Itron climbs on sentiment, acquisition; Ford, Intel, Symantec ride equity rally; Equity REIT quiet in gray

By Kenneth Lim

Boston, Aug. 16 - A dearth of activity continued to plague the convertible bond market on Wednesday as equities rallied on the back of positive inflation data.

Itron Inc.'s newest 2.5% convertible due 2026 was up in line with its stock for another session after the company said it was buying a private company for an undisclosed amount in cash.

Meanwhile, Equity Residential's planned $500 million offering of 20-year exchangeables was quiet in the gray market with investors describing the deal as a tough sell to outright as well as hedge investors.

Also in the primary market, Macrovision Corp. also proposed $175 million of five-year convertibles expected to price Thursday after the market closes.

Auto maker Ford Motor Co.'s convertible preferreds rose on Wednesday, in line with a stock that was buoyed by broad-based gains in the equity market. The Ford 6.5% convertible traded at 32.72 against a stock price of $8.05, about 0.375 points higher outright than day-before levels. The preferred closed at 33.28, up 2.72% or 0.88 point.

Shares of Dearborn, Mich.-based Ford (NYSE: F) climbed 4.29% or 34 cents to close at $8.26.

"I don't know if there's anything in particular here, looks like it's up with the rest of the market," a sellside convertible bond trader said.

Tech names were mostly up outright as stocks in the sector gained on Wednesday. Chip maker Intel Corp.'s 2.95% convertible due 2035 changed hands at 84.5 versus a stock price of $18.125, up by 1.5 points. Shares of Santa Clara, Calif.-based Intel closed at $18.61, a gain of 2.65% or 48 cents.

Symantec Corp., which develops security software and solutions, also saw its 1% convertible due 2013 add about 1.5 points outright in line with its stock. The convertible traded at 108 versus a stock price of $18, while shares of Cupertino, Calif.-based Symantec rose 2.51% or 45 cents to end at $18.37.

The convertible market in general was dulled by recent rallies in the equity market amid economic data that showed inflation growth was milder than expected.

"What usually happens is that when the stock market picks up, volatility goes down," the convertible bond trader said.

Itron rides stock higher

Itron's 2.5% convertible due 2026 climbed about 2 points outright on Wednesday as its stock continued to rise amid broader market gains and news that it is buying a privately held company.

The convertible traded at 107 against a stock price of $50.50. Itron stock (Nasdaq: ITRI) rose 4.1% or $2.04 to close at $51.80.

Itron said Tuesday that it planned to buy Flow Metrix, a Maynard, Mass.-based company that makes leak detection equipment in underground water pipes. Spokane, Wash.-based Itron makes meters that compile data for utility companies.

Itron did not disclose the terms of the acquisition.

A buyside convertible bond analyst said the acquisition suggests that Itron is following through with its expansion plans, for which the company issued the convertible series at the end of July. The company said at that time that the $300 million it raised from the convertibles would be used for acquisitions and investments.

But the analyst added that the Flow Metrix acquisition seems to be a small one - it was not large enough to warrant disclosure of the takeover terms and has only 13 employees - and Itron is probably still looking for other targets.

"They're probably looking for a bigger acquisition, possibly overseas," the analyst said. "It's an acquisitive company, and the market seems to like it."

Wednesday's gains were likely related more to the broader market's rally and in particular recent interest in the sector, the analyst said.

"People are coming back to these industrial names and tech names, and it's [Itron] somewhere between the two," the analyst said.

Equity Residential muted in the gray

Equity Residential's planned $500 million of 20-year exchangeable senior notes were missing from the gray market on Wednesday, with investors describing the deal as unexciting for outrights and hedge investors.

"No, thanks," a sellside convertible bond trader said of the deal.

Equity Residential planned to price the deal on Wednesday after the market closed at a reoffer price of 992.5 per note, with talk for a coupon of 3.6% to 3.85% and an initial exchange premium of 28% to 30%.

The notes will be issued by Equity Residential's subsidiary ERP Operating L.P., and exchangeable into Equity Residential common stock.

There is a greenshoe option for a further $50 million.

Merrill Lynch was the bookrunner of the registered off-the-shelf offering.

Equity Residential said it will use the proceeds of the deal to pay down its outstanding revolving credit facilities. Equity Residential is a Chicago-based real estate investment trust that develops and operates apartment properties in the United States.

Equity Residential stock (NYSE: EQR) closed at $47.64 on Wednesday, down by 1.77% or 86 cents.

The convertible trader said outright investors would be better off buying the common stock if they were bullish about Equity Residential, and it was not easy setting up a position for hedge investors.

"A common stock on a name like this could yield 5.5% to 6% without increasing the dividend," the trader said, making the yield advantage on the convertible a tough sell.

A buysider called the offering "another in a procession of REIT deals." REIT convertibles are currently in favor because they are close to investment value, the buysider said.

But the volatility that is being priced into the deals is at the high end of historical levels, the buysider said.

"If volatility goes back down, those bonds are going to come down as well," the buysider said.

Some REIT deals have managed to pique interest by offering another angle on the same-old REIT story, such as Digital Realty Trust Inc.'s $150 million offering of 20-year exchangeables a week ago. Digital Realty invests in technology-related real estate, such as data centers.

"But this is yet another apartment REIT," the buysider said of Equity Residential. "There's nothing there to distinguish it."

Equity Residential stock was downgraded to neutral from buy by Merrill Lynch equity analyst Steven Sakwa in a note on Wedneday. Sakwa said the downgraded was based solely on valuation, noting that the stock is trading near an all-time high and intermediate-term price gains "will not be sufficient to merit a buy rating."

Macrovision plans $175 million deal

Macrovision expects to price on Thursday $175 million of five-year convertible senior notes, talked at a coupon of 2.625% to 3.125% and an initial conversion premium of 25% to 30%.

The convertibles will be offered at par, and pricing is expected after the market closes.

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

JP Morgan is the bookrunner of the Rule 144A offering.

Macrovision is a Santa Clara, Calif.-based developer of anti-piracy solutions for software and other digital content. It will use the proceeds of the deal for general corporate purposes and to concurrently buy back up to $50 million of its own stock for convertible note hedge and warrant transactions.

Macrovision stock (Nasdaq: MVSN) closed at $22.32 on Wednesday, up by 2.57% or 56 cents, before the deal was announced.

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