Four Seasons springs up on buyout; XM climbs on results, buoys Sirius; Arris silent in gray

By Kenneth Lim

Boston, Nov. 6 - The convertible bond market had a generally dull session on Monday, with Four Seasons Hotels Inc. dominating trading on the back of a $3.7 billion buyout offer.

Four Seasons rose sharply outright after the offer was announced, although hedge investors also stood to collect a premium on their convertibles.

XM Satellite Radio Holdings Inc. rose after the company narrowed its third-quarter loss, and optimism about its sector also pulled up rival Sirius Satellite Radio Inc.

Arris Group Inc.'s planned $225 million offering of 20-year convertibles were quiet in the gray market ahead of its expected Monday evening pricing, although analysts and traders felt the deal appeared to be fairly interesting at talk.

Meanwhile, Hornbeck Offshore Services Inc. and Inland Real Estate Corp. announced new deals after the market closed, with pricing slated for Tuesday.

Four Seasons gains on deal

Four Seasons' 1.875% convertible due 2024 jumped about 12 points outright on Monday after the company received a $3.7 billion privatization offer.

The convertible traded at 124.875 against a stock price of $84. Four Seasons stock (NYSE: FS) closed at $82.50, up by 29.17% or $18.63.

"Everyone dodged the bullet on that one," a sellside convertible bond trader said. "The hedge guys weren't destroyed...For the outright guys, it's up at 124.875 versus $84, what else is there to say?"

Toronto-based Four Seasons said Monday that private companies Kingdom Hotels International and Cascade Investment are offering $82 in cash for every Four Seasons limited voting share not owned by chairman and chief executive Isadore Sharp's family, a 28.4% premium to the stock's closing price on Friday. Sharp's family will retain its 10% stake in the hotel chain and he will continue to run the company. Kingdom Hotels is controlled by Saudi Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, and Cascade is owned by Microsoft Corp. founder Bill Gates.

A sellside convertible bond analyst said the deal seems to work out for all the convertible holders.

"The bonds have climbed quite a bit, so the outright guys should be happy with this," the analyst said. "The offer's at a premium to the conversion price [of $71.64] so it looks like even the hedge guys can get back some cash."

The analyst said the offer stood a good chance of being accepted.

"It's not a small premium that they're offering, and it's not clear if there's someone else interested in the deal who will want to make a higher offer," the analyst said.

Deutsche Bank equity analyst Bill Lerner and Chris Woronka pointed out that the offer values Four Seasons at a forward price-earnings ratio of 44 times estimated 2007 earnings per share.

"These multiples are curiously strong - particularly since there is virtually no underlying real estate," Lerner and Woronka wrote in a note.

"Our sense is that the offer has a high likelihood of moving forward as proposed; we cannot envision any competing bids that could trump the current offer on valuation alone," Lerner and Woronka wrote.

XM, Sirius rise

XM Satellite Radio's 1.75% convertible due 2009 gained a point outright on Monday after the company reported a smaller third-quarter loss.

The convertible traded at 82 against a stock price of $12.85. XM stock (Nasdaq: XMSR) rose 15.63% or $1.78 to close at $13.17.

XM on Monday reported a third-quarter loss of $85.5 million, or 32 cents per share, from $134 million, or 60 cents per share, in the year-ago period. Analysts were expecting 46 cents per share. But the average subscriber churn rate rose to 1.83% from 1.4%, while the cost of adding each new subscriber increased to $93 from $89.

"They beat estimates, so the stock's up," a sellside convertible bond analyst said. "People were sort of expecting the worse for XM, so they probably took this as better news than it really is. The company still has some issues, especially in their costs."

XM's results also helped to pull up Sirius Satellite's 3.25% convertible due 2011, which inched north of par on Monday. The Sirius convertible changed hands at 100.25 versus a stock price of $3.75, while Sirius stock (Nasdaq: SIRI) rose 6.91% or 26 cents to close at $4.02.

"They move together," a convertible bond trader said of Sirius and XM. "That's why Sirius is up. That's just how it works."

Arris quiet in gray

Arris' planned $225 million offering of 20-year convertible senior notes was quiet in the gray market on Monday, although market sources said the deal appeared to be fairly attractive.

The deal, which was expected to price after the market closed, was talked at a coupon of 2% to 2.5% and an initial conversion premium of 35% to 40%. The notes were offered at par. Arris stock (Nasdaq: ARRS) closed at $11.49 on Monday, dropping 9.53% or $1.21 after the deal was announced.

"There's no gray for this, although it looks like it buys out cheap," a sellside convertible trader said. "It'll probably be plus half bid."

There is an over-allotment option for a further $33.75 million.

UBS Investment Bank and Deutsche Bank Securities were the bookrunners of the registered off-the-shelf offering.

Arris, a Suwanee, Ga.-based maker of broadband communications equipment, said the proceeds of the deal will be used for general purposes, which includes future acquisitions.

A sellside convertible bond analyst thought the deal looked about 2% cheap at the midpoint of talk. The deal appeared to be slightly more attractive for outright investors, partly because Arris could be a potential merger and acquisition target, "which if you're outright could be a huge positive," the analyst said.

But the analyst said there were concerns about Arris' acquisition plans.

"They're going to use the money for acquisitions, so that makes people a little nervous, not knowing where they're going to spend the money on," the analyst said. "Also they compete against Motorola and Cisco, and although they've carved out a niche for themselves there's concern they're competing against behemoths."

Another sellside convertible analyst said the deal appeared just over a point cheap at the midpoint of talk using a conservative volatility assumption of around 37%.

"The delta's like a 74.5, with a long call protection," the sellsider said. "I would say that people are probably going to look at the volatility."

The sellsider thought both outrights and hedges could find the deal interesting.

"I think both groups can probably find it somewhat interesting, maybe more toward the cheap end," the sellsider said.

Hornbeck, Inland plan deals

Hornbeck and Inland Real Estate plan to price separate convertible bond deals Tuesday after the market closes.

Hornbeck's $200 million offering of 20-year convertible senior notes is talked at a coupon of 1.625% to 2.125% and an initial conversion premium of 32.5% to 37.5%.

There is a greenshoe option for a further $30 million.

Jefferies & Co. and Bear Stearns are the bookrunners of the Rule 144A offering.

Hornbeck, a Covington, La.-based provider of offshore supply vessels to the oil and gas industry, said part of the proceeds will be used to fund convertible note hedge and warrant transactions. The company also earmarked 30% of the proceeds to buy back its common stock, and for general purposes that could include acquisitions.

Meanwhile, Inland's $150 million of 20-year convertible senior notes is talked at a coupon of 4.125% to 4.625% and an initial conversion premium of 15% to 20%.

There is an over-allotment option for a further $22.5 million.

Wachovia Securities is the bookrunner of the Rule 144A deal.

Inland Real Estate is an Oak Brook, Ill.-based real estate investment trust that owns and operates neighborhood retail centers and community centers primarily in Oak Brook. It will use the proceeds of the deal to buy back up to $50 million of its own common stock, pay back an existing loan with Key Bank National Association and for general purposes.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.