Freeport boosted 2.5 times, gains; Komag climbs past 105; Nortel very active, trades past 101

By Ronda Fears

Memphis, March 23 - On an astounding 150% increase to the size of Freeport-McMoRan Copper & Gold Inc.'s jumbo mandatory offering, the convertible market saw $8.67 billion of new paper come to market for the week.

"It was like everyone suddenly started looking at the [Freeport-McMoRan] deal and it just ballooned," said one sellsider.

Another said he had to look twice at the Freeport deal announcement, first thinking it had been seriously reduced to 2.5 million mandatory preferreds from a planned 10 million; instead, it was boosted to 25 million from 10 million; the preferreds were issued at a par of $100.

Elsewhere, Diversa Corp.'s small issue also was bumped up to $100 million from $75 million and Amerigroup Corp.'s deal was boosted to $240 million from $200 million. Komag Inc.'s deal - a raging success in the secondary, reaching 105.625 - had been increased before pricing to $220 million from $200 million.

Appetite for REIT paper, however, continued to show signs of diminishing, as the new Vornado Realty Trust 2.85% convertible bond slipped ½ point to 97 versus a stock price of $122.40; the stock (NYSE: VNO) closed up 4 cents Friday at $122.17. The issue was priced at a reoffer price of 97.5, cut from price talk of 98 to 98.5, on Thursday and was described as trading pretty much sideways to the issue price.

Freeport gains to 102 bid

Interest in Freeport's mandatory swelled remarkably into late Thursday before it priced, sources said. It was boosted to $2. 5 billion from $1 billion and it priced fairly aggressive but still zoomed in the immediate aftermarket.

Freeport sold the three-year mandatory convertible preferreds on Thursday after the market closed at par of $100 with a dividend of 6.75% - the aggressive end of yield talk for a dividend of 6.75% to 7.25% - and an initial conversion premium of 20% - the middle of price talk for an initial conversion premium of 18% to 22%.

The issue traded steadily higher throughout the session Friday, according to one trader, who closed the issue at 102 bid, 102.5 offered with the stock (NYSE: FCX) closed at $62.30, a gain of 29 cents. He remarked that the cheapness of the deal, typical for mandatories, was enticing to many players.

Freeport also raised $2.5 billion from sale of an increased follow-on offering of 41 million common shares at $61.25, discounted from the closing price of $61.91 for the stock on Thursday. The deal was increased from 35 million shares.

New Orleans-based Freeport-McMoRan, a mining concern, intends to use proceeds to repay two outstanding term loans due 2012 and 2014 that were used to help fund its $25.9 billion acquisition of Phelps Dodge Corp., which was closed on March 19.

Komag hits home run

Despite much of the juice getting squeezed out of the Komag deal with the tighter terms than where the deal was initially shopped, it shot out of the gate and several traders referred to it as a "home run." After pricing at par, the issue was sent out for the weekend at 105.625 bid versus $34.25 for the underlying stock.

Komag shares (Nasdaq: KOMG) gained $1.42 cents, or 4.33%, to settle Friday at $34.22.

Well ahead of the final terms, demand for the convertible paper was high and price talk was tightened.

The San Jose, Calif., data storage device maker priced and upsized $220 million of seven-year convertible senior subordinated notes after Thursday's close at par with a coupon of 2.125% and initial conversion premium of 77%.

It priced at the aggressive end of revised price talk, which put the coupon at 2.125% to 2.375% and initial conversion premium at 75% to 77%. Original price talk was for a coupon of 2.375% to 2.875% and an initial conversion premium of 73% to 77%.

The issue was increased from $200 million.

The issue includes embedded warrants equal to 0.75 times the number of underlying shares. If, at the time of conversion, the applicable price of Komag stock exceeds the base conversion price, holders will receive up to an additional 13.2836 shares per note.

Komag said it would use proceeds to repurchase common stock in connection with the offering, to redeem any 2% convertible subordinated notes due 2024 not converted, and any remaining proceeds for general corporate purposes, which may include additional stock buybacks.

Nortel tranches active

Nortel Networks Corp.'s jumbo $1 billion of convertible wasn't upsized but demand was strong for the paper, exemplified by the aggressive price talk and heavy trading when the paper debuted, according to traders.

The Toronto-based telecommunications networking gear maker sold the senior unsecured notes on Thursday after the market closed with the two-part deal pricing within range at par. Both tranches traded past 101.

Tranche A, $500 million of five-year convertible senior unsecured notes, priced with a coupon of 1.75% and initial conversion premium of 30%. It came at the middle of revised yield talk, which put the coupon at 1.625% to 1.875% and initial conversion premium at 30%, versus original talk for a coupon of 1.875 % to 2.375% and an initial conversion premium of 25% to 30%. The issue is non-callable for four years; there are no puts.

Tranche B, $500 million of seven-year convertible senior unsecured notes, priced with a coupon of 2.125% and initial conversion premium of 30%. It came at the aggressive end of revised yield talk, which put the coupon at 2.0% to 2.5% and initial conversion premium at 30%, versus original talk for a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%. The issue is non-callable for six years; there are no puts.

The 1.75% tranche was last seen Friday at 101.125 and the 2.125% tranche at 101.4, both against a stock price of $24.07, which was where the stock (NYSE: NT) closed for a loss of 51 cents, or 2.07%.

Nortel said estimated net proceeds of $980 million, or $1.125 billion if the greenshoes are exercised in full, will be used to redeem at par up to a corresponding amount of its $1.8 billion of 4.25% convertible senior notes due 2008 on or about Sept. 1.

Any remaining proceeds will be invested in money market instruments and used for general corporate purposes.

Diversa deal boosted

Diversa priced an upsized $100 million of 20-year convertible senior notes on Thursday after the market closed at the cheap end of price talk with a coupon of 5.5% and initial conversion premium of 27.5%.

The issue was increased from $75 million.

Price talk had put the coupon at 5.0% to 5.5% and initial conversion premium between 27.5% and 32.5%.

The over-allotment option also was increased to a further $20 million from $11.25 million.

UBS Investment Bank is book-runner of the Rule 144A offering.

The notes are non-callable for five years and may be put in years five, 10 and 15.

San Diego-based Diversa, a developer of specialty enzymes used in alternative fuel, industrial, health and nutrition processes, said it plans to use proceeds to expand its biofuels business, to develop its specialty enzyme business and for general purposes.

The company said that while the offering is not contingent upon its pending merger with Celunol Corp., which was announced in January, if the merger is successfully consummated, it intends to use a portion of the proceeds to fund operations of the combined company, including the planned construction of a demonstration-scale ethanol facility.

Diversa bought Cambridge, Mass.-based ethanol company Celunol for $154.7 million in stock, plus debt financing.

Amerigroup upsizes

Amerigroup priced an upsized $240 million of five-year convertible senior unsecured notes on Thursday after the market closed at the cheap end of price talk with a coupon of 2.0% and initial conversion premium of 32.5%.

The issue was increased from $200 million. Price talk put the deal pricing with a coupon of 1.5% to 2.0% and an initial conversion premium of 27.5% to 32.5%.

The issue is non-callable; there are no puts.

There is standard dividend and takeover protection.

There is a net-cash settlement feature.

Goldman Sachs is bookrunner of the Rule 144A offering.

There is an over-allotment option for a further $20 million, unchanged.

Amerigroup said it also entered into convertible note hedge and warrant transactions to offset dilution from the potential conversion of the notes; the warrants have a strike price of $53.77 per share, representing a 67.5% premium to Thursday's closing stock price.

Virginia Beach, Va.-based Amerigroup, which manages health care plans, said proceeds would be used to repay a portion of its new senior secured credit facility or other financing arrangements in order to post a bond in connection with the appeal of its Illinois litigation.

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