CSK on tap; L-3, Barnes, Manor Care, FTI, Conseco later in week; Ivax in quandary on Teva merger

By Ronda Fears

Nashville, July 25 - Convertible traffic on the primary side of the market picked up sharply Monday with a six-pack of new deals now on the table for this week. Secondary flow was described as light, however, even in Teva Pharmaceutical Industries Ltd. and Ivax Corp. on Teva's $7.4 billion purchase of Ivax.

Teva's purchase of Ivax, a union of the top two generic drug names, created widespread confusion centered on the treatment of the Ivax convertibles - four issues that total upward of $1.5 billion, only one of which has takeover protection of any kind.

At first blush, the reaction among holders of Ivax convertibles was to head for the doors on the threat of ending up with issues linked to an all-cash merger transaction, as suggested by Merrill Lynch convertible analyst Tatyana Hube.

"I am staying the hell away from this mess," said one convertible hedge fund manager in Connecticut.

A buyside analyst at an outright shop said, however, "I think the Ivax bonds should be up. Teva bonds may weaken a little [because it is a] credit event as Teva has to raise additional funds/debt to fund the cash portion."

Indeed on an outright basis, Teva's convertibles were off 0.25 to 0.50 point while the Ivax issues were up by several points, but traders said there was little to no activity in the Ivax bonds. Teva shares added 7 cents on the day, or 0.22%, to $31.23 while Ivax shares surged $2.29, or 10%, to end at $25.17 versus the merger terms that value Ivax shares roughly at $26.00 each.

Merrill sees all-cash outcome

Merrill's Hube said in a report Monday that Ivax convertible holders will essentially get whatever the shareholders don't choose and since stock is the most likely option for shareholders, that would leave them being involved in an all-cash transaction.

Hube said the Ivax convertibles will become convertible into whatever consideration "non-electing" Ivax shareholders will end up getting. Therefore, if the Teva stock price stays above $30.69 before the compensation election deadline, and all electing Ivax shareholders choose all stock, the non-electing shareholders would end up with an all-cash merger consideration.

The all-cash conversion consideration for the Ivax convertibles would happen, she said, despite the fact that the electing Ivax shareholders would then end up getting only about half of their merger consideration in Teva stock and half in cash, per the merger deal's restriction on total stock and cash payouts.

"This is due to the fact that the key determinant of the convertibles' post-merger treatment is based on what the Ivax electing shareholders choose, not what they end up getting as their merger consideration," Hube said.

Other sellside analysts disagreed with Hube's analysis, but a source familiar with the merger negotiations between Teva and Ivax, as well as the indentures on the Ivax convertibles, said her conclusion was "not inconceivable."

Hedged holders nowhere to run

An all-cash transaction would not be desirable for convertible arbitrageurs sitting on a short position in Ivax shares as the stock zoomed on the news, or looking at being involved in the Teva story because those shares also gained.

"There's no way to cover yourself," said a convertible hedge fund manager.

And the option of converting the Ivax bonds into stock to become an "electing Ivax shareholder" rather than "non-electing" one as a convertible holder was not an option available on all the outstanding four issues, analysts said. Besides, one sellsider said that holders could still end up shoved into a position of taking cash in the merger, which would be costly from a tax liability and/or capital gains standpoint.

Some hedge guys even looked at putting on a risk arb position, but that circled back to an exit door, too.

"Yeah, there was a risk arb trade but it was a 1 point spread and the annual return was less than 4%," said one buyside manager whose firm has both a convertible arb and risk arb strategy. "So, yeah, there was a trade there, but why bother. It was so small, if the wind blew the wrong way just a little bit it would screw you up."

Thus, the upshot, said one sellsider, was a sense that "you might be better off selling the bonds."

L-3 terms anticipated Tuesday morning

L-3 Communications Holdings Inc. announced a $500 million 30-year convertible offering Monday alongside plans to sell $1 billion of 10-year straight junk bonds, both for Wednesday's business, to help fund its $2 billion acquisition of The Titan Corp.

Price talk on the convertible is expected to emerge early Tuesday, according to market sources. Also Tuesday, L-3 Communications is slated to report financial results, with a conference call scheduled at 2 p.m.

S&P has rated the new L-3 convertibles and straight bonds at BB+, and put both bonds on negative watch.

In June, on the Titan acquisition news, S&P put L-3's BBB- corporate credit rating on negative watch, citing potential deterioration in its financial profile from the proposed debt-financed acquisition outlay, plus the assumption of $680 million of Titan debt - $200 million of which L-3 has taken out with a tender offer.

L-3 had just been lifted from junk territory in January by S&P on the defense electronics contractor's improved diversity, rapidly growing earnings and cash flow. S&P also noted that a significant portion of L-3's increases in revenues and profits in recent years was driven by acquisitions, but said organic growth also has been solid due to the favorable environment for defense spending.

On the news, L-3 shares gained 79 cents, or 1.02%, to close Monday at $78.33.

FTI coupon talk may come Tuesday

Convertible players were anticipating a coupon range to emerge on FTI Consulting Inc.'s $125 million convertible bonds Monday, but that guidance is now seen coming until Tuesday, too. A sellside source working on the deal said the yield talk will probably emerge late Tuesday, or, if not, by early Wednesday.

The six-year, non-callable convertibles are expected to price with an initial conversion premium of 27.5% to 32.5%. The convertible is scheduled to price Thursday after the market close concurrently with $175 million of straight junk bonds.

Goldman Sachs and Banc of America Securities LLC are joint bookrunners of the convertible.

In late April, the Annapolis, Md.-based consulting firm amended its credit facility, adding a $50 million term loan B due Sept. 30, 2008 to the previously $225 million credit structure. Those proceeds were earmarked to repay revolver borrowings, and the balance may be used for future acquisitions, stock repurchases and general working capital purposes.

FTI Consulting focuses on three areas - forensic and litigation matters, corporate finance/restructuring and economic consulting services. The stock closed Monday off 32 cents, or 1.34%, at $23.56.

CSK on tap as quick-sale deal

CSK Auto Corp. was the only deal launched with a short marketing period, expecting to price the $110 million of 20-year convertible notes - talked to yield 3.25% to 3.75% with a 27.5% to 32.5% initial conversion premium - after Monday's close.

The offering includes a call spread overlay and warrant options arrangements with the underwriters, and up to $25 million of proceeds also are earmarked for stock buybacks.

Moreover the convertible is part of a refinancing package for CSK's outstanding $252.5 million bank facility. In addition to the convertible, the company has a proposed new $250 million senior secured revolving line of credit, which could be increased by another $75 million.

In April, CSK (B+/stable) announced it will postpone the release of fourth-quarter and year-end 2004 financial results due to the review of its lease accounting practices and a potential voluntary change of its inventory accounting method that might require a restatement of prior periods.

CSK shares Monday dropped 66 cents, or 3.58%, to $17.76.

Barnes Group no thrill, yet

Barnes Group Inc. launched an $85 million convertible talked to yield 3.25% to 3.75% with a 20% to 25% initial conversion premium with pricing anticipated after the market close Tuesday.

"I sort of like the story," said a convertible hedge fund manager. "But if the Fed keeps bumping up interest rates maybe this doesn't look so good six months from now. Or, maybe it does. I think I'll take a pass right now and maybe have another look later."

The 20-year notes will be non-callable for 5.5 years. There are puts in years 5.5, 10.5 and 15.5. There is a 120% contingent payment trigger and a net share settlement feature.

Proceeds are earmarked to repay a bank revolver, the company said, and any remaining proceeds will be used for further debt reduction, capital expenditures, working capital and possible acquisitions.

Barnes Group, based in Bristol, Conn., makes precision metal components and assemblies for a wide variety of industries, including aerospace, utilities and telecommunications.

On the convertible offering, Barnes shares fell $1.43 on Monday, or 3.72%, to $34.69.

Conseco plans convertible, loan

Conseco Inc. launched a $300 million convertible Monday as part of an effort to refinance its bank debt. The insurance company, which emerged bankruptcy in the fall of 2003, also is scheduled to launch a new $475 million term loan on Tuesday, part of its plan to reduce its current $767 million senior secured credit facility.

Carmel, Ind.-based Conseco said that as part of the new term loan it plans to cut interest costs, relax financial covenants and increase flexibility to enter into capital markets transactions.

Banc of America Securities and JPMorgan also are lead arrangers and joint bookrunners in connection with the bank debt transactions.

There is a $30 million greenshoe available on the convertible offering.

Almost exactly a year ago, the surprise resignation of Conseco chief executive officer William Shea and lowered guidance from the company sparked market chatter of a merger or takeover.

Conseco shares Monday added 12 cents, or 0.55%, to end at $21.77. The Conseco 5.5% mandatory convertible due 2007 added 0.0625 point to 27.625 bid.

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