Convertibles mostly quiet; Chattem jumps on M&A news; Beckman slightly higher in trade

By Rebecca Melvin

New York, Dec. 21 - The convertible bond market was mostly quiet to start the holiday shortened week; but, Monday merger and acquisition news did spur activity in Chattem Inc.'s two smaller convertible issues, sending them sharply higher.

News was on the tape early that Sanofi-Aventis has agreed to buy consumer health care company Chattem for about $1.9 billion.

Beckman Coulter Inc., the Brea, Calif.-based biomedical testing company, was up slightly in trade with its underlying stock 2% higher on the day.

Beckman Coulter's 2.5% convertibles due 2036 last traded by round lot at 115.056 versus the company's closing share price of $65.58, which was up 0.431 of a point from Friday, when the shares were $64.28.

Ford Motor Co.'s 4.25% convertibles due 2016 traded at 124 versus a share price of $9.75.

Citigroup Inc.'s new convertible mandatory preferreds closed at $105.60 on the New York Stock Exchange.

The new Citi 7.5% preferreds will be included in Bank of America Merrill Lynch's model portfolio for 2010 as an "equity alternative" and its play on the financials sector, according to research published by Bank of America Merrill Lynch on Monday.

Overall, trading Monday was thin, with one sellsider predicting the week will be "painfully slow" in terms of trading activity.

Next week there might be a little more trading, another sellsider suggested.

Stock markets added. The Dow Jones Industrial Average gained 85.25 points, or 0.8%, to 10,414.14; the Nasdaq Stock Market added nearly 26 points, or 1.2%, to 2.237.66; and the S&P 500 index lifted 11.6 points, or 1.1%, at 1,114.05.

Chattem in play

Chattem's 1.625% convertibles due 2014 jumped 30.5 points Monday to 135.50 versus a share price of $92.19, which was up from 105 versus a share price of $69.98 on Friday.

Chattem's 2% convertibles due 2013 jumped 37.6 points to 165.125 compared to 127.506 on Friday.

Shares of the Chattanooga, Tenn.-based consumer health care company surged $23.21, or 33%, to $92.19 on news that the company agreed to be acquired by Sanofi at $93.50 per share, which is about a 38% premium to the close on Friday.

Both of the convertible issues show a matrix, and the bonds were very active compared to usual activity on an otherwise very slow day, sources said.

Of the Chattem 1.625% paper, $12.5 million traded; and of the Chattem 2% paper, $4 million of bonds traded, according to New York-based sellside analyst at the end of the session.

"The acquisition of Chattem will be a significant milestone in Sanofi-Aventis' transformation strategy and will provide us with the ideal platform in the U.S. consumer health care market, which represents 25% of the current worldwide opportunity," Sanofi chief executive Christopher Viehbacher said in a statement.

Chattem brands include Selsun Blue shampoo, Gold Bond skin products and Icy Hot pain relief medicine.

Also on Monday, Sanofi said it stopped developing two medicines as part of an overhaul of its research and development portfolio, saying they would not bring significant benefits.

Moody's Investors Service said it placed Chattem's Ba3 corporate family rating and the B2 senior subordinated ratings on review for possible upgrade following the announcement that it will be acquired by the A1 rated Sanofi-Aventis.

The last rating action took place on Dec. 1 when the ratings were confirmed following a review for downgrade that was initiated October 2006.

Citigroup preferreds at $105.60

Citigroup's new 7.5% mandatory convertible preferred shares traded last at $105.60, which was up from Friday's 102.

Shares of the New York-based financial services company's common stock settled at $3.40 Friday, up 20 cents, or 6.25%.

Although some investors were taken aback by some new twists in the way the 7.5% mandatory was structured, a closer look at the details revealed that it is largely a different way of repackaging a more straightforward mandatory structure, resulting in the same type of valuation, according to research published by Bank of America Merrill Lynch.

Versus the $3.30 Citigroup common price, the 7.5% mandatory was recently at 101.75 bid, 102, making it 5.3% cheap at the offer price, Bank of America Merrill Lynch convertibles analyst Tatyana Hube wrote of trading activity at B of A.

For a 25% move in the Citi common stock in either direction, "we project a one-year total return for the Citi 7.5% preferred of plus 20.4% to negative 15.5%, a 1.3 times reward/risk ratio, assuming it continues to trade at the same cheapness level; even a one point richening improves the reward or risk ratio to 1.5. In our valuation, we used a 50% volatility assumption and a conservative 700 basis points spread over Treasuries," Hube wrote.

Hube noted that equity strategists recommend staying overweight in financials in 2010.

In their 2010 year-ahead report published on Dec. 7, the Bank of America Merrill Lynch equity strategy team commented that financial earnings should rebound strongly. The rebound would come as banks stop adding to loan loss reserves in 2010 and net interest margins benefit from prolonged steepness of the yield curve as the Fed keeps short-term rates unchanged owing to subdued growth in U.S. gross domestic product.

Significantly higher earnings in 2010 would improve confidence in the long-term earnings potential, according to Hube.

Mentioned in this article:

Beckman Coulter Inc. NYSE: BEC

Chattem Inc. Nasdaq: CHTT

Citigroup Inc. NYSE: C

Ford Motor Co. NYSE: F

National Retail Properties Inc. NYSE: NNN

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