Medtronic pat on 16% dividend boost; Kulicke & Soffa snubbed; Per-Se at 101.5; Rite Aid higher

By Ronda Fears

Nashville, June 24 - Kulicke & Soffa Inc. was in the market Thursday with a tiny $65 million offering that caused quite an uproar as potential buyers balked at its takeover protection, after having recently been stung in the Kroll Inc. and Mandalay Resort Group situations.

In addition, indicative terms were viewed too expensive and even with the bonds reoffered at 98 and sweetened to 1%, up 23% - versus original talk of 0.5% to 1.0%, up 27% to 32% - buyside sources said the Kulicke & Soffa deal was being snubbed.

It was the second convertible deal to be reoffered below par by the underwriter in as many days, after not seeing such a deal in the market for several months following heavy use of the practice last year. American Financial Realty Trust's overnighter that emerged Wednesday after the close was the first.

American Financial Realty's $300 million deal - a 4.375%, up 27% convertible - was said to have been repriced at 98, but buyside traders said it still met resistance in the aftermarket and never topped par.

"The banks [Deutsche Bank and Banc of America on the AFR deal and Merrill Lynch on the Kulicke & Soffa deal] have deep pockets, they can swallow a tine $65 million deal, or, hell, even a $300 million deal, but we get paid to make money, make smart investments," said a convertible fund manager in Boston.

"As for being a smart investment, these just don't pass muster, or they wouldn't be discounted by the underwriters, right?"

Kulicke & Soffa 'egregious'

Indicative terms on the new Kulicke & Soffa deal were "egregious," even after being sweetened, said a source in the outright community on the West Coast. Besides that, buyside sources said the takeover protection language proposed would set a treacherous prototype for underwriters peddling new issues.

"The deal terms are lousy," said a buyside contact in Connecticut. "It would set a dangerous precedent" to change the threshold that defines a change-of-control to trigger protection provisions.

In the new Kulicke & Soffa convertible, several buyside sources confirmed, the make-whole provision would not be triggered unless 40% to 60% of a merger consideration was in cash; there was some discrepancy among sources about the level, which may be due to negotiations with the underwriters.

Typically a change-of-control is triggered when 90% percent of a deal is stock, or 10% in cash.

Another point of contention was an automatic conversion clause triggered if the bonds trade to 140.

"They tried to use the old language that doesn't include the grid specifying make-whole values, which is bad," said a convert trader at a huge hedge fund in New York. "Plus, they wanted to say that a takeover could be up to 60% cash and not trigger the make-whole."

Price talk on the deal was sweetened twice during marketing Thursday and last proposed at 1%, up 23% - versus original talk of 0.5% to 1.0%, up 27% to 32%, which had been bumped to 1%, up 25% earlier.

Buyside sources also said bookrunner Merrill Lynch & Co. was reoffering the bonds at 98. "And it still seems like the deal is struggling," one sources added.

As for the deal being expensive, a sellside trader said the old Kulicke & Soffa convertibles are rich, too - at least the 0.5% issue, which was where the new deal started. That 2008 convert is showing up with terms in the neighborhood of 5.5%, up 80%, but still "look rich," he said. The issue was pegged at 81.75 by another sellside shop.

The Kulicke & Soffa 5.25% convertible due 2006 was quoted at 101 bid, 101.5 offered at one sellside shop but another ticked that issue down to 99.5 bid, 100 offered.

Kulicke & Soffa shares ended the day losing 39 cents, or 3.6%, to $10.44.

Per-Se at 101.5 bid in gray

At the other end of the spectrum, buyers liked the new Per-Se Technologies Inc. convertible. Buyside traders said early afternoon that the small $100 million deal was bid 1.5 points over issue price with an offer at 2.25 points over in the gray market.

After the closing bell, final terms were set on the issue for a 3.25% yield with a 42% initial conversion premium - at the middle of yield talk for a 3.0% to 3.5% coupon but at the aggressive end of premium guidance of 38% to 43%. One appealing feature to buyers was that it was sold on swap with $25 million of proceeds earmarked to buy back stock sold short by note buyers.

Rite Aid up but could slip

Recovering drugstore chain Rite Aid Corp. turned in its first profitable first quarter in three years, beating Wall Street's expectations, and also made some debt buybacks. That pushed the Rite Aid converts higher in tandem with the stock, but a buyside trader said the 4.75% issue could be in store for a drop because of the call coming up.

The Rite Aid convertible added 4 points on the day to 111 bid, 112 offered, he noted, whereas the issue is callable Dec. 4 at 101.9, "so there is a lot of call risk not priced into these bonds."

Since the most recent quarter ended, Rite Aid said it bought back $27 million of its 7.125% junk bonds and "could further de-lever."

The converts were taking the cue from the stock, however, which moved up on the quarterly results, plus the company's boosted earnings outlook.

For the quarter ended May 29, Rite Aid posted profits of $63.3 million, or 10 cents a share, versus the year-ago net loss of $38.8 million, or 8 cents a share, and twice as good as analysts expected.

Based on that, Rite Aid upped its fiscal 2005 net income forecast to between $121 million and $167 million from a previous range of $112 million to $157 million.

But the company also cut its 2004 sales outlook to between $17.2 billion and $17.4 billion, down from an original estimate of $17.4 billion to $17.6 billion. Also, same-stores growth was lowered to between 4.5% and 5.5% from an earlier expectation of 5.5% to 6.5%.

Rite Aid also cut its capital expenditures target for 2005 to $275 million to $325 million, from a range of $300 million to $350 million.

Medtronic

Medtronic Inc. on Thursday boosted its common stock cash dividend by 16% and there was no ripple in the converts, although some players expect a downdraft in reaction.

The Minneapolis-based Medical device maker said the dividend would be .08375 per share, an increase of about 16% over the amount paid in the past four quarters.

"There's no dividend protection, so I was wondering how badly the converts were hit. I couldn't believe it when I was told the converts were holding at a flatline," said a buyside convertible trader.

"I can't believe they won't come in when the dust settles."

Another buyside convert trader said, however, that the increased dividend was only worth about 1/16 of theoretical value, so he wasn't surprised that the bonds were little changed.

The Medtronic 1.25% convertible was quoted at a sellside shop unchanged at 101.625 bid, 102.125 offered. The underlying stock ended up 7 cents, or 0.14%, to $49.12.

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