Computer Network bonds crushed as holders flee due to cash use for acquisition

By Ronda Fears

Nashville, April 7 - It was a tough day in convertibles Monday and the lack of flow confirmed that players are struggling to find opportunity. An early rally in stocks fizzled as the day wore on, while an untimely spring snowstorm that struck New York didn't begin to subside until late afternoon.

There were the sporting events or at least sports talk - Syracuse up for the NCAA men's basketball title and the Yankees home opener, which was snowed out Monday and reset for Tuesday afternoon - to fill the hours though.

"There may have been more money made on sports in New York today than convertibles," said one dealer at a major shop, who reported very low volume.

"It was quiet in terms of trading [converts], but it's Monday. There was all the war news and the games, though, so we didn't mind."

John Siebel, head of trading at Silverado Capital Management, said many New York natives working in the market were "psyched" about the NCAA game but a bit disappointed that snow postponed play at Yankee Stadium.

A good deal of the day was taken up with the news on the war in Iraq, too, he said, noting that the stock rally turned around sharply in the afternoon, particularly in the last hour of trading.

"A lot of the busted names are active," Siebel said.

"But the real stuff isn't moving."

The spotlight in convertibles involved the shellacking that Computer Network Technology Corp. took after announcing the $190 million cash acquisition of rival network storage firm, Inrange Technologies Corp.

"The company claims it's good for them. The price is not exorbitant, but if you don't have free cash flow do you really want to take down your cash reserves?" asked Rao Aisola, head of convertible research at Bear Stearns & Co.

"Basically it drains liquidity from the company."

Thus, he added, an argument to own Computer Network last week that was bolstered by strong cash balances is no longer valid.

Indeed, the cash drain was what spooked convertible holders, said Jimmy Giordano of JGiordano Securities.

"The [Computer Network] bonds reacted violently," Giordano said.

Computer Network's 3% convertible due 2007 plummeted 17 points to 67 bid, 69 asked.

The underlying stock closed down $1.95, or 27.66%, to $5.10.

"They are taking this cash and buying an asset that we're not quite sure about, how it's going to mesh together," Giordano said.

"The company must be thinking this is a good investment. It just is not leaving much breathing room [on the balance sheet]."

Computer Network is buying SPX Corp.'s 91% stake in Inrange for $2.31 per share - a 4% premium over Inrange's closing stock price of $2.22 on Friday. It will then acquire Inrange's remaining shares at the same price.

Following the transaction, anticipated to close by midyear, Computer Network said its annual revenues will be an estimated $435 million. The company said it expects the deal to add at least 10% to its earnings per share in the current fiscal year and provide annual cost savings between $10 million and $15 million by early next year.

For fiscal 2002, revenues were $211.5 million, which was a 13% gain mainly driven by acquisitions. The company reported a loss from continuing operations for fiscal 2002 of $28.5 million, or $1.02 per share, compared to a loss from continuing operations of $11.9 million, or 40c per share, for fiscal 2001.

When reporting year-end and fourth-quarter earnings in mid-February, Computer Network said it anticipated revenue in fiscal first quarter in the range of $52 million to $55 million, or down about 10-15% from fourth quarter, due to normal first quarter seasonality, as well as the current uncertain economic outlook for IT capital spending.

For fiscal fourth quarter ended Jan. 31, revenue totaled $61.5 million, a 10% sequential increase from third quarter and up slightly from $60.7 million in year-ago quarter. The company reported a net loss of $21.7 million, or 81c per share, compared to net income of $1.3 million, or 4c per share, in the year-ago quarter.

Computer Network said it ended fiscal 2002 with a strong balance sheet and positive cash flow. Cash and investments were up $6 million to $209 million. Cash flow from operations was a positive $7.9 million.

There are broader implications to draw from the Computer Network event by investors, though, Giordano said.

"This illustrates, the lesson here is that the balance sheet or the cash situation is subject to change suddenly," he said.

Yahoo! Inc. has plenty of cash since its deal last week, but players continued to take down the new convertible. The 0% was quoted closing off 0.5 point to 95.5 bid, 96 asked while Yahoo shares ended off 5c, or 0.2%, to $24.

Power names continued to see action in the other direction, with bids continuing to move the group higher on refinancing hopes.

Calpine Corp. remains the top pick, as it faces the May renewal or rollover of its $1 billion in bank facilities.

Also active were Mirant Corp. and El Paso Corp., along with AES Corp. as the latter two companies are major sources of the optimism.

While Calpine and AES converts were "a couple of points" higher, a distressed trader noted their junk bonds were lower and he said there was some crossover buyers exiting the junk paper to buy the converts.

Calpine's 4% convertible due 2006 was quoted at 75.5 bid, 77.5 asked. Calpine's 8.5% junk bonds due 2011 were quoted down 1.5 points to 66 bid. Calpine shares ended off 6c, or 1.44%, to $4.10.

The AES 4.5% convertible due 2005 was quoted at 82.625 bid, 85.625 asked. AES' 9.375% junk bonds due 2010 were quoted down 1.5 points to 89.5 bid. AES shares closed up 8c, or 1.7%, to $4.78.

Charter Communications Inc. also continued to gain "a little ground" on hopes that it will be able to cinch up a debt reorganization plan, one trader said. A possible $300 million capital injection from Paul Allen will give the company enough breathing room to work on the $18.6 billion debt burden, he said.

Investors were also pleased to see headlines to the effect that Cablevision Systems Corp. has dropped out of the bidding war for Hughes Electronics, parent of DirecTV. Cablevision edged a bit higher, traders noted, but so did News Corp., which is the sole suitor for the General Motors Corp. unit now.

General Motors was higher, as well.

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