Mylan falls on acquisition; Ford gains on Chrysler deal, buyout hopes; Gold Reserve reserved in gray

By Kenneth Lim

Boston, May 14 - Mylan Laboratories Inc. fell outright and on a dollar-neutral basis Monday after the company's credit was downgraded following its decision to pay $6.7 billion in cash for Merck KGaA's generic drugs business.

Ford Motor Co. rose on unconfirmed speculation about takeover possibilities in the wake of the Chrysler group's buyout and rumors that the Ford family may be considering selling its stake in the company.

Meanwhile, Gold Reserve Inc. stayed quiet in the gray market with its planned $75 million offering seen as highly risky and hampered by a lack of stock borrow.

Mylan falls on purchase

Mylan's 1.25% convertible due 2012 fell about 10 points outright after the company agreed to pay €4.9 billion for Merck's generic drug operations.

The convertible traded at 102.375 against a stock price of $19.80. Mylan stock (NYSE: MYL) closed at $19.70, down by 12.05% or $2.70.

"Mylan came in about a point [dollar-neutral]," a sellside convertible trader said.

Mylan said over the weekend that it hopes to close the deal by the second half of the year. The acquisition is expected to break even in the second year and be earnings-accretive in the third year, Mylan said. Mylan is believed to have beaten out other generic drug makers including Teva Pharmaceuticals Inc. for the Merck unit, which was put on the block in early 2007.

Mylan, a Canonsburg, Pa.-based generic drug maker, said it plans to issue about $1.5 billion to $2 billion of equity and equity-linked securities to reduce its leverage.

"I think it was a surprise," a sellside convertible analyst said. "People weren't expecting them to make such a big acquisition in cash...It may work out really well for them but at the same time you gotta say, 'Hey, look at all the leverage they're putting on.'"

The analyst said the deal definitely widened Mylan's credit spread, but noted that credit spreads in the sector have tightened recently, and figuring out where to place the company's credit profile right now could be tricky until the company provides more details about how it will finance the deal.

The analyst also noted that Standard & Poor's downgraded the company's credit profile to BB+.

"But BB+ isn't a bad credit," the analyst said.

Credit ratings agency Standard & Poor's on Monday cut Mylan's corporate credit and senior unsecured debt rating by a notch to BB+ from BBB- and placed the company on CreditWatch with negative implications.

"The acquisition is expected to add a significant amount of debt and Mylan's financial policies and profile will be clearly inconsistent with an investment-grade rating," wrote S&P credit analyst Arthur Wong.

A buysider said some of the impact on hedged investors is not clear.

"It really depends on how you're hedged," the buysider said. "The stock really took a beating, but the problem was that the credit also widened because of this. Another concern is that they may be issuing more debt after this, which will widen its spread even more."

Ford gains on buyout hopes

Ford's 4.25% convertible due 2036 gained about 4 points outright on hopes of a buyout fueled by the sale of Chrysler and rumors that the Ford family was thinking of paring its stake, although the rumor was dismissed by a family representative.

The Ford convertible traded at 119.375 against a stock price of $8.75 on Monday. Ford stock (NYSE: F) gained 4.18% or 35 cents to close at $8.72.

"The Fords were up with the stock because of the Chrysler deal," a buysider said. "There were some rumors about a buyout, but I haven't heard anything to confirm it and most of it is probably just wild speculation."

DaimlerChrysler said it was selling a majority stake in its Chrysler operations, which focus on the North American markets, to private equity group Cerberus Capital Management LP for $7.4 billion. Also on Monday, reports said the Ford family was considering selling part of its stake in Dearborn, Mich.-based Ford. But Ford family lawyer David Hempstead later told media that those rumors were untrue.

Ford and Chrysler are auto makers.

"I think the Chrysler deal probably put a bit of optimism in the other two companies [General Motors Corp. and Ford]," a sellside convertible analyst said. "It's the idea that there are still interested buyers out there willing to invest in the sector, and also I think some people are hoping that any positive operational changes at Chrysler will spur the other two to speed up their restructuring. Other than that I'm not sure there's going to be a lot of impact for GM or Ford. All of them are too busy trying to put out their own fires."

The analyst said a Ford buyout was a remote possibility.

"I can't imagine who would want to buy Ford at this time," the analyst said. "It's a huge company with deep issues that are just as problematic. In fact, I'd be more concerned than hopeful if the Fords are really thinking of selling their stake."

Gold Reserve seen as risky

Gold Reserve's planned $75 million offering of 15-year convertible senior subordinated notes was quiet in the gray market Monday with its deal seen as highly risky and hampered by a lack of stock borrow.

"There's nothing in the gray for Gold Reserve," a sellside convertible trader said. "Nobody seems to care very much for it."

The deal was expected to price Monday after the market closed. The deal was talked at a coupon of 5% to 5.5% and an initial conversion premium of 30% to 35%.

The convertibles were offered at par.

There is an over-allotment option for a further $11.25 million.

JP Morgan and RBC Capital Markets are the bookrunners of the registered offering.

There is a concurrent offering of 16 million shares of Gold Reserve common stock, with an over-allotment option for an additional 2.4 million shares.

Gold Reserve, a Spokane, Wash.-based gold and copper mining company, said it will use the proceeds of the deals to fund construction activities, equipment purchases and the development of its Venezuela-based Brisas project.

"There's no borrow or very limited borrow," a buyside convertible analyst said. "I also heard the other guys say it's very speculative."

A sellside convertible analyst said the underwriters were using credit spread assumption around 750 basis points over Treasuries and a volatility of about 50%.

"My own opinion is that the risk here really justifies a wider spread, but nothing is trading that far outside," the analyst said.

The analyst said the deal was difficult to model because there was no stock to borrow. The company's stock offering could free up the borrow, but it was difficult to figure out what the borrow rebate would turn out to be, the analyst added.

"Either it's very, very cheap if they have a normal borrow, or it's about fair if you have zero rebate," the analyst said.

The key risk in the company was its dependence on an asset in Venezuela, where president Hugo Chavez has been nationalizing the country's various resource-extraction businesses.

"With Chavez and such a small market cap, it's really risky," the analyst said. "They only have approval from the government to build up infrastructure at the property, but then they have to go back to Chavez to get approval to mine this stuff, so who's to say the government won't say, 'Thanks for building all this infrastructure for us, now leave it alone?'"

Without a stock borrow, hedge investors are unlikely to be interested in the deal, the analyst said. But outright investors may find the risk too tough to swallow as well, the analyst said.

"It's just so risky, oh my God," the analyst said.

But the analyst thought that there was a possibility that the deal could still find a decent market.

"It's amazing, the appetite of investors these days," the analyst said.

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