Charter convertibles drop 1 point while stock edges up on Cox buzz; Cadence, Magma soften

By Ronda Fears

Nashville, Aug. 2 - News that Cox Communications Inc. was making a move to go private gave some fodder for speculators on consolidation in the cable sector. A buyside trader said Charter Communications Inc. convertibles ended lower, and he did not see Adelphia Communications Corp. at all - as the price premium for Cox was not overly palatable - although Charter shares edged up along with the field of cable stocks.

Moreover, activity was muted as market interest took back stage to terrorist fears centered on the financial market, literally, as the New York Stock Exchange, Citigroup Inc. and Prudential Financial Inc., the International monetary Fund and the World Bank were included in a Department of Homeland Security high-level alert regarding possible al Qaeda attacks.

But the terrorism alert sent crude oil prices to a new record level of $43.82 a barrel, up 2 cents from Friday, and that was off the high of the day of $43.94.

Traders said the mood on the interweaving of oil prices, airlines and the auto industry generally was summed in the fear that a prolonged spike in oil prices would be a major setback for economic recovery.

Ford Motor Co. and General Motors Corp. were both higher, with the convertibles of both automakers up by about 0.25 point ahead of reporting vehicle sales on Tuesday. But the airline paper was in negative territory as the financial troubled industry on whole has been slammed particularly hard by the surge in fuel prices.

"Oil prices have already put a huge kink in the economic recovery, because there's a lag to when we, the public, the consumer actually feels it. If everyone thinks gasoline prices are outrageous now, just wait until all this is passed through to the pump," said a buyside trader at a hedge fund in New Jersey.

"If it goes on much longer [the rise in oil prices], we will be in a world of hurt. It already has probably derailed the Fed's plan regarding interest rates. They are going to be having to move against inflation, and swiftly I'd think."

Cox price not impressive

The offer price to buy out Cox Communications by Cox Enterprises "was not overly impressive," said a buyside convertible trader. Charter, which has been viewed as a takeover target as well as a suitor in the cable industry, stock rose along with the sector, albeit to a much lower degree than most. The converts, however, ended the day off from last week's levels.

"The rumors have been rampant recently, ranging from Cox buying Charter to Charter buying Adelphia, you name it," the trader said. "We saw Charter [convertibles] all over the place, and I didn't see anything on Adelphia at all."

Charter's convertibles were both lower by about 1 point, according to a sellside convertible trader at one of the bulge bracket firms, who put the 4.75s of 2006 at 88.5 bid, 86 offered and the 5.75s of 2005 at 89.5 bid, 90 offered.

Charter shares ended up 6 cents on the day, or 1.94% on the day, to $3.15.

Cox shares gained 20.23% on the day, and Comcast Corp. rose 4.37%. Cox Enterprises is offering the remaining stake of Cox it doesn't own for $7.9 billion, or $32 a share, a 16% premium from the close Friday and a 14% premium over the 10-day average.

"It is not really what a lot of people were hoping for," in a potential buyout of Charter, the buyside trader said.

But, he added, "In that price neighborhood, looking at the lousy action in Charter today could be illustrating a complete lack of demand for Charter at all."

"Now, the market is backtracking, thinking any offer for Charter will be a lowball offer, and even that will look good because the stock has been beaten up so badly."

Charter going private a plus

Meanwhile, chatter about Paul Allen, chairman of Charter, taking that company private would be a big plus, the buyside trader said.

"I think he's [Allen] got to be watching closely to see how the Cox deal plays out. If no one squeals, Paul might try it," he said.

"Seems like I recall he talked about taking the company private a couple of years ago. Now, the SEC trouble has been resolved, so, who knows, maybe it could happen. That, I think would be a good thing, because seems like the first order of business would be to get the debtload down" and the convertibles are among the first in line of Charter's debt to mature, or come due.

As for the Cox-merger-with-Charter buzz, he said that is still astir in the market but far less credible now with the Cox-going-private plan. But he said the chatter about Cox and/or Charter looking to make a play for Adelphia out of bankruptcy has quieted down what with some real action taking place.

In any event, he said, the market is widely anticipating some action from Charter regarding the 2005 convertibles soon.

Charter is scheduled to report earnings next Monday before the market open, followed by a conference call.

Cadence, Magma issues soften

Weakness pervaded the software sector again Monday on the warning from Synopsys Inc., and Cadence Design Systems Inc. and Magma Design Automation Inc. both dropped around 2 points on the day.

Cadence's zero-coupon convertibles ended at 102 bid, 102.5 offered with the stock losing 42 cents on the day, or 3.12%, to $13.05.

Magma's zero-coupon convertibles closed at 100 bid, 101 offered as the shares dropped 57 cents, or 3.21%, to $17.18.

Some of the pullback in Magma, a trader said, was in light of a sharp runup on its earnings last week.

"There was a big jump [in Magma] on the earnings that was probably overdone," he said. "Magma, the software sector, has been in a downward trend for several months and there's really no reason why it won't continue, the nice earnings aside.

"I don't see spending on new software, licensing tools, all that sort of thing, getting much better anytime soon, for another year and a half, at best."

Last week, Magma Design, which provides chip design solutions, reported record fiscal first-quarter revenues of $36 million, up from $22.8 million a year before. Pro forma net income was $7.7 million, or 18 cents per share diluted, up from $4.9 million, or 14 cents per share diluted, but there was a GAAP net loss of $2.5 million, or 8 cents per share diluted, compared with net income of $100,000, or zero per share diluted.

St. Paul Travelers slips

St. Paul Travelers Cos. Inc. confirmed Monday that it is looking at a second-quarter loss following its warning a month ago that how regulators determine the accounting method for a change in the valuation of reserves would reverse its fortunes.

The big insurance concern, formed earlier this year in the merger of St. Paul Cos. and Travelers Property Casualty Corp., said it expects to report a net loss of $275 million to $300 million, or 42 cents to 45 cents per share, and an operating loss of 47 cents to 51 cents per share. Without the adjustments to account for $1.63 billion of reserves, the company said it had expected to post a net profit of $775 million to $800 million, or $1.13 to $1.16 per share.

"In my opinion, the market is saying there is no way St. Paul is going to hit even these lower estimates," said a buyside trader. "But, that said, if they make it or get turned around, it is cheap relative to the rest of the insurance group."

The St. Paul Travelers 4.5% convertibles dropped 0.625 point to 26 and the 9% mandatory lost 0.5 point to 66.5, he said. The stock fell 45 cents, or 1.21%, to $36.62.

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