Merger could be negative for Apogent converts, positive for Fisher Scientific, Merrill analyst says

By Ronda Fears

Nashville, March 23 - The $3.7 billion all-stock merger of Fisher Scientific International Inc. and Apogent Technologies Inc. could be a negative event for Apogent's convertibles, said Merrill Lynch & Co. convertible analyst Tatyana Hube in a report Tuesday.

Specifically, the combination could hurt Apogent's floater from a credit standpoint while the contingent conversion trigger on the 2.25s may be a factor going forward.

But the transaction should be a positive event for the Fisher 2.5% and 3.25% convertibles, from a credit standpoint, Hube said.

The change-of-control puts on all four convertibles will not be triggered because the merger is an all-stock transaction.

In response to the merger news March 17, Standard & Poor's as well as Moody's Investors Service put Fisher on review for possible upgrade and Apogent on review for possible downgrade. The rating agencies did not speculate about the magnitude of any upgrades or downgrades, however.

Fisher's 2.5% convert is rated B1/BB- and the 3.25% convert B2/B+.

Apogent's 2.25% convert and floater are both rated Ba1/BBB-.

The Apogent 2.25% issue may become convertible if either S&P or Moody's downgrades the issue two notches or more, Hube said. Given that the convertible's parity value is close to par, or about 96, the flexibility of having conversion rights may become beneficial to the holders going forward.

From a credit standpoint, a two-notch downgrade would deduct about 125 basis points from the Apogent floater and 35 basis points from the Apogent 2.25s; a one-notch downgrade would subtract 50 bps from the floater and 15 bps from the 2.25s, the Merrill analyst estimated. Those estimates were based on a price of 114 for the floater and about 106.5 for the 2.25s.

Conversely, if the Fisher converts were upgraded, she said, a one-notch boost would add about 210 bps to the 2.5s and 105 bps to the 3.25s; a two-notch upgrade would add 290 bps to the 2.5s and 340 bps to the 3.25s. Those estimates were based on a price of about 135.75 for the 2.5s and 104 for the 3.25s.

The Apogent 2.25s were quoted closing at 108.5 bid, 109 offered and the floaters at 115.875 bid, 116.125 offered. Apogent shares closed up 81 cents, or 2.78%, to $29.94.

The Fisher 2.5s were quoted closing at 137.5 bid, 138 offered and the 3.25s at 105.125 bid, 105.625 offered. Fisher shares closed up $1.21, or 2.29%, to $54.01.

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