Paxson sold off; Toys bounces; El Paso deal delayed; Ford skids on outlook; Yellow off on USF news

By Ronda Fears

Nashville, April 8 - After a string of earnings restatements that go back for over a year, El Paso Corp. delayed its new $750 million convertibles as yet another restatement was announced by the Houston power firm.

As a result, traders said the existing El Paso convertibles saw "just a little" action, losing about a quarter-point with the 9% mandatory due 2005 at 30 and 4.75% convertible trust preferreds at 38.

The Nuveen Investments Inc.-linked issues sold by Morgan Stanley & Co. and Merrill Lynch & Co. were described as little changed with the stock up a nickel to close Friday at $34.05. But otherwise, there was nothing new on the primary market front.

"The pipeline, I would say, is relatively modest," said a top convertible origination official at one of the leading underwriters. He would not go so far as to say the shadow calendar is drying up from some 20 to 30 deals estimated in the works a month or so ago, but indicated that the number of potential new issues is on the decline.

There were a couple of new euro deals in play overseas, however. Jazztel plc sold a €200 million convertible in addition to Fugro NV's €125 million bond, and traders in London reported those were active due to such a dearth of new deals in Europe recently. Jazztel's 5% issue was quoted off from par at 98.5 bid and Fugro's steady from Thursday at 100.75 bid.

In an otherwise lackluster trading session, even for a Friday, merger and acquisition names Toys "R" Us Inc., Paxson Communications Corp. and Yellow Roadway Corp. were high-profile in mixed fashion.

Despite a drop in oil futures, transportation issues, including most airlines, took a dive Friday. Ford Motor Co. also rocked the auto group with a warning about 2005 results and abandoned its target for $7 billion pre-tax profits by 2006, in part blaming high gasoline prices. In addition to a drop in Ford's converts, General Motors Corp.'s three issues were lower by a quarter-point to a half-point, though traders noted that only the 6.25% issue saw much activity.

Crude oil futures dropped $1.31 on Friday to settle at $52.80 a barrel.

El Paso new issue delayed

On the latest earnings restatement, pricing for El Paso's convertible is on hold until early next week, a source close to the deal said Friday. The perpetual preferred is still talked with a 4.375% to 4.875% dividend and 25% to 30% initial conversion premium, however.

The deal was scheduled to price after the close Thursday when it launched Tuesday. Instead, after Thursday's close El Paso announced that it will restate its 2003 fourth quarter and annual 2003 consolidated earnings.

For more than a year, El Paso has made a series of financial restatements, which have weighed heavily at times on its securities.

In the latest event, El Paso said it will reclassify $82 million deferred tax benefits related to the sale of its Canadian exploration and production business. The company said it will not impact 2003 net income, EBIT, or cash flow, and has no impact on financials for 2004 and 2002. The 2003 restatement will increase the loss per share from continuing operations to $1.01 per share from $0.87 per share and make a corresponding benefit to discontinued operations.

El Paso shares closed Friday down 6 cents, or 0.56%, at $10.56.

Paxson convertible drops 5 points

With signs of a bidding war emerging for Paxson, the stock shot up 20% on Friday, but convertible holders cashed out of the situation.

The 9.75% convertible preferred due 2006 was indicated with an offer at 48 early Friday but traded at 43, said a sellside trader. Paxson shares closed Friday up 23 cents, or 20%, at $1.38.

In addition to reports that Hollywood talent agency The Firm has been negotiating to purchase the troubled Paxson, rumors were circulating Friday that television celebrity and businessman Byron Allen was working to make a $2.2 billion cash bid for the family friendly network.

The Firm is backed by Banc of America Securities in its talks with Paxson, according to reports, and Allen is working with investment bank Credit Suisse First Boston and several undisclosed private equity firms to establishing financing. In addition, two investors in The Firm - private equity groups Thomas H. Lee Partners and Bain Capital - are said to be involved in the discussions, reports said.

"Meanwhile, the company has close to $2.2 billion in debt and preferred stock, and with payments coming due this summer. Some say the network could be facing bankruptcy if it doesn't find a buyer," said one buyside trader.

"Buying on a possible buyout is a risky game, very high risk. If it happens, there could be an easy double [in the stock price], but if the talks fall apart look for at least a 50% drop."

In 2002 Paxson hired investment bank Bear Stearns to explore strategic alternatives such as the sale of the company.

Toys convertible up after tender

Toys "R" Us' mandatory traded sideways for most of Friday following the tender filed for the $400 million of bonds underlying the convertible, but late in the day it gained a dime as a buyer pushed it to 62, a sellside dealer said.

The stock edged up a penny to $25.83, but Toys "R" Us junk bonds slid on information that the company's new debt would be senior to the existing bonds, for which there are no other tender plans. The Toys "R" Us 7.375% notes due 2018 were seen plunging 3 points to 82. Those bonds had run up on speculation of a potential tender offer but quickly retreated as the company pointed out it was not obligated to do so.

CreditSights analyst Suzanne Chamberlain said in a report Friday that despite the subordination of the existing Toys "R" Us debt, the credit default swap spreads were trading in the context of 450 bps over Libor. She said it appears, though, that "much of the downside has been priced in."

Merrill Lynch analysts suggested the offer for the bonds attached to the convert was fair to attractive, depending on one's credit viewpoint. (See full story elsewhere in this edition.)

Toys "R" Us said it was making the tender at the request of Global Toys Acquisition LLC, the investment group consisting of Bain Capital Partners, Kohlberg Kravis Roberts & Co. and Vornado Realty Trust, which is buying Toys "R" Us for about $6.5 billion.

Vornado off on debt concerns

Vornado, which has pledged one-third of the cash portion of the Toys "R" Us acquisition cost or roughly $450 million, sold $500 million of 20-year exchangeables a couple of weeks ago, and a buysider said there is considerable concern about funding the deal with debt.

The Vornado 3.875% issue, which was reoffered at 97, has not been seen in trade but was indicated by a sellside trader on Friday at 96.5 bid, 97.5 offered with the stock at $71.00. Vornado shares closed off 15 cents at $70.80.

"It would appear as though the suitors for TOY will borrow almost all the money needed to buy TOY. They have borrowed through a series of loans, one of which caught my eye," said the buyside source.

"And here is the part that caught my eye. In the $2.85 billion U.S. asset-based facility it states: 'Borrowings under the asset-based facility are limited by a borrowing base which is calculated periodically based on specified percentages of the value of eligible inventory, eligible credit card accounts receivable and eligible real estate (with a limit of $725 million on borrowing based on eligible real estate at closing).'

"Well now that's interesting," the buysider continued, wondering whether that indicated that the owned real estate - which is eligible at closing - was "worth far less than we anticipated.

"How much IS it worth? Did TOY under value the real estate? It's no wonder CFSB was trying to get the bidders to sweeten the deal as the real estate value was grossly OVER-exaggerated. If you read closely the assets used to leverage the loan include inventories. Apparently the value of BRU [Babies "R" Us] as a business was the driver of the deal. And TOY's real estate was not as valuable as originally thought."

Yellow fades on USF warning

Yellow Roadway, which has a $1.5 billion cash bid pending for peer trucking firm USF Corp., took it on the chin Friday when USF warned that first-quarter earnings would come in far short of expectations. Still, market sources said it doesn't appear that Yellow intends to dump the merger plans.

The Yellow 3.375% and 5% convertibles fell around 10 points across the board, including both the exchanged and original issues, a sellside market source said. But, he added, that on an 80% to 90% hedge, arbitrageurs probably only lost about 1 point.

Yellow shares were slammed, too, dropping $4.69 on the day, or 7.93%, to close Friday at $54.45.

USF surprised the markets, warning after Wednesday's close that it would earn between 12 cents and 16 cents a share, well below the analyst consensus of 38 cents. About two weeks ago, Yellow projected its first-quarter earnings would be at or above the high end of its previous outlook of 80 cents to 90 cents per share.

Yellow is due to report results on April 21 and USF the following day.

Bill Zollars, Yellow's chief executive, said Friday the company remains committed to the USF merger, asserting that, "given their first-quarter revenue growth and tonnage increase, we believe the business fundamentals remain sound."

Ford convertible skids on warning

Ford's 6.5% convertible trust preferred fell 1 point Friday to 42.75 on the automaker's lower earnings forecast in addition to the company ditching its goal of making $7 billion in pre-tax profits by 2006. That, in turn, sparked a lower outlook on Ford's credit ratings.

"Historically high prices for steel and crude oil, escalating health care expenses and a weak U.S. dollar presented formidable challenges as we entered 2005," said Don Leclair, executive vice president and chief financial officer.

"Throughout the first quarter we saw those and other business factors worsening, and as a result in mid-March we announced that we expected our full-year performance to be at the lower end of the guidance we provided in January 2005. The company's analysis of recent market trends, which include the prospect of higher and sustained gasoline prices and continued aggressive pricing actions by competitors, have led us to conclude that further challenges lie ahead."

First-quarter earnings per share are expected to exceed previous guidance of $0.25 to $0.35, but Ford now expects 2005 earnings per share of only $1.25 to $1.50 before special items, down from its previous guidance of $1.75 to $1.95. Management also said automotive operations this year will likely be no better than breakeven before taxes and special items, in contrast to the previous goal of $1.5 billion. The company is slated to report first-quarter earnings April 20.

Standard & Poor's cut its outlook on Ford debt to negative from stable, reflecting heightened concerns in the wake of the significantly revised earnings and cash flow guidance for 2005.

"We now view the rating as weak," said S&P analyst Scott Sprinzen. "The rating can tolerate several quarters of weak profitability and cash flow, but only under the assumption that financial performance will improve to more satisfactory levels thereafter."

Although Ford is expected to maintain strong liquidity, he said that is not sufficient to offset heightened concerns about its competitive position and business prospects.

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