Intel gains on possible job cuts; Gateway slips on spurned offer; General Motors climbs, Ford falls on sales

By Kenneth Lim

Boston, Sept. 1 - The convertible bond market had another uneventful session on Friday, with Intel Corp. gaining on reports that the company could be laying-off workers after the Labor Day weekend.

Gateway Inc. was lower outright after the company rejected a $450 million offer to buy its retail operations.

U.S. auto maker General Motors Corp. gained while rival Ford Motor Co. declined along with their August sales figures.

Meanwhile, a report by Citigroup noted that new issuance terms changed in favor of issuers in August, although terms are still attractive compared to earlier in the year.

The market in general was quiet with many market players away from their desks ahead of the Labor Day long weekend.

"I haven't gotten any bids today," a sellside convertible bond trader said. "I'm messaging people on Bloomberg asking them what's going on and half of them aren't around."

Another sellsider was hoping for activity to pick up with the departure of summer.

"Hopefully guys will come back again next week and the market will pick up," the sellsider said.

Intel up on layoff talk

Intel's 2.95% convertible due 2035 improved by about a point outright on Friday after it was reported that the company may announce job cuts soon.

The convertible was 87.75 bid, 88.25 offered against a stock price of $19.77 on Friday. Intel stock (Nasdaq: INTC) closed at $19.88, up by 1.58% or 31 cents.

"It's tracking about right," a convertible bond trader said of the gains.

Intel is expected to announce of Tuesday plans to cut 10,000 to 20,000 jobs as part of the company's restructuring plans, said several reports on Friday. Intel, which posted its lowest sales and profit numbers since 2004 in July, has said it wants to reduce its expenses by $1 billion by the end of 2006. Santa Clara, Calif.-based Intel makes semiconductor processor chips.

"This isn't unexpected," a convertible trader said of the gains. "They are cutting expenses. It's a positive thing for the company."

Gateway slips as deal spurned

Gateway's 2% convertible due 2011 traded about a point lower on Friday after the personal computer maker rejected a $450 million offer for its retail operations.

The convertible changed hands at 79.875 against a $1.95 stock price. Gateway stock (NYSE: GTW) closed at $1.90 on Friday, a loss of 5% or 10 cents.

Irvine, Calif.-based Gateway on Friday said its board found an offer by eMachines founder Lap Shun Hui to buy Gateway's retail operations was "not in the best interest of shareholders."

Hui made his $450 million offer on Aug. 23, and also suggested that he would be willing to buy the entire company and split up its business operations. Gateway did not respond to that option. Hui, whose eMachines was bought by Gateway in 2004, said the company must separate its retail units from its other businesses if it is to compete against other PC makers such as Dell.

A sellside convertible bond trader said Gateway's decision to turn down the offer may have been the right one.

"We felt all along that the bid was too low," the trader said.

"It's probably a positive, because it means that company isn't in that much trouble that it has to accept this offer," the trader added. "Now the company can get a better bid or look for something else."

A convertible bond analyst was also not surprised that Gateway rejected the offer.

"They are looking at different options, but...with something like that, I think it was probably too limited in scope to interest them," the analyst said.

And while Gateway has "a long way to go to get things turned around," the retail operations in the latest quarter saw some improvement.

For the stock and outright convertible investors, "I think it's going to continue to trade up a little bit like where it is as long as it seems like it's a possibility that a deal may come out from this whole process," the analyst said.

Convertible bond holders would benefit from a deal, and it is not too far fetched to think of Gateway as an acquisition target, the analyst said.

"It's a weak credit, you've got two bonds out there that are in the 80, 85 area, and a takeout would be a pretty happy event for either of those, especially if it's cash," the analyst said. "Gateway doesn't have a real big market value, so it's certainly doable."

But some companies that have put themselves on the block recently have had trouble finding good bids, and Gateway may not have better luck, the analyst cautioned.

"You could argue that they might be a good target for another player in PCs that wants to consolidate a little bit," the analyst said. "But it remains to be seen whether anyone would be interested in doing that."

GM, Ford split ways

General Motors' convertibles gained, while Ford's declined on Friday in sympathy with fresh U.S. auto sales figures for August.

General Motors' 5.25% convertible due 2032 (NYSE: GBM) gained 1.64% or 0.31 point to close at 19.21, while the stock closed at $30.27. The 6.25% General Motors convertible due 2033 (NYSE: GPM) rose 1.38% or 0.29 point to end at 21.29. The General Motors 4.5% convertible due 2032 (NYSE: GXM), which may be put in March 2007, declined slightly by 0.2% or 0.05 point to close at 24.46. General Motors stock (NYSE: GM) rose 3.74% or $1.09 over the day.

Meanwhile, Ford's 6.5% convertible preferred declined 0.5% or 0.17 point to close at 33.87, against Ford's closing stock price of $8.27. Ford stock (NYSE: F) slipped 1.19% or 10 cents on Friday.

"No surprise there," a buyside convertible bond trader said. "The stock's reacting to the sales numbers."

Those movements came as U.S. auto sales figures showed that General Motors sold 3.9% more vehicles in August than it did a year ago. Ford, however, sold 20.8% fewer vehicles year-on-year, although car sales improved 8.5%. Ford's sales in August 2005 also got a boost from employee pricing discounts that were offered to all customers a year ago.

New deals more aggressive

New deal terms in the United States shifted in favor of issuers in August, although they remained attractive to investors compared to the year-to-date weighted averages, wrote Citigroup convertible analyst Stuart P. Novick in a note.

The new deals in August had a weighted average coupon of 3.8% and an initial conversion premium of 27.5%, which were more aggressive than the 4.2%, up 23.8% weighted average in July, the analyst said. But terms in August remained more attractive relative to the year-to-date weighted average coupon of 2.4% and initial conversion premium of 22.2%.

Novick expects issuance to remain strong for the rest of the year, citing short marketing periods, a healthy proportion of upsized deals and steady over-allotment take-ups. Larger deal sizes, higher interest rates and higher equity volatility should keep new deals in the pipeline for the rest of 2006, and total issuance volume could exceed $50 billion for the year, Novick wrote.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.