Schering-Plough bid up in gray; Henry Schein goes to 102.25; News Corp. off on BskyB news

By Ronda Fears

Nashville, Aug. 4 - Schering-Plough Corp.'s jumbo $1.25 billion mandatory gave proof that the primary market for convertibles was returning from the dead after some five weeks of lifelessness. The issue was viewed cheap by players and thus expected to price aggressively - so the gray market bids were modest, ranging from 0.25 to 0.625 point over par.

Perhaps illustrating the market's appetite for fresh paper, Henry Schein Inc.'s new 3.0%, up 41% convert broke out of the chute on higher ground and ended in the immediate aftermarket up by over 2 points.

But equally illustrating some discretion, buyers flexed muscles as Netherlands biotech concern Qiagen NV sold a convertible abroad. Market sources said the 1.0%, up 47.5% issue was repriced below par at 99 and only afterward was seen trading up from there.

SFBC International Inc. was said to be quiet in the gray market, while the stock dropped $2.81, or 8.28%, to $31.13 ahead of the $100 million convertible bond deal on Thursday.

Outside of the market's focus on the new deals afloat following a dry summer spell, oil prices retreated sharply but the convertible market was still described as "easier" with stocks slightly weaker on the day and Treasuries as well as volatility rather flattish. Crude oil futures settled down by $1.32 to $42.83 a barrel, after hitting a new high of $44.34 in overnight trade.

There was a slight uptick in the Ford Motor Co. and General Motors Corp. convertibles, market sources said, along with some of the airline paper - but Delta Air Lines Inc. and AMR Corp., parent to American Airlines Inc., continued to soften on restructuring concerns.

Media and cable issues were a hot spot in secondary trading, but all the issues involved were lower.

Charter Communications Inc.'s chief financial officer leaving to become CFO at Cablevision Systems Corp. - its second CFO in less than a year - capped any potential gains that might have been caused by market chatter that Charter chairman Paul Allen was making or heading up an effort to pump $1.5 billion of new capital into the cable company.

Cablevision did not get any pop from the news. One trader said that was due to the New York cable company being a takeover target as well as sentiment souring on its spin off of its old Rainbow Media Group, now called Rainbow DBS.

News Corp. converts also weakened on an aggressive spending plan from British Sky Broadcasting Group plc, but dealers noted the 0.375 to 0.5 point drop in the converts was mild compared to the double-digit plunge in News Corp. and BSkyB stocks.

Also noteworthy, and on the plus side, the School Specialty Inc. 6% convertible continues to gain ground on market buzz that the Greenville, Wis.-based maker of classroom furniture and playground equipment is looking to flush out the $149.5 million issue. The 6s were up by 3.125 to 3.625 points Wednesday, a sellside market source said. The company also has $100 million of 3.75% cash-to-zero convertibles out.

Schering-Plough bid +0.25

Pharmaceutical giant Schering-Plough was peddling $1.25 billion of three-year mandatory convertible preferreds in a quick-sale deal talked to price with a dividend of 6.0% to 6.5% and 20% to 24% initial conversion premium.

Because the price talk is generally viewed as cheap to fair value, with a par of 50 on the mandatory, a buyside trader said the market is expecting the deal to price at the rich end of the guidance. In the gray market, the issue was bid 0.25 point over par shortly after it launched and the bid ran up to 0.625 point over par at one point of the session before edging back down to 0.25 points over par at the close.

At the middle of indicative terms, Merrill Lynch analysts put the issue 4.8% cheap, using a credit spread of 152 basis points over Treasuries and 28% volatility.

Another sellside analyst put the issue 2.2% cheap at the midpoint of guidance, using a credit spread of 177 bps over Treasuries and 26% volatility.

Yet another sellside analyst put the deal 0.7% cheap at the middle of price talk, using a credit spread of 175 bps over Treasuries and 27% volatility.

The Kenilworth, N.J.-based Big Pharma concern said proceeds would be used for general corporate purposes, including the refinancing of debt, funding operating expenses, taxes, business development activities, the payment of licensing fees and to fund legal costs.

Schering-Plough, the subject of several federal investigations into its pricing and marketing practices, said part of the proceeds will be used in connection with its agreement last week to plead guilty to defrauding the Medicaid insurance program and pay $345.5 million in fines and damages. Also, its profits have come under pressure since its allergy drug Claritin lost patent protection in 2002.

Henry Schein goes to 102.25

Henry Schein sold $200 million of 30-year contingent convertible senior notes at par to yield 3.0% with a 41% initial conversion premium, and early out of the gate it was seen with a bid of 100.625 but with no trades seen. By the end of the day, however, it was well over 2 points above par.

The deal priced at the wide end of price talk for a coupon of 2.5% to 3.0% and 41% to 46% initial conversion premium.

"This is very cheap financing for Henry Schein," said an outright convertible fund manager in New York. "Essentially they are selling stock at $80 share and keeping fixed costs low."

Lehman Brothers, a joint bookrunner with JPMorgan Securities, closed the new Henry Schein convert Wednesday at 102.25 bid, 102.5 offered. The underlying stock dropped $1.33 on the day, or 2%, to $64.40.

A source working on the deal said there was "not much noise at all" from potential buyers regarding the 130% contingent conversion trigger with no waiver provisions in the event of new accounting rules for those structures like the Ocwen Financial Inc. issue recently. In the Ocwen issue, the company has the option to waive the CoCo feature pending a final ruling by the Financial Accounting Standards Board on the treatment of potential dilution from CoCo converts in reporting earnings, which the panel is due to discuss again Sept. 29 and 30.

Qiagen convert repriced at 99

In Europe, Netherlands biotech concern Qiagen NV apparently met with some resistance to the aggressive terms on its proposed convertible bond offering. A market source in London said the small deal "didn't go too well" and, thus, was repriced below par.

The Venlo-based company sold $150 million of 20-year convertible bonds with a 1.5% coupon and 47.5% initial conversion premium.

The Regulation S deal priced at the wide end of coupon talk of 0.875% to 1.5% and at the middle of premium guidance for 45% to 50% but still sole bookrunner Goldman Sachs & Co. had to re-offer it at 99, according to a market source in London.

After getting marked down by the underwriter, the source said the Qiagen convertible was trading firmly at 99.25 bid, 99.75 offered.

In the United States, Qiagen shares ended Wednesday down 43 cents, or 4.29%, to $9.60.

Charter issues split on news

Charter's convertibles were split Wednesday with its shorter paper firmer on rumors that chairman Paul Allen was behind an effort to inject $1.5 billion of fresh money into the cable company, while the longer bonds weakened on yet another executive departure. Furthermore, traders said the company's earnings due Monday were overshadowing Wednesday's developments, as many expect bad news in the financials.

Charter CFO Michael Huseby resigned to take the same position at Cablevision Systems Corp., effective Aug. 20. Cablevision had been looking for a new CFO since June as William Bell is stepping down. Charter did not immediately name a successor.

"Charter has a serious management problem and that's reflected in the stock price," said a convert trader at a buyside shop in New York. "The top people are leaving in droves. This marks the second time in a year that Charter, the third-largest cable company in the country, is having to fill its CFO slot. Something's got to be rotten there."

The Charter 4.75% convertible due 2005 was said to be about a 0.25 point higher as the possible equity infusion would help toward refinancing that issue, a measure widely anticipated soon by the market. The Charter 5.75% convertible due 2006 was said to be down by as much as 1.5 points. One sellside trader quoted the issue at 87.75 and another put it at 86.5.

Charter's bank debt dropped 0.125 to 0.25 point on the news and its junk bonds waffled around before ending the day mostly unchanged.

Charter stock lost 3 cents on the session, or 0.96%, to $3.08.

Cablevision sighted lower, too

Cablevision-linked convertibles were lower too, with the company's 6.5% mandatory down by about 0.75 point and the AT&T Corp. 6.25% mandatory exchangeable into Cablevision was lower by about 0.5 point in tandem with stock.

Despite the new CFO news, dealers said the market generally is skeptical about Cablevision's timing for its spin off of Rainbow, as a Merrill Lynch analyst speculated the move is imminent, perhaps within two to three weeks.

"What a terrible time to spin off a stock. Now, when the market is in the tanks, and they've been talking about this for a year now," a sellside trader said.

Jessica Reif Cohen, Merrill's media stocks analyst, said in a report that Cablevision "is closing in on instituting a separate capital structure at its start-up satellite operation, the key condition enabling the eventual spin-off of its Rainbow DBS venture."

Rainbow National Services, a new borrowing entity, is said to be planning an offering of $800 million in senior notes, which Cohen said, in the report, "could be completed within the next two weeks, compatible with a September distribution date for the spin off."

Cablevision shares lost 80 cents on the day, or 4.24%, to close at $18.05.

News Corp., BSkyB tumble

The Murdoch media family concerns, News Corp. run by father Rupert Murdoch and BSkyB by his son James Murdoch, took a dive Wednesday as BSkyB reported earnings and announced an aggressive spending plan aimed at propelling the pay-TV company to the forefront of the U.K. broadcasting scene.

Both stocks fell sharply, but traders in the United States as well as United Kingdom. said the convertibles held up very well against that pressure.

News Corp.'s 0% convertible lost 0.375 point to 57 bid, 57.5 offered, a sellside trader in New York said. News Corp. shares plunged $1.55, or 4.51% on the day, to $32.80.

The News Corp. 0.75% exchangeable that converts into BSkyB shares dropped 0.5 point to 92.25 bid, 92.75 offered, a sellside trader in London said. BSkyB shares plummeted $7.75 on the day, or 17.38%, to $36.85 in the U.S.; the stock lost 114p, or 18.94%, to close at 488p in London.

BSkyB said it would boost marketing and capital spending by $821 million as it attempts to lift its subscriber base by 35% by 2010. Thus, the satellite broadcaster warned that operating margins would shrink during the next three years.

Investors also were reacting to BSkyB's fiscal 2004 results, particularly subscriber additions that fell short of expectations, as has been the case for the last two quarters.

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