Market not ready to swallow Bristol-Myers Squibb; Cracker Barrel drops 1.5 on dividend

By Ronda Fears

Nashville, Sept. 26 - Deal activity picked up with half a dozen deals this past week, for a total of $1.725 billion, but market players are wondering what to make of Bristol-Myers Squibb Co.'s jumbo floater - whether the quirky structure and aggressive terms were signaling more on the way or whether it was just a fluke, a leftover from earlier this year.

While there were some buyers for it, traders said they didn't see the new Bristol-Myers convert trade much at all Friday. On Thursday, while it was being marketed, traders only saw live offers for it, and those ranged from 100.375 early on to 100 near the close.

Joint bookrunner JPMorgan closed the new Bristol-Myers convert at 99.9375. The stock ended off 42c, or 1.63%, to 25.38.

Guidance wasn't sweetened as some had expected, or hoped, but the deal also was not reoffered below par, which was some comfort to the market.

"We don't know whether this deal is telling us that the bankers are going back to the same stuff we were seeing earlier this year like this or not," said a buyside trader in New Jersey.

"We're hoping it was just a fluke. Whatever the case, the market certainly wasn't ready to swallow something like this."

Bristol-Myers sold the $1 billion of 20-year convertible floaters at par to yield 3-month Libor minus 50 basis points with a 60% conversion premium - at the cheap end of price talk of Libor minus 50-75 basis points and a 60% to 65% initial conversion premium.

It was sold with a warrant kicker, much like the Wells Fargo & Co. $3 billion floater that sold at 3-mo Libor minus 25 bps, up 110.75% in April and the Mandalay Bay convert, but Bristol-Myers provides holders with dividend protection.

Mandalay Bay sparked a dividend scare that spread throughout the market in May, and virtually every new deal since then has included a conversion ratio adjustment provision for convert holders in the event of a common dividend increase.

Capital markets sources at several of the busier shops say they don't see a lot of jumbo deals with new-fangled structures sitting in the wings. Rather, they say the line-up for the convertible primary market this fall is more nostaligic - small cap names and smallish deal sizes.

"This [Bristol-Myers] was a leftover from late spring or early summer, I think, that just never got done because the timing never worked out - there was one of the other big deals in the way or something like that," said a senior capital markets source.

It wasn't a case of flagging demand that the Bristol-Myers issue lagged par out of the gate, though.

Buyside sources said allocations are still running at about 20% of an order, versus around 50% a couple of years ago.

Also, before the Bristol-Myer deal sprang up, buyers felt like the pricing trends had been in their favor for the most part.

"Some of these deals are coming my way, at least in structure," said Ted Southworth of Northern Trust Co.

"The problem is they are small, few and far between."

Pharmaceutical Resources Inc., despite being named in a complaint by the Massachusetts state attorney, had one of winners of the week. The generic drugmaker sold an upsized $160 million of seven-year convertible notes, on a call spread, at par to yield 2.875% with a 35% initial conversion premium, at the tighter end of talk of 2.75% to 3.25%, up 33% to 37%.

Just as the deal was wrapping up, Pharmaceutical Resources confirmed it was one of 13 drug firms in a complaint being filed in Massachusetts alleging price gouging of generic medicines in the state's Medicaid program. That cause a snag in orders for the new deal, buyside sources said, but in the end it was hailed as a successful placement.

Pharmaceutical Resources' new convert added about 1 point on Friday and bookrunner Bear Stearns took it out for the weekend at 105 bid, 105.5 offered. The stock rebounded slightly, adding 35c, or 0.55%, to end at $64.07.

Elsewhere in the secondary market, traders said the market held its own against the continuing slide in stocks. In general, dealers said convert arb players were beginning to look at boosting hedges while outrights were sitting pat with their status quo, unless something happened to force them to act.

In that vein, buyers were still seen for Flextronics International Ltd. in the wake of the shocking jury judgment for nearly $1 billion that sent the convertibles and stock spiraling lower around midweek.

Cracker Barrel got some people busy Friday, too, as it launched a huge increase to its stock dividend.

CBRL Group Inc., parent to the Tennessee-based restaurant chain, announced it was switching from an annual stock dividend to a quarterly dividend, and said it would pay 11c a share on Nov. 10 to holders of record Oct. 17. Since January 2000, the company has paid an annual dividend of 2c a share.

"The new policy reflects our confidence in the company's continuing cash generating outlook, our strong balance sheet and financial condition, and the more favorable tax treatment of dividends for our shareholders," said CBRL chief executive Michael A. Woodhouse in a prepared statement.

"We recently announced that fiscal year 2003 marked the fourth consecutive year in which cash provided by operating activities substantially exceeded cash used for capital expenditures (purchase of property and equipment)," he added.

But the common dividend will cut into the yield on the convertible, and the 0% due 2032 issue plunged 1.5 points on the news. The issue closed at 48.875 bid, 49.375 offered and dealers said it was very active and traded more than it usually does.

CBRL shares ended down 63c, or 1.72%, to $36.02

Woodhouse said the company plans to continue its stock buyback program, which he said has been an effective strategy of increasing shareholder value by returning cash flow to shareholders and boosting earnings per share.

Convertible players have been looking for value, and it has been a tedious process over the past year or longer.

"We are trying to stick to the basics and we're finding a few ideas," said Southworth of Northern Trust.

"It's a lot like searching for truffles, but I don't have a trained pig. I have to do the work myself."

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