Chesapeake gains on renewed takeover rumors; Bunge firms on merger headwinds; Amgen, Ford decline

By Kenneth Lim

Boston, Nov. 5 - The convertible market had a mixed day on Wednesday as equities took a beating, but the bond market continued to see some signs of optimism.

Chesapeake Energy Corp. bucked sector trends to climb higher on renewed speculation that the company could be a takeover target.

Bunge Ltd. saw some rare activity, gaining slightly after Corn Products International, Inc. decided to withdraw a merger recommendation.

The rest of the market was mostly lower outright as stocks fell across the board.

Amgen, Inc.'s 0.125% convertible due 2011 slipped about ¼ point outright to trade at 94.25 against a stock price of $60.05. Its 0.375% convertible due 2011 was at 89.5 versus a stock price of $59.75. Amgen common stock closed at $59.42 on Wednesday, lower by 1.9% or $1.15.

Amgen is a Thousand Oaks, Calif.-based biotech company.

Ford Motor Co.'s 4.25% convertible due 2036 eased a point to change hands at 28.5 versus a stock price of $2.10. Ford common stock declined by 3.24% or $0.07 to close at $2.09.

Ford is a Dearborn, Mich.-based automaker.

The overall sentiment in the convertible market, however, had brightened from a week ago, a sellside trader said.

"The markets seem to be doing better," the trader said.

But the trader was skeptical about the resilience of the improvements.

"It's good to see some consistency, but it would be good just to see the market solidify a little bit...become more stable," the trader said. "I think smart people are selling into any kind of strength, so I think ideally we should be delivering and lightening up. But stuff is very attractive, and I don't fault anyone from buying...All the better for me."

A buyside convertible analyst said the markets remain highly volatile.

"I think it's typical when there's crisis like what we had that you have a lot of hopeful optimism, a lot of investors looking for signs that the situation isn't as bad as it looks, and that gives you the occasional rally in the markets, and many of these rallies are quickly followed by sharp drops when the investors realize that the optimism was unfounded," the analyst said.

"So you get a lot of instances of the markets doing wonderful today and just terribly tomorrow, which is what we've been seeing."

Chesapeake gains on rumors

Chesapeake Energy benefited from renewed speculation Wednesday that the company could be the target of an acquisition.

Chesapeake's 2.25% convertible due 2038 closed at 58.625 against a stock price of $24.88, up by about 4 points outright. Its 2.75% convertible due 2035 also added about 4 points to trade at 83.125 versus a $24.81 stock price, while the 2.5% convertible due 2037 ended at 68.5 versus a stock price of $25.10.

Shares of Oklahoma City-based Chesapeake, a natural gas producer, closed at $24.83, up by 8.19% or $1.88.

"I heard about a rumor about British Petroleum maybe buying them, but I don't know anything more than that," a convertible trader said.

Old reports from the Wall Street Journal in October had suggested that BP was looking into buying some assets owned by Chesapeake, but no new reports emerged Wednesday.

A convertible analyst who looks at the sector said that with Chesapeake's share prices having fallen as low as they have, it was plausible that some people might think they were a good takeover candidate.

"The rumors have been out there for a reason, I guess," the analyst said.

If BP were to acquire Chesapeake, it would most likely be a positive development for the convertibles, the analyst said.

If the convertibles can be put in a takeover situation, the value of the convertibles would jump, the analyst explained. But even if the convertibles cannot be put, investors would benefit from BP's stronger credit profile.

"You'd be part of a $153 billion company...it's rated double A, so you would immediately see the spreads contract," the analyst said. "You'd lose something on the volatility, but I would think it would be good for the bonds."

Bunge gains on deal problems

Bunge's 4.875% perpetual convertible preferreds moved up by about a point Wednesday after Corn Products International expressed reluctance about a planned merger.

The convertible was marked at 54 bid, 56 offered versus the closing stock price of $44.16. Bunge, a White Plains, N.Y.-based agribusiness and food company, saw its common stock slip 2.54% or $1.15.

"They've just gotten crushed over the last month or two, but it's a big company, and solid company," a sellside trader said. "Sometimes it's hard to fight against perception."

Corn Products on Wednesday said its board of directors no longer supports a planned all-stock acquisition by Bunge that was valued at $4.4 billion.

Bunge, which may seek up to $10 million in deal expenses from Corn Products, said it still believed that a deal made sense and it was reviewing its options.

A convertible analyst said not having a merger did not significantly affect the convertibles.

"They were paying for it with shares, so there aren't really credit implications," the analyst said. "I think maybe it was a good deal from an operational standpoint, but Bunge was doing OK without this new business. If anything it might even be slightly better for credit because they won't be taking on Corn Product's debt now and they won't have to spend money trying to integrate the two companies."

The move by Corn Products was not entirely a surprise, the analyst said.

"They announced the deal in June, and Bunge stock has fallen about 60% since then," the analyst said. "Even if the board doesn't withdraw its recommendation, there's a chance shareholders wouldn't approve the deal anyway."

Mentioned in this article:

Amgen, Inc. Nasdaq: AMGN

Bunge Ltd. NYSE: BG

Chesapeake Energy Corp. NYSE: CHK

Ford Motor Co. NYSE: F

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