ImClone convertibles jump on potential sale; focus shifts to proposed NRG, UAG deals

By Rebecca Melvin

Princeton, N.J., Jan. 24 - The convertibles market was fairly quiet on Tuesday, traders said, with the exception of ImClone Systems Inc., which was bid up in a flurry of trading early.

Prices tailed off by mid session, but the bonds still closed higher on the day after the biotechnology company announced that it is putting itself up for sale, traders said.

New York-based ImClone said that it has hired Lazard to review strategic alternatives, which could include a merger, sale or strategic alliance.

In addition, the company, which also posted earnings, said that Joseph Fischer, a member of ImClone Systems' board since 2003, was named interim chief executive officer, replacing Philip Frost.

"ImClone was the trade du jour. There was a flurry of trading this morning. They were bidding the stuff up on the change-of-control put," a Connecticut-based sellside trader said.

The technology sector didn't seem to garner a lot of action after the earnings of Texas Instruments Inc., which was a focus of market players after the close on Monday. Although the largest maker of chips for mobile phones isn't a convertibles issuer, it's a bellwether of the industry and provides indications for the group, a buysider said.

On Tuesday, Texas Instruments' shares traded lower after the company reported a 34% jump in quarterly income but offered a lackluster outlook for 2006.

Intel Corp. saw its convertibles trade lower by about 0.125 point on Tuesday, its 2.95s closing out at 90.75 bid, 91 offered, according to one sellside shop, as its shares (Nasdaq: INTC) drifted lower during the session, closing off 7 cents, or 0.33%, at $21.28.

On the upside, Cray Inc.'s convertibles pushed higher, extending a trend that has persisted since it offered guidance a week ago, a New York-based sellside trader said.

The convertibles of the Seattle-based supercomputer maker were "busted in the mid 50s a couple of months ago and have been moving up steadily until now they trade in the low 70s," the sellsider said.

Convertibles players were also eyeing new issues expected from NRG Energy Inc. and United Auto Group Inc., which were expected to price Wednesday after the close of markets.

There was no bid in the gray market for the auto paper, but NRG was seeing "an issue bid," or bid at the issue price a day ahead of pricing.

"It's very well structured," a sellsider said of the $500 million of mandatory preferreds NRG proposes to price.

UAG was also expected to do fairly well, given the reception received by a similar deal last week from Hutchinson Technology Inc.

"I think UAG does well but seems pricey," a New York-based sellside trader said.

Another sellsider called UAG's proposed $250 million of 20-year convertibles "generic," meaning that it wasn't priced to move, he said.

"They'll get their par and a half pop, but that will be it," he said.

The Rule 144A deal of UAG, a Bloomfield Hills, Mich.-based automotive retailer, was talked to yield 3% to 3.5% with an initial conversion premium of 25% to 30%. It's non-callable for five years, with puts in years five, 10 and 15.

NRG looks cheap

A range of inputs were used for valuations on the mandatory convertible preferreds of NRG; but the upshot was that all analysts polled saw the deal as cheap.

One analyst put the paper 7% cheap using a credit spread of 400 basis points over Treasuries and a volatility of 23%.

The rationale on the credit spread was that NRG's straight debt is 300 bps over Treasuries and there is a premium for the shorter duration of the mandatory paper. As for the volatility, the analyst was looking two years out at the calls and then "haircutting" a little.

A second convertibles strategist put the proposed issue "a little cheap," using a credit spread of 350 bps over Libor and a volatility of 24% to 27%.

A third source saw the NRG mandatories 3.2% cheap at the midpoint of talk, using a credit spread of 400 bps over Treasuries and a volatility of 30%.

The mandatories were talked to yield 5.75% to 6.25% with an initial conversion premium of 20% to 24%. There is a 15% greenshoe, and concurrently with the offering NRG Energy plans to price a $3.6 billion three-part offering of senior unsecured notes (B1/B-/B).

Price talk on the Princeton, N.J.-based merchant power company's straight debt included 7.375% to 7.625% for a $2.2 billion tranche of 10-year fixed-rate notes. While for a $1.1 billion tranche of eight-year fixed-rate notes were talked at 12.5 bps to 25 bps inside of the 10-year notes.

The company, which came out of bankruptcy "pretty clean," according to one analyst, is well positioned going forward.

NRG is hedged more than the other merchant power plant companies, the analyst said, having hedged its fuel costs and output.

But among risk factors, the analyst said, is the forward curve on gas prices, which if it comes down will be bad for NRG.

Also something to watch is capital expenditure, in particular its environmental spend on coal plants. And in addition, it collateral requirements can put a strain on liquidity.

"It will be interesting to watch what happens with coal," the analyst said, especially in regard to the fatal mining accidents this month.

Those deaths may, and should, prompt some changes that could add a layer of cost to coal, the analyst said.

ImClone gains on potential sale

The ImClone 1.375% convertibles traded up about 3.5 to 4 points to 90 early on and then tailed back to 88 offered, compared to trades on Monday at 85.

"They came back in about 2 points," the sellsider said shortly after noon.

But by the end of the day the bonds were still well up, with one sellside shop putting the close at 88.5 bid, 89 offered.

At one point in the session, ImClone shares were unchanged, but the stock (Nasdaq: IMCL) ended higher by $1.30, or 3.82%, at $35.36.

"It's not going to be a quick sale," a sellsider said about the potential sale of ImClone. "It will be like Serono; they put themselves up for sale last November and have gotten no bids for the company."

Serono SA is a Geneva, Switzerland-based maker of fertility treatments and a multiple-sclerosis drug. The company faces uncertainty especially as regards potential competition in its MS drug market.

As for ImClone, Fischer said in the company's pre-open announcement that during the review of strategic alternatives, "the company will continue to move forward in the ordinary course, with the goal of maximizing the potential of Erbitux and developing novel oncology therapeutics to benefit patients with cancer."

But uncertainty regarding the valuation ImClone led to question marks in the market. "The 1.375% convertibles' change-of-control put is valued at par," a sellsider said, "But the bonds will probably go back to where they were. They are outperforming their delta by a factor of four."

Also on Tuesday, ImClone posted fourth-quarter earnings that fell short of analysts' expectations. Even though the company posted a profit of $13.1 million, reversing a loss of $13.2 million in the year-ago quarter, revenue fell 9% to $98.2 million from $107.3 million while royalties from sales of its colorectal cancer drug Erbitux, marketed with partners Bristol-Myers Squibb Co. and a division of Merck & Co. Inc., rose 38% to $52.6 million.

Potential bidders for ImClone include Bristol-Myers, which already owns 20% of the company.

"It would certainly make sense for Bristol-Myers," said a sellside biotech stock trader. "It would make more sense for ImClone, because outside of Erbitux, and they are sharing those dollars with Bristol-Myers and Merck already, they don't have much except manufacturing facilities."

ImClone expects to bolster Erbitux sales with the anticipated approval next month for its use in head and neck cancer, which would trigger a $250 million payment from Bristol-Myers, and is testing Erbitux in pancreatic and lung cancer. The company faces competition from Amgen Inc. and Abgenix Inc.'s rival panitumumab, which could reach the market and begin generating sales later this year, so traders said Imclone's Erbitux partners Bristol-Myers or Merck might want to step in with a stronger offense.

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