Avaya LYONs improve on tender offer; Fiat equity swap needs more clarity, sources say

By Sara Rosenberg

New York, Dec. 23 - Avaya Inc.'s 0% Liquid Yield Option Notes due 2021 were relatively active on Monday, moving upwards after the company announced a tender offer. Meanwhile, Fiat SpA's announcement of an equity swap to unload its stake in General Motors Corp. has left many market participants slightly confused as little information has so far been released on the matter.

Avaya announced an exchange offer in which it is offering either a combination of cash and stock worth $407.74 per LYON or $389.61 in cash for its existing 0% LYONs that were issued in October 2001.

The LYONs were quoted around 40/41 on Monday afternoon, up from quotes in the high 30's on Friday, said Stuart Novick, convertibles analyst at Salomon Smith Barney, explaining that it will trade up to the approximate price of the tender offer "if people think it's a real offer and it can get done."

The LYONs closed at around 40/43, according to a trader, while Avaya's stock closed at $2.16, down 17 cents or 7.3% on the day.

The offer covers $660.542 million principal amount at maturity of the LYONs, or about 70% of the amount outstanding.

Funding for the cash portion of the offer will be split between Avaya and Warburg Pincus Equity Partners, LP, which owns 14.5% of Avaya's stock. Avaya will provide up to $100 million and Warburg Pincus will provide up to $100 million of the $200 million in cash that may be needed.

The Basking Ridge, N.J. communications equipment company said the goal of the exchange is to reduce its debt and increase its financial flexibility. It noted that the cost of repurchasing the LYONs is lower than if holders exercise the put on Oct. 31, 2004, which according to Novick is around 54.29.

One thing on people's minds was the news late Friday that Fiat SpA sold all of its General Motors' stock, according to Jonathan Cohen, vice president and convertibles analyst at Deutsche Bank Securities Inc.

"People are trying to digest the Fiat news and understand what that means," Cohen said, adding that at this point the company has not released enough information on the transaction to make matters clear.

Fiat owned a lot of General Motors' stock, which it then used to issue an exchangeable, Cohen explained. And, now the company has entered into an "equity swap". However, the picture will remain unclear "without really seeing what they've purchased presumably from Merrill Lynch. The dust will settle over the next couple of days," Cohen added.

Fiat was reported as selling its entire 5.1% in General Motors to Merrill Lynch & Co. for $1.16 billion through an equity swap. Last December, Fiat sold a $2.2 billion exchangeable using its GM stake.

On Monday, Moody's Investors Service downgraded Fiat to non-investment grade, cutting its senior unsecured debt to Ba1 from Baa3 and short-term debt to Not-Prime from Prime-3. The outlook is negative.

"The downgrades not only reflect Fiat's weak operating performance, especially at Fiat Auto, and its high debt levels, but also Moody's current expectation that Fiat's business and financial profile - even after exercising Fiat's option to dispose of the remaining share of 80% in Fiat Auto to General Motors (GM) - will most likely not be commensurate with an investment-grade rating," Moody's explained.

The rating action is based on the assumption that the company will exit the automotive business of Fiat Auto by early 2004, the intention to dispose of a major part of its financial services business and the sale of its stake in GM as well as other disposals of assets in order to improve its overall financial profile, Moody's added.

The 3.25% exchangeable due in 2007 closed at 82 on Friday, according to Cohen. When asked for a quote on the exchangeable on Monday, Cohen responded that pricing would not be very accurate due to the limited amount of participants in the market. A trader quoted it at 81.625 on Monday, up 7/8 from previous levels. The company's stock closed at $8.19, down 2c or 0.24% on the day.

Fiat is a Turin, Italy manufacturer and seller of automobiles, commercial vehicles and agricultural and construction equipment.

Meanwhile, CMS Energy's news that it has reached a definitive agreement to sell CMS Panhandle Companies to Southern Union Panhandle for $1.828 billion is "definitely a positive" for the company, although it a "still very much a show-me story," Cohen said. He explained that the company is still very highly levered and it is unclear whether dividends from the utility will be sufficient to cover all the debt at the holding company.

The company's 1.81% convertible due in 2003 closed at 15.59, up 23c, according to a trader. CMS' stock closed at $8.84, up 23c or 2.67% on the day.

Under the acquisition agreement, Southern Union Panhandle will pay $662 million in cash and assume $1.166 billion in debt. CMS intends to use these proceeds to accelerate debt reduction. Already in 2002, CMS has reduced its debt by $860 million, including paying down $239 million in bank debt since July.

"This sale is a significant step forward in our efforts to increase our financial flexibility. With this agreement, CMS Energy has sold or announced $3.6 billion in asset sales in 2002. Clearly, we are executing our asset sales plan, despite difficult market conditions," said Ken Whipple, chairman and chief executive officer, in a news release. "We will continue to pursue strategies that support our back-to-basics approach and our focus on improving our balance sheet, reducing risk, and strengthening our liquidity."

CMS is a Dearborn, Mich. integrated energy company.

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