double the $4 level seen just a year ago, long-term holders can only remember with fading nostalgia the price levels above $30 per share which the stock commanded at the beginning of the decade, or the $40 levels seen in the late 1990s.

Several disgruntled shareholders tried unsuccessfully to oust chief executive officer Paul Toback via a proxy contest earlier this year. As part of its effort to mollify shareholders nervous about the underperformance of its shares, Bally said in December that it would explore strategic alternatives, possibly including the sale of the company, and hired J.P. Morgan and Blackstone to search for buyers.

The Post said that Bally sent out deal books to prospective purchasers at the beginning of the month, and first-round bids are due in mid-April.

The paper said that aside from the colorful and iconoclastic billionaire Branson, whose far-flung holdings under the "Virgin" nameplate also include interests in the airline, telecommunications and music-retailing fields, Bally has reportedly gotten inquiries from several private-equity firms, other health club operators and some real estate investment trusts.

It quoted analysts as saying that should a deal be reached for Branson to acquire Bally, re-branding the Bally operation under his Virgin logo would give the chain more cachet and would be a good first step in turning the business around.

L-3 higher on acquisitions

Elsewhere, the bonds of L-3 Communications Holdings Inc. were seen having moved up, probably in response to the news that the New York-based defense electronics manufacturer had acquired two companies that develop and manufacture military and homeland security products, CyTerra Corp. and SafeView Inc. Terms of the acquisitions were not disclosed.

L-3's chairman and chief executive officer Frank C. Lanza said that the two companies being acquired will complement his company's existing security and detection systems business and are expected to slightly boost L-3's 2006 earnings.

A trader said that "like Bally, L-3 was higher earlier in the day, but then gave back" some of its gains, with the company's 6 1/8% notes due 2013 rising to 99.5 bid, 100.5 offered before slipping back to 98 bid, 99 offered, which he called up just a quarter point. He saw L-3's 6 3/8% notes due 2015 ending up ¾ point at 99 bid, par offered.

A market source likewise said that L-3's 5 7/8% notes due 2015 got as good as 97.5 bid in early trading, a 2 point gain, before coming off that high to finish at 96.75, up about 1¼ points quarter on the day.

The pullback from the highs may have been linked to the news hitting the tape at mid-day that British defense giant BAE Systems had denied a report in the U.K.'s Guardian newspaper that it was considering a $10 billion bid for L-3 in an effort to strengthen its position in the U.S. military market. BAE called the story "simply not correct."

Sirius higher

Sirius Satellite Radio Inc.'s bonds firmed in apparent response to the New York-based satellite radio broadcaster's Monday announcement that it has topped four million subscribers - an amazing jump of some 700,000 since the start of the year - and is on track to easily beat its previously announced goal of six million paid customers by the end of 2006.

Sirius' 9 5/8% notes due 2013 were up 1¼ points to 97.75 bid, 98.75 offered.

Much of the big subscriber boost can be attributed to the heavily advertised and widely publicized move of radio bad-boy Howard Stern to Sirius in January. That move was, ironically, given new and even wider publicity recently from an unexpected source, with the announcement that Stern's disgruntled former employer, CBS, is suing Sirius and the self-crowned "king of all media" because Stern incessantly promoted his coming move to Sirius while he was still working for the Eye Network at its New York station formerly known as K-Rock, WXRK.

Philips-Van Heusen gains on earnings

Philips-Van Heusen Corp.'s bonds were looking pretty sharp, after the New York-based apparel maker reported better fiscal fourth-quarter and full-year results.

A trader saw its 7¼% notes due 2011 half a point better at 102.75 bid, 103.75 offered, and its 7¾% notes due 2023 up 1¼ points at 107 bid, 108 offered, although he said that the latter bonds made their gains early and "didn't get quoted after lunch."

The owner of the famous Calvin Klein and Izod clothing labels reported after the close on Monday that in the fiscal fourth quarter ended Jan. 29 net income after paying preferred dividends totaled $19.7 million (41 cents per share) on $460.1 million of revenues, up from $12 million (33 cents per share) on $413.8 million of revenues a year earlier. The results beat Wall Street expectations of 37 cents per share of earnings.

For the full-year ended Jan. 29, Phillips-Van Heusen earned $82.5 million ($1.85 per share) compared with $37.5 million ($1.14 per share) in fiscal 2004.

Duane Reade falls after results

Also on the earnings front, though on the downside, a trader saw Duane Reade's 9¾% subordinated notes due 2011 down 1¼ points at 72 bid, 74 offered, while the pharmacy operator's floating-rate senior secured notes due 2010 were unchanged at 97.5 bid, 98 offered.

Another trader said the 93/4s were "down as much as five points right after the [drugstore chain released its] numbers, but then came back to close down just a point" at 72.5 bid, 73.5 offered.

The company - whose pharmacies are almost as ubiquitous as Starbucks coffee bars in midtown and lower Manhattan, and are also now being seen in parts of the city's outer boroughs as well - reported 2005 net sales of $1.6 billion, about the same as 2004. The company's reported net loss for 2005 was $100.4 million, nearly twice the reported net loss of $52.1 million in the previous year. It does not give per-share information since going private in 2004.

Duane Reade also announced a six-point plan aimed at turning the company's fortunes around - but said that "management will not hesitate to redeploy capital where there is not an appropriate return, and the company will close stores when necessary."

GM steady

In the automotive area, General Motors Corp.'s bonds, and those of its General Motors Acceptance Corp. financial unit were seen little changed on the session, with a trader quoting GM's benchmark 8 3/8% notes due 2033 staying at 74 bid, 75 offered - after having firmed a little intra-day to 75 bid, but then having come off that peak. He saw the GMAC 8% notes due 2031 likewise unchanged at 93 bid, 94 offered, although these two were as much as a point higher during the day before coming back to the same levels at which they started.

Another trader, seeing GM and GMAC pretty much unchanged, also saw GM rival Ford Motor Co.'s bonds and those of its financial arm, Ford Motor Credit Co., also little moved, with Ford's 7.45% notes due 2031 at 74 bid, 74.5 offered, a gain of perhaps ¼ point, and the Ford Credit 7% notes due 2013 steady at 88.25 bid, 88.75 offered.

Delphi higher

The only automotive name seen really going anywhere Tuesday was Delphi Corp., which a trader called "stronger on speculation that they will get a deal done" with former corporate parent GM and with the United Auto Workers union on cutting the bankrupt Troy, Mich.-based automotive electronics manufacturer's bloated labor costs.

He saw Delphi's 7 1/8% notes due 2029 as much as three points better at 67.5 bid, 68.5 offered.

Another trader agreed, pegging those bonds at 66.75 bid, 67.75 offered, up 2½ points, while seeing Delphi's 6.55% notes due 2006 were 1¾ points better at 65.5 bid, 66.5 offered.

There were weekend news reports that the parties were nearing an accord, which would avert a possible strike against the company - which could in turn prove very harmful to GM, Delphi's biggest customer. Delphi has set March 31 as the deadline by which a plan to cut its labor costs must be in place, or else it will seek bankruptcy court approval for junking its contracts with its labor unions. The unions, in turn, say they will strike if that occurs. Delphi has, however, extended its self-imposed deadline several times so far in order to keep talking.

The feeling that an agreement could be near gained momentum on Tuesday, boosting GM shares about 5%. Reports said the carmaker, former unit Delphi and the union were talking about offering incentives toward early retirement for tens of thousands of workers at the two companies.

Delphi, which has about 34,000 hourly employees, is trying to trim burdensome labor costs it inherited when GM spun it off in 1999. GM, with over 100,000 unionized hourly employees, has set as a goal the elimination of 30,000 positions between now and the end of 2008.

Will they become bank loans?

Meanwhile the primary market maintained its sedentary ways as no issues were priced.

A buy-side source, pressed for primary market news, paraded out a familiar roster of potential issuers including Burlington Coat Factory Warehouse Corp. (expected $500 million), Activant Solutions Inc., Avis Budget Car Rental/Cendant Car Rental Group (expected $1 billion), Education Management Corp. (expected $760 million) and SourceCorp Inc.

All of them are subject to market conditions, and could turn into loans pretty quickly, the source added.

The buy-sider also said that timing on these expected deals seems to be extremely difficult to come by right now.

Nortel rumors

One name that has recently popped up as the pundits ponder the pipeline is that of Nortel Networks Corp.

Sources on both the buy-side and sell-side say that Nortel is expected to bring a deal, although the company's delay in meeting its filing requirements for 2005 - the numbers are now expected by the end of April - could slow the offering down.

The buy-sider said Tuesday that the buzz on Nortel is that it will bring $1.5 billion of 10-year paper, and added that the timeline may indeed not be that long, suggesting that Nortel could be April business.

The buy-sider recounted that the Canada-based telecom took out a $1.3 billion credit facility in early February in order to pay off its 6 1/8% notes due in 2006.

"People are saying that they may want to get their financials squared away and replace the bank deal with a bond deal," the buy-sider said.

"The interesting thing is that Nortel has about $3 billion in cash. They could almost pay off the debt with the cash that they have, but I think they're going to want to keep some cash on the books."

Eschelon brings $35 million add-on

In an otherwise motionless primary market, one nugget of news surfaced on Tuesday.

Minnesota-based Eschelon Operating Co. plans to price a $35 million add-on to its existing 8 3/8% senior secured notes due March 15, 2010 (B3/B-) late Wednesday afternoon via Jefferies.

The Minneapolis-based voice, data and internet services provider will use the proceeds for general corporate purposes including the acquisition of Oregon Telecom Inc.

The original $100 million issue priced at 84.813 on March 10, 2004 to yield 12%, and a $65 million add-on priced on Nov. 19, 2004 at 79.0 resulting in 14.132% yield to worst.

Saskatchewan Wheat downsizes

Also from Canada, Saskatchewan Wheat Pool Inc. downsized its offering of seven-year senior unsecured notes (B) to C$100 million from C$150 million.

At the same time Pool intends to raise approximately C$50 million by selling shares of common stock at a price of C$7.50 per share to a syndicate of underwriters led by TD Securities in a bought deal.

TD Securities is the bookrunner for the bonds, which will be marketed in one-on-one investor presentations starting Thursday. Guidance on the senior notes is 8% to 8½%.

Pool is using the proceeds from the new bonds to redeem its senior subordinated notes due Nov. 29, 2008. Although that paper priced with an 8% coupon, a step-up took effect late last year bumping the coupon to 12%.

An informed source told Prospect News on Tuesday that the company was presented with a bought deal opportunity and took it.

The source added that the new debt deal, which had been going very well, will now be a little less liquid. However, the source said, some holders of the subordinated paper that is being called are expected to come into the new bond deal and liquidity should not be a major factor for those investors.

The source commented that Canadian high-yield activity, like that in the United States, has been slow, although the Canadian market is a "sketchy" one, the source added - with most of the high-yield issuers either going to the bank loan market or the United States.

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