Ford, GM slide on sales data, production cuts; MGI Pharma acquisitions move convertibles up

By Ronda Fears

Nashville, Sept. 1 - Ford Motor Co. and General Motors Corp. were both a little lower Wednesday after reporting weak August sales, which prompted both to cut production levels. In regard to GM's convertibles, though, it was a mixed bag with fatter coupon paper edging up while other issues were off slightly.

MGI Pharma Inc. got a huge shot in the arm after announcing a series of acquisitions totaling roughly $240 million. The convertibles shot up about 7.5 points while the stock soared nearly 20%, which traders said was partly due to short covering.

Charter Communications Inc. stock also was erratic, spiking 22% at the open on what was reportedly a tier 1 firm's buy program "gone awry," as one convert trader put it. However, he said there was some "background buying" in the convertibles, moving the paper up by 1 to 1.5 points, even though Charter shares pulled back from the surge to end just 3% higher.

Dow Jones reported that small-cap stocks spiked at Wednesday's opening in a move attributed to a large errant buy program. In addition to Charter, stocks affected by the situation included convertible issuer Finisar Corp.

"There was some jumpy people on the sidelines. Charter had about three false starts. Every time we get one of these false starts you can almost feel the panic out there," one sellside trader said. "I think there are a ton of people out there who don't really like Charter and are on the sidelines but they really don't want to miss the boat if it ever comes to port. They must keep one eye on the ticker at all times. This could make for some volatile situations especially as we head into October and the Adelphia auction."

Six Flags Inc. continued to get a lot of play, too, and traders pointed out that the convertible outmaneuvered the stock as the 8.8% current yield on the issue turned heads. The 7.25% convertible preferred added another 0.60 point, or 2.92%, to 21.15 in heavy trade on the New York Stock Exchange, while the stock rose 8 cents on the day, or 1.44%, to $5.65.

"The fundamentals look bad for Six Flags, but there was just a lot of demand for the paper, mostly because people think that heavy-weights like Gates and Snyder will be able to either get management's attention or get the company turned around somehow," a convertible dealer said. "Maybe we all have a soft spot for amusement parks, maybe we are all cheerleaders or maybe because we think Americans feel that way, then one day there has to be a turnaround."

Microsoft Corp. chairman Bill Gates, who owns an 11.5% equity stake in Six Flags, and Washington Redskins owner Daniel Snyder, who bought 8.1 million shares last month, have indicated they plan to challenge Six Flags management to come up with a plan to improve results at the Oklahoma City-based theme park operator.

At Calpine Corp., however, the San Jose, Calif., independent power producer's plan to improve liquidity - essentially translated as an asset liquidation process - has come under fire, and selling in the convertibles continues.

Ford, GM sputter on sales data

Ford and GM both announced weak sales, even amid ongoing incentive programs, and said they were cutting production, which spooked lots of auto paper holders.

Ford's 6.5% convertible trust preferred lost a half-point and then came back before the close to end off by 0.375 point at 52.6 with Ford shares down 21 cents, or 1.49%, to $13.90. GM's 6.25% convert was up slightly, by less than one-eighth point, to 23.8 while its 5.25% convertible slipped by a similar amount to 28, with GM shares off a dime, or 0.24%, to $41.22.

"Ford and GM are in cyclical trouble - incentive stimulated demand wearing off, high gasoline prices and interest rates rising - and secular trouble - that is, the Japanese make much better cars for the value, and are penetrating in Ford and GM's main profit areas of SUVs and trucks," said a buyside convertible analyst.

"As such, I see them continuing to lose share and would not want to own the stocks long term."

Ford, which reported another month of disappointing U.S. sales on Wednesday, said it was setting its fourth-quarter North American production below last year's levels in a move that could hurt its earnings. The second-largest U.S. automaker, which has been losing market share to Asian and domestic rivals, said its U.S. sales fell 13% in August. To help cut inventories of unsold cars and trucks, Ford said it would produce 830,000 vehicles in the fourth quarter compared with 900,000 in the same quarter a year ago. Production cuts can hurt earnings because Ford and other automakers count profits from vehicles when they are shipped to dealers, not when they are sold to consumers. Ford's sales results include its import brands and some medium- and heavy-duty trucks and are not adjusted for the number of selling days.

Both automakers also are looking for ways to offset the impact of rising U.S. steel prices, some of which have doubled since the beginning of the year.

"Ford's market share continues to contract, dramatically," said a Ford convertible holder. "It just seems as if it's not getting any better for Ford, or GM, while DaimlerChrysler and Nissan, the foreign carmakers, just keep beating them."

GM and Ford, whose planned production cuts could hurt profits, capped a weak summer with their third straight month of lower sales, despite steadily hiking consumer incentives. Hurricane Charley's damaging path through Florida, high energy prices and falling consumer confidence also hurt sales results.

MGI Pharma lifted on buys

Minnesota-based MGI Pharma, a biotech firm focused on oncology, was getting snapped up after announcing three purchases.

"They will still have around $200 million in cash in the bank after buying two cancer drug companies and the licensing for another cancer drug," said a convertible fund manager in Chicago. "These are accretive acquisitions and strategically placed."

Before the deals were announced, MGI Pharma had a cash coffer of about $400 million, he said.

The MGI Pharma discount cash-to-zero convertible, which pays a 1.682% coupon, climbed 7.5 points to 82.8125 bid, 83.3125 offered. The stock shot up $4.62 on the day, or 19.89%, to $27.85. Current yield on the issue is around 2.25%, the fund manager said.

MGI Pharma will acquire Zycos, a privately held company focused on the creation and development of oncology and antiviral products, for $50 million. The transaction is expected to close later this month.

MGI Pharma also reached a deal to acquire Aesgen, a privately held company focused on treating side effects associated with cancer treatments, for $32 million in cash. Terms of the deal also require MGI to pay a 5% royalty on product sales and MGI also may be have to make performance milestone payments of $33 million upon regulatory approval of new drugs plus another $25 million if sales exceed $50 million in the second year after product launch.

In addition, MGI Pharma signed an agreement with SuperGen granting it exclusive worldwide licensing rights to Dacogen, an investigational anti-cancer therapy. Under the terms of the deal, MGI Pharma will make a $40 million equity investment in SuperGen at $10 a share, pay up to $45 million in potential milestone fees and invest a minimum of $15 million in the drug's development.

Calpine drops by 0.5 point

Calpine has indeed been busy with regard to its ambitious target of $3 billion of liquidity by year-end, but many bondholders, including those sitting on the Calpine converts, remain concerned that the company is liquidating revenue and/or income generating assets.

Echoing those concerns, Gimme Credit bond analyst Kimberly Noland said in a report Wednesday, "Unfortunately, the basic business is still not generating enough cash flow to pay financing costs and debt maturities.

"The river of liquidity created by recent sales of gas and oil assets is simply pulling assets away from existing bondholders, including those who thought their security interests gave them a significant priority should a restructuring be necessary...In the meantime, the long-awaited recovery of the power market has failed to materialize."

Noland said in the report that she would continue to avoid the longer unsecured debt, including the 4.75% convertible, at prices in the mid to high 60s.

Calpine's convertible, however, is still in the mid 70s. The 4.75% issue slipped about a half-point on Thursday to 74.25 bid, 74.75 offered, while the stock ended off by 2 cents, or 0.58%, to $3.40.

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