Medtronic down on recall; resignation drives down Level 3; Tektronix surges with takeover

By Evan Weinberger

New York, Oct. 15 - Huge volumes and big swings marked Monday, particularly in convertibles linked to Medtronic Inc., Tektronix Inc. and Level 3 Communications Inc.

Medtronic and Level 3 made news they probably would have preferred not have happened - particularly Medtronic - while a fundamental change sent Tektronix convertibles soaring.

Apex Silver Ltd. slid while Ford Motor Co. gave back some of its big gains from the previous week. Archer Daniels Midland Co. convertibles also had a tough day.

The downward trend in convertibles Monday mirrored the equities markets. Record oil prices and Citigroup's announcement that third quarter profits were down 57% wrestled all three major indexes to the ground for the day.

The Dow Jones Industrial Average recovered from its low point of around 150 points below the break even mark, but was still lower by 108.28 points, or 0.77%, on the session to close at 13,984.80.

The Nasdaq slouched even farther, closing at 2,780.05, a loss of 25.63 points, or 0.91%.

The Standard & Poor's 500 fell right in the middle of the other two markets. The S&P dropped 13.09 points, or 0.84%, to close at 1,548.71.

Heart woes strike Medtronic

Minneapolis-based Medtronic is the dominant player in heart defibrillators. So when the company announced that it was stopping production of those defibrillators because of a "small chance of a fracture" on its Sprint Fidelis defibrillators, Medtronic's stock and convertibles tumbled.

The leads on that model are susceptible to those small chances of fracture. Medtronic asked doctors to stop inserting the leads, which send signals monitoring the heartbeat to a device implanted near the shoulder, and to send any unused leads back to the company. The problem was linked to at least five deaths, as the broken lead can cause either over-stimulation of the heart by the defibrillator or no stimulation when necessary.

Medtronic didn't call its action a recall, but the Food and Drug Administration did.

Both of Medtronic's outstanding convertibles were hammered Monday. They were also more active than normal. "The volume in those convertibles is phenomenal," one analyst said at midday.

Medtronic's 1.5% convertible senior notes due April 15, 2011 closed at 103.637 versus a closing stock price of $50. They finished trading Friday at 110.942 versus $56.33.

Medtronic's 1.625% convertible senior notes due April 15, 2013 closed at 103.945 versus $50 Monday, falling from Friday's close of 111.899 versus $56.33.

Medtronic stock (NYSE: MDT) fell $6.33, or 11.24%, on the day.

Analysts said they thought Medtronic convertibles would recover from the fall, however. "It's a very solid credit. So these things are not going to dip far below par," another analyst said.

Level 3 down with CFO ouster

Sunit Patel, Level 3's chief financial officer, announced Monday that he would be leaving his post as soon as a replacement is found.

Patel was seen as one of the key actors keeping Broomfield, Colo.-based business internet service provider Level 3 afloat during a recent spate of seven acquisitions. It probably didn't help investor confidence that the resignation came as a complete surprise, according to media reports.

How much did Patel mean to Level 3? That's difficult to quantify. If the company's convertibles and stock are any indication, investors thought he meant a lot.

Level 3's 3.5% convertible senior notes due June 15, 2012 closed Monday at 105.477 versus a closing stock price of $4.36. The convertibles closed Friday at 112.033 versus $4.90.

Level 3 stock (Nasdaq: LVLT) tumbled 54 cents, or 11.02%, Monday.

Tektronix up on Danaher deal

Washington-based medical, industrial and professional instruments manufacturer Danaher Corp. agreed to pay $38 per share of Beaverton, Ore.-based diagnostic instrument maker Tektronix Monday. The deal is worth a total $2.8 billion.

When the deal goes through, Tektronix will become a part of Danaher's Electronic Test platform, along with Danaher's Fluke and Fluke Networks subsidiaries. According to a statement released by the two companies Monday, the addition of Tektronix's $1.1 billion in revenues will nearly double the platform's revenue. The deal is expected to close by the end of 2007.

Tektronix stock (NYSE: TEK) and convertibles bucked the market Monday. Both shot up. A Lehman Brothers report released after the close Monday said the $345 million in outstanding 1.625% convertible senior notes due 2012 valued using the agreed-upon $38 per common stock share would be worth approximately 106.49.

Lehman Brothers recommended that outright investors holding the convertibles should take their profits sooner rather than later, and those currently not holding the convertibles should sit this one out since there's not much upside left to go.

Risk-arb investors betting on a competing bid should consider getting in on the convertibles. The convertibles remain a much stronger proposition for risk-arb investors than the stock.

Investors didn't need Lehman Brothers' prodding to act on the convertibles. They jumped, closing at 106.516 versus a closing stock price of $37.85 Monday. The convertibles closed Friday at 92.624 versus $28.34.

Tektronix stock went skyrocketing $9.51, or 33.56%, Monday. Danaher is laying out the cash, so its stock (NYSE: DHR) took a spill, losing 95 cents, or 1.15% to close at $81.52.

The rest of the day's downers

This may be only a small sampling of the convertibles traded Monday, but they seem to fit the general downward tilt of the day.

Dearborn, Mich.-based Ford gave back some of the recent gains it saw on its 4.25% convertible senior notes due Dec. 15, 2036 despite announcing a slight rise in U.S. sales in 2008 and talks with the United Auto Workers on tap.

The convertibles closed Monday at 121.63 versus a closing stock price of $8.99. They finished trading Friday at 123.5 versus $9.20.

Ford stock (NYSE: F) skidded 21 cents, or 2.28%, on the day.

George Town, Cayman Islands-based Apex Silver Mines saw its 4% convertible senior subordinated notes due Sept. 15, 2024 close Monday at 99.1613 versus a closing stock price of $20.97. They went home Friday at 100.391 versus $20.61.

Apex stock (AMEX: SIL) gained 36 cents, or 1.75%, on the day.

Decatur, Ill.-based agriculture giant Archer Daniels Midland saw its 0.875% convertible senior notes due Feb. 15, 2014 wrap up the session Monday at 98.38 versus a closing stock price of $34.91. They finished Friday at 99.375 versus $35.48.

ADM stock (NYSE: ADM) closed Monday down 57 cents, or 1.61%.

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