Mercury Computer at 105; CNET reoffered at 98, trades down; Leucadia ends at 102.5

By Ronda Fears

Nashville, April 22 - Convertible players were glad to have some new paper trickle into the market from the smaller sellside shops - even a few deals that were warmly received. Otherwise, the secondary market was on the rise after a brief markdown that traders said did little to cheapen the universe to the point of sparking a buying spree.

A threesome of new issues was put into circulation at the open by CNET Networks Inc., Leucadia National Corp. and Mercury Computer Systems Inc. Also, Prospect News learned Thursday that Headwaters Inc. is looking at the possibility of a convertible issue to help fund a $200 million acquisition.

"It's encouraging to see companies planning to issue debt - at very low rates - to expand or acquire rather than just to refinance existing debt at lower rates. Thus far in the recovery, American business has been remarkably cautious," said one convertible fund manager in New York who is involved in several strategies.

When asked if the cautiousness of business could be interpreted that the recovery isn't solid, or maybe even is a mirage, he said, "Capital spending, acquisitions, employment are merely lagging. The economy is strong. Don't doubt the economy. It's strong. I am not a Republican. I am telling the truth."

The Leucadia and Mercury Computer deals appeared to be home runs, but one market source commented, "I'm not sure what a home run is in this market."

CNET trades down to 96

Meanwhile, buyside sources said the CNET deal was just too expensive.

CNET's new $125 million of 20-year convertible senior notes were printed with a 0.75% coupon and 46.2% initial conversion premium, then reoffered by bookrunner Citigroup Global Markets Inc. at 98, according to market sources.

At the printed final terms, the 98 reoffer price was right at fair value, according to Deutsche Bank Securities analysts, using a credit spread of 450 basis points over Libor and 50% volatility to model it. At par, in other words, Deutsche analysts put the CNET issue 2% rich.

"I am very keen on the story," said a buyside source in the outright community.

"CNET is definitely on the move with acquisitions, and right now I think that is a good growth strategy. We think the stock is trading at a discount right now, but I'm not a buyer at $15 [the conversion price on the new issue]. Besides that, this deal was just too aggressive with a 0.75% handle."

Before the market open, the new CNET traded at 96, according to market sources.

The new CNET closed at 97 bid, 98 offered. The underlying stock ended off 29 cents, or 2.82%, to $9.99.

"It's nice to see the market refuse to swallow unacceptable terms," said another buyside source. "We did well with the old CNET 5s, bought at a discount."

CNET 5s up on new deal

As a result of CNET's new deal, the old 5% convertible shot up about 2 points to 101.375 bid, 101.875 offered - right at about the call price, according to a sellside shop.

The San Francisco-based internet company plans to use proceeds to redeem the full $113.7 million outstanding on its 5% convertible subordinated notes due 2006 and the balance for general corporate purposes, including business expansions, acquisitions, investments and working capital requirements.

Earlier this month, CNET reported first quarter revenues rose 12% to $63.4 million from $56.6 million in first quarter 2003, an operating loss of $5.7 million versus an operating loss of $14.6 million and net income of $2.9 million, or 2 cents per share, versus a net loss of $15.8 million, or 11 cents per share.

CNET also reviewed several recent acquisitions in the earnings report, including MP3.com from Vivendi Universal, which bought the online music distributor last year for $375 million.

For second quarter, CNET estimates revenues at $65.5 million to $67.5 million, an operating loss of $1.8 million to $2.8 million and EBITDA of $3.5 million to $4.5 million. Also, CNET boosted its guidance for 2004. Revenues are forecast at $275 million to $285 million. Operating income is projected between $3.1 million and $5.1 million with EBITDA of $30 million to $32 million.

Leucadia piques interest

A source familiar with the Leucadia deal said it garnered interest from both hedge funds and traditional outright investors and was oversubscribed. The company, a New York-based conglomerate involved in telecom, banking, manufacturing, real estate, wine making, copper mining and reinsurance, has been characterized as a mini-Berkshire Hathaway Inc., the master investment vehicle of financial guru Warren Buffett - the Oracle of Omaha.

Orders went well, obviously, as the deal was bumped up to $300 million from $200 million.

Leucadia sold the 10-year non-callable convertible to yield 3.75% with a 30% initial conversion premium - at the tight end of yield guidance for a 3.75% to 4.0% coupon and at the aggressive end of talk for a 27% to 30% initial conversion premium.

Deutsche Bank Securities analysts put the Leucadia deal 3.71% cheap at the final terms, using a credit spread of 250 basis points over Libor and 20% volatility, plus accounting for a 0.47% common dividend yield.

Sole bookrunner Jefferies & Co. closed the Leucadia issue at 102.5 bid, 103 offered. The stock ended the day off by $2.26, or 4.26%, to close at $50.74, which indicated fairly strong hedge fund participation in the overnight transaction.

A buyside trader said the new Leucadia convertible traded as high as 103.75 during the session.

"The Plains Resources situation is part of the story," but buyers for the convert "wanted to be part of the Leucadia story," said a market source close to the deal, noting that the company has built up stockholder value nicely over the years.

Leucadia has been butting head-to-head with Vulcan Energy Corp. in an aggressive play for Houston-based independent oil and gas producer Plains Resources Inc., which has rejected Leucadia's proposals twice. Vulcan Energy is a unit of Vulcan Capital, the private investment group of Vulcan Inc., founded by Microsoft Corp. co-founder Paul Allen.

Mercury soars to 105

Buyers flocked to the new Mercury Computer deal, and several dealers noted that there was considerable outright interest in the issue.

Mercury Computer sold $100 million of 20-year convertible senior notes at par to yield 2.0% with a 35% initial conversion premium - at the aggressive end of guidance for a 2.0% to 2.5% coupon and 30% to 35% initial conversion premium.

Deutsche Bank Securities analysts put the Mercury Computer deal 1.62% cheap at the final terms, using a credit spread of 375 basis points over Libor and 37% volatility. Merrill Lynch & Co. analysts had put it 4.84% cheap, at the middle of price talk, using a credit spread of 330 basis points over Treasuries and 35% volatility.

The new issue was last seen at 105 bid, 106 offered after hitting a bid of 101.5 in the gray market just before pricing.

Mercury Computer shares closed Thursday up 85 cents, or 3.8%, to $23.24.

Headwaters may be coming

Down the road, probably sometime in May, Headwaters Inc. is looking at a range of funding options to help pay for its $202 million acquisition of Eldorado Stone LLC, including a convertible issue, Prospect News learned Thursday.

The Utah energy services company will also use existing cash and financing available under its new credit facility with Bank One to fund the purchase. However Headwaters does not expect that junk bonds will provide it with the most attractive terms.

Under its new credit facility, the company is now paying about 3.5% for borrowings based on its current leverage ratio, which should decline once the Eldorado acquisition is completed, said Headwaters chief financial officer Steven Stewart on the company's first quarter earnings conference call.

The company anticipates the cost of financing the purchase of Eldorado should be in the area of the 3.5% it is paying for current bank borrowings. Its new senior secured credit facility - a $50 million term loan due November 2007 and a $50 million revolver - priced with an initial interest rate of Libor plus 225 basis points. The term loan and $20 million of existing cash were used to repay $70 million of senior debt that carried an interest rate of Libor plus 425 basis points.

"If we used convertible debt it would probably be at a [yield] around 3% or a little lower," added Kirk Benson, chairman and chief executive officer. "If we used senior debt it would be 3.5% to 4%."

Headwaters reported Thursday fiscal second quarter net income of $18.6 million, of 55 cents per diluted share, compared with $6.8 million, or 24 cents per diluted share, a year earlier. Revenue increased to $119.5 million from $86.1 million, and operating income rose to $38 million from $16.8 million.

Stewart said the company forecasts earnings per share of $1.70 to $1.85 for fiscal 2004.

"If our acquisitions perform as anticipated, we should be able to finish the year at the high end of the range," Stewart said.

Benson said the company has focused on growth through an aggressive merger and acquisition strategy, noting a strong balance sheet. At March 31, the company recorded a total-debt-to-equity ratio of 0.19 times.

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