Lincare jumps on hedged basis on Linde takeout; Amylin up outright on Bristol-Myers deal

By Rebecca Melvin

New York, July 2 - A pair of merger announcements drove a good chunk of action in the convertible bond market on Monday.

Lincare Holdings Inc.'s convertibles surged on an outright basis and hedged investors made multiple points depending on their deltas on news that Germany's Linde AG plans to buy the Clearwater, Fla.-based at-home respiratory services provider for $4.6 billion, which represented a 22% premium to shares of Lincare on the Nasdaq stock market on Friday.

Amylin Pharmaceuticals Inc. was slightly higher outright by about a point or so after news that Bristol-Myers Squibb Co. plans to buy the San Diego-based diabetes drug maker for about $5.3 billion in cash.

Why the two deals - which have been on radar screens of convertible players for a while - both occurred over the same weekend wasn't clear. It was described as "bad luck," because there was "a lot of action in health care in a little amount of time. It's better to spread it out," one New York-based convertibles analyst said.

Elsewhere, the market was pretty quiet, and volumes dropped off after the Lincare and Amylin trades.

Onyx Pharmaceuticals Inc.'s 4% convertibles due 2016 changed hands at 105.5, which was up about 3 points outright, on a 2.2% climb in the underlying shares of the San Francisco-based biopharmaceutical company.

Also changing hands amid a small move up in the underlying shares was Fifth Street Finance Corp. The Fifth Street 5.375% convertibles due 2016 traded at 97.25 with the common shares of the White Plains, N.Y.-based specialty finance company up 1.6%, at $10.14.

Lincare jumps on takeout

Lincare Holdings' 2.75% series A convertibles due 2037 closed up at 153.5 versus an underlying share price of $41.34, which was up from about 120 and change on Friday.

The Lincare 2.75% series B convertibles due 2037 closed up at 169.25 versus the $41.34 closing share price.

Both issues were extremely active contrary to typical action in the name in which the Lincare As, which are callable and putable November 2012, have been more active. The Lincare Bs are callable and putable in November.

On news of the Linde takeout, both were active and the Bs may have seen even more trading action.

In the A's, investors, on a 130% to 150% delta, made 6 to 7 points, and on the B paper, if holders had it on a 140% to 150% delta, they made about 5 points on a dollar-neutral, or hedged, basis, according to a New York-based trader.

"Yes it was a good deal," a second New York convertibles player said, citing the issues on 120% and 130% deltas for the A and B paper, respectively.

The bonds did better because of their so-called hyper structure, for which the conversion ratio is adjusted in a takeout to include the incremental share factor.

"It's an additional kiss in this trade," an analyst said.

The incremental share factors of the two bonds were different, set at 85% for the A convertibles and at 60% for the B convertibles.

The structure of the bonds, with their variable conversion ratio, and risk arb made the deal very favorable for investors, the analyst said.

A second source said, "Shares kicked in and it took off."

But depending on how the convertibles were set up and how the situation was viewed, the deltas varied, they said.

The only downside for this deal is that $500 million of bonds are leaving the convertibles market, the analyst said.

Shares of the Clearwater, Fla.-based oxygen and respiratory therapy services company surged $7.32, or 21.5%, to $41.34 in ultra-heavy volume.

Munich-based Linde has submitted a cash offer of $41.40 per common share to acquire Lincare, representing a 22% premium to Lincare's closing price Friday of $34.02. Linde said it would fund the transaction through cash and an acquisition loan of $4.5 billion, to be refinanced by debt and equity issues. The German company said it expects the deal to close in 2012.

Amylin adds mildly

Amylin's 3% convertibles due 2014 traded up to 103.25 versus an underlying share price of $30.71 on Monday, compared to 101.75 versus a share price of $27.90 last Thursday.

These convertibles didn't really move on the news because their conversion price is way out of the money at $61.00 per share, a New York-based trader said.

"Parity is still 50; it's still just a bond," he said of the convertibles, which trade on an outright basis.

Amylin shares rose $2.50, or 9%, to $30.70 in ultra-heavy volume.

Bristol-Myers Squibb agreed to acquire the diabetes-drug maker for $5.3 billion, or $31.00 a share, according to an announcement late Friday.

Under the terms of the deal, Bristol will take on $1.7 billion in Amylin debt and other obligations. Bristol expects to launch the tender offer in seven business days and close within about six weeks.

Amylin has been under pressure from billionaire investor Carl Icahn to pursue a deal. The price tag is $9 a share higher than what Bristol offered for the company earlier in the year. The offer also represents a 9.9% premium to Amylin's closing price Friday of $28.20 a share.

In connection with the deal, AstraZeneca plc will expand its diabetes collaboration with Bristol and pay at least $3.4 billion to Amylin after the close of the transaction when it is a unit of Bristol, expanding upon an existing partnership between the two pharmaceutical makers in diabetes treatments.

Amylin recently won Food and Drug Administration approval for a once-weekly drug for Type 2 diabetes called Bydureon, which competes in one of the biggest and fastest-growing segments of diabetes.

Bristol and Amylin will still be behind diabetes drug market leaders Novo Nordisk SA, Merck & Co. and Sanofi SA.

Mentioned in this article:

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Fifth Street Finance Corp. NYSE: FSC

Lincare Holdings Inc. Nasdaq: LNCR

Onyx Pharmaceuticals Inc. Nasdaq: ONXX

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