Kulicke and Soffa slips below reoffered price on debut; Micron gains on buyout rumors, sector rally

By Kenneth Lim

Boston, June 1 - Kulicke and Soffa Industries Inc. slipped below its already reoffered price on Friday as investors mostly stayed away from its high conversion premium and low coupon.

Micron Technology Inc. gained on the strength of a broad semiconductor rally and rumors of a potential buyout.

The convertible market in general had a slow session.

"There's really not much of anything, more like cleaning up," a buyside convertible trader said. "We sold a couple of things, but it's mostly a lot of delta trades."

The convertible market ended the week and the month on a positive note, with special situations driving activity especially in the past week, market sources said.

"We're seeing a lot in terms of special situations, things continue improve but it's kind of quieted down as well," the trader said. "Maybe some richening, but who's to say whether it's really richer because the volume is so thin...Some things picked up, but a lot of the stuff have been stronger because of the special situations."

An outright convertible fund manager said a strong equity market has helped to boost outright returns as well.

"On the outright side it's certainly up a lot," the fund manager said. "We're up about 3% on the month on the outright side, so that's great."

"It's the equity market more than anything else," the fund manager said. "Equities look pretty cheap relative to bonds, the CPI was low, economic numbers came in well. Year-to-date the Merrill Lynch [Vxa0 convertible index] is up 7.3%. The average return on mutual funds is about 7.76% year-to-date. I'm still pretty positive on the equity markets. Like I said, equities still look cheap relative to bonds, so the outlook is positive."

Kulicke and Soffa slips on debut

Kulicke and Soffa's new 0.875% convertible subordinated note due 2012 slipped below its reoffered price of Friday as critics said the deal's underlying terms were too unattractive even with the discounted price.

The convertible was 97 bid, 97.125 offered against a stock price of $9.57 early Friday. The convertible was reoffered at 97.5. Kulicke and Soffa stock (Nasdaq: KLIC) closed at $9.64, up by 0.73% or 7 cents.

"I don't think the new Kulickes did all that well," a sellside convertible trader said. "They were trading below the reoffered price. I think it was the underwriter bidding for them all day to support it. We didn't like it at all."

Kulicke and Soffa priced the $100 million deal on Thursday after the market closed with an initial conversion premium of 50%.

The deal was talked at a reoffered priced of 98 to 98.5 with a coupon of 0.75% to 0.875% and an initial conversion premium of 50%.

There is an over-allotment option for a further $10 million that was exercised during Friday's session.

Banc of America was the bookrunner of the Rule 144A offering.

If the stock price exceeds the initial conversion price of $14.355 per share, holders will receive up to an additional 34.8311 shares of the company per $1,000 principal amount of notes upon conversion.

Kulicke and Soffa, a Fort Washington, Pa.-based maker of semiconductor equipment and packaging materials, said it will buy back up to $40 million of its common stock concurrently with the offering and use the remaining proceeds to retire part of its outstanding 0.5% convertible subordinated notes due 2008.

"You know what it is?" the sellside trader asked. "I've got a problem with these bonds that come with the warrants attached. It sounds like it might be good but it's deceiving. I think accounts want something that's simple and straightforward. The stock runs up, that's fine, but the stock's at like a 52-week high and the company's selling a piece of paper with a 50% premium. I think it's too high and I think most people probably agree with me. Optically they look terrible."

An outright buysider said Kulicke and Soffa's older convertibles have also done poorly in the past, and that legacy coupled with the unusual structure of the current convertible made for an unappealing issue.

"I went back and I was thinking, how did I ever make money on the Kulickes?" the buysider said. "There've been problems before with the Kulickes. I think they had issues back in the '80s."

A hedge fund trader also did not find the new convertible attractive.

"We didn't play it," the trader said. "It didn't really entice any of the guys here."

Micron gains on report, rally

Micron's 1.875% convertible due 2014 rose about 4 points outright on Friday as the stock gained on a broad-based semiconductor rally and persistent rumors of a potential buyout.

The convertible traded at 107.5 against a stock price of $12.625. Micron stock (NYSE: MU) closed at $12.60, up by 3.45% or 42 cents.

"The new Microns were active," a convertible trader said. "There's been some talk this week that private equity could be looking to buy them out, but so far nothing solid has appeared."

Micron, a Boise, Idaho-based maker of memory devices, piqued the interest of investors a week ago on unconfirmed speculation that private equity group Blackstone Capital Partners LP could be interested in privatizing the company. Neither Micron nor Blackstone would comment on the rumors.

"People are pointing to a spike in options activity in the name, which has often meant that something was going on at the company," a sellside convertible analyst said. "But options activity has spiked before and nothing's happened, and even if there is a deal you don't know what kind of a deal it is. It might be some other kind of a deal but not a buyout. There's really nothing firm to stand on."

But the analyst said a buyout bid for Micron was possible.

"I think a buyout isn't impossible," the analyst said. "The stock's trading near a 52-week low and the company's in a good space. Memory guys have been having some trouble because of pricing, but some people think pricing is improving, so the outlook is improving. It's not unthinkable."

Micron stock also got a boost from a broad semiconductor rally on Friday. In a report, UBS equity analyst Alex Gauna said pricing for dynamic random access memory and NAND flash memory is showing signs of improvement, which would benefit Micron.

"We believe Micron is now seeing flat contract pricing for the first half of June, or significant improvement over the string of bimonthly double digit declines seen over the course of the past quarter," Gauna wrote in a note.

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