Electronic Data climbs on buyout rumors; RAIT upsizes, improves on debut; Franklin gains in light volume

By Kenneth Lim

Boston, April 13 - Electronic Data Systems Corp. gained outright on Friday on unconfirmed rumors that it could be the target of a leveraged buyout.

Meanwhile, RAIT Financial Trust gained on its first day of trading amid healthy demand for its upsized offering, but activity came mostly in the morning on a generally slow day for the convertible market.

Franklin Bank Corp. also improved slightly despite a weak stock and concerns about the company's credit profile.

Electronic Data gains on rumors

Electronic Data's 3.875% convertible due 2023 improved about 2 points outright on speculation that the company could be taken private.

The convertible was 104 versus a stock price of $28.50 on Friday. Electronic Data stock (NYSE: EDS) gained 2.3%, or 64 cents, to close at $28.51.

"EDS was really active today," a sellside convertible trader said. "They've been active all week because of rumors that they could be in an LBO. I don't know if it's true."

Electronic Data did not comment on the rumors. The company is a Plano, Texas-based provider of information technology and business process outsourcing services.

A sellside convertible analyst said there is no indication at the moment whether there is any truth to the rumors.

"It's an interesting company with an improving story, but I wouldn't say that they're a clear LBO target," the analyst said. "Their stock hasn't moved much over the past year, but it's still pretty expensive. We've been seeing a bit of private equity activity lately, so it's not surprising that some people will be trying to figure out which is the next one. I would be a little cautious."

The analyst said the convertible did not have a make-whole premium feature in its takeover protection, but it did have a change-of-control put that would kick in if the company was privatized.

"But these have been trading above par and they're still above par now, so the put probably doesn't make too much sense at this point," the analyst said. "I think some of the hedge guys could be hurt because of this, but it's still too early to know how everything will play out. The stock's up but it hasn't gone up by that much, which is probably because it's still not clear whether there's really any kind of deal in the works. The stock could easily go back down to $27 on Monday."

RAIT improves on debut

RAIT's new 6.875% convertible senior note due 2027 improved slightly on Friday after the deal was upsized amid healthy interest.

The convertible was 100.25 bid, 100.75 offered against a stock price of $27.35 early Friday. It was offered at par. RAIT stock (NYSE: RAS) closed at $27.86, up by 1.9% or 52 cents.

"Most of the trades were in the morning," a sellside convertible trader said. "The stock was up in the afternoon, but the converts were quiet."

RAIT priced the $350 million deal on Thursday after the market closed to yield 6.875% with an initial conversion premium of 27.5%. The deal was talked at a coupon of 6.75% to 7.25% and an initial conversion premium of 25% to 30%.

The size of the deal was originally $275 million with an over-allotment option for a further $50 million. The greenshoe is now an additional $75 million.

Bear, Stearns & Co. was the bookrunner of the Rule 144A offering.

RAIT, a Philadelphia-based real estate investment trust that provides debt financing options to the real estate industry, said it will use the proceeds of the deal to concurrently buy back up to $75 million of its common shares and to fund general purposes.

"I thought it was OK," the trader said. "It looked like it may have been a little cheap yesterday, but because they upsized it and priced it at the rich end, it may have taken a lot of the attractiveness out of it."

The trader said the deal may have been a concern for some investors worried about the company's exposure to the troubled subprime mortgage sector.

"One of the issues here is that you're talking about a credit that could fall apart," the trader said. "They are paying a big coupon, but that's not going to matter if the company has deeper problems."

A buysider whose firm received an allocation thought that the deal still looked attractive, and its gains may have been dampened by broader market sentiments.

"It definitely finished OK," the buysider said. "For right now we're holding...I think we're happy with the allocations. Right now we definitely have a position in it. It was not flipped or anything like that. Compared to some of the deals that came out in the middle of last month, this one I think priced a little bit better. I think it's tough for anything right now to get bid up too much."

Franklin struggles in start

Franklin's new 4% convertible senior note due 2027 gained slightly on Friday after the deal priced at the cheap end of talk, overcoming a weak stock and concerns about the company's credit profile.

The convertible, which was offered at par, traded as high as 100.375 against a stock price of $15.80 at the open but was seen as low as 99.5 in the Street. Franklin stock (Nasdaq: FBTX) eased 1.21%, or 19 cents, to close at $15.51.

Franklin priced the $100 million deal on Thursday after the market closed with an initial conversion premium of 40.127%. The deal was talked at a coupon of 3.5% to 4% and an initial conversion premium of 40% to 45%.

There is no over-allotment option.

RBC Capital Markets was the bookrunner of the registered offering.

Franklin, a Houston-based bank, said it will use the proceeds of the deal to pay part of the purchase price of the First National Bank of Bryan in Bryan, Texas.

Despite the gains, interest in the deal was limited, market observers said.

"I know a lot of people who normally are involved or they've got their hands in the water, but I haven't seen anything about it today," a buysider said.

A sellsider said the initial conversion premium was too high for the company.

"This is a bank," the sellsider said, calling the premium "ridiculous."

Another convertible trader said the Franklin deal also raised concerns about the company's subprime exposure.

"This one also looked like it has some subprime risks," the trader said, "except its coupon isn't as high as the RAS."

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