Bristol-Myers slips on dashed merger hopes; Anixter prices at rich end; Illumina seen as fair; Essex in play

By Kenneth Lim

Boston, Feb. 12 - Bristol-Myers Squibb Co. slipped slightly on Monday, following reports that merger talks with Sanofi-Aventis SA were called off.

Anixter International Inc. priced its $300 million deal at the rich end of talk, after strong interest in the gray market early Tuesday.

Illumina Inc. was not as active in the pre-market, with its planned offering seen as fairly valued and hampered by what some thought was a stingy coupon.

The market in general began the week on a quiet note, although real estate investment trust convertible preferreds saw an increase in activity.

Essex Property Trust's 4.875% convertible preferred was marked at 29 bid, 29.5 offered against the closing stock price of $141.76 on Monday. Essex stock (NYSE: ESS) closed lower by 2.23% or $3.24.

Essex is a Palo Alto, Calif.-based REIT that focuses on apartment properties.

REITs have been in the spotlight following the successful buyout of Equity Office Properties a week ago, which fueled a pick-up in volume.

"We saw some buy interest in REITs," a sellside convertible strategist said. "Buyers moved in on preferreds, paper at the far end of the capital structure."

"What you've seen with the REITs is all the bonds have moved up significantly...The REITs have always traded at a significant discount on a volatility basis, and rightly so, in my opinion. As much as a lot of the value has been extracted from the bonds over the past few days, a lot of people may be focused on the last part, where there may still be perceived value in a sector [of REIT convertible debt] that typically have been an afterthought. It can be a debate whether people can be looking for cheapness or whether it's really cheap."

Bristol-Myers slips on report

Bristol-Myers' three-month Libor minus 50 basis points convertible due 2023 eased about ½ point on Monday after reports that merger talks with Sanofi-Aventis - never officially confirmed in the first place - had been called off.

The convertible, which currently carries a coupon of about 4.86%, changed hands at 101 against a stock price of $27.25. Bristol-Myers stock (NYSE: BMY) ended the day at $27.59, lower by 3.26% or 93 cents.

"BMY was active in the morning because of the report that said the merger was off, but it didn't move much afterwards," a sellside convertible trader said.

A report by The Times of London over the weekend said merger talks were called off because France's Sanofi-Aventis was not willing to pay almost $28 per share for New York-based Bristol-Myers. The French press reported in January that the two drug makers had begun merger discussions, prompting a spike in Bristol-Myers stock.

"Another week, another rumor," the trader said. "Nobody's bothered too much about all this speculation. At least nobody I know. They've been talking about possible mergers since last year, so nobody's going to be surprised."

A sellside convertible analyst agreed that the latest development was unlikely to affect the convertible much.

"It didn't really move much when they said there was going to be a deal, why should it move now when there isn't going to be one, according to all these reports?" the analyst said. "I think some of the expectations of a merger were already priced in before the first reports came out. But we never really got any details in terms of what a merger may have looked like, so there was no real way to know how it would affect the converts."

"What's possibly interested here is that they mentioned $28 as a possible price, but Sanofi-Aventis didn't want to pay that amount," the analyst said. "That's probably why the stock came back below $28 today."

The analyst said a merger or sale of Bristol-Myers was still possible.

"I think a sale could still make sense, especially if the buyer is interested in Bristol-Myers' pipeline," the analyst said. "But I guess the price has to be right for Bristol-Myers. But what else is new, right?"

Anixter prices, up in gray

Anixter's $300 million offering priced at the rich end of talk on Monday, and was bid up in the gray market amid strong interest in the deal.

"It's cheap," a sellside convertible analyst said. "I'm modeling it around 2.5% to 3% cheap. It definitely looks interesting...We like AXE because of the low premium."

The new convertible senior note priced after the market closed with a coupon of 1% and an initial conversion premium of 15%.

The convertible was offered at par. Price talk guided for a coupon of 1.25% to 1.75% and an initial conversion premium of 12.5% to 17.5%. Anixter stock (NYSE: AXE) closed at $55.20, down by 0.04% or 2 cents.

The size of the deal was originally $275 million, but an over-allotment option for a further $25 million was immediately exercised upon pricing.

Merrill Lynch was the bookrunner for the Rule 144A offering.

Anixter, a Glenview, Ill.-based distributor of communications and specialty wire and cable parts, plans to use the proceeds to concurrently buy back $100 million of its common stock, to fund general corporate purposes and for convertible note hedge and warrant transactions.

A sellsider said the deal modeled about 2 points cheap at the mid-point of talk, using a credit spread assumption of just under 200 basis points over Libor and a volatility of 25%.

A buyside convertible analyst agreed that the deal was cheap.

"The terms look really attractive," the analyst said. "The six-year structure is a little unusual, but it's not too bad. The company is a good credit, their outlook is decent, the premium is pretty low. The only thing I would think would be a little bit of a concern is their products are a bit of a commodity-type products, and they have some exposure to falling copper prices, although I think the company is still forecasting growth.

Illumina seen fairly valued

Illumina's planned $325 million of seven-year convertible senior notes were quiet in the gray market on Monday, with the deal largely seen as fairly valued.

The deal, which was expected to price Monday after the market closed, was talked at a coupon of 0.5% to 1% and an initial conversion premium of 22.5% to 27.5%.

The notes were offered at par.

There was an over-allotment option for a further $50 million.

Goldman Sachs was the bookrunner of the Rule 144A offering.

Illumina, a San Diego-based developer of genetic research tools, said it will use $200 million of the proceeds to concurrently buy back its common stock in privately negotiated transactions, to fund general purposes and to fund convertible note hedge and warrant transactions.

"I like the AXE a little better," a sellsider said. "It's [Illumina] a pricier credit, and less of a straightforward story. You have to buy into the rosy forecast to get to the credit spreads they're using, and it's seven years instead of the typical five-year structure. The AXEs are a definitely better looking name, but given the market I wouldn't be surprised if the Illuminas also hold up fine tomorrow."

A sellside analyst said the convertible looked about 1% cheap using a credit spread in the mid-300 bps over Libor region and a stock volatility capped in the mid-40% range.

The analyst said that, like all biotechs, investors have to believe that their products will go well because "it's all pretty much riding on a handful of products."

But the analyst thought that Illumina's outlook was fine.

"We think that the future prospects of the company are pretty decent, although the stock may be fully valued in the market right now," the analyst said. "But they've beat earnings and upgraded guidance pretty consistently."

Another convertible analyst agreed that the company had demonstrated "solid growth" and can support the debt, but was concerned about the low coupon and a pending lawsuit.

"It doesn't set up well at all...and it doesn't have a good upside-downside profile," the second analyst said. "And you have the court case out there, which is a binary event and will be significant. It sounds like it could be really heavy if they lose."

The analyst said the court case, which involves patents used in a number of Illumina's products, could be a volatility event, but waiting for that volatility could be short-sighted.

"The vol guys might be waiting for that, but you don't know how it's going to end up," the analyst said. "And you know what usually happens? The verdict comes, and then you lose all the vol...All other things being constant, it just does not set up well and you have the overhang from the court case."

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