Cephalon, Reebok, Nextel Partners lose; Albertson's, Halliburton gain; Essex Partners set to price

By Rebecca Melvin

Princeton, N.J., Oct. 24 - Convertibles players watched a rally in the underlying stocks of many convertible issues on Monday, but the bonds didn't all join in and enjoy the upside. Among names of convertibles that were lower despite higher stocks were biotechnology firm Cephalon Inc., traders said.

"Indeed, there is a rally in the equity market, but I have not seen a material rally in convertible bonds yet," said a buyside trader in Connecticut.

Stock markets rallied after President Bush named top White House economic adviser Ben Bernanke as chairman of the Federal Reserve Board on Monday to replace Alan Greenspan.

"It was big news" and viewed as positive because "there were a lot worse candidates," said a buyside source in Connecticut. "I don't think he's going to stop with the interest rate increases, but he's not viewed as a controversial candidate and so there are no major surprises."

The convertibles market was termed "tough out there," causing some to pull in and keep from getting involved in the market in recent days. But the stock market rally was viewed as the impetus for a new issuer in convertibles to come forward on Monday.

The operating partnership of Essex Property Trust Inc., a real estate investment trust, said it planned to price $190 million of exchangeable senior notes plus a greenshoe of $35 million of notes, according to a syndicate source.

The 20-year notes, to be sold via joint bookrunners UBS Investments and Bear Stearns, are talked to yield 3.375% to 3.625% with a fixed conversion price of 103.25.

The senior unsecured obligations are non-callable for five years and have a put in year five.

The notes will be fully and unconditionally guaranteed by Essex. The operating partnership intends to use a portion of the net proceeds to repay some of its outstanding debt and a portion to buy back up to $25 million of stock.

The notes will be sold to qualified institutional buyers in accordance with Rule 144A.

Essex is a Palo Alto, Calif.-based investor in multifamily apartment communities.

In the secondary market, the 2% convertibles of Reebok International Ltd. traded down about 3 points after the company, which has agreed to a deal with Adidas-Salomon AG, reported 40% higher net income but revealed sales were off for its third quarter.

Nextel Partners Inc. saw its 1.5% convertibles down about 2 points while its underlying shares hugged the flat line, but then ended lower after the wireless company's shareholders voted to approve a provision requiring parent company Sprint Nextel Corp. to buy the company.

But Albertson's Inc. traded higher in brisk trade after word spread that supermarket rival Kroger Co. had emerged as a potential bidder for Boise, Idaho-based Albertson's.

Also higher were the convertibles of Halliburton, which ended the session at about 170, according to a New York-based buyside source, a level which was up 6.5 points from 163.50 early Monday. The oil and gas services company rose ahead of its earnings released late Monday and after Fitch Ratings on Friday revised its outlook on Halliburton's debt ratings to positive from stable, citing continued debt reduction and improving cash flow.

Cephalon moves in 0.50 point

Despite a 3.32% climb in its underling shares, the Cephalon 2% convertibles were in about 0.50 point on Monday.

On Friday, the company said the U.S. Food and Drug Administration has said its drug to treat attention deficit hyperactivity disorder, Sparlon, could be approved if the company meets certain conditions. Its shares moved up 3.8% on Friday.

Final approval will be based on results from three phase 3 trials, the data of which was presented at a meeting of child and adolescent psychiatrists in Toronto last week. Cephalon said it expects to obtain final approval and begin selling the drug in early 2006.

"I'm trying to figure that out," said a New York-based sellside trader, when asked why the 2% convertibles were lower.

Other sources didn't have any information to add.

The Cephalon 2% convertibles were seen at 112.25 bid, 112.75 offered. Its shares closed up $1.51, or 3.32%, to $46.96.

Reebok lower after earnings

The 2% convertibles of Reebok traded at 109, compared to an early day level at 111.95 bid, 112.95 offered. Its shares moved down just 21 cents, or 0.37%, to $57.21.

The Canton, Mass.-based athletic shoe and clothes maker reported net income of $117.7 million, or $1.87 per share, for the July to September period compared with a profit of $81.8 million, or $1.34 per share, in last year's third quarter. Sales fell nearly 11% to $1.04 billion.

The results included a one-time gain of $49 million from the sale of Reebok's Ralph Lauren Footwear business.

Paul Fireman, Reebok's chairman and chief executive, said Adidas' plans to buy Reebok for $3.8 billion announced Aug. 3 created in the short term some retailer uncertainty with respect to the company, and this hampered company sales and order intake.

The convertibles of Reebok do not have takeover protection and early Monday were trading at parity plus the present value of the coupon expected until the closing of the Adidas deal, a New York-based sellside analyst said.

The deal is expected to close in about eight months.

Halliburton jumps ahead of earnings

The 3.125% convertibles of Halliburton closed up more than 6 points on a 5.24% climb in its underlying shares ahead of the company's third-quarter results that were announced after the close.

Strong sales from the oil services group contributed to better-than-expected profit of $499 million, or 95 cents per share, compared to a loss of $42 million, or nine cents a share, for the same period last year.

The year-ago loss included a $230 million charge to settle asbestos and silica claims, which had dragged quarterly results lower by 51 cents per share.

This quarter's profit from continuing operations rose to $499 million, or 95 cents per share, from $186 million, or 42 cents per share, last year. Revenue rose to $5.1 billion, up 6%.

The results beat Wall Street projections for earnings of 82 cents per share, but missed revenue expectations of $5.24 billion, according to analysts surveyed by Thomson Financial.

Halliburton shares closed up $3.04, or 5.24%, at $61.09.

Albertson's sale looks more favorable

The mandatory convertibles of Albertson's rose nearly 3% while its underlying shares gained nearly 5% after word that Kroger may make a bid for the struggling grocery chain.

The stock made a big move because it's been under pressure of late due to doubts that any deal would get done, according to a Connecticut buyside source. The news was a reversal of that, he said.

In a report published Monday, CreditSights said, "In the bidding process for Albertsons, five groups - including three groups of private-equity firms, a supermarket operator teamed up with a financial sponsor, and Kroger - have made preliminary bids in the high $20 a share range which would value a potential deal north of $10 billion."

"On a combined basis, the companies would generate revenues of roughly $100 billion and earnings before interest taxes depreciation and amortization of $5.6 billion, leaving debt/EBITDA at 2.5x in an all equity deal," the report said.

But whether a winning bid from Kroger, which would bring obvious synergies to the table, is a foregone conclusion isn't definite as there will likely be antitrust issues, CreditSights said. But the credit research firm put Kroger as a frontrunner at this point.

The mandatory convertibles of Albertson's closed at 24.84, up 0.71 point, or 2.94%. Shares of Albertson's closed up $1.19, or 4.95%, at $25.25.

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