Solectron surges on buyout; Amylin flat in gray; Dendreon faces borrow problem; Integra, Ciena plan deals

By Kenneth Lim

Boston, June 4 - Merger and acquisition activity continued to inject life into the early summer's convertible market, with Solectron Corp. surging on Monday after the company received a $3.6 billion cash-and-stock offer from rival Flextronics International Ltd.

Meanwhile, Amylin Pharmaceuticals Inc. was neutral in the gray market after the company upsized its offering and refocused price talk toward the cheap end of earlier guidance.

Dendreon Corp. was quiet in the gray market, but early indications suggest that its deal will see limited interest as a lack of stock to borrow keeps hedge investors at bay.

New deal terms were cheaper in May than in April, although returns from recently issued convertibles lagged the broader secondary market, said convertible analysts at Lehman Brothers and Merrill Lynch.

Meanwhile, the primary market continues to chug ahead, with Integra LifeSciences Holdings Corp. and Ciena Corp. announcing $700 million worth of new paper that will price Tuesday after the close.

Solectron takes off on offer

Solectron's 0.5% convertible due 2034 jumped about 12 points outright on Monday after Flextronics made a $3.6 billion cash-and-stock acquisition bid.

The convertible was 95.5 bid, 95.75 offered on Monday against a stock price of $3.85. Solectron stock (NYSE: SLR) closed at $3.88, up by 15.13% or 51 cents.

"They did very well today," a buyside convertible trader said. "We weren't involved, but I would think guys who were did very well."

Flextronics on Monday offered Solectron common stockholders $3.89 per share or 0.345 shares of Flextronics common stock. Between 50% to 70% of Solectron stock will be converted into Flextronics stock through the deal. The cash consideration represented a 15% premium over Solectron's Friday closing stock price, while the stock consideration was a 20% premium.

The acquisition is expected to close by the end of the year. Milpitas-based Solectron and Singapore-based Flextronics are electronics contract manufacturers.

"I think this is a pretty good deal for both sides," a sellside convertible analyst said. "Both companies benefit from being a bigger player in a less competitive market. The whole sector's been hit by really thin margins because there are so many players and so many new players from places like China that are threatening to keep margins low for a long time. Any kind of consolidation will be welcome by guys in the industry."

The analyst said Solectron convertible holders likely benefited regardless of whether they are outright or hedged.

"It's up on an outright basis, so it's obviously positive on that basis," the analyst said. "Hedge guys look like they're going to do fine also, because the credit's improving as well and you can convert for a premium or hold on to the converts and gain from the improved credit."

A sellside convertible trader said the convertible were actually trading below expectations.

"They're saying that they may complete it by the end of the year, but people have to say that maybe it's not necessarily going to finish by the end of the year, so it could be that they will have to wait a little more," the trader said.

Amylin flat in gray

Amylin's upsized $500 million offering of seven-year convertible senior notes was flattish in the gray market on Monday with the deal seen as fair but sitting on a promising outright story.

The convertible was 99.75 bid, 100.125 offered in the gray market ahead of pricing expected after the market closed. Amylin stock (Nasdaq: AMLN) fell 6.72% or $3.14 to close at $43.62.

"It's just not that well priced," a hedge trader said. "But I think it will do just fine. I'm going to play it, but I don't love it."

Amylin narrowed price talk during the day to a coupon of 2.75% to 3% with an initial conversion premium of 40%. Price talk was originally at a coupon of 2.5% to 3% and an initial conversion premium of 37.5% to 42.5%. The convertibles were offered at par.

The size of the deal was originally $400 million with an over-allotment option for a further $50 million. The greenshoe is now for an additional $75 million.

Goldman Sachs and Morgan Stanley were the bookrunners of the Rule 144A offering.

Amylin, a San Diego, Calif.-based biopharmaceutical company, said the proceeds of the deal will be used to develop its late-stage product candidates and fund research and development, operating expenses, potential acquisitions and other general purposes.

"It looks really fair," a sellside convertible analyst said. "Most people I talked to were saying they modeled it out around fair...But maybe the outrights are so interested they can add another $100 million."

The analyst said that that with a credit spread in the mid-200 basis points over Treasuries region and a volatility in the low-30% range, the deal would model fair at the midpoint of talk.

Although equity analysts were split on the outlook of the common stock, the convertible analyst reckoned that the stock was a little undervalued.

"To me it looked a little more attractive to outrights because they don't set up all that well," the analyst said. "It will require a more volatility for that."

But the company was standing on solid ground in terms of its outright prospects, the analyst said. Amylin's Byetta twice-daily injection diabetes treatment is currently being developed for a once-a-week version and for "monotherapy," where the drug could be a first-line treatment that does not have to be used in combination with other treatments, the analyst explained.

"It's a great story," the analyst said.

Dendreon lacks borrow

Dendreon's planned $75 million of seven-year convertible senior subordinated notes was quiet in the gray market Monday as a lack of stock borrow limited interest in the deal.

The deal was expected to price Tuesday after the market closes, talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%. The convertibles will be offered at par. Dendreon stock (Nasdaq: DNDN) closed at $8.20, up by 1.23% or 10 cents.

There is an over-allotment option for a further $25 million.

Merrill Lynch was the bookrunner of the Rule 144A offering.

Dendreon, a Seattle-based biotechnology company, said the proceeds of the deal will be used to develop the commercialization and manufacturing of its prostate cancer drug Provenge, research other products and fund general purposes.

"We probably won't get involved," a buysider said. "The reason is that there's no borrow. That's the bottom line."

A sellside trader also noted the lack of borrow, but said the deal could be interesting for outrights.

"They don't need cash immediately, but they're doing this in order to get some manufacturing facilities going," the trader said. "They've just submitted some data to the FDA and they're waiting to hear back on that, but I think it's an incredibly bullish statement from the management to say they're trying to raise money now for manufacturing."

But a convertible analyst did not agree that the issuance was necessarily a sign of confidence from Dendreon.

"They would need cash by early 2008 by their own guidance," the analyst said. "A new phase III trial will eat up cash. The timing of this is due to the recent announcement that interim data may be sufficient for FDA submission. Not all analysts believe that, but stock is up on news. If they need to use final data, they will need more money than the convert. Also, best not to wait until last minute to raise money."

New converts cheaper in May

New convertibles in May came at cheaper terms on average than in April, but recently issued deals returned less than the rest of the secondary market, said convertible brokers.

Average new issue cheapness increased to 1.39% in May from 0.71% in April, wrote Lehman Brothers analyst Venu Krishna in a research note. On a year-to-date basis, however, average cheapness of 1% continues to lag the 1.25% average discount for all of 2006.

Merrill Lynch's Tatyana Hube also found that new issue terms were generally better for investors in May, but noted that the Merrill Lynch VXA0 All-Convertibles Index also cheapened to 0.06% rich from 0.29% rich.

"Recent secondary market cheapening helped to keep the primary market terms in May attractive, with average yield at issue of 3.3% weakening somewhat from the 3.6% number in April, but still better than the 2.9% average yield in March," Hube wrote. "On the other hand, last month's average conversion premium at issue of 33% was significant improvement on the 42% average conversion premium offered in April."

The New Issue Index also improved in May, gaining 1% during the month on the back of a 1.4% return by the underlying equities, Hube wrote. But the all-convertible benchmark did even better, returning 2.3% on a 3.5% gain in the underlying equities. Year-to-date, the New Issue Index has returned 7.15%, slightly less than the 7.29% gain from the broader index.

Ciena, Integra launch deals

Ciena's $450 million of 10-year convertible senior notes is expected to price Tuesday after the market closes, talked at a coupon of 0.625% to 1.125% with an initial conversion premium of 13% to 17%.

The convertibles will be offered at par.

There is an over-allotment option for a further $50 million.

Deutsche Bank is the bookrunner of the registered offering.

Ciena, a Linthicum, Md.-based supplier communications networking equipment and software, said about $38.3 million of the proceeds will fund a call spread option on its common stock, while the rest of the proceeds will be used for general purposes, which could include buying back its outstanding 3.75% convertible senior notes due 2008.

Integra also launched a two-tranche $250 million offering of convertibles slated to price after the market closes.

The $125 million three-year series is talked at a coupon of 2.75% to 3.25% and an initial conversion premium of 27.5% to 32.5% while the equally sized five-year tranche is talked at a coupon of 2.125% to 2.625% and an initial conversion premium of 22.5% to 27.5%.

Both series will be offered at par.

Each tranche has an over-allotment option for a further $25 million.

JPMorgan, Banc of America, Morgan Stanley, Deutsche Bank and Citigroup are the bookrunners of the Rule 144A offering.

Integra, a Plainsboro, N.J.-based maker of surgical implants and medical instruments, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions, buy back up to $75 million of its common stock, repay outstanding bank loans and fund general purposes.

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