American Financial rallies on merger; Ford drives on labor deal; Royal Gold a shiny nugget

By Evan Weinberger

New York, Nov. 5 - American Financial Realty Trust leaped on takeover news. Separately, Ford Motor Co. convertibles took a pleasant ride on the conclusion of talks with the United Auto Workers.

Itron, Inc. rebounded after a thrashing late last week.

Cell Genesys Inc. continued a tumble following a weak earnings report last week.

Overall, the convertibles market was relatively quiet as credit worries continued to bubble. "Down but no [convertibles] noise" was how one trader described the markets Monday.

Equity markets struggled for direction as credit concerns and turnover at the tops of two major companies added to existing credit concerns. Charles Prince stepped down from his perch as CEO of Citigroup Sunday following massive losses in the subprime mortgage meltdown. On top of the $6.5 billion in losses already written down for the third quarter, Citigroup warned of a further $8 billion to $11 billion on the way.

Late in the day, Time Warner Inc. chief executive officer Richard Parsons announced that he will turn over the reins to Jeff Bewkes, currently Time Warner's chief operating officer.

Speaking of subprime mortgages, Federal Reserve governor Randall Kroszner warned a banking conference that deterioration in the subprime sector could get worse soon.

The Dow Jones Industrial Average was all over the place Monday, down more than 100 points at one point, poking its head above water at a couple of others, before closing the day at 13,543.40, a loss of 51.70 points, or 0.38%.

The Nasdaq was fluid but down the whole day. The tech-heavy index fell 15.20 points, or 0.54%, for a 2,795.18 close.

The Standard & Poor's 500 slipped 7.48 points, or 0.50%, for a close of 1,502.17.

One new issue was set to price Monday after the market close. Royal Gold, Inc. launched $100 million in mandatory convertible preferred stock due Nov. 15, 2010 Monday before the market open. The mandatories are talked at a dividend yield of 6.75% to 7.25% and an initial conversion premium of 18% to 22%.

There is a $15 million over-allotment option on the registered transaction. The mandatories are expected to be listed on the Nasdaq as RGLD P.

The mandatories carry a provisional conversion until May 15, 2008. Royal Gold cannot convert the mandatories if it carries out an acquisition of $100 million or more.

There are takeover protections, a make-whole agreement and anti-dilution protections.

Royal Gold is a Denver-based precious metals royalties acquisitions and management company. Royal Gold plans to use the proceeds to acquire further precious metals royalty interests.

Coming in from India, Pidilite Industries Ltd. priced $40 million in zero-coupon foreign currency convertible bonds due 2012 to yield 6.75% with an initial conversion premium of 30% Friday after the market close in Mumbai, India. The convertibles, offered as a Regulation S transaction, will mature five years and one day from the settlement date.

The convertibles have a conversion price of Rs. 256.035. They will be redeemed at 139.37% at maturity. The convertibles are callable beginning Jan. 9, 2008.

Pidilite is a Mumbai, India-based industrial and consumer chemical producer. The company plans to use the proceeds for capital expenditures, international expansion and general corporate purposes.

Royal golden

Royal Gold makes money by investing in gold royalties without getting involved in messy mining. That means that the company rarely has to make costly capital investments and is somewhat shielded from market fluctuations. "They have no debt," one analyst said, adding that since the new issues are mandatory stock, Royal Gold's debt won't significantly bump up with the new issue.

Several market watchers contacted by Prospect News had Royal Gold's $100 million in mandatory convertible preferred stock due Nov. 15, 2010 modeling cheap. "I think they come in really cheap because I think the credit spreads should be a lot tighter than the way that they're being proposed," the analyst said. The mandatories are talked at a 6.75% to 7.25% dividend and an 18% to 22% initial conversion premium. They modeled anywhere from 2.8% cheap to 3.84% cheap.

Royal Gold operates primarily in American mines, notably in Nevada. It has been expanding its interests in Latin America and Africa, so there are some sovereignty and weak dollar concerns, the analyst added.

With good credit and that lack of over-hanging debt, the analyst said that the Royal Gold mandatories model out well for risk-arb investors, a view that was borne out in other models viewed by Prospect News.

The same isn't true for outrights, since there are few price targets and analyst reports on Royal Gold's stock. The company is listed as a "hold" by three analysts, and there is a price target of around $35 among them. Royal Gold (Nasdaq: RGLD) lost $3.32, or 10.14%, for a $29.41 close after the mandatories were announced.

"The stock looks like it may rebound assuming metals prices hold up," a fund manager said. "[The] company will grow its royalty stream over the next couple of years." The fund manager did say the company's small size - it only has 14 employees - and "less than perfect stock borrow" were negatives. He did, however, model the mandatories a couple of percentage points cheap.

"It's tough to say whether there's an up stock case to be made," the analyst said. "Outrights may be spooked."

American Financial spikes on takeover

Jenkintown, Pa.-based American Financial, a real estate investment trust specializing in managing bank branches and other financial institutions, agreed to be acquired by New York-based Gramercy Capital Corp., the two companies announced Monday. Gramercy is a REIT specializing in mortgage loans and other real estate financing.

The deal comes out to $5.50 per share, or around $3.4 billion. The merger is expected to close toward the end of the first quarter of 2008.

That sent American Financial stock soaring. The convertibles weren't too shabby either.

American Financial's 4.375% convertible senior unsecured notes due July 15, 2024 closed Monday at 98.5955 versus a closing stock price of $8.01. They closed Friday at 93.3541 versus a stock price of $6.45.

Stock in American Financial leaped $1.56, or 24.19%, on the day.

Ford up on UAW deal

Dearborn, Mich.-based Ford and the UAW reached a tentative labor agreement Saturday. The four-year deal includes a more than $15 billion commitment from Ford to an independent trust to handle health care payments for thousands of retirees. The UAW made similar deals with Chrysler LLC and General Motors Corp.

The deal has the unanimous support of local chapters of the UAW, and the union said it hopes to ratify it by Monday.

Ford's 4.25% convertible senior notes due Dec. 15, 2036 gained on the news, closing Monday at 119.9 versus a closing stock price of $8.67. They finished trading Friday at 118.4 versus a stock price of $8.95.

Investors weren't as bullish on Ford stock (NYSE: F), which slid 28 cents, or 3.13%, on the day.

Ford releases its earnings Thursday, and analysts expect significant losses.

Itron rebounds

After reporting disappointing earnings after the market close Thursday, Liberty Lake, Wash.-based analytic software and meter reader maker Itron saw its stock and convertibles get smacked.

Monday saw the value-hunting vultures reappear.

Itron's 2.5% convertible senior subordinated notes due Aug. 1, 2026 closed Monday at 143.55 versus a closing stock price of $83.10. They closed Friday at 139.335 versus a stock price of $80.07.

Itron stock (Nasdaq: ITRI) surged $3.03, or 3.78%, on Monday.

Cell Genesys fall continues

South San Francisco, Calif.-based cancer drug developer Cell Genesys announced distressing third-quarter earnings Thursday. The company said it lost 46 cents per share for the third quarter, far worse than analysts' predictions. Reuters estimated a loss of 39 cents per share.

The company's stock and its convertibles tumbled. After closing Oct. 15 at 82 versus a closing stock price of $3.69, Cell Genesys's 3.125% convertible senior notes due Nov. 1, 2011 are now trading in the mid-70s.

The convertibles closed Monday at 75.14 versus a closing stock price of $2.82. They finished trading Friday at 79.3362 versus a stock price of $3.22.

Cell Genesys stock (Nasdaq: CEGE) dumped 40 cents, or 12.42%, on Monday.

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