First Data deal to buy Concord blows up; Grey above par out of gate, but off from gray market

By Ronda Fears

Nashville, Oct. 23 - It was quiet in most of the convertible universe Thursday, but in the last minutes of the session lots of hedge funds were frantically unwinding positions in Concord EFS Inc. as its acquisition by First Data Corp. hit a major obstacle with anti-trust authorities.

Otherwise, convertible dealers said there was some activity in semiconductor issues, Lucent Technologies Inc. and Xcel Energy Corp.

Some action is anticipated for Friday in Nortel Networks Corp., dealers said, as the company announced it would restate financials for three years past, with a positive impact, after it reported profits in line with expectations on Thursday and echoed other telecoms with a positive outlook.

Grey Global Group priced an upsized deal of $125 million, boosted from $100 million, with a 5% handle, up 35% - aggressively outside tightened guidance. It closed at 101 bid, 102 offered, but had been bid 3 points over par in the gray market before pricing.

Grey shares ended down by $15, or 2.11%, to $697.

By the end of the session, First Data was the big news of the day, however.

First Data's $7 billion bid to buy Concord was challenged by the U.S. Justice Department, saying it would monopolize the PIN debit networks and ultimately could lead to higher consumer prices.

"This merger of the two of the three largest PIN debit networks will lead to higher prices to merchants, forcing them to pass on those price increases to many consumers throughout the United States in the form of higher prices for general merchandise," Hewitt Pate, head of the antitrust division of the Justice Department, said in a statement.

First Data and Concord, in a joint statement, characterized the challenge as "inaccurate and ill-advised" and vowed to vigorously defend the merger plan. They said they want a quick resolution, well in advance of the Jan. 31 termination date for the transaction. Both said they plan to proceeds with respective shareholder meetings next Tuesday.

The late afternoon headlines jolted lots of hedge funds that had taken positions in Concord, however.

"FDC's deal blew up so all the arbs were unwinding positions," said one sellside source.

Concord shares plunged $2.58, or 19%, to $11.

First Data's 2% convertible due 2008, however, gained 0.75 point to 105 bid, 105.25 offered on the stock's move, traders said. First Data shares ended up 70c, or 1.95%, to $36.60.

Everyone didn't abandon the situation immediately, however.

"We still have a position. We'll look at it tonight and then make a decision," said a source in the risk arb community, a hedge fund based in New Jersey, who also manages considerable investments in convertibles.

"The whole Street is caught up in this. For all intents and purposes, this deal could still get done, though.

"The solution to solving this problem has been known from the outset: FDC would have to divest its NYCE network. The [challenge] was filed based on the combination of the NYCE network with Concord's STAR network.

"Clearly a problem came up. The question is what went wrong in the negotiations with the Justice Department, can the deal be salvaged?"

The headlines alone, though, sparked a massive unwinding in Concord shares. Some 15.5 million shares were dumped, causing the 19% decline in the stock, compared to the three-month average of 4.72 million shares.

First Data and Concord agreed, though, that the Justice Department was fixated on the combination of the NYCE network, which is majority owned by First Data, and the STAR network, owned by Concord.

"While those networks carry PIN debit transactions at both the point-of-sale and ATMs, the DOJ's complaint is limited to the alleged market for PIN debit services at the POS," said First Data and Concord in their joint statement.

"First Data has continuously stressed that this merger is about choice, voice and innovation: Greater choice for consumers and merchants through the expansion of PIN debit; greater voice for merchants and banks in shaping the developing of new products; and greater scale that will result in lower prices and enable investment in innovation to the benefit of the payments marketplace as a whole."

Charlie Fote, chief executive of First Data, said the opposition could have severe detrimental impacts in the payments marketplace.

"It seems that the DOJ has either misinterpreted or ignored both rapidly changing industry dynamics as well as a common-sense interpretation of a marketplace that clearly encompasses both PIN and signature debit," Fote said.

"For instance, they seem to have ignored recent wins by competitors for some of the largest banks in the U.S.," Fote added, referring to the Wells Fargo & Co. and Wachovia Corp. announcement earlier this week that they selected Visa for PIN-based debit contracts.

"I find it ironic that the DOJ is acting against a transaction where the combined company would handle less than 45% of PIN debit transactions, when only two years ago, the DOJ approved Concord's acquisition of STAR, which resulted in Concord handling approximately 60% of exactly the same transactions," Fote continued.

Before the open Wednesday, Concord reported third quarter earnings slipped 1.8% on charges related its proposed acquisition by First Data. The company posted earnings of $92.6 million, or 19c per share, compared with $94.3 million, or 18c per share, a year earlier. Excluding the charges, Concord said earnings for the quarter grew 17% to $102.1 million, or 21c a share.

Also, Concord boosted its projection for merger-related expenses for the year, excluding fees payable upon closing of the First Data deal, to $20 million to $23 million compared to an estimated $15 million to $18 million in July. Concord still sees 2003 earnings per share of 75-79c, excluding charges.

Last week, First Data reported third quarter net income rose 5.4%, on strong revenue growth at Western Union, to $360.9 million, or 49c a share, from $342.5 million, or 45c a share, a year before.

Excitement elsewhere in convertibles was slim.

Grey Global Group's new deal was upsized to $125 million from $100 million and priced to yield 5.0% with a 35% initial conversion premium - aggressively outside of price talk that had been tightened during the one-day marketing period.

Originally, guidance was for a 5.0% to 5.5% coupon and 23% to 27% premium. That was revised to 5.0%, up 28-32% before pricing.

"It was pretty busy this morning, it seemed a lot of the Grey deal got flipped around," said a buyside convert trader in New York.

"Then this afternoon it seems to have gotten very quiet, very quickly. It's Thursday, though, people begin to start thinking about the weekend coming up."

Some activity could be stirred up, though, on Friday by Nortel's restatement, market sources said.

After reporting earnings that were "very satisfying," as one sellside trader put it, Nortel said it plans to restate its last three years of financials to correct nearly $1 billion worth of accounting mistakes - positively.

Nortel said, however, the "principal expected impacts of restatement" will be a reduction in net losses for 2000, 2001 and 2002, and an increase in shareholder equity and net assets. The company posted a third quarter profit of $179 million, or 4c a share, on revenues of $2.27 billion, and said it expects sequential revenue growth in fourth quarter and hopes to post a profit for the year.

The company said the restatement stems from booking restructuring costs that resulted in $31 billion of net losses and some 60,000 job cuts since 2000. Nortel said an early review found that about $900 million of liabilities carried on its previously reported balance sheet as of June 30 should be released into prior periods in the restatements.

"It's hard to say which way this [Nortel] will go tomorrow," said a sellside convertible market source.

"By the looks of what's happening in the stock, it won't be good. Any hint of impropriety, restatements, audits, or the like, is a kiss of death. If it turns out okay, then people will get back in. Before the outcome, though, everyone sells on the news."

Nortel's 4.25% convertible due 2008 lost 0.5 point on the day to 93.25 bid, 93.75 offered while the stock dropped 21c, or 4.52%, to $4.44 and the shares were weaker in after-hours trading. Nortel's mandatory sank 3.5 points to 78.5 bid, 79 offered.

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