Fisher Scientific, Emmis climb on merger, acquisitions; Silicon Graphics takes beating on Chapter 11 filing

By Kenneth Lim

Boston, May 8 - Convertible bond investors kept their trading in check on Monday as they awaited indications from the Federal Reserve on its interest rate policy, starting the week on another quiet note.

Except for merger-and-acquisition related news driving activity in a handful of names, the market was generally muted, market sources said. But three new deals were announced after the market closed and some hoped they would boost the convertible bond market.

"It's been kind of a slow news day, everybody's kind of waiting for the Fed," a sellsider said.

Fisher Scientific International Inc.'s convertibles gained about half a point on Monday after the company said it would be bought by Thermo Electron Corp. in a $10.6 billion share swap.

Emmis Communications Corp.'s 6.25% convertible preferreds were better to buy on Monday as the common stock climbed by over a fifth after the company's chairman offered to buy out the media company for $567 million.

Meanwhile, Silicon Graphics Inc.'s 6.5% convertible due 2009 lost almost half its value outright after the Mountain View, Calif.-based maker of high-performance computers filed for Chapter 11 bankruptcy protection. The lightly traded convertible traded at about 34.50 against a stock price that fell to 7 cents on Monday. Silicon Graphics stock (OTCBB: SGID) closed lower by 78.13% or 25 cents. Under its restructuring plan, holders of Silicon Graphics' secured notes - including the 6.5% convertibles but not the subordinated convertibles - will swap their debt for a 25% stake in the reorganized company and the right to buy the rest of the reorganized Silicon Graphics.

The convertible bond market in general was slow on Monday.

"I think it's been fairly slow for several weeks," said a buy-side convertible bond trader. "I think part of the reason is you're coming into summer, and the new issuance has been muted."

Also, "I think people are seeing the market as relatively fair-valued," the trader said. "I don't think people are seeing a lot of buying opportunities or selling opportunities."

A convertible fund manager said there is also some concern over how the Federal Reserve views its interest rate policy, with the Fed policy meeting slated for Wednesday.

"We were talking about that earlier today," the fund manager said. "It does seem like a lot of people are sitting on the fence. If [Fed chairman Ben] Bernanke comes out indicating that they may raise again, that might not be good for the stocks."

But the fund manager pointed out that the primary market could be starting to kick back into life. Three new deals were announced Monday after the market closed, the largest a $1 billion offering from memory card maker SanDisk Corp.

SanDisk's offering of 7-year convertible senior notes is talked at a coupon of 0.75% to 1.25% and an initial conversion premium of 27.5% to 32.5%, market sources confirmed. Pricing is expected Tuesday after the market closes, and there is a greenshoe option for a further $150 million.

Morgan Stanley and Goldman Sachs are the bookrunners of the registered off-the-shelf deal.

Sunnyvale, Calif.-based SanDisk earmarked the deal proceeds for general corporate purposes including capital expenditures.

SanDisk stock (Nasdaq: SNDK) closed at $64.70 on Monday, up $2.17 or 3.47%, before the deal was announced.

Qiagen NV proposed $220 million of 20-year convertible senior notes talked at a coupon of 3.125% to 3.625% and an initial conversion premium of 30% to 35%.

Qiagen's deal, which will also be priced Tuesday, has an over-allotment option of a further $30 million. Goldman Sachs is believed to be one of bookrunners of the deal.

Qiagen is a Venlo, Netherlands-based maker of research equipment and instruments for the biotech sector. It said the proceeds will help to "optimize the structure of its balance sheet," which includes repaying existing debt, to finance future acquisitions and for general purposes.

Qiagen stock (Nasdaq: QGEN) closed at $15.28 on Monday before the offering was announced, lower by 0.46% or 7 cents.

Also, Broadwing Corp. announced $125 million of 20-year convertible senior unsecured debentures talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 25% to 30%.

There is a greenshoe option for a further $25 million.

Broadwing did not say when the deal would be priced. Jefferies & Co. is the bookrunner of the deal, which is offered in the United States under Rule 144A with registration rights and in other markets under Regulation S.

Broadwing is an Austin, Texas-based provider of communication network services. It did not say how it would use the proceeds of the offering.

Broadwing stock (Nasdaq: BWNG) closed at $14.04 on Monday, down by 1.34% or 19 cents, before the deal was announced. The stock slid to $13.27 in after-market trading after the offering was reported.

Fisher Scientific gains on merger

Fisher Scientific's convertibles were about half a point higher on Monday after the company said it would merge with Thermo Electron Corp. in a $10.6 billion share swap, said a buy-side convertible bond trader.

The company's 3.25% convertible due 2024 was seen at 115.375 against a stock price of $77, while its 2.5% convertible due 2023 was about 170 at the same stock price. The Fisher Scientific floating-rate convertible due 2033, which currently has a coupon of about 2.16%, was seen trading at 144 versus the same stock price. Fisher Scientific stock (NYSE: FSH) closed at $75.95 on Monday, up 3.01% or $2.22.

Waltham, Mass.-based Thermo Electron on Monday said it would take over Hampton, N.H.-based Fisher Scientific by exchanging two Thermo Electron shares for every Fisher Scientific share. The new company will be based in Waltham, and Thermo Electron's president and chief executive Marijn Dekkers will be president and chief executive of the new entity. Fisher Scientific vice chairman Paul Meister will become chairman, and Fisher Scientific's chairman and chief executive Paul Montrone will leave the board but remain as an adviser.

A buy-side convertible fund manager said the deal was unexpected.

"But it was a good surprise," said the buysider, whose fund has a significant position in Fisher Scientific. "When they first told me that they wanted to talk about Fisher Scientific, I said, 'Oh God, don't tell me if it's bad,' but they said, 'Don't worry, it's OK.'"

The merger will provide some healthy consolidation in the medical equipment sector , the buysider said.

The buysider said the deal takes some volatility out of convertibles' underlying stock, but the new company will have better credit, so the impact on the convertibles' valuations will not be significant. The merger is also largely a stock deal, so there is no major concern in terms of credit.

"It's a good thing from my perspective," the buysider said.

The share swap initially valued Fisher Scientific shares at $78.90 apiece or a 7% premium to Fisher Scientific's closing stock price of Friday, but Thermo Electron shares slid 2.31% on Monday, reducing the valuation to just $77.08.

Emmis better to buy on buyout bid

Emmis Communications' 6.25% convertible preferreds improved about five points outright on Monday after the company's chairman offered to buy out the media company for $567 million.

The convertible closed at about 45.02, up 4.98 points or 12.44%, while Emmis stock (Nasdaq: EMMS) rose 21% or $2.82 to end at $16.25.

"The preferreds were better to buy on the news," a buy-side convertible bond trader said. "Historically it's not that liquid, but I think some did trade today [Monday]."

Emmis chairman and chief executive Jeffrey Smulyan on Monday made a non-binding offer to buy up the rest of Emmis stock he does not own at $15.25 per share, a premium of 13.6% over the stock's Friday close of $13.43. Smulyan also plans to refinance some of the preferred stock and $656 million in outstanding debt, the company said.

Indianapolis-based Emmis has formed a committee of independent directors to assess the offer.

Shareholder approval is required for the privatization, and Smulyan said he will not agree to any other offer for Emmis. Although he owns 16.9% of Emmis stock and the same voting percentage on privatization offers, he controls two-thirds of the vote when it comes to takeover offers.

The stock's sharp climb on Monday to above Smulyan's offer price suggested that investors were seeking a better offer, a sell-side convertible bond analyst said.

"If shareholders are not satisfied, which is entirely possible because this was a $20 stock a year ago, he may have to raise his bid," the analyst said.

For the preferreds, the analyst said there are some "fairly unusual provisions" that could make a successful privatization by Smulyan better for the convertible holders.

If Emmis is taken private in a change of control by anyone other than Smulyan, the preferreds become convertible at a lower conversion price, which "may not be beneficial given where the stock is," the analyst said, explaining that it such a situation could give a parity in the low 30s and become a loss of several points for preferred holders.

But if Smulyan is the buyer, the preferreds become putable a year after the close of the deal.

"At a pretty fat interest rate, a yield-to-put at a year to a year and a half out, to put it at 50 points, that's going to be up several points from Friday," the analyst said.

The analyst also believes that most holders of the preferreds are not heavily hedged, mostly because of there was take-out risk while the take-out protection was "not terrific."

The privatization bid was not a big surprise for the market, the analyst said. Emmis, a media group with radio, TV and print operations, has been selling its TV stations. It said Monday in a separate announcement that it was selling its WKCF-TV in Orlando, Fla., to Hearst-Argyle Television Inc. for $217.5 million in cash and KKFR-FM in Phoenix for $77.5 million to Bonneville International Corp. and Bonneville Holding Co.

"I think many people suspected he was moving in this direction," the analyst said.

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