General Mills issues buck downdraft in stock; gains also in InterActive, Cablevision

By Ronda Fears

Nashville, Dec. 21 - Winding down the year in a rather slow pace, traders said that convertibles nonetheless saw a nice gain Tuesday as stocks gained nicely amid better-than-expected earnings from brokerages Morgan Stanley & Co. Inc. and Bear Stearns & Co. Inc.

The investment houses' earnings also made for more cheerful moods on those desks in terms of higher hopes regarding year-end bonuses.

"It's a little slow, volumewise, but we're marking just about everything up today," said one sellside trader.

Convertibles in the financial sector were not overly active, traders said, but American Express Co. was mentioned as a position eyed for a volatility strategy. And, the Lehman Brothers Holdings Inc. exchangeable into General Mills Inc. stock was active on the food maker's earnings, resisting a downward pull from the stock to close a tad higher.

Otherwise, media names took center stage as IAC/InterActive Corp. announced it would spin off its Expedia online travel business and Cablevision Systems Corp. said it would suspend plans to break away from its Rainbow Media Group. The Walt Disney Co. and News Corp. issues also were slightly higher on the surge in the media sector.

St. Louis-based cable company Charter Communications Inc. was continuing to see gains, particularly in its newest 5.875% convertible, on the merger-friendly atmosphere prevailing right now, traders said.

General Mills steady to firmer

General Mills Inc. reported Tuesday a 19% gain in fiscal second-quarter profits, but on market disappointment that the company did not raise its guidance after beating estimates for the quarter, the General Mills stock sank in afternoon trade. But convertible traders said the issues linked to the cereal maker - among other foods - were holding steady to firm against the downdraft.

The Lehman Brothers 6.25% mandatory exchangeable due 2007 that converts into General Mills stock edged up on "modest" volume, ending on the New York Stock Exchange up 0.08 point to 27.05. The General Mills 0% convert due 2022 was quoted unchanged to slightly lower at 71.

General Mills shares closed Tuesday off 16 cents, or 0.33%, at $48.96.

The food giant reported fiscal second-quarter earnings of $367 million, or 97 cents per share, up from $308 million, or 81 cents a share, a year earlier. That beat analysts' estimates by 12 cents a share. Sales rose 4% to $3.2 billion.

General Mills said it still expects to earn between $2.75 and $2.80 a share for all of fiscal 2005, which disappointed onlookers who anticipated the company might boost its outlook on the strong quarterly results.

AmEx call buyers on volatility

JP Morgan initiated coverage of American Express Co. with an overweight rating, and that lent buying support to the stock, which also pushed up the American Express convertibles. But traders said the convert market was eying the credit card name more as a volatility play.

One trader noted that in a Lehman Brothers convertible research report on market volatility Monday that American Express was mentioned. In the report, the Lehman convert analysts said that with volatility in the stock running below average, if a holder in the convertible has a positive outlook on the stock they should consider buying calls. The trader said that, indeed, on Monday there was heavy open interest in buying American Express $50 and $55 calls.

The American Express 1.85% convertible due 2033 gained in tandem with the stock by a half-point to 109.5 bid, 109.75. American Express shares added 59 cents on the day, or 1.06%, to close at $56.44.

On Friday, American Express said it plans to cut 2,000 jobs as part of a restructuring and take a related fourth-quarter charge of $100 million to $120 million. The credit card company said it was a result of revamping its business travel unit with the sale of its American Express Bank operations in Bangladesh, Egypt and Pakistan. That news was initially met with a slight back-tracking in American Express shares.

AT&T/Cablevision convertible up

Cablevision announced that it would abandon plans to spin off its Rainbow Media Group, at least as it was previously planned, and the development was cheered on Wall Street as the stock shot up over 13%. Rather, the New York based cable company is now looking to pursue other "strategic alternatives" for the satellite unit.

The AT&T Corp. 6.25% mandatory due 2005 that converts into Cablevision stock soared 3 points on the news to close at 25.05 on the New York Stock Exchange.

No one wants Cablevision to keep the Rainbow division, which comprises its Voom satellite service and national programming channels American Movie Classics, the Independent Film Channel and WE: Women's Entertainment, said a sellside desk analyst, but now it seems that an outright sale of those assets - perhaps to rivals like DirecTV Corp. or EchoStar Communications Inc. - would fetch more than a stock sale.

"DBS is a cash drain, a big sinkhole for Cablevision," he said. "But those assets might work well for another satellite company."

Until the fate of the Rainbow group is decided, however, Standard & Poor's said Tuesday that it is keeping Cablevision's BB ratings on negative watch.

"If Cablevision chooses to continue to own and operate the satellite business, its credit profile could be materially weakened. Such weakening would be exacerbated if the company also pursued the launch of additional satellites," S&P said, noting that Cablevision has contracted Lockheed Martin Corp. to building five more satellites for $740 million.

Worries revolve around the high degree of competition from DirecTV and EchoStar.

"Moreover, if the satellite business is discontinued in 2005, [Cablevision's] credit profile could still be under some pressure due to the $1.4 billion of initial debt incurred by Cablevision's Rainbow National Services LLC subsidiary to fund the business and uncertainty about the potential alternative use of cash derived from these financings," S&P said.

"Conversely, if the satellite business is spun off in a modified form that is materially similar to the previous plan, ratings would be affirmed with a positive outlook."

InterActive floaters spike up

Most of the rest of the media sector was on the rise Tuesday as well, and IAC/InterActive Corp. was among the leaders on its breakup news as the online giant announced it would spin off its Expedia travel business.

InterActive shares climbed $1.53, or 5.91%, to $27.41.

The Deutsche Bank floaters that convert into InterActive shares spiked 2.75 to 3 points higher with the tranche A quoted at 133.5 bid, 134.5 offered and the tranche B at 123 bid, 124 offered.

The transaction is anticipated to take the form of a reclassification of IAC shares, with the holders of IAC stock receiving a proportionate amount of Expedia stock in a tax-free transaction, expected to be accomplished sometime in early 2005.

Barry Diller, the chief executive behind the internet commerce empire, called it a strategy of "simplicity and clarity" in a conference call - departing from a previous acquisition spree that dovetailed online businesses ranging from travel to dating to mortgage-lending into the fold that built InterActive into a powerhouse among internet names.

"Diller is smart to spin this dog off well before the end game; [it's] a brilliant move," said a sellside convertible trader. "The travel industry is quickly figuring out how to get customers to go directly to their web sites. When they all get up to speed, there will be no need for Expedia to exist."

Expedia will include the domestic and international operations of Expedia.com, Hotels.com, Hotwire and the group's other travel sites.

InterActive will retain ticketing businesses like Ticketmaster, plus electronic retailing business such as the Home Shopping Network, and financial services and real estate, including LendingTree. It also will include services like Citysearch, Evite and Match.com.

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