GM, Ford rev up in pricing war, Daimler bows out so far; Mercury Interactive plunges, then recovers

By Ronda Fears

Nashville, July 5 - Convertible traffic picked up sharply Tuesday afternoon but traders said it still seemed like a Monday following the three-day weekend, and flow was the proof. Moreover, buyside traders said bids were drying up and their focus turned to stocks and covering interest rate hedges as Treasury yields backed up.

"The benchmark 10-year notes backed up to [a yield of] 4.11% from 4.05% on Friday and it was a pretty volatile day in bonds, so that kept us busy," said a convert trader at a huge hedge fund in New York. "There was lots of news, like from the auto group, and that caused a lot of interest in options, although the [auto] stocks didn't see much going on. But we didn't trade a lot of converts today, I didn't see anything interesting there."

June data from General Motors Corp. suggested that its program to match employee discounts to the general public succeeded in boosting overall sales didn't help GM much, but Ford Motor Co. matched the GM discounts on most of its 2005 models and that propelled Ford's converts nicely. DaimlerChrysler AG is playing along, too, in its U.S. Chrysler division - with a plan due Wednesday - but its euro convert slipped alongside the stock.

Overall another buyside trader said there were plenty of indicated bids with a two-sided market, but not a lot of buying. "Buying is being done by a select group of people," he said. "I'm surprised there isn't some bloodletting going on, but there haven't been any fireworks today."

Rather, a selling tone seemed to prevail, a sellside trader said, who mentioned that there was big seller in the UTStarcom Inc. 0.875% convertible.

"A guy in Baltimore said he would not buy any more converts until the Baltimore Orioles start winning again. They are down 12-2 right now," the sellsider said.

Convert analyst pans GM plan

GM said Tuesday, as its "employee discount for everyone" pricing program was about to expire, that it would extend it until Aug. 1 after reporting a surge in June sales that displaced rivals Ford and DaimlerChrysler

Under the program, which was launched last month, GM boosted sales by 41% in June and gained market share from Ford and Chrysler. But a sellside desk analyst said that because it could also put the squeeze on profits it did not rouse a big response from investors.

"They are not making any money on this. The only benefit is that they are burning off inventory," the convertible analyst said. "It's really a stupid business strategy, if you ask me."

As a result, the GM converts - $25 bonds that are typically big among retail investors - saw very little activity and little price movement on the news. The 6.25% issue added a dime to 21.39 while the 5.25% issue lost 0.07 point to 18.57 and the 4.5% issue was off by a nickel to 24.25 - all on very light volume. Meanwhile, GM stock saw light volume, as well, ending the day up by 12 cents, or 0.35%, to close at $34.83.

One GM convert holder said, however, that the positive angle on the GM plan is that it brings in more potential financing business through General Motors Acceptance Corp., which is its most profitable business.

Credit analysts mixed on GM

The reaction among credit analysts was as mixed as that illustrated in GM's convertibles.

"Although some industry analysts were critical of the cost of the program, we would characterize it as a huge success. Not only did GM regain significant market share, but it also brought new customers to its showrooms, it had a robust sales mix, and it cleared out 2005 inventories," said Gimme Credit analyst Craig Hutson in a report Tuesday.

"Rival domestic automakers are probably kicking themselves after neither Ford nor Chrysler matched [GM's] offer at the beginning of June."

GM (Baa3/BB) saw its market share surpass 30%, well above the 25.7% realized year-to-date, he noted.

Separately, CreditSights analysts Glenn Reynolds and Hitin Anand said in a report Tuesday that "GM's success will still raise questions from the bears, but at least the bulls have a few more answers that help." Yet, the monster month for GM may be overshadowed by record sales in June for Toyota, Nissan and Honda, which were too much "for anyone to get cocky."

Ford yields, 6.5% issue rises

Ford on Tuesday said it will offer employee pricing to the public on its 2005 models starting July 6 and running to Aug. 1, except for its Mustang, Escape hybrid and GT models. Ford didn't get much more of a rise out of investors than GM, the convertible analyst said, but it did see more support in the way of a price move.

"These discount plans are not popular anywhere, GM, Ford or otherwise," the sellsider said. "They just aren't smart."

Ford's 6.5% convertible added 0.30 point to 40.74 but volume was light, as was the case with the underlying stock. Ford shares gained 9 cents, or 0.87%, to close at $10.40.

Gimme Credit's Hutson said Ford (Baa3/BB+) was the most adversely impacted by the GM program, with total sales down 3.2%, trailing expectations. "We are concerned that retail sales fell an estimated 8.2%, and have now declined every month this year," he said.

Daimler euro convert easier

Chrysler said it will unveil its own discount program by Wednesday, but the stock and euro converts slid in negative reaction to its sales data and participation in the price war.

DaimlerChrysler (A3/BBB) reported that June sales for its Chrysler group edged up 1.1%, marking seven consecutive quarters of year-over-year sales gains. And it was viewed as the most resilient to GM's pressure by showing a gain in brand sales of 16% along with a 2% rise in truck sales on strength in the Jeep brand.

DaimlerChrysler shares in the United States lost 38 cents, or 0.94%, to close at $40.10. On the Xetra, the stock dropped €0.20, or 0.59%, to end at €33.56. The UBS 4.35% exchangeable due 2010, which converts into DaimlerChrysler shares, was off a quarter-point to 95.75 bid, 96 offered, a convertible trader in Europe said. But he was bullish on the convert.

"I'm keen to buy the [DaimlerChrysler] convert on any weakness," the trader in London said. "Daimler is the strongest of the big automakers, and if they can withstand the pricing pressure, they will be much more profitable."

Mercury reaction steadies

Buying on weakness helped steady Mercury Interactive Corp. by day's end Tuesday, following a huge sell off in response to the company's reduction to its earnings forecast and news that, in response to a probe by regulators, it had begun looking into previous stock options granted to employees.

Early on, Mercury shares plunged over 5% and its convertibles followed suit, but by the end of the session the stock recovered to a loss of just 25 cents, or 0.65%, at $37.96. The 4.75% convertibles were quoted off by 0.5 point to 98.5 bid, 99 offered and the 0% due 2008 down by 0.25 point at 93 bid, 93.5 offered.

"The retraced almost all of the losses. There were a couple of analysts, at Prudential and Legg Mason, I believe, who put out some pretty upbeat pieces on the stock, so that brought it back a lot," said a sellside desk analyst away from both shops mentioned. "It seemed the reaction was couched as an over-reaction because the shortfall was entirely due to business in Europe."

Bottom line, he said, the suggestion of buying on weakness caught on and Mercury recovered nicely. As for the options investigation, he said that seemed like a minor point. The bigger consensus, he said, seemed to suggest that the company was going to be proactive in a restructuring, which sparked some optimism about the debt issues.

Mountain View, Calif.-based Mercury said it now expects to post second-quarter earnings, before one-time items like merger-related and stock option expenses of 30 cents to 35 cents a share. That is down from its previous forecast calling for 33 cents to 37 cents a share issued. The firm, which develops software used by other companies to test and monitor internet-based applications, cut its revenue outlook to $200 million to $205 million from $205 million to $215 million estimated previously.

Collegiate cheered on purchase

Collegiate Pacific Inc. was cheered on Tuesday after announcing that it is buying a majority stake in Sports Supply Group Inc. from Emerson Radio for $32 million, which pushes its stake to 53.2% of the provider of direct marketing and e-commerce services for sporting goods and physical education equipment.

Dallas-based Collegiate Supply said the deal will add to its earnings in fiscal 2006 and it lifted its profit outlook for the year to between $220 million and $230 million. EBITDA is estimated at $15 to $20 million.

On the news, Collegiate Supply shares rose $1.10, or 10.68%, to $11.40, while Sports Supply shares skyrocketed 40%, or $1.50, to $5.25. Collegiate Supply's 5.75% convertible due 2009 was marked up in tandem with the underlying stock, but a sellside trader said it did not change hands, as "no one wants to sell."

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