GM mixed in light trade, Ford flat, Incyte gains on Pfizer pact, but SFBC falls

By Rebecca Melvin

Princeton, N.J., Nov. 21 - Convertibles players mostly eyed, rather than traded, General Motors Corp. on Monday, when the ailing automaker made good on a promise to strengthen its North American business turnaround efforts. The news was viewed as positive, but the convertible bonds traded mixed in light trade after a solid move higher on Friday in anticipation of the news.

"We basically watched the credit," a New-York-based buyside trader said of GM on Monday. "The credit tightened a bunch. Then after the call, things went the other way, and we ended up about where we started."

The trader's comments referred to GM's conference call in which GM chairman and chief executive Rick Wagoner said that the sale of a stake of GMAC was "not a certainty." Later he also said it was "inevitable," but investors reacted at first against the initial ambiguity.

Ford Motor Co., which is seen "a step or two behind" GM, traded lower most of the session but ended essentially unchanged, albeit in positive territory.

"Ford is basically seen a step or two behind GM. It will see what happens and reap the benefit if GM can successfully pull this off," a New York-based sellside analyst said, referring to an agreement among GM, the United Auto Workers Union and Delphi Corp., GM's largest parts supplier, which is under Chapter 11 bankruptcy protection and facing a potential worker strike.

Also on Monday, buyers scooped up Incyte Corp. bonds, sending the 3.5% convertibles up more than 8 points on an outright basis and up by about 1.5 points on a 50% hedge after the Wilmington, Del.-based drug discovery company and Pfizer Inc. announced they have inked a collaborative research and license agreement for the development and commercialization of CCR2 antagonists, a chemical mediator in the body associated with chronic inflammation.

Among other biotechnology issues traded Monday were Amgen Inc. and Nektar Therapeutics Inc., which was seen a little better again. The bonds are recovering from a beating taken in recent weeks after disappointing news that the Food and Drug Administration extended its deadline by three months in making a final decision on Exubera, an inhalable form of diabetes treatment that Pfizer and Sanofi-Aventis are developing in conjunction with Nektar.

On the downside, SFBC International Inc., a drug development services company, based in Miami, was seen lower after it was downgraded to "hold" from "buy" by Jefferies and Co. But overall trading was pretty quiet on Monday, traders said.

Meanwhile, Spansion Inc., the Sunnyvale, Calif.-based maker of flash memory, abandoned a proposed offering of $200 million of mandatory convertible preferred stock. The company, owned by Advanced Micro Devices, Inc. and Fujitsu Ltd., still plans to offer $400 million of senior unsecured notes and a smaller-than-expected common stock offering of 39.22 million shares, plus a possible greenshoe of 5.88 million shares, according to an S-1/A filing with the Securities and Exchange Commission.

Previously the stock portion of the transaction had been 35.29 million shares.

GM convertibles mixed on news

The $25 face value convertible bonds of GM traded mixed on Monday while the credit tightened initially, then widened after the company's conference call on its restructuring plans, but then tightened again by the end of the session.

The credit was no longer trading with up front points either, according to a New York-based derivatives trader. Up front points were implemented by sellers of the credit default protection last week when bankruptcy fears flared.

But the credit default swaps of GMAC "came in" in relation to the CDS of parent GM, the trader said. The GMAC credit ended at the day at about 410, 420 basis points, after widening out by 30 to 40 bps.

"GM came out with some better announcements than previously made. It was definitely a positive but there is still so much uncertainty related to the situation at Delphi. And if Delphi strikes, GM doesn't work either," a New York-based sellside analyst said.

GM said it will reduce jobs by 30,000 with most of the cutting done before 2007, compared to a previous target of 25,000 jobs cut over the next three or four years, the analyst said.

The Detroit, Mich.-based maker of cars and light trucks said that a major capacity reduction is its next step in a turnaround plan for its North American operations.

With an eye toward an additional reduction of capacity of North American operations by 1 million units by the end of 2008, GM will shut nine assembly, stamping and powertrain facilities and three service and parts operations facilities in the United States and Canada.

The new reductions will be made in addition to its previously implemented reduction of 1 million units between 2002 and 2005, the company said. The total cost reduction running rate is $7 billion by the end of 2006.

The shut downs and job cuts are part of its comprehensive four-point plan to return the company to profitability and long-term growth, GM's Wagoner said Monday.

Factoring in the additional capacity from GM's new Delta Township facility in Lansing, Mich., slated to begin production next year, the overall net result will be an assembly capacity of 4.2 million units for the company's North American operations.

Other aspects of the four-part plan include health care and sales and marketing.

Pending court approval of an agreement with the UAW announced on Oct. 17, GM expects to be able to reduce GM's retiree health-care liabilities by about 25% of the hourly liability, or about $15 billion, and cut the company's health-care expense by about $3 billion on an annualized, pre-tax basis. Annualized cash savings will be about $1 billion a year, the company said.

Analyst: GM moves to boost cash

In a report Monday, CreditSights analyst Glenn Reynolds said, "If GM plans to take the actions they announced today and they execute on the GMAC sales stake, they could very well be sitting on north of $45 billion in cash and liquid reserves, including VEBA, by the end of 1Q06 or in 2Q06."

"Those types of companies usually do not run off and file Chapter 11. Getting past the Delphi strike risk is likely to drive a monster rally in GM securities, but that remains a big if, and the handicapping in our view has not been sufficiently removed by the recent spate of news. The Delphi-UAW-GM game of chicken continues, and Delphi is driving awfully fast," Reynolds said in his report "GM: Restructuring Detail Provides Multiple Messages."

The company also said that GM North America will continue its "aggressive product assault on all vehicle segments," eyeing on average 15 all-new entries a year in the North American market for the foreseeable future.

It will also continue to develop a portfolio of hybrid cars and trucks, including hybrid versions of the Saturn VUE, Chevrolet Malibu, and the next generation of GM full-size pickups and SUVs.

"We also will continue to lead in the implementation of other fuel savings technologies, such as displacement on demand and six-speed transmissions. GMNA also will expand its offerings of ethanol-capable vehicles (E85 fuel)," the company said.

And it will continue to adjust suggested retail prices to match more closely actual transaction prices, it said.

GM markets primarily under the brands Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn, and Hummer. GMAC is its financial services segment, including consumer vehicle financing, full service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners insurance, and asset-based lending.

There will be a significant restructuring charge in conjunction with this capacity announcement, and also with any related early retirement program, the company said, adding that details of these charges will be provided when available.

Incyte surges on Pfizer pact

Incyte's convertibles jumped on Monday in response to an agreement in which Pfizer gains worldwide development and commercialization rights across a broad range of indications for Incyte products, and in exchange Incyte may receive up to $803 million in payments.

The move up in the convertibles was especially strong on an outright basis for the 3.5% convertibles, but on a hedged basis it wasn't as high as may have been expected.

"On a 50% hedge, which was probably more or less the 'market' hedge, they improved by about 1.5 points. I don't think that's enough based on what could be a gigantic credit improvement. Even though the bonds did well today I would have expected they'd do even better," a Connecticut-based buysider said, suggesting that the hedged move wasn't greater possibly due to holders taking profits on Monday.

The buysider said that when the stock moved one point, the 3.5% convertibles moved about 4 points. So when the shares were near their highs at around $6.50, the 3.5s were trading around 83 bid, 83.75 offered.

Other trades of the 3.5s were reported at about 81.6, up from 73 on Friday.

Trading was less active for Incyte's 5.5% convertibles, which are older and have been partially bought back by the company. They traded higher but by a smaller amount, rising to near par early in the day and were seen steadying at about 98.5 bid, 99 offered.

Shares of Incyte surged to as high as $6.65 before closing up slightly off that level at $5.86, up $1.06, or 22.1%.

Incyte and Pfizer have entered a global collaborative research and license agreement for the development, manufacture and marketing of novel oral CCR2 antagonists.

Under the agreement, Pfizer gains exclusive worldwide development and commercialization rights to Incyte's portfolio of CCR2 antagonist compounds, the most advanced of which is in phase 2a studies in rheumatoid arthritis and insulin-resistant obese patients, the company said in a press release.

Pfizer's rights extend to the full scope of potential indications, with the exception of multiple sclerosis and one other undisclosed indication, where Incyte retains exclusive worldwide rights, along with certain compounds.

Incyte will not have obligations to Pfizer on pre-clinical development candidates it selects for pursuit in these indications.

In exchange, Incyte will receive an upfront payment of $40 million and will be eligible to receive additional milestone payments of up to $743 million for the successful development and commercialization of CCR2 antagonists in multiple indications, as well as royalties on worldwide sales, the release said.

Pfizer will also purchase $20 million in convertible subordinated notes, with $10 million to be issued within 20 days after the effective date of the agreement and another $10 million to be issued after Incyte files an Investigational New Drug Application in a retained Incyte indication. The notes will bear no interest and will be convertible into Incyte common stock at a premium.

Pfizer will also provide research funding to Incyte to support the continued expansion of the CCR2 compound portfolio, the company said.

The agreement is subject to antitrust review and approval and other standard closing conditions.

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