Celgene hit on merger; United Rentals hurt on breakup; Ford, GM fall on fears mortgage mess spreading

By Evan Weinberger

New York, Nov. 19 - Celgene Corp. convertibles tumbled on the company's takeover of partner drug producer Pharmion Corp.

United Rentals Inc. convertibles were down as its fight with Cerberus Capital Management LP over a buyout deal gone bad continued.

Fannie Mae and Countrywide Financial Corp. fell as housing continued to weigh down the broader markets.

Ford Motor Co. and General Motors Corp. were hurt as they are among the broader markets weighed down by housing.

Archer-Daniels-Midland Co. convertibles were also down as the ethanol boom may not be panning out as expected.

Overall, however, analysts and traders reported that activity was slower than normal in the convertibles market Monday. Part of it was the stock dive that drew the attention of most investors. Part came from the holiday week settling in.

"Sellers" was the one word a trader used to describe who was prowling the market Monday.

"Just because there are sellers out there doesn't mean things are trading," countered an analyst, who said that his shop had sell orders that couldn't get done. "It's pretty remarkable. In fact, I'd say it's remarkable for being inactive."

One new deal was announced before the market open Monday, and that may well be it for this short week. Wright Medical Group, Inc. launched $150 million in convertible senior notes due Dec. 1, 2014 Monday before the market open. The convertibles are talked at a 2.25% to 2.75% coupon with an initial conversion premium of 22.5% to 27.5%.

The registered transaction, set to price before trading Tuesday, has a $22.5 million greenshoe.

The convertibles have a contingent conversion subject to a 140% hurdle beginning Dec. 6, 2011. They also have fundamental change protection.

Wright Medical is an Arlington, Tenn.-based orthopedic and medical products producer that focuses on reconstructive joint devices. The company plans to use the proceeds for general corporate purposes.

Wright's corporate headquarters may not have liked the stock markets' direction Monday, as fresh banking concerns, worrying earnings from home improvement chain Lowe's Cos. and continued weakness in housing drove stocks to their seventh day of losses in the last eight sessions.

Goldman Sachs dropped Citigroup to a sell rating in the morning, and people sold to the tune of a nearly 6% drop in the stock.

Lowe's reported a 10% earnings decline for the third quarter, sparking fears that the problems in housing were beginning to seep into the consumer spending sector.

The National Association of Homebuilders reported that its index of industry sentiment remained at a record low for October.

All of this added up to a 218.35 point, or 1.66%, loss for the Dow Jones Industrial Average, a close at 12,958.44.

The Nasdaq was down to a 2,593.38 close, a loss of 43.85 points, or 1.66%.

And the Standard & Poor's 500 fell 25.47 points, or 1.75%, to close at 1,433.27.

Wright braves the bears

So maybe Monday didn't turn out to be the best day to launch a new convertible. On top of the big losses on Wall Street, Wright Medical (Nasdaq: WMGI) saw its stock get hammered to the tune of a $2.36, or 8.29%, loss to close at $26.12.

The convertibles due 2014 with a coupon talked at 2.25% to 2.75% and an initial conversion premium of 22.5% to 27.5% drew a positive review from analysts contacted by Prospect News.

"It's a nice piece of paper. It looks cheap, low premium, decent coupon," one analyst said, noting that the week leading up to Thanksgiving is a tough one to launch a new deal. "At least they didn't bring a dog this week, because that wouldn't get done."

"It looks like it's fairly priced," a sellside analyst said. "I think it will probably go to the mids."

Celgene down on buyout

Summit, N.J.-based cancer and blood disorder pharmaceutical Celgene and Boulder, Colo.-based Pharmion have worked together on several cancer drugs, so the two companies were familiar with each other.

On Monday, Celgene and Pharmion announced a $2.9 billion merger, with Celgene buying existing shares of Pharmion stock for $72 each.

"The acquisition of Pharmion is an exceptional strategic fit that will expand our role as a leader in hematology and oncology," Sol J. Barer, Celgene's chairman and chief executive officer, said in a statement Monday morning.

Celgene said in the statement that the deal, which is set to close by the second quarter of 2008, will be "slightly dilutive to earnings in 2008" and will be profitable in 2009 and beyond.

That won't help holders of Celgene's existing convertibles, which mature in 2008, before the forecasted accretion will take hold. And investors noticed Monday. Celgene's 1.75% convertible notes due June 1, 2008 closed Monday at 527.38 versus a closing stock price of $64. They closed Friday at 538.28 versus a stock price of $64.90.

Celgene stock (Nasdaq: CELG) closed down 90 cents, or 1.39%, on the day.

United Rentals down on endangered buyout

Greenwich, Conn.-based equipment rental firm United Rentals filed a lawsuit Monday against two subsidiaries of private equity house Cerberus Capital Management to attempt to get the buyout firm to complete their agreed upon transaction.

Last week, Cerberus announced that it did not want to complete the $4 billion transaction - valued at $7 billion when debt obligations are included - and instead would pay a $100 million breakup fee. The original deal was announced at the end of July.

In its suit, United Rentals says Cerberus did not cite a material change that would be necessary for them to initiate a breakup.

All this excitement wasn't good for the company's convertibles. United Rentals' 1.875% convertible senior subordinated notes due Oct. 30, 2023 closed Monday at 112.605 versus a closing stock price of $22.50. They closed Friday at 115.41 versus a stock price of $23.37.

Stock in United Rentals (NYSE: URI) was down 87 cents, or 3.72%, on the day.

Fannie Mae, Countrywide down

Fannie Mae and Countrywide convertibles fell victim Monday to further concerns about the mortgage sector.

The Wall Street Journal reported that analysts feared Washington-based Fannie Mae and Freddie Mac, two government-supported mortgage backers, were more vulnerable than previously thought to weakness in housing and subprime defaults.

Fannie Mae's 5.375% series 2004-1 convertible perpetual preferred stock (NYSE: FNM-PI) closed down 85 cents, or 2.14%, to close at $38.90 on Monday.

Fannie Mae (NYSE: FNM) stock did far worse, closing down $3.11, or 7.64%, Monday to close at $37.58.

Calabasas, Calif.-based Countrywide, America's largest mortgage lender, was down further as the cost of insuring the company's mortgage origination unit reportedly surged.

Countrywide's Libor minus 350 bps series A convertible senior debentures due April 15, 2037 closed Monday at 81.36 versus a closing stock price of $10.57. They closed Friday at 82.39 versus a stock price of $12.07.

Countrywide's Libor minus 225 bps series B convertible senior debentures due May 15, 2037 closed Monday at 75.227 versus a stock price of $10.57 after closing Friday at 77.98 versus a stock price of $12.07.

Countrywide stock plummeted $1.50, or 12.43%, on the day.

Is the auto sector next?

Fallout from the mortgage meltdown spreading to other sectors of the economy has been one of the major fears of the past few months.

Prominent analysts at the Reuters Auto Summit in Detroit Sunday said that auto sales in the United States could slump to 15-year lows in 2008.

"While I am very negative on the autos sector over the next 12 to 18 months, I'm just not sure how bad it could be," Jerry York, currently an adviser to Kirk Kerkorian and a former GM board member and chief financial officer of Chrysler, told the conference, according to a Reuters report Monday morning.

The Reuters story went on to say analysts expected auto sales from between 14.5 million to 15 million in 2008, down from an estimated 16 million in 2007, with much of the loss attributed to falling house prices.

That news did a number on automaker issued convertibles. Three of GM's four convertible issues saw steep declines Monday, as did GM stock.

GM's 6.25% convertible senior debentures due July 15, 2033 (NYSE: GPM) closed at $20.49, a loss of $1.07, or 4.96%, on Monday.

GM's 5.25% series B convertible notes due March 11, 2032 (NYSE: GBM) fell 65 cents, or 3.31%, to close at $18.99 on Monday.

And GM's 1.5% convertible senior debentures due May 31, 2009 (NYSE: GRM) gave back 74 cents, or 2.96%, for a $24.26 close.

Detroit-based GM fell $2.48, or 8.47%, to close at $26.79 on Monday.

Dearborn, Mich.-based Ford didn't fare much better, as its 4.25% convertible senior notes due Dec. 15, 2036 closed Monday at 105.4 versus a closing stock price of $7.34. They closed Friday at 107.4 versus a stock price of $7.70.

Ford stock (NYSE: F) closed down 36 cents, or 4.68%, on the day.

Ethanol losses drive down ADM

Decatur, Ill.-based agribusiness giant Archer-Daniels-Midland had expected rising ethanol prices to help raise its bottom line.

But that rise in demand for ethanol hasn't yet materialized, and several ethanol producers have been taking a beating on Wall Street in recent days.

ADM hasn't been facing quite as stiff a decline - it is well-positioned in other agricultural sectors and corn prices continue to rise - but the company's stocks and convertibles were treated harshly Monday.

ADM's 0.875% convertible senior notes due Feb. 15, 2014 closed Monday at 104.93 versus a closing stock price of $36.39. They closed Friday at 106.482 versus a stock price of $37.89.

ADM stock (NYSE: ADM) fell $1.50, or 3.96%, on the day.

© 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.