Western Wireless, Alltel soften on merger; GM, Ford, auto suppliers lower

By Ronda Fears

Nashville, Jan.10 - Western Wireless Corp.'s $6 billion takeover by Alltel Corp. became official Monday and the convertibles of both companies came under pressure as the Western Wireless converts are likely to be taken out by the merger and Alltel stock faces considerable dilution.

Terms call for Western Wireless shareholders to get 0.535 share of Alltel stock and $9.25 in cash. Alltel's total cash outlay to Western Wireless stockholders was estimated at $1 billion, plus the company said it planned to use cash on hand to take out some $1.5 billion of Western Wireless debt.

The news heartened holders of other wireless paper - especially that of smaller players in the sector like Dobson Communications Corp.

"The WWCA-AT deal tells you that more deals are coming. Just this morning, the CEO of AT [Alltel] on CNBC said that he expected more deals," said a buyside convert trader at a hedge fund in New York. "I think DCEL [Dobson] has three possible suitors - Cingular, T-Mobile and now AT."

The broader markets were higher Monday and lots of the convertible market was marked higher but dealers said most of the real action in converts moved the paper involved lower.

General Motors Corp. and Ford Motor Co., for example, were easier on remarks from the Detroit car show that GM was still looking to make job cuts in 2005. That, in turn, pressured suppliers like Tower Automotive Inc. and American Axle & Manufacturing Holdings Inc.

Speculation that DirecTV Group Inc. might be considering a satellite radio venture put pressure on Sirius Satellite Radio Inc. and XM Satellite Radio Inc. but late in the session comments from DirecTV executives at a Smith Barney Citigroup conference suggested the company has no thoughts along those lines. Still, traders said Sirius was seen as a takeover candidate by the likes of Viacom Inc. if not its chief rival, XM, and valuations on both companies "seem rich by today's standards."

There was some noise about a new deal popping up Monday but nothing transpired. Meanwhile, a seller was seen in the new Fannie Mae $2.5 billion of perpetual convertible preferreds at 104.75, moving the private placement down a quarter-point from Friday. Fannie Mae shares, however, ended Monday up 17 cents, or 0.24%, to close at $70.17.

Alltel move defensive, painful

Alltel's play for Western Wireless was widely perceived as a defensive measure against the buyer's own vulnerability to a takeover but was painful for Alltel convert holders.

The 7.75% mandatory, a $1.4 billion issue that settles in May 2005, was under pressure along with the common stock, which traders attributed chiefly to the "double whammy dilution" coming down the pike for Alltel stockholders. In addition to the dilution from the mandatory, Alltel is issuing some 60 million shares to Western Wireless stockholders as part of the deal terms.

Alltel's convert dropped 0.5 point to 51.25, while the stock fell $1.37, or 2.44%, to close Monday at $54.75.

Not everyone was selling out of the situation, obviously.

"We already own a boatload of Alltel - in a little pain - but good stock methinks," said a convertible fund manager out West.

But credit analysts warned about the situation, including a negative watch on the ratings by Standard & Poor's. Dave Novosel, analyst at GimmeCredit, said in a report Monday that with Alltel spreads wider by roughly 5 basis points since the Western Wireless rumors emerged last week he would not be inclined to chase the credit.

Alltel could still be a target

Much of the continued interest in Alltel, a sellside dealer said, is that the company remains a potential acquisition target. The downside, he said, is that the company is using so much cash in the Western Wireless deal.

"Alltel is ponying up some $1 billion in cash to the WWCA stockholders and another $1.5 billion to WWCA debtholders," the trader said. "That would be a negative, as the rating agencies agree, but the company would still be appealing to some of the bigger telecoms."

Verizon Communications Inc. was probably the most commonly mentioned suitor for Alltel.

"While we see a takeover of Western Wireless as a defensive move by Alltel, we do not think the acquisition, if it were to occur, would preclude a subsequent takeover of Alltel," said GimmeCredit's Novosel in his report. "The combined entity, with a market cap in the $20 billion range, could still be easily swallowed by Verizon."

Western Wireless call pressure

Even though the Western Wireless converts came in 2 to 3 points further on the Alltel merger news, it was not enough to entice a lot of buying.

"We passed since we did not see the upside at 7 to 8 points of premium. Even at 5 points where it is now, it does not really excite us," said a buyside market source in Connecticut on Monday.

By day's end, the Western Wireless converts were still hovering at about 4 to 5 points over parity, sellside sources said. Western Wireless shares, though, gained another 85 cents, or 2.33%, to $37.37.

Call pressure was a big drawback to the Western Wireless bonds, as Alltel said it would mostly use cash on hand to take out the $1.5 billion of debt assumed in the merger. Analysts said current trading levels leave little room for price appreciation potential.

There is a make-whole provision on the Western Wireless converts, holders point out, but some feel current levels are "just too expensive unless you are just reaching for a better credit in Alltel."

Dobson up as possible target

The Alltel/Western Wireless deal noise caused bonds of other regional wireless service providers - Dobson Communications, among others - to climb a couple of points last week and further on Monday as the Alltel/Western Wireless deal became official.

Dobson's 13% senior exchangeable preferreds shot up 45 points to 555 on Monday and a sellside dealer said there were two huge trades, and possibly just one buyer. The 12.25% senior exchangeable preferreds, however, were unmoved from Friday at 515, he said.

Dobson shares closed Monday off a penny at $1.80.

"We had these a long time ago, not anymore," said a West Coast convert manager. "There's probably an interesting hedge trade. We've been looking at it a bit."

Another buyside source said he was gauging his timing for an entry point into Dobson against his expectations that the company would make a positive pre-announcement on upcoming earnings by this weekend. He said he foresees Dobson fetching as much as $3 to $5 a share, "with all things being equal, and with the number of rural carriers available for consolidation dwindling."

Kim Noland, an analyst at GimmeCredit, in a report Monday pointed out that Dobson and other rural wireless providers lowered guidance in 2004 because of significant losses of roaming revenue, partly because of the merger of Cingular and AT&T Wireless. But, she added that renegotiations in 2005 of roaming agreements with Cingular, even at a lower rate, could be a positive catalyst for Dobson.

On the credit side, convert traders said they expect some tightening, but were more interested in the expected spike in volatility for Dobson shares.

Sirius, XM off on rivalry noise

Sirius and XM both sank on speculation early in the day that DirecTV would enter the satellite radio business, challenging the market now ruled by the two rivals. There was plenty of action in Sirius, at least, convert traders said, because of the ongoing volatility in the name. XM saw less action than Sirius but more than it normally sees, traders said.

XM's 8.25% convertible preferred fell throughout the session, ending lower by 1 point to 57 after trading as low as 56.75 in the day, according to a sellside dealer. The 1.75% convertible bonds dropped about 2 points, another dealer said, to end Monday at about 96.5. XM shares closed off $1.15, or 3.37%, at $32.94.

Sirius shares plunged 6.76%, or 48 cents, to end Monday at $6.62. The Sirius converts dropped in tandem with the stock, losing 8 or 9 points, with the newer 3.25% issue at 153.5 and the 2.5% issue at 168.

"The Sirius [convertible] bonds, at least, rallied off the lows of the day late in the day because of comments from DirecTV," a sellside analyst said, noting that DirecTV chief executive Chase Carey was quoted from the Smith Barney media conference as saying he would leave Sirius and XM to "duke it out" among themselves.

GM jobs cuts weigh on Ford

Headlines from the Detroit car show that GM again will cut its U.S. work force this year pressured all the auto paper with GM converts off about a quarter point and Ford dropping a half point on the news. GM is scheduled to meet with analysts on Thursday.

GM chief executive Rick Wagoner, speaking at a press briefing at the car show Monday briefing, denied a news report that the automaker would cut up to 7% of its U.S. workforce this year but said further workforce reductions are planned. Since the end of 2000, GM's employee count in North America has dropped from 212,000 to 181,000. At the end of third quarter 2004, GM workers in the U.S. totaled 150,000, down nearly 6% from a year before. Last month, GM said it would offer buyout packages in 2005 to some of its 38,000 salaried workers in the United States.

GM shares closed down 51 cents, or 1.31%, to $38.49 and its convertible issues lost 0.35 point.

Ford's 6.5% convertible preferred dropped 0.5 point to 52.3 on heavy volume and the stock lost a dime Monday, or 0.68%, to end at $14.55.

Tower, American Axle lower

Auto parts and components makers continued to suffer at the hands of GM and Ford, too, with Tower Automotive Inc. and American Axle & Manufacturing Holdings Inc. both lower on the headlines from the Detroit car show.

Tower's 5.75% convertible dropped about 2.5 points to 66.625 bid, 68.625 offered, a dealer said, with the stock dropping 12 cents on the day, or 5%, to $2.28.

American Axle also was pressured by negative remarks from equity analysts for both automakers and their suppliers, he said.

The American Axle 2% convert lost 1 point to 88.5 bid, 89 offered, he said. The stock dropped 61 cents, or 2.1%, to $28.44.

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