Cytyc goes to 104.375; XL prices at tight end of revised talk; Saks, Greater Bay, CommScope appear

By Ronda Fears

Nashville, March 17 - Convertibles marched higher with stocks Wednesday, but traders said most of the action was driven by the parade of new deals shopping the market on St. Patrick's Day. By day's end, there was a total of $2 billion of new paper awhirl for the week.

Cytyc Corp. and XL Capital Ltd. both hit home runs and priced aggressively. Those came on the heels of Providian Financial Corp. and CapitalSource Inc., which were both still treading water around the par mark.

Then, Saks Inc., Greater Bay Bancorp and CommScope Inc. launched deals on Wednesday.

Outside of some selling as a result of several new deals afloat, traders said Agere Systems Inc. was sold off and lost 4.5 points outright, or about 1.75 points on swap, after it warned revenues would likely not meet previous expectations.

Most convertibles were marked up with underlying stocks, though.

Traders mentioned buying in the technology space for Yahoo! Inc. and Juniper Networks, plus biotech concern Amgen Inc. and drugmaker Elan Corp. plc were both higher on buying interest.

Finally, Apogent Technologies Inc. rose in reaction to a merger with Fisher Scientific International Inc., as the Apogent 2.5% convertible may be redeemed as early as October as a result of the merger, while Fisher's convertibles weakened slightly on the $2.7 billion acquisition.

Saks bid minus 1.5 points

Saks Inc. may be an upscale retailer, but it was shopping a very expensive convertible note offering in market sources' view.

"It [the Saks convertible] was too pricey for our taste," said a hedge fund manager in New York.

The $200 million of 20-year convertible notes, launched before Wednesday's open, were being shopped with a 1.75% to 2.25% coupon and a 30% to 35% initial conversion premium. The Birmingham, Ala.-based retailer is making the offering on a call spread in order to boost the effective conversion premium and thereby limit the dilution impact.

The Rule 144A deal, at bat after Wednesday's close, was bid 1.5 points below issue price with an offer at 0.25 point over in the gray market, according to another buyside source.

At the cheap end of price talk, the source put the Saks convertible 2% to 3% rich, using a credit spread of 200 basis points over Libor and 26% volatility.

At the middle of the guidance, Merrill Lynch & Co. analysts put it 0.83% rich, using a credit spread of 310 basis points over Treasuries and 30% volatility.

Saks shares closed Wednesday down 63 cents, or 3.72%, to $16.29.

CommScope to take out 4s

CommScope Inc. launched $225 million of 20-year convertible notes talked to yield 1.0% to 1.5% with a 30% to 35% initial conversion premium. Proceeds of the deal are earmarked to take out the company's old 4% converts and repay some of its bank revolver drawn to buy Avaya Inc.'s connectivity unit earlier this year.

The proposed issue, for pricing after Thursday's close, was not seen in the gray market late Wednesday, but the 4% convertible due 2006 was quoted at 99 bid, 101 offered so it will likely get a boost Thursday from the news. CommScope shares ended up 8 cents, or 0.46%, to $17.52 but in after-hours trading were down by 62 cents, or 3.5%.

Hickory, N.C.-based CommScope, which makes cable products, said proceeds would be used to retire all its $172.5 million 4% convertible subordinated notes due 2006 at 101.7143 plus accrued interest. The company also said it would use proceeds to repay $25 million of the outstanding revolving credit loans under its senior secured credit facility.

In February, CommScope bought the Avaya Inc. unit for $250 million in cash and about 1.8 million shares of common stock, plus assumed some $65 million in liabilities mostly related to employee benefits.

To finance the acquisition, CommScope borrowed about $100 million under a new credit facility - consisting of a $75 million five-year term loan A at Libor plus 275 basis points and a $110 million five-year revolver at Libor plus 250 basis points - to supplement $150 million drawn from cash on hand.

Greater Bay shops deal

Greater Bay Bancorp launched a quick-sale deal after the close, shopping $200 million in proceeds of 20-year zero-coupon convertible notes talked at a 0.25% to 0.75% yield to maturity with a 33% to 38% initial conversion premium for pricing before Thursday's open.

The overnighter is being sold on swap with $47 million of proceeds earmarked to buy back stock from note purchasers.

Greater Bay's existing 0% convertible was quoted at 66.375 bid, 66.625 offered with the stock closing up 9 cents, or 0.33%, to $27.53. The $200 million proceeds issue, which was sold at 67.231 in April 2002, is putable this coming April 24 at 66.849.

After repurchasing stock, the Palo Alto, Calif.-based financial services concern only commented that proceeds would be used for general corporate purposes.

XL Capital prices aggressive

XL Capital Ltd. took advantage of the dearth of mandatories thus far in 2004 among the slate of new deals and priced a hefty $750 million issue at the tight end of tightened guidance.

The Bermuda-based property and casualty insurer sold the three-year mandatory convertible at par of 25 to yield 6.5% with a 25% initial conversion premium.

It priced at the tight end of revised guidance for a 6.5% to 6.75% dividend and a 23% to 25% initial conversion premium, which had been revised from original price talk for a 6.75% to 7.25% dividend and a 20% to 24% initial conversion premium.

XL Capital said the extra capital in a mandatory structure would improve its balance sheet leverage when the company first mentioned it in January.

Cytyc belts out home run

Cytyc Corp. had the big home run of the week, though, pricing $220 million of convertible notes to yield 2.25% with a 50% initial conversion premium - at the tight end of guidance for a 2.25% to 2.75% coupon and a 45% to 50% initial conversion premium.

The issue soared to 104.375 bid, 104.875 offered, according to bookrunner Morgan Stanley & Co. The stock recovered 20 cents, or 1%, to close at $19.98.

Buyside sources put the issue pricing about 4% to 4.5% cheap, but sellside analysts had been more conservative.

Merrill Lynch analysts put the Cytyc convertible 2.07% cheap, at the middle of guidance, using a credit spread of 375 basis points over Treasuries and 35% volatility.

Deutsche Bank Securities analysts put the Cytyc convertible 0.55% rich to 2.87% cheap, at the middle of price talk, using a credit spread of 350 basis points over Libor and 35% volatility.

Boxborough, Ma.-based Cytyc, which makes cervical cancer screening tests, is using proceeds to finance its $325 million cash purchase of Novacept, a Palo Alto, Calif.-based maker of medical devices to treat excessive menstrual bleeding.

Apogent higher on Fisher buy

On redemption possibilities as well as an improved credit picture, Apogent Technologies' converts were lifted on buying interest after the Fisher Scientific merger news hit the tape, traders said. Conversely, Fisher Scientific convertibles dropped on a hit to its stock as a result of the $2.7 billion purchase.

The Apogent 2.5% convertibles due 2021 are callable in October and, depending on how the company's high-yield notes trade, company officials said the converts will likely be taken out. Apogent's high-yield note is putable on a change of control.

The 2.5s were quoted up 1.75 points to 106.125 bid, 106.625 offered. Apogent's 0% convertible due 2033 also got a strong lift on the news, adding 3.25 points outright to 113 bid, 113.5 offered. The stock rose $1.07 on the day, or 3.85%, to end at $28.85.

Apogent said in a conference call Wednesday that it plans on getting a new credit facility in connection with the Fisher Scientific merger to refinance its existing bank debt, possibly redeem its high-yield notes and call its 2.5% convertible notes in October.

Apogent is a Portsmouth, N.H., manufacturer and seller of laboratory products. Fisher Scientific is a Hampton, N.H., provider of equipment, supplies and services for the clinical laboratory and global scientific research markets.

On Wednesday, Fisher Scientific and Apogent announced a merger agreement whereby Apogent shareholders will receive 0.56 shares of Fisher Scientific stock for each share of Apogent stock. Based on Tuesday's closing prices, it would be a 5.5% premium price for Apogent shares.

Fisher Scientific's 2.5% convertible due 2023 was quoted down 1 point to 134 bid, 134.5 offered, and the 32.5% convert due 2024 was off by 0.5 point to 103.625 bid, 104.125 offered. The underlying stock closed down 22 cents, or 0.42%, to $52.10.

Agere slumps on revenue miss

Agere announced on Wednesday that it now sees revenues falling short of its earlier projections, on weak chip sales in the wireless telecom sector, which will erode its estimates for earnings, too.

The microchip maker said it now expects revenues of $465 million to $475 million for the current quarter, down 8.9% compared with the most recent past quarter. Previously, the company expected flat revenues to a 1% decline. As a result, the company said earnings per share are forecast at breakeven to 1 penny, versus its earlier projection of 1 cent to 2 cents.

Agere's 6.5% convertible due 2009 fell 4.5 points outright, or about 1.75 points on swap, a trader said.

Agere shares fell 18 cents, or 5.28%, to $3.23.

Although the convertible may be less appealing for outright accounts, Citigroup convertible analyst Lynn Hambright said it still makes sense for hedged players and she's still bullish on the convert.

"We do not view today's news as a significant credit event or a knock to management credibility; we view it as a 'momentum investor' event and also as a caution signal for outright accounts," Hambright said in an email bulletin.

"The question is - do you speed up on yellow or slow down?"

Because of good Greeks - delta at 71.8%, gamma at 0.3148 and vega at 0.5798 - plus long call protection, she said there's still ample opportunity to trade this name. Moreover, she's also more comfortable with wider credit spread assumptions for the issue, in a range of 350 basis points to 400 basis points over Treasuries.

"We continue to believe the credit remains solid. However, we are growing to believe the ways by which to see out performance appear to be narrowing and as such, from an outright perspective, we have become cautiously opportunistic," she said, suggesting the issue may not be appropriate for all outright accounts.

"We continue to favor hedge accounts being delta neutral but we offer that in the past, the few weeks before earnings have offered opportunity for aggressive hedge accounts willing to lighten the hedge. Bottom-line, we think there is more to go in this name and we would like to see it play out."

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