XM jumps on merger amid put debate; Charys sneaks into secondary market; Mylan deal gets early nods

By Kenneth Lim

Boston, Feb. 20 - XM Satellite Radio Holdings Inc. jumped up on Tuesday to lead the convertible market back from a long weekend.

XM rose in line with its stock after the company entered into a merger agreement with rival Sirius Satellite Radio Inc., although confusion emerged over whether holders would be able to put the convertibles.

Charys Holding Co. Inc. made its debut on Tuesday after a quick launch and pricing at the end of the previous week, although its new paper was quiet with the private deal going to a handful of investors.

Mylan Laboratories Inc. announced a $400 million offering that is only expected to price a week later, but investors say they already like what they see.

XM gains, put in question

XM's 1.75% convertible due 2009 rose about 3 points outright on Tuesday as a merger deal with Sirius sent the stock flying, but confusion arose over whether the convertible may be put back to the company.

The XM convertible traded at 87.5 against a stock price of $15.80 on Tuesday. XM stock (Nasdaq: XMSR) rose 10.23% or $1.43 to close at $15.41.

Sirius Satellite's 3.25% convertible due 2011 gained 4 points outright on lighter volume to change hands at 105.375 versus a stock price of $4. Sirius stock (Nasdaq: SIRI) climbed 5.95% or 22 cents to close at $3.92.

"Both of them came up today," a buyside convertible trader said. "The XMs were a lot more active, but they've always been more interesting. They're doing better with the stock now, and I heard some people were wondering whether they can put the convertibles back...I don't think you can put them, and I don't think the market thinks you can put them, otherwise they'd be closer to par, but even if you can put them there's only upside from here."

Washington-based XM and New York-based Sirius announced over the weekend that they had agreed to merge in a deal valued at $4.9 billion. Under the agreement, XM shareholders will receive 4.6 Sirius shares for each XM share. XM chairman Gary Parsons will be the chairman of the combined company, while Sirius chief executive Mel Karmazin will be CEO. The deal still needs regulatory approval, and the companies hope to close the deal by the end of 2007.

Michael Knox, managing director of Xtract Research, noted some confusion about whether the XM convertible's change of control put will be triggered. Xtract Research provides research services focused on indentures and documents related to convertible and fixed-income securities.

Knox explained that there were two fundamental change triggers that could be seen as applying to this case. But the trigger that deals with mergers is ineffective because more than 90% of the transaction is in stock. The trigger that deals with groups acquiring more than 50% of the voting power of XM, however, is only intended to deal with groups acquiring voting power, Knox said. While it could be argued whether Sirius could be such a "person or group" in this instance, this is really a technical legal issue, but "the spirit is that the change of control should not be triggered due to the all-stock nature of the transaction," Knox said.

A sellside convertible analyst said Sirius is unlikely to interpret the language of the indenture as allowing a put.

"But from XM's point of view, it really depends on how the language on the 1.75s are interpreted," the sellsider said. "Either way there won't be any make-whole premium, because the stock price is too low. The real issue here is whether the 1.75s will be put back to par."

Holders of the XM convertible are unlikely to be too bothered if there is no put, however.

"You don't have much downside here if there's no put," the sellsider said. "The risk-reward profile is quite attractive, but on a valuation basis it looks a little rich at this moment...As people do the risk/reward assessment, the probability on completion is probably not going to be more than 50%."

Another convertible analyst said the merger could be a non-event for XM convertible holders.

"They end up with a Sirius convertible," the analyst said. "Everything should stay relatively similar, except you end up with a lower vol on the underlying stock, but you probably end up with better credit just on the scale of the combined company...The potential of the credit upgrade and lower vol will probably offset somewhat. Sirius has had some problems with the common, but that's probably due in part to merger speculation and arbs shorting it."

The analyst said the completion of the deal was still in the air.

"My opinion all along has been that it would not be approved by either the Justice Department or the FCC [Federal Communications Commission], but now that I think about it a little bit more, if the companies had actually gone ahead and agreed to merge, they must at least have the sense that it's possible," the analyst said.

"But you really need to see the merger agreement to get a better sense of that. I don't know how strong a contract that is going to be. They may just be rolling the dice on this without any real teeth in the merger agreement to require the companies to complete the merger. It may be an agreement where if they don't get the approval that they need they can just walk away."

Charys quiet on debut

Charys' new 8.75% convertible senior note due 2012 was quiet on its first day of trading after a quick, low-key marketing period at the end of the previous week.

"We didn't see any of them at all," a sellside convertible trader said. Charys stock (CHYS) fell 6.39% or 14 cents to close at $2.05.

Charys priced the $175 million offering on Feb. 16 after the market closed at an initial conversion premium of 2.7% over its closing price on that day.

The notes were offered at par as separable units that comprise the convertible and two warrants. The warrants, which expire with the convertibles, give holders the right to purchase 333.333 shares of Charys common stock at $4 per share and 333.333 shares of Charys common stock at $5 per share.

There was no price talk.

There is an over-allotment option for a further $26.25 million.

McMahan Securities was the bookrunner of the Rule 144A offering.

Charys, an Atlanta-based telecommunications infrastructure services and general business support provider, said it will use the proceeds of the deal to pay for the Cotton group of companies, to refinance debt and for general purposes. Charys has also set aside a cash reserve using to proceeds to cover the first two quarters of interest due under the notes.

A sellside market source noted that the deal came with the hefty coupon mostly because of the relatively large fundraising effort by Charys.

"The company has a $75 million market cap," the source said. "The deal is $175 million. That's more than double the market cap. It's got a nice-sized coupon because of the risks involved."

A buysider said the deal was unlikely to ever see much action in the secondary market.

"I don't think you're ever going to see it trade much," a buysider said. "It's more like a PIPE deal, and it probably went to a few guys who are going to hang on to this until it matures."

Mylan draws early praise

Mylan's planned $400 million of five-year convertible senior notes could receive strong demand based on its strong credit and the low expected conversion premium on the deal, investors said Tuesday.

The offering is expected to price March 1 after the market closes. The deal is talked at a coupon of 1.25% to 1.75% and an initial conversion premium of 10% to 15%.

The notes will be offered at par.

There will be a concurrent offering of 21.5 million shares Mylan common stock, of which about 2.75 million shares will be sold by current Mylan shareholders.

There is an over-allotment option for a further $60 million for the registered off-the-shelf offering.

Merrill Lynch and JP Morgan are the bookrunners of the convertible and stock offerings.

Mylan, a Canonsburg, Pa.-based maker of generic drugs, plans to use the proceeds to fund convertible note hedge and warrant transactions and to fund general purposes.

"I think people are going to find it very attractive because of the low premium and good credit, and the potential for improvements in volatility," a sellside convertible analyst said.

Although the deal models fair to rich using an aggressive volatility assumption, it will still be interesting for investors, the analyst said.

"It's still attractive because it's investment-grade credit, and it's got a premium of 12.5%," the analyst said.

A sellside convertible trader said no grey market has formed for the offering yet, but the deal already looks promising at first glance.

"It looks just like ADM," the trader said, referring to the Archer Daniels Midland deal that priced Feb. 15 and shot up on its debut. "They're going to have no problems selling this. That's terrific...I would think that they're going to do just fine. There's a big, big market in the outrights for issues like this. Investment grade but low premium where guys can hold these things for several years and hope that they can make 50% or double."

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