IVAX reoffered at 98.5; BearingPoint up to 101.25; Charter up on M&A talk; PSEG soars on buyout buzz

By Ronda Fears

Nashville, Dec. 17 - The recent surge in merger activity was a driving force in convertible trading Friday, moving both Charter Communications Inc. and Public Service Enterprise Group Inc. up on speculation. Fresh paper also consumed cash, as market sources on both sides of the market say there is money aplenty to put to work as the year closes.

On the new issue front, Gateway Inc. and BearingPoint Inc. upsized their deals, but neither traded remarkably in the immediate aftermarket although traders said both were very active throughout the session.

IVAX Corp. also put a deal on the table for breakfast. Players were greeted Friday morning by fixed terms of 1.75%, up 31.5% on the bought deal, which was reoffered at 98.5 by bookrunner UBS Investment Bank.

DOV Pharmaceutical Inc., a Hackensack, N.J.-based biotech company, sold a tiny $65 million issue with a 2.5% coupon and 30% initial conversion premium - at the aggressive end of price talk for a 2.5% to 3.0% coupon, up 25% to 30%, which one sellside analyst said looked about 1.2% rich, using a credit spread of 500 basis points over Treasuries and a 35% stock volatility.

Other new issues performed "similarly dismally" to Gateway and BearingPoint, as one buyside trader put it. NRG Energy Inc.'s new private placement 4% convert dropped about 1.25 points to close out Friday at 105 bid, 105.5 offered, while Abgenix Inc.'s new 1.75% convertible added a half-point to 104.5 bid, 105.25 offered.

In Europe, however, Austrian oil and gas firm OMV AG did print its €550 million deal at 1.5%, up 40%, which analysts said was "marginally attractive."

Otherwise from Europe, perhaps ending speculation about a new issue from Lazard LLC, the Paris financial house filed its initial public offering on Friday sans any mention of a convertible. Since October, there has been chatter in the United States and abroad about such a possibility, with speculation about size starting in the neighborhood of $250 million to $400 million and ranging to as much as $700 million.

Gateway hovers around par

Personal computer maker Gateway bumped its two-parter to $275 million from $250 million, but both tranches ended the day near par.

Tranche A, $137.5 million of five-year non-callable notes, was printed with a 1.5% coupon and 47.5% initial conversion premium - at the middle of yield talk and at the aggressive end of premium guidance. Sellside analysts had put that issue about 0.3% cheap at the middle of price talk.

Tranche B, $137.5 million of seven-year non-callable notes, came with a 2.0% coupon and 47.5% initial conversion premium - cheaply outside of yield talk and at the aggressive end of premium guidance. Sellside analysts had put that issue about 0.8% cheap at the middle of price talk.

Both parts had been talked at 1.25% to 1.75%, up 42.5% to 47.5%.

"They hit the high spot of about 101.25 to 101.5 not long after the open and went south from there for the rest of the day. In fact, the Bs traded as low as 99.375 in the afternoon; but the As never went below par, I don't think," said a buyside trader.

"There's some nervousness about PC sales and the terms were not all that impressive," he said, explaining what he referred to as an "unimpressive" performance in the Gateway new issues.

Tranche A ended at 100.875 and tranche B at 100.5, according to a sellside trader. Gateway shares on Friday gained 4 cents, or 0.68%, to close at $5.90.

BearingPoint steadily gains

Computer and data consulting firm BearingPoint Inc. also boosted its two-parter - to $400 million from $350 million - and both tranches inched up progressively through the session.

Series A, a $225 million issue of 20-year notes non-callable for seven years, have a 2.5% coupon and priced with a 35.5% initial conversion premium - at the middle of yield talk for 2.25% to 2.75% and aggressively outside of premium guidance for 30% to 35%. Sellside analysts put that issue about 4.2% cheap at the midpoint of price talk.

Series B, a $175 million issue of 20-year notes non-callable for 10 years, was set with a 2.75% coupon and 35.5% initial conversion premium - at the cheaper end of talk for a 2.375% to 2.875% coupon and aggressively outside of premium guidance of 30% to 35%. Sellside analysts put that issue about 5.6% cheap at the midpoint of price talk.

Both tranches broke to trade right at par, a buyside trader said, but steadily gained with both ending at 101.25. The 2.5s closed at the high point of 101.25 but he said the 2.75s traded as high as 102.25 around noon before easing back. BearingPoint shares closed Friday off by 16 cents on the day, or 2.06%, to $7.59.

PSEG up 2 points on buyout buzz

A considerable amount of the convertible market's attention, however, was devoted to merger noise, despite nice volume in the new issues, traders said.

Public Service Enterprise Group, or PSEG, was sharply higher on a Wall Street Journal report that it was being eyed by Chicago-based Exelon.

The PSEG 10.25% mandatory due November 2005 shot up 1.5 to 2 points on the headlines to 61.75 bid, 62 offered, a sellside trader said, describing volume in the issue as "decent." The mandatory closed on the New York Stock Exchange up 2 to 62.24.

PSEG shares also soared on the buyout buzz, gaining $1.66 on the day, or 3.64%, to end at $47.27.

According to the Journal report, the deal could be worth about $12 billion but talks were said to be at a delicate juncture and could still fall apart. But sources close to the talks were cited saying that a deal announcement could come as early as the upcoming week.

Charter rises on M&A activity

A "merger mood" was conducive to a nice gain in Charter Communications, a sellside trader said, noting that the St. Louis cable company is considered both a takeover target and a bidder for cable assets from the likes of bankrupt Adelphia Communications Corp.

Charter's newest convertible, the 5.25 notes due 2009, added about 1.25 points on Friday, he said, to 109.25 bid, 110.25 offered, while Charter stock gained 3 cents, or 1.45%, to close at $2.10.

"It depends on who you talk to, as to whether Charter is a target or a suitor, but the uptick in [M&A] deal activity seems to bode well for Charter overall," the trader said.

Charter officials have been cagey on both subjects but have acknowledged interest in Charter assets by certain private equity investors as well as its own interest in the Adelphia assets. Adelphia has extended the bidding process for its cable businesses out of bankruptcy until the end of January.

There has been much speculation, too, about the role of Charter principal owner and major debtholder Microsoft Corp. co-founder and billionaire investor Paul Allen. Thus far, Allen and Charter officials also have been mum about recurring market rumors that Allen might be a white knight for the debt-laden cable company, riding in to save the day with a big capital infusion. Yet, there has been speculation that, conversely, Allen has washed his hands of the matter and will not pour any more money into Charter.

"The Allen factor is probably the biggest factor in the Charter story," the trader said. "This could very likely be what determines its whole future, how any [M&A] deal would play out for Charter, because they will either need to make a big sale or get a big equity injection if they are going to make a play for additional assets or make any headway in debt reduction."

OMV issue seen attractive

OMV priced its €550 million four-year convertible bond with a coupon of 1.5% and 40% initial conversion premium - at the aggressive end of the indicative range of 1.25% to 1.75%, up 35% to 40%. The Austria oil and gas concern also priced a concurrent €657 million stock offering.

Total proceeds will help finance OMV's recent acquisition of a 51% stake in Romanian refiner SNP Petrom for €1.5 billion.

Barclays Capital Markets analysts said the new issue was "marginally attractive" as they estimated a theoretical value of €308.2 against the conversion price of €306.6, and calculated a 26.9% implied volatility and 35.2% delta for the new issue. They used a credit spread of 45 basis points over Libor - noting that OMV could issue further debt, which might lead to a widening credit spread in the near future. A 75 basis point stock borrow also was factored in.

"If OMV continues to grow through acquisitions and increases its leverage, then there could be upside to our volatility estimate," the analysts said. "Although in the past there has not been a strong relationship between credit spread and stock volatility, we note that a substantial increase in volatility could go hand in hand with credit spread widening."

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