Titan tumbles as merger plan stumbles; Sicpa prices euro deal

By Paul Deckelman and Paul A. Harris

New York, June 25 - Titan Corp. bonds and shares took a titanic fall Friday, as the San Diego-based high tech defense electronics company's planned merger with aerospace giant Lockheed Martin Corp. appeared to be headed down the tube after Lockheed refused to give Titan more time to work out a settlement with the Justice Department, which is investigating whether Titan paid overseas bribes to get business.

Primary market activity was quiet, with Swiss ink manufacturer Sicpa heard to have priced an offering of seven-year euro-dominated notes. Price talk meanwhile emerged on another European-originated deal, this one dollar-denominated, for Dutch office supplies provider Buhrmann NV.

Titan's 8% notes due 2011 "took a nice fall," a market observer said, quoting the bonds at 102.25 bid, down from prior levels at 109.5.

The bonds had been hovering at stratospheric levels since last September, when it was first announced that Bethesda, Md.-based Lockheed would acquire Titan, a provider of information technology and other services to the government and to defense contractors, in a $2.4 billion deal that included the assumption by Lockheed of $600 million of Titan debt, including the $200 million of 8% junk bonds.

Earlier this year, allegations began surfacing that Titan subsidiaries operating in Saudi Arabia and the West African nation of Benin may have made payments to officials there as a way of drumming up business, in violation of the U.S. Foreign Corrupt Practices Act.

The Justice Department began an investigation, as did the Securities and Exchange Commission. Lockheed twice agreed to an extension of the deadline for completing the merger while Titan attempted to work out a settlement with the government. Along the way, Titan was forced to agree to a lower cash price - $20 per share, or $1.66 billion total, down from the original $22 per share, or $1.8 billion. But as Titan approached a June 25 deadline for reaching agreement with Washington that had been written into the second extension, Lockheed made it known that enough was enough, and there would be no further delays.

With the close-of-business deadline looming late Friday, Lockheed had not officially said anything up to that point, and analyst Mark Jordan of A.G. Edwards & Sons Inc. in St. Louis said that contractually, Lockheed would have the right to either pull out completely - or come back and renegotiate the deal downward again, as it did in April.

"It certainly sounds like if they are going to go forward, it's going to be at a lower price. It sounds like a $20 [per share] all-cash deal from [Lockheed's] vantage point probably ain't gonna happen."

Jordan - who rates the company's stock as a "sell" and considers it speculative in nature - noted that when the original $1.8 billion cash portion of the deal was negotiated back in the summer of 2003, "prices in general in the independent government service companies [sector] were appreciably higher than they are today."

The stock price at that time, a year ago, of what Jordan calls "the average quality governmental services company," such as Titan, was about 18 to 21 times its 2004 per-share earnings. The same company's price has now been cut to about 14 times their anticipated 2005 per-share earnings, "so there's been a significant price-multiple compression" that has eroded the value of governmental services companies like Titan over the last nine months.

"Another way of saying that is that there was probably a significant takeover premium in the industry's valuations last year - and that's been worked off."

Jordan said that when the original deal was struck, Lockheed was not aware of the legal problems Titan potentially faced. "There are various levels of due diligence" that a company making an acquisition undertakes, he explained. "There's what they do from a distance and what they do once they've struck a deal and they get to look more closely at a company's businesses and assets."

Be that as it may, Lockheed certainly knew by this spring the extent of the government's concerns, which gave it some leverage in getting Titan to accept a lower cash price in return for the April extension to June 25.

"The last extension was done with full knowledge [on Lockheed's part] of what [Titan] was addressing with the Department of Justice, and at least that time, it was deemed that if they could cop a plea, that this would not hinder the deal and it would go forward once that plea arrangement had been consummated," the analyst said.

So what went wrong?

The unknown variable in any such equation is what stance the government will take - whether it will move quickly to get what is essentially a plea bargain in place - or whether it might play hardball, possibly a factor in this case since the DOJ knew that Titan was running against a deadline on its merger and had some leverage.

Jordan said that it's impossible for anyone not connected with the negotiations to accurately assess what may or may not have been going on. That having been said, it can be assumed that "the Department of Justice obviously is not going to accept a plea agreement until they are totally satisfied that they've done all the work they want to do. For whatever reason [Titan] seems not to have been able to get it to a point where [the DOJ] is willing to come to some form of agreement," he said.

He said a key question would be "how high up did this go, how systemic was this throughout the organization? If it was misbehavior by a few isolated people in a subsidiary, it would obviously be less severe than something that was condoned at the highest levels of the corporation." The Justice Department, he added "has to be very comfortable that they have a complete, full understanding of everything that happened and everything that did not happen."

Jordan said that the demise of the Lockheed-Titan merger would not send Lockheed competitors such as General Dynamics, Northrop Grumman or Boeing rushing in to try to scoop up Titan - not as long as the specter of federal proceedings continues to hang over the latter company's head like the sword of Damocles. "It just doesn't make sense" otherwise, he said.

And even Lockheed itself may not be so quick to try to pick up where it left off, assuming Titan can somehow reach an accord with the DOJ within a short time, such as a few weeks. "If this deal falls apart, it probably will have fallen apart for a good deal of time," the analyst said, "because there probably will be some anger on at least one side, if not both" - Titan feeling abandoned by Lockheed, and Lockheed feeling it had been deceived and put into an untenable position by Titan.

"If something's going to happen, it may be some re-working of the existing framework, maybe a negotiation of price - but my guess is if this thing falls apart, it goes by the board for at least a meaningful period of time."

Even beyond the question of a merger with Lockheed or some other industry player, the stakes for Titan to resolve the bribery allegations are high indeed. Jordan said that should the company fail to reach a settlement, go to trial and lose, punishment could range anywhere from "a slap on the wrist to a death sentence" - meaning it is in the company's interest to settle this matter and not let it get to trial. Titan itself, in its December financials made only what he called "a significant - but relatively modest - provision for a settlement," an indication the company is not thinking in worst-case scenario terms.

Titan equity investors were as traumatized as the bond players by the impending demise of the merger deal; the company's New York Stock Exchange-traded shares swooned $3.71 (20.34%) to $14.53, and at one point were as low as $13.96. Volume was 18.9 million shares, about 12 times the usual turnover.

aaiPharma dips on loss

Elsewhere, aaiPharma Inc.'s 11½% notes due 2010 were seen lower, quoted down half a point to 84 bid after the Wilmington, N.C.-based pharmaceuticals company reported a sharply first quarter net loss of $49.6 million ($1.74 per share) versus $2.5 million (nine cents a share) a year ago. The company's operating loss in the latest quarter was $43.9 million versus a $1.6 million operating profit a year ago.

However, the company - which has been struggling with accounting problems for much of the year - announced that it had amended its 2003 first, second and third quarter 10-Q filings with the SEC.

Company chairman and chief executive officer Frederick Sancilio declared on a mid-morning conference call Friday that with the filings of those amended results, the filing of the first-quarter 2004 10-Q and the recent filing of an amended 10-K report for 2002 and 2003, "we are now up-to-date with our SEC periodic reporting requirements," a major step in the company's efforts to right its ship.

aaiPharma stunned Wall Street in early March, when it announced that it was starting an internal probe of what it called "sales abnormalities" in its Brethine and Darvocet product lines, causing its bonds - then trading well above par - to tumble. The company also withdrew its 2004 guidance, pending the outcome of the internal inquest.

Originally, the investigation centered on sales figures generated in the second half of 2003 - but was then widened to include all of that year, causing the company to delay filing its 2003 10-K and shuffle its top management.

Sancilio told the conference call that the special committee that had been looking into aaiPharma's accounting practices had completed its investigation on April 27.

"We are now taking strong action to address the company's problems of the past," including a shift in its sales tactics to focus more on its traditional customer base in hospitals and clinics and less on sales to wholesale distributors - the area where the problems arose in the first place.

Sancilio also recounted the measures the company took during the quarter to shore up its liquidity, including closing on a new $140 million credit facility, after first getting the consent of its noteholders to key indenture changes.

He said that he considers 2004 to be a "transitional year" and envisions "a return to normal operations by 2005."

Solo drops after SEC filing

Solo Cup Co.'s 8 ½% notes due 2014 "were getting beaten up," a market source said, noting that an S-4 filing the company made with the SEC seemed to reveal that the synergies from Solo's recently consummated merger with SF Holdings Group Inc. - Sweetheart Cup - were not producing the kinds of synergies that had been expected.

Another source quoted the Highland Park, Ill.-based paper cup manufacturing company's notes dropping to 90.25 bid from prior levels at 93.

Levi still heading up

Levi Strauss & Co. notes continued to firm, on the hopes that the San Francisco-based apparel maker might soon be able to announce a sale of its Dockers khaki clothing business; analysts have estimated that the unit could fetch anywhere from $500 million to $1 billion for Levi, which would use the proceeds to cut debt. Levi has been shopping Dockers around for several months.

Levi's 7% notes due 2006 were seen a point better, at 93.75 bid; its 12 ¼% notes due 2012 advanced to 96 from 95.25; and its 11 5/8% notes due 2008 firmed to 97.5 bid from 96.75 on Thursday.

Primary quiet

Telephone numbers that in a normal session reliably turn up human voices late into the day began engaging automatic voice mail responses by mid-afternoon Friday as the high-yield primary appeared to be sleepwalking toward the Fourth of July break.

A single, euro-denominated deal priced during the session.

Meanwhile market sources said that a combination of economic and political factors, added to the high yield's customary summertime slowdown, may presently be weighing upon the market.

Pax World High Yield Fund portfolio manager Diane Keefe told Prospect News on Friday that in spite of 2004's negative high-yield mutual fund flow numbers - the latest of which is a $69.5 million outflow for the week ending June 23 - the junk bond market seems okay.

Farewell to fast money

"I think there are some fast money people who afraid of interest rates rising and are getting out of everything and going into cash," Keefe said Friday, when Prospect News raised the specter of 2004's apparently rampant redemptions.

"However," Keefe continued, "there was so much cash that came in last year that to have redemptions when you have plenty of money sitting around in a high yield fund yielding only 5%, well, you don't really mind raising cash at that level to get those fast-money people out.

"The present levels in the market tell you that it's pretty healthy right now."

Keefe is still maintaining the bearish outlook on the U.S. economy that she professed when she spoke to Prospect News in mid-May.

"It's wobbling between inflation and deflation," she commented, adding that she remains to be convinced that current economic expansion is translating into meaningful employment growth.

June 30 double-whammy

As to Wednesday, June 30's double-whammy - the Federal Open Market Committee meeting which is expected to generate a turning of the tides in interest rates and the U.S. hand-over of sovereignty to Iraq - the Pax World High Yield Fund manager is not overly apprehensive.

She expects the Fed to tighten short term rates by 25 basis points. As for Iraq, she does not expect the hand-over to immediately bear favorable or unfavorable news that will make an impact on the U.S. economy.

Elsewhere, the preponderance of opinion on the FOMC meeting among high-yield market observers seems similar to Keefe's: the Fed will tighten by 25 basis points.

"I don't think the economic data warrants a 50 basis point increase," a sell-side source said on Friday.

"I think the markets are expecting an increase of 25 basis points and I think that's a pretty safe bet."

Sicpa prices session's sole deal

The only transaction to price during Friday's session came from Europe.

Noma Luxembourg SA (Sicpa) sold €160 million of seven-year notes (B3/B-) at par to yield 9¾%.

The Lausanne, Switzerland-based ink-maker's debt refinancing deal came at the tight end of the 9¾%-10% price talk, via Credit Suisse First Boston and BNP Paribas.

Buhrmann talked

Price talk of 8¼%-8½% emerged Friday on Buhrmann NV's planned $150 million of 10-year senior subordinated notes (B2). The debt refinancing deal is expected to price on Monday via Deutsche Bank Securities.

Portfolio manager Keefe said she likes the deal.

"With an eight-handle I think people are getting paid fairly for it," she said.

"The company's margins are thin but they are entering the janitorial products business. That makes sense that they have all of these trucks delivering office supplies to the Fortune 1000, so they could try to deliver more stuff to them.

"It seems like a well managed company," Keefe added. "I think they said it was 3.8 times levered. But when I added in their pension, and other liabilities, I got it up to 4.8 times levered. But the company seems committed to de-leveraging."

More Seitel tremors

Meanwhile, Friday, revised price talk was heard on the recently restructured $190 million senior notes deal (expected ratings B3/B-) from Houston seismic technology company Seitel, Inc.

The new talk on the UBS Investment Bank-led Chapter 11 exit-financing deal is for a 11¾% coupon priced at a discount to yield 12¼%.

On June 23 Seitel restructured the deal into a seven-year bullet from an eight-year non-call-four structure. At the same time the company issued 11¼%-11½% price talk.

"I looked closely at the Seitel deal," Keefe commented on Friday.

"We asked if they could secure the deal with the data library and they said 'No.'

"They did a covenant change," Keefe added, specifying that the deal now comes with a cash flow sweep of 50% of excess cash flow, which has to be used to make a repurchase offer on the bonds at par.

"They have to keep on de-levering the company with any money that they get or at least make that offer," Keefe said.

"I'm just going to see how it performs in the aftermarket.

"I think there are some challenging companies out there trying to raise money. It's really equity, but it's paying a high coupon."

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