XM Satellite maintains climb; Commonwealth climbs on takeover; Human Genome keeps tightening

By Kenneth Lim

Boston, Sept. 18 - The convertible bond market had a quiet session on Monday, with XM Satellite Radio Holdings Inc. continuing to improve in the wake of a stock upgrade and takeover speculation.

Commonwealth Telephone Enterprises Inc. improved slightly with the stock after it agreed to be bought by Citizens Communications Co. in a stock-and-cash deal initially valued at about $1.16 billion.

Also seen trading on Monday was Human Genome Sciences Inc.'s 2.25% convertible due 2011, which continued to improve on the back of gaining stock. The convertible was marked at 101.875 versus a stock price of $11.80, while Human Genome stock (Nasdaq: HGSI) closed at $11.87. The stock was up by 2.33% or 27 cents.

"Human Genome Sciences was little better, it continued to tighten," a sellside said. "I'm not sure if it's a little vol, but the credit continues to grind tighter."

Human Genome is a Rockville, Md.-based biopharmaceutical company that focuses on developing protein and antibody drugs.

XM continues climb

XM Satellite's 1.75% convertible due 2009 improved by another point outright in early trading as hopeful investors continued to feed off a positive stock upgrade and speculation about a possible takeover or merger that began the week before.

The convertible traded at about 80.25 against a stock price of $13.85 late Monday, while XM stock (Nasdaq: XMSR) gained 1.54% or 21 cents to close at $13.88.

"XM Satellite Radio improved slightly," a sellside convertible bond strategist said. "It's kind of a recent high for the name."

Credit Suisse upgraded the shares of Washington-based XM stock on Sept. 14 to outperform from neutral, citing an improved sales environment and management's more realistic expectations that should help the company meet or exceed targets. Credit Suisse equity analyst Bryan Kraft also examined a hypothetical merger between XM and rival satellite radio broadcaster Sirius Satellite and reckoned that both companies stood to benefit from combining their businesses.

A convertible bond trader said a merger seemed to make sense for the companies.

"Both of them are bleeding trying to beat the other guy," the trader said. "Obviously if they stopped competing both of them will be better off. They'll have better pricing power, and they wouldn't have to spend so much trying to add customers."

But the trader was not sure if any deal would emerge soon.

"If there's any merger the pricing is probably going to be an issue," the trader said. "And then there's also the regulatory side of things...They may not get the approval they need for a merger, if they want to do that."

The convertible strategist agreed that the talk about a possible merger between the two rivals is still very much in the realm of speculation.

"I think the FCC [Federal Communications Commission] wouldn't allow it," the strategist said. "I think if there's any talk it's probably drying up now."

Commonwealth gains on buyout

Commonwealth's 3.25% convertible due 2023 improved by about 2 points outright after it announced an agreement to be taken over by Citizens Communications in a $1.16 billion stock-and-cash deal.

The Commonwealth paper traded at about 105.75 against a stock price of $40.45 early Monday. Commonwealth stock (Nasdaq: CTCO) improved by 6.1% or $2.35 and finished the day at $40.87.

"It was up on the news that they're being taken over by Citizens," a sellside convertible bond trader said.

Stamford, Conn.-based Citizens is offering to pay $31.31 in cash and 0.768 Citizens share per Commonwealth share. Based on Citizens' closing stock price of $13.66 on Monday, the deal is worth about $1.16 billion. The boards of both companies have approved the deal. Citizens and Commonwealth are providers of telephone services in rural areas in the United States.

The combined company will be the seventh-largest local telephone exchange company in the United States, the two companies said in a joint statement. Citizens added that it intends to maintain its current annual dividend of $1 per share.

The merger came after Commonwealth announced a week earlier that it had hired Evercore Partners as a financial adviser to review its strategic opportunities, including finding a buyer for the company.

"It clearly wasn't unexpected after the news from last week," a sellside convertible bond analyst said.

The analyst said the deal seemed like a step in the right direction for both companies.

"It's a good thing for Commonwealth," the analyst said. "For these rural operators, it's better economies of scale. It's better for them to join up."

A buysider said Citizens' credit was likely to hold firm after the acquisition.

"They're a pretty stable company," the buysider said. "They're paying some cash for this, but they've already gotten financing [commitment from Citizens' financial adviser, Citigroup,] and the business is probably going to improve after the deal."

Fitch Ratings on Monday maintained its BB rating for Citizens with a stable outlook.

"Citizens' BB rating reflects the relatively stable financial performance of its telecommunications business, which stems from its primarily rural operations," Fitch said.

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