Jean Coutu two-part mega-deal prices; AMC Entertainment up on takeover buzz

By Paul Deckelman and Paul A. Harris

New York, July 20 - Jean Coutu Group, Inc. was heard by high-yield syndicate sources Tuesday to have successfully priced a $1.2 billion offering of new bonds - a senior tranche of eight-year notes and a much larger senior subordinated tranche of 10-year paper.

Elsewhere in the primary market, price talk emerged on the upcoming deal for Foundation PA Coal Co., while Blount International was heard getting ready to hit the road to market a $175 million offering of eight-year notes.

In the secondary market, AMC Entertainment Inc. bonds were quoted being up several points on news reports that private equity firm J.P. Morgan Partners was negotiating to buy the Kansas City, Mo.-based movie theater company.

With primary market news continuing to come at a mid-summer trickle, Tuesday's big story was the restructured $1.2 billion acquisition deal priced by Quebec pharmacy chain owner Jean Coutu.

The transaction saw the company shifting $100 million to the senior tranche from the subordinated tranche in a move which, according to one informed source, both played to investor demand and also improved the company's capital structure.

Jean Coutu upsized its tranche of eight-year senior notes (B2/B) to $350 million from $250 million, and priced them at par to yield 7 5/8%, at the tight end of the 7¾% area price talk.

Meanwhile the company downsized its tranche of 10-year senior subordinated notes (B3/B) to $850 million from $950 million and priced it at par to yield 8½%, right on top of the 8½% area price talk.

Merrill Lynch & Co. and Deutsche Bank Securities ran the books for the deal which Jean Coutu brought to the market in order to help fund its acquisition of the Eckerd drugstore chain.

The two-part deal had earlier been restructured from single senior subordinated tranche.

"The seniors priced at the tight end of talk and there was more demand for the senior tranche than the subs," one informed source told Prospect News in the wake of the Jean Coutu transaction.

"The sub tranche went very well," the source added, stating that it was subscribed between two and three times.

Billion-plus deals "jolt" summer market

The source, a sell-side official, observed that a spate of billion dollar-plus deals - Jean Coutu representing the most recent manifestation - appear to have "jolted" a summer new issue market that earlier in the season showed signs of sleepwalking toward the fall.

"It is surprising how well the market has been holding up," said the official. "It's been doing very well, helped by the Treasury rally last week and back-to-back inflows to the high yield funds.

"I think the buy-side is pretty flush with cash at present."

The official observed that flanking the Jean Coutu $1.2 billion deal are Freescale Semiconductor, Inc.'s $1.25 billion, which priced July 15 in three tranches, and PanAmSat Corp.'s $1.01 billion 10-year offering, which is expected to price late in the final week of July.

"It was surprising to see how Freescale did last week," the official commented.

"The IPO was said to have struggled. Merrill Lynch downgraded the entire semiconductor sector a couple of days before the IPO, which came out at $13.00, whereas the range was as high as $19.00.

"However the bond deal seems to have done well. People seemed to see it as a large, stable double-B name and as a good place to park cash."

Sparse new issue calendar

With less than $1.5 billion, in four deals, expected to price in the primary market during the final three sessions of the present week, very little news circulated in the new issue market as Tuesday morning gave way to afternoon.

"In the secondary things started out pretty strong this morning, then got pretty weak following Treasuries this afternoon," one syndicate official told Prospect News late in the session.

"Balancing that is the fact that there is very little on the new issue calendar. So the market kind of ended up flat to weaker, having sold a little bit on the back of Treasuries."

Blount to market $175 million

One roadshow start was heard during the session.

Marketing will begin Thursday for a $175 million offering from Blount, Inc. of eight-year senior subordinated notes, according to a market source.

Pricing is expected mid to late in the week of Aug. 2.

Lehman Brothers has the books for the debt refinancing deal from the Portland, Ore.-based outdoor products, industrial and power equipment and lawn mower company.

The Blount deal notwithstanding, one sell-side source professed the expectation that the new issue market would likely trend away from debt refinancing deals in favor of LBO and spin-off financings.

This source also said that at present the forward calendar is "below trend compared to earlier this year, but still pretty healthy."

Another sell-sider put out some numbers: thus far into 2004, said this syndicate official, the market has seen 309 deals price for a total of $88.4 billion of issuance. Averaging that sum across 28 weeks, the source added, turns up a $3.2 billion weekly rate of new issuance.

Barring surprises, the present week figures to see $2.665 billion of business, counting Jean Coutu.

Foundation PA Coal talked

Finally on Tuesday, price talk of 7¼%-7½% emerged on Foundation PA Coal Co.'s $300 million of 10-year senior notes (B1/B), which is expected to price on Wednesday morning via Citigroup and Credit Suisse First Boston.

Jean Coutu up in trading

When the new Jean Coutu Group bonds were freed for secondary dealings, the drugstore operator's new paper seemed like just the tonic that a generally listless summer market needed.

The bonds were seen "moving up" after the break, a trader said, quoting the 7 5/8% senior notes due 2012 as pushing up to 102 bid, 103 offered from their par issue price earlier in the session, while the 8½% senior subordinated notes due 2014 managed a respectable, if not stellar, rise to 100.375 bid, 100.875 offered from par.

However, the trader said later in the session that the new bonds were "losing altitude," with the 7 5/8% notes dipping below 102 on the bid side to go home at 101.8775 bid, 102.375 offered.

Another trader said "yeah, they were stronger out of the gate," seeing the 81/2s get as good as a bid in the 100.5-100.625 area, while the 7 5/8s traded up to 102.25 bid, 103.25 offered.

However, he said, "then they came in and trailed off at the end of the day. He saw the 8½% notes going out at 100.375 bid, 100.5 offered, and while he did not see the 7 5/8% notes at the close, he surmised that "they probably ended a little off their highs as well," probably at or below 102.

Freescale holds levels

Also on the new-deal front, the trader saw Freescale Semiconductor Inc.'s new bonds, which priced Friday in a $1.25 billion three-part deal, continuing to hold onto the high levels to which they moved after pricing at par - but going no higher.

He quoted both the fixed-rate tranches - the 6 7/8% senior notes due 2011 and 7 1/8% notes due 2014 - at 101.25 bid, 101.75 offered, up perhaps a quarter point from Monday's close, but did not see the floating rate Libor-based notes due 2009, which had last been seen hovering at 102 bid, 102.5 offered.

AMC gains

Back among the existing issues, the trader saw AMC Entertainment's 8% notes due 2014 "up a couple of points," quoting them at 99 bid, par offered, well up from Monday levels in the 96 vicinity, as takeover talk percolated around the marketplace.

At another desk, the 8s were seen up nearly two points on the day to around 99.25 bid.

However, another market source saw little change in those bonds, although he pegged them a bit higher at their original level than the other two, quoting them steady at 98. He saw AMC's 9½% notes due 2011 likewise unchanged at 104 bid.

Tuesday's New York Post reported that J.P. Morgan Partners, the private equity arm of J.P. Morgan Chase & Co., is in "advanced talks" to take AMC private for $19 to $20 per share, plus assumption of nearly $750 million of debt.

The Post - perhaps mindful of its recent embarrassing front-page fiasco of "scooping" the world on John Kerry's vice-presidential pick, only to get the wrong man - left itself plenty of wiggle room this time around, quoting unidentified sources as saying the terms were still being negotiated and the deal could still fall through.

AMC officials said they would not comment on the Post story.

The financial markets considered the story possible enough to move on; besides the rise in the bonds, AMC's Amex-traded shares jumped $3.28 (23.07%) in Tuesday dealings to $17.50, on volume of 920,000 shares, about seven times the norm.

AK Steel better

Elsewhere, AK Steel Corp. bonds were firmer, after the Middletown, Ohio-based specialty steels producer reported solidly better second-quarter results including its first net profit after eight straight quarters of red ink.

A trader saw AK's 7 7/8% notes due 2009 half a point better at 97.5 bid, 98 offered, while its 7¾% notes due 2012 were a point better, at 95 bid, 96 offered.

At another desk, AK's 7 7/8s were seen as good as 98 bid, up half a point on the day, while the 73/4s were at 95.

Second-quarter net income was $92.7 million (85 cents per share) - a sharp turnaround from the company's year-earlier net loss of $78.2 million (72 cents per share).

The latest results included several large positive items - an after-tax gain of $44.2 million on the sale this spring of the company's Houston industrial park and a $27.2 million tax benefit related to discontinued operations.

Excluding those special items, AK reported an operating profit of $56.4 million, versus a year-ago operating loss of $115.2 million, and income from continuing operations of $20.2 million (18 cents per share), versus a continuing operations loss of $86.6 million (80 cents a share), in the second quarter of 2003.

The company also said that its liquidity is "solid," having reduced debt by $142 million in the latest quarter, and refinancing existing debt so it has no maturities nearer than 2007 (see related story elsewhere in this issue).

Tenneco stronger

Tenneco Automotive's 7 3/8% notes due 2013 were seen nearly a point better at 95, while its recently issued 9¾% notes due 2014 were a full point higher at 106.25 after the Lake Forest Ill.-based auto parts maker reported better quarterly numbers.

Tenneco said that second-quarter net income was $30 million (69 cents per share) versus year-ago net income of $24 million (58 cents per share).

Of more interest to debt investors, the company reported a 15% improvement in EBIT (earnings before interest, taxes, and minority interest) to $76 million over second quarter 2003 EBIT of $67 million.

EBITDA (EBIT before depreciation and amortization) in the quarter increased 12% to $120 million versus $108 million a year earlier.

Continental unchanged

Continental Airlines bonds were unchanged, its 8% notes due 2005 staying at 89.25 bid, 90.25 offered, even as the Houston-based air carrier reported a $17 million (26 cents a share) loss on Tuesday, citing the high price of jet fuel, low fares and the cost of retiring leased aircraft.

A year ago, Continental reported a net profit of $79 million, or $1.10 per share.

But a trader did see some lift in Northwest Airlines Corp. paper, its 9 7/8% notes due 2007 a point ahead, at 77.5 bid, 79 offered.

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