Kinetic shoots higher on takeover; Forest City sells new deal; Peabody, Kodak up with stocks

By Kenneth Lim

Boston, July 13 - Kinetic Concepts, Inc. jumped on Wednesday after the company became a cash takeover target, as a rebound in equity markets offered some relief for convertibles.

Forest City Enterprises, Inc. announced a $250 million offering of seven-year notes. The deal drew decent reviews, although there were some misgivings about the deal's provisional conversion termination feature.

The bulk of the convertible market improved on Wednesday as equities finally stopped their two-day decline after Federal Reserve chairman Ben Bernanke told Congress that the central bank was open to further stimulus measures if the economy and inflation slow further.

"Equities were up today, so that helped convertibles across the board," a sellside convertible trader said.

Most of the names on the screens were higher on the day.

Peabody Energy Corp.'s 4.75% convertibles due 2066 improved by a point outright to trade at 124.5 against a $59.35 common stock price.

The common stock closed at $58.77 on Wednesday, up by 1.43% or $0.83.

Peabody, a St. Louis-based coal mining company, is currently bidding for Australian miner Macarthur Coal in a joint effort with ArcelorMittal.

Eastman Kodak Co.'s 7% convertibles due 2017 were up ¼ point at 84.5 versus a common stock price of $2.80. The common stock was up 1.09% or $0.03 on the day to end at $2.79.

Eastman Kodak is a Rochester, N.Y.-based camera and accessories maker.

Meritor, Inc.'s 4% convertibles due 2027 were up ½ point to trade at 96.5 against a common stock price of $16.15. The Troy, Mich.-based automobile component maker's 4.625% convertibles due 2026 also gained a point to trade at 109.5 versus the same stock price.

Meritor's common stock closed at $15.95 on Wednesday, down by 1.18% or $0.19.

But not all convertibles had a positive session.

Clearwire Corp.'s 8.25% convertibles due 2040 continued to struggle, trading at 86.75 against a common stock price of $3.50.

"That's the lowest price since the bonds were issued [in December]," an analyst noted.

Clearwire, whose shares have been falling steadily since April, is a Kirkland, Wash.-based provider of wireless broadband services.

Kinetic draws takeover bid

Kinetic's convertibles rose sharply on Wednesday after a consortium led by private equity firm Apax Partners offered to take the company private in a $6.3 billion proposal.

The deal, which will include all of Kinetic's debt, will pay Kinetic shareholders $68.50 per share.

Apax made the offer in partnership with pension funds Canada Pension Plan Investment Board and the Public Sector Public Investment Board.

Kinetic may solicit a better offer over the next 40 days.

The company's 3.25% convertible due 2015 traded at 143.75 versus a common stock price of $67.70 on Wednesday, up by about 14.5 points outright.

The shares rose by 5.8% or $3.74 to close at $68.23 on Wednesday.

Kinetic is a San Antonio-based medical technology company.

Investors welcomed the offering, with brisk buying in the name in the aftermath of the offer.

"We've been trading a lot of those today," one sellsider said.

The convertible analysis team at Barclays Capital said in a research note that the convertible was more attractive than the stock, given that convertible holders will be made whole if they convert. Holders are also entitled to a coupon payment if the deal is concluded after Oct. 1.

The relative downside to the deal is that convertible holders' returns are probably limited to about 1.56% if no better bid is found.

"Investors who believe a higher bid for KCI is unlikely to emerge should rotate out of KCI 3.25s convertible bonds into more balanced convertible opportunities, in our view," the analysts wrote. "However, from a risk-arb perspective the bonds appear attractive relative to equity."

Forest City plans deal

Forest City on Wednesday offered $250 million of seven-year convertible senior notes, talked at a coupon of 3.75% to 4.25% and an initial conversion premium of 20% to 25%, market sources said.

The notes will be offered at par, and will be convertible into the company's Class A shares.

There is an over-allotment option for an additional $50 million.

Goldman Sachs & Co., Barclays Capital Inc., Merrill Lynch and Morgan Stanley & Co. Inc. are the bookrunners of the Rule 144A offering.

The issuer may terminate conversion rights of holders after three years if the underlying stock trades about 130% of the conversion price, with coupon make-whole.

Proceeds will be used to pay off reduce existing debt, including $46.9 million of Forest City's Puttable Equity-Linked senior notes due 2011, a $450 million revolver and certain mortgage debt. The proceeds will also be used for general corporate purposes.

Forest City is a Cleveland-based real estate developer.

The deal priced after the market closed at a coupon of 4.25% and an initial conversion premium of 20%. But the size of the deal was increased to $300 million, with the greenshoe yet to be exercised.

"Looks like a decent deal," one trader said. "It's not extremely attractive, but I think they're giving enough to get a good book on the deal."

The use of the proceeds to reduce debt will is also slightly positive.

"They're using it to pay off other debt, so their debt isn't going down, but it's not going up either," the trader said.

One sellsider, however, said the provisional conversion feature may not be liked by everyone because holders' returns will be capped.

"It's going to limit the upside," the sellsider said.

Mentioned in this article:

Kinetic Concepts, Inc. NYSE: KCI

Forest City Enterprises, Inc. NYSE: FCEA

Peabody Energy Corp. NYSE: BTU

Eastman Kodak Co. NYSE: EK

Meritor, Inc. NYSE: MTOR

Clearwire Corp. Nasdaq: CLWR

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