LSI Logic drops, Agere climbs on merger; Reckson mum on new offer; Bunge gains; Ford unveils deal

By Kenneth Lim

Boston, Dec. 4 - Merger and acquisition activity dominated an otherwise slow market on Monday, with LSI Logic Corp. and Agere Systems Inc. going in separate directions after announcing a $4 billion all-stock merger.

LSI Logic fell outright, while Agere improved over concerns that LSI Logic may be buying too much for the other company.

Reckson Associates Realty Corp. did not trade, but holders of the convertible got a surprise on Monday when billionaire Carl Icahn changed his previously all-cash bid for the company into a less-attractive $4.3 billion offer of cash and American Real Estate Partners LP convertible preferreds. The new offer makes it less certain where the company is headed, and how convertible holders will be affected, market sources said.

Meanwhile, Ford Motor Co. said its previously announced $3 billion fund-raising plans will come in the form of convertibles. That offering is expected to price Wednesday.

Also launching deals were real estate investment trusts Acadia Realty Trust and First Potomac Realty Trust, each of which is planning $100 million deals expected to price Tuesday after the market closes.

Elsewhere in the convertible bond market, Bunge Ltd.'s recently priced 4.875% convertible preferred gained about ¾ point on Monday on a generally positive session for convertibles.

The convertible was quoted at 103.625 bid, 104.125 offered against a stock price of $71. Bunge stock (NYSE: BG) closed at $70.90, up by 1.31% or 92 cents. Bunge is a White Plains, N.Y.-based agribusiness and food retail company.

"That's been more actively quoted than it's been in quite some time, so that's pretty good," a sellside convertible bond trader said.

"It was just offered for days after it was priced, nobody really wanted to buy. But today it's seen a number of bids, which is good. The market's just terrific, stock's terrific right now."

LSI up, Agere down on deal

LSI Logic's 4% convertible due 2010 fell about 5 points outright after the company agreed to buy Agere in a stock swap valued at about $3.3 billion as of the end of trading Monday.

The LSI convertible was marked at 103.25 bid, 103.5 offered against a stock price of $9.30. LSI Logic stock (NYSE: LSI) dropped 13.64% or $1.44 to close at $9.12.

But Agere's 6.5% convertible due 2009, but callable in June 2007, improved about 1 point outright, marked at 102.125 bid, 102.375 offered versus a stock price of $19.75. Agere stock (NYSE: AGR) closed at $19.30, an 8.49% or $1.51 gain.

"We did see some LSI and AGRs trading today," a sellside convertible bond trader said. "LSI is down a few points. There's some concern that LSI is paying too much for Agere, although credit-wise there isn't very much of a problem."

LSI Logic on Monday offered 2.16 shares of its common stock for every Agere share. LSI will issue 379 million shares to fund the acquisition, but also buy back $500 million shares of common stock. The deal is expected to close in the first quarter of 2007.

LSI Logic, a Milpitas, Calif.-based maker of data storage chips, expects the merger to be dilutive to earnings per share in 2007, but accretive in 2008 on estimated cost savings of at least $125 million. Allentown, Pa.-based Agere also makes semiconductor chips.

A buyside convertible bond trader expected the deal to go through, citing the sharp gains in Agere's common stock.

"It seemed like the market agreed with it," a buyside convertible bond trader said.

Standard & Poor's on Monday affirmed its BB- corporate credit rating for LSI Logic, and raised the outlook to positive from stable.

The credit ratings agency said the merger will broaden LSI Logic's customer base and could provide operating cost savings. It could also enhance LSI Logic's business position with some key customers, S&P said.

Reckson's new offer disappoints

Holders of Reckson's 4% convertible due 2025 stayed on the sidelines on Monday amid disappointment that a bid for the company did not offer as much cash as expected.

The convertible, which did not trade Monday, was last seen at about 121.75 versus a stock price of about $48.40 on Nov. 30. Reckson stock (NYSE: RA) fell 4.87% or $2.34 to close at $45.75 on Monday, after Icahn-controlled American Real Estate revised its offer to $1 billion in cash and $3.3 billion in preferred stock convertible into American Real Estate common shares, instead of the earlier all-cash offer by Icahn and his two partners, who have withdrawn from the bidding. The preferred stock in that deal will pay a dividend of 5% and have an initial conversion premium of 30%. Icahn controls about 90% of American Real Estate.

"It's disappointing," a sellside convertible bond analyst said. "I don't think this is really the way anybody expected it to play out."

The analyst said Reckson shareholders are unlikely to be happy about the prospect of owning American Real Estate convertible preferreds.

"It is publicly traded, but it's not going to be very interesting to convert into," the analyst said. "And it's going to convert into a common stock that you'll not really be able to hedge or borrow...So it's not going to be very attractive."

The analyst said there was no "short answer" as to how the new offer will affect convertible holders. SL Green Realty Corp. also has a $4 billion cash-and-stock offer on the table, comprising about $2.8 billion in cash and the rest in SL Green common stock. SL Green has said it will not match Icahn's offer, but the less attractive new offer by Icahn could give the SL Green bid another chance at success, the analyst said.

"Their cash and stock offer might not be that much worse just in dollar terms that Icahn's, and there's a shot that they may still win it," the analyst said.

"By if there's a difference in taxability of the merger consideration, that might make a difference as well. You'd have to weigh the two competing bids and see what they're worth, and see how the Reckson bonds fare in terms of applying the takeout protection."

The analyst said analyzing the takeout protection is further complicated by the fact that SL Green could opt out of paying the takeover make-whole premium if it wins its bid because it is a public acquirer. American Real Estate is also publicly traded, but with Icahn controlling 90% of the company, it could be questionable as to whether the company can also be considered a public acquirer.

Ford launches deal

Ford's anticipated mammoth $3 billion offering of 30-year convertible senior notes was launched Monday, with pricing expected on Wednesday after the markets close.

Ford's offering is talked at a coupon of 4.75% to 5.25% and an initial conversion premium of 23% to 27%. The notes are offered at par.

There is an over-allotment option for a further $450 million.

Citigroup, Goldman Sachs, JP Morgan, Deutsche Bank, Lehman Brothers, Merrill Lynch, Pierce, Fenner & Smith and Morgan Stanley are the bookrunners of the registered off-the-shelf offering.

Dearborn, Mich.-based Ford, an auto maker, said on Nov. 27 that it was raising money through the convertible offering and another $15 billion of senior secured debt to address near- and medium-term negative operating-related cash flow, fund restructuring and to provide a liquidity cushion against unexpected events.

Ford stock (NYSE: F) slipped 2.41% or 19 cents to $7.70 in after-hours trading on Monday after the deal was launched.

More REITs to issue

Acadia and First Potomac also announced deals on Monday, with pricing expected Tuesday after the market closes.

Acadia's $100 million of 20-year convertible senior notes is talked at a coupon of 3.5% to 4% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $15 million.

Merrill Lynch and Lehman Brothers are the bookrunners of the Rule 144A offering.

Acadia, a White Plains, N.Y.-based real estate investment-trust focused on retail properties, plans to use the proceeds of the deal to repay outstanding debt, fund capital commitments and for general purposes.

First Potomac is also offering $100 million of new paper. The planned five-year exchangeable senior notes are talked at a coupon of 4% and an initial exchange premium of 20% with a reoffered price of 99.25 to 99.75.

There is an over-allotment option for a further $15 million.

Wachovia is the bookrunner of the Rule 144A offering.

First Potomac, a Bethesda, Md.-based real estate investment trust that owns industrial and flex properties in the Washington metropolitan area, Virginia and Maryland, will use the proceeds of the deal to repay outstanding debt, fund hedging transactions, and for general purposes, including future acquisitions.

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