GM roars ahead; Archstone-Smith gains, Bausch & Lomb up, Advanced Medical quiet on takeover talk

By Kenneth Lim

Boston, May 25 - New issues and takeover rumors dominated convertible trading on Friday, with General Motors Corp.'s new 1.5% convertible due 2009 climbing to a strong start amid robust demand.

Archstone-Smith Trust jumped a few points following reports that picked the real estate investment trust as a likely privatization candidate.

Bausch & Lomb Inc. continued to tick up slightly as hopes mounted that Advanced Medical Optics Inc. will make a takeover offer, although the potential acquirer's convertibles were more subdued as investors took wait-and-see positions.

Other recently issued convertibles remained active, fueling an unusually busy session for the Friday before the long Memorial Day weekend.

"We had a lot of trades but they were mostly concentrated in a few names," a sellsider said. "It's all the new issues."

LifePoint Hospitals Inc.'s new 3.5% convertible due 2014 continued to gain by about 1.25 points outright with a trade at 103.25 against a stock price of $39.875. The convertible was offered at par earlier in the week. LifePoint stock (Nasdaq: LPNT) closed at $40.18, up 3.05%, or $1.19. LifePoint is a Brentwood, Tenn.-based operator of hospitals in non-urban areas.

Micron Technology Inc.'s recently issued 1.875% convertible due 2014 also improved slightly with its stock to trade at 104.375 versus a stock price of $11.80. Micron stock (NYSE: MU) rose 1.35%, or 16 cents, to close at $11.97.

A convertible strategist said the week ended on a solid note.

"We had a couple of new issues, but I guess it's somewhat of a slowdown in terms of new issues compared to the last few weeks, although it's not unexpected heading into a holiday weekend," the strategist said. "We saw good two-way flow but the market was firm. A lot of people were focusing on takeover scenarios, looking more closely at takeover protections."

General Motors gains on debut

General Motors' new 1.5% convertible senior debenture due 2009 climbed quickly right out of the gates and remained in positive territory all of Friday.

The convertible, which was offered at par of $25, traded at 25.25 against a stock price of $30.89 but was seen as high as 25.45. General Motors stock (NYSE: GM) started higher but then lost grip of the early gains to finish at $30.49, up by 0.07%, or 2 cents.

"They quieted down but they were very active at the open," a convertible strategist said. "The stock was up, and the bonds were up 25 cents to 35 cents all day. [There was] a lot of interest on both sides trading that. It was definitely interesting."

General Motors upsized the deal to $1.305 billion from $1.1 billion on Thursday and priced it with an initial conversion premium of 20%. Price talk was narrowed to a coupon of 1.5% to 1.75% from a coupon of 1.75% to 2.25%. The initial conversion premium was left at 20%.

The over-allotment option was increased to a further $195 million, from a further $165 million.

Citigroup, Deutsche Bank and Goldman Sachs were the bookrunners of the registered offering.

General Motors, a Detroit-based automaker, said it will use the proceeds of the deal to pay the put on its older 4.5% convertible due 2032, to bolster liquidity and to fund its turnaround plans.

"We did a lot of the new GMs this morning," a sellside desk analyst said. "Every single trade is above issue."

The analyst said General Motors' older 5.25% convertible due 2032 eased slightly with the issuance of the new paper. The 5.25% convertible (NYSE: GBM) was a couple of pennies lower at 21.10 with the stock around $20.47.

"I would understand that there are some switching going on, but the interest in the new GMs are mainly just that it's coming in slightly cheap," the analyst said.

Archstone-Smith gains on rumor

Archstone-Smith's 4% convertible due 2011 gained about 2 points outright but came in slightly on a dollar-neutral basis after reports speculated that the company could be a prime takeover candidate.

The Archstone-Smith convertible traded at 103.25 against a stock price of $54.50. Archstone-Smith stock (NYSE: ASN) surged $4.10, or 8.02%, to end at $55.23.

"There was a report by UBS saying that they could be taken over," a sellsider said. "The stock really jumped up but the bonds didn't go up as much."

UBS equity analyst Alexander Goldfarb said in a report that private real estate company Tishman Speyer Properties LP could be in talks to take over Archstone-Smith, citing a trade publication. Archstone-Smith is an Englewood, Colo.-based apartment developer.

Goldfarb called the company "one of the most likely privatization candidates given its high-quality assets, presence in key markets, low leverage and its high-rise properties that can be viewed as call options on the next condo wave."

Archstone-Smith did not comment on the report. Goldfarb has a neutral rating on the stock.

A convertible analyst said a deal would probably hurt hedge investors.

"The convertibles came in about half a point, so you would get hurt on a buyout," the analyst said. "They do have takeover protection, but I guess when the table was set a year ago the conditions were different. The vol has improved since then and the credit is going to widen if there's a buyout."

Bausch & Lomb ticks up

Bausch & Lomb's floating-rate convertible due 2023 improved slightly as investors continued to chase the stock on hopes that Advanced Medical Optics will make a bid for the company.

The convertible, which pays a coupon of six-month Libor plus 50 basis points, gained about a quarter-point to change hands at 130.25 versus a stock price of $70.50. Bausch & Lomb stock (NYSE: BOL) ticked higher by 0.4% or 28 cents to close at $70.49.

"BOL's a little better today because of the EYE interest," a sellsider said.

Bausch & Lomb has already received an offer by private equity firm Warburg Pincus for $65 per share, but it will be soliciting better bids for at least another month. Bausch & Lomb is a Rochester, N.Y.-based maker of eye health care products.

Advanced Medical on Thursday said it is considering making a competing offer, although a decision has not been made and no pricing details were provided. Santa Ana, Calif.-based Advanced Medical also makes eye health care products and equipment.

Lehman Brothers equity analysts Evren Ergin and Bob Hopkins said in a note on Friday that Advanced Medical was likely to bid for Bausch & Lomb. The analysts cited Advanced Medical's long-time interest in Bausch & Lomb, Bausch & Lomb's comparably low stock price from year-ago levels and Advanced Medical's hiring of Deloitte as clues that a competing bid may be on the horizon.

"Because the deal does, on the surface, make strategic sense, the fact that EYE has already hired Deloitte for integration consulting and the fact that if BOL goes private, it would make it much more difficult for EYE to gain access to the contact lens market, we believe the probability of a bid from EYE is high," Ergin and Hopkins wrote.

Ergin and Hopkins added that a likely ceiling for a bid by Advanced Medical would be around $75 to $80 per Bausch & Lomb share.

Advanced Medical quiet

Despite significant confidence in an Advanced Medical bid, the company's convertible did not see much action on Friday as investors held back to wait for better clarity.

"I think we're hoping that if there's anything that EYE will richen a little bit," a buysider said.

The uncertainty surrounding Advanced Medical went beyond whether they would make a bid but also how a bid would affect the company. Ergin and Hopkins of Lehman Brothers noted that although ownership of Bausch & Lomb was strategically important, Advanced Medical's resources are tied up with its recent acquisition of Intralase Corp.

Ergin and Hopkins reckoned that Advanced Medical can only lever up to seven times combined EBITDA, or an additional $1.2 billion of debt. Advanced Medical will unlikely be able to pay cash, and could split the deal consideration evenly between cash and equity if the bid was $70 per Bausch & Lomb share, or pay 40% cash and 60% equity if it bids $80 per Bausch & Lomb share, Ergin and Hopkins wrote.

"All in, we recognize and appreciate the strategic rationale behind EYE's potential bid for BOL, but believe the road to significant shareholder return for the company could be long and bumpy," Ergin and Hopkins said.

A sellside convertible analyst said Advanced Medical will face a challenge if it tries to outbid Warburg Pincus.

"EYE doesn't have the ability to pay in cash," the analyst said. "You also have to figure the private equity groups are going to get in a bidding war with them, and the private equity groups have access to a lot more cash."

The buysider said all that uncertainty makes determining a clear strategy difficult for Advanced Medical convertibles.

"We kind of traded around a little bit on the stock, but I think we're just kind of holding out to see what happens," the buysider said. "We're hoping that increased speculation might richen it a little more."

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