All eyes on Bausch & Lomb, Advanced Medical Optics; Huntsman up again; Hilton flattens

By Evan Weinberger

New York, July 3 - Mergers and acquisitions drove action in the secondary market Friday. Armed with news that Advanced Medical Optics Inc. had submitted a rival, higher bid for Bausch & Lomb Inc., traders who were active on a semi-holiday summer Friday looked to move on convertibles from both companies.

But even the prospects of a bidding war in eyecare couldn't stir the broader convertible markets Friday, as those were two of the most active issues in the secondary market on a day when active was a relative term.

With no new issues hitting the market Friday and one extremely active convertible issue in the secondary market Thursday essentially standing still the next day, investors and traders were taking advantage of the last day of a vacation week.

"It's dead slow," one analyst said.

"I feel like the few people that worked this week worked the first half and that everyone's taking the long weekend."

One mover to go along with Bausch & Lomb and Advanced Medical Optics was Companhia Vale do Rio Doce SA's 5.5% mandatory exchangeable notes. The exchangeables (NYSE: RIO-P) traded up $0.32, or 0.79%, closing at $40.62. The exchangeables traded at slightly below normal average volume for the last three months.

Rio de Janeiro-based CVRD was again linked to a possible buyout of Alcan Inc., or possibly Alcoa Inc., in a Friday report from London's Daily Telegraph. The newspaper also said that Rio Tinto plc, the British mining giant, had contacted Credit Suisse and Deutsche Bank to discuss a possible bid for Alcan. Shares in CVRD, the Brazilian mining and metals company, (NYSE: RIO) traded up $0.56, or 1.18% at $48.03.

Huntsman moves up

Huntsman Corp.'s 5% convertible mandatory preferred due 2008 traded higher again Friday, but not with the vigor seen Thursday. The mandatories (NYSE: HUN-P) were up $0.42, or 0.83% to $50.77 with a volume of 156,900 shares, around twice the average daily volume in the mandatories for the last three months. The Salt Lake City-based chemical company's mandatories jumped $1.30, or 2.65%, to $50.35 Thursday at a volume of 711,300 on news of a possible bidding war.

Hexion Specialty Chemicals Inc., a portfolio company of private equity firm Apollo Management Ltd., offered Huntsman $27.25 per share, for a total of $6.1 billion, in a rival takeover bid. The Hexion bid was $2 sweeter per share than Basell Polyolefins Co.'s $5.6 billion takeover bid for Huntsman just over a week earlier. Huntsman stock (NYSE: HUN) closed at $28, up $0.54, or 1.97%.

Hilton edges higher

One other notable secondary issue was Hilton Hotel Corp.'s 3.75% convertible senior notes due 2023. A day after a frenzy sparked by the Blackstone Group LP's offer to buyout Hilton Hotels for $26 billion, the convertibles traded up slightly, finishing Friday at 202.329 versus a closing stock price of $45.71. They were last seen Thursday at 202.366 versus a closing stock price of $45.39.

With the likelihood that Blackstone will redeem the Hilton convertibles before the April 15, 2008 call date analysts say that the convertibles are now just a proxy for the stock. "It's just common with a coupon on it right now," one analyst said.

Hilton stock (NYSE: HLT) closed up $0.32, or 0.71%. Overall, the stock markets closed up Friday. The Dow Jones Industrial Average finished better by 45.84 points, or 0.34%, at 13,611.68 while the Nasdaq completed the week up 9.86 points, or 0.37%, at 2,666.51.

Bausch, Advanced Medical catch a look

With a $3.7 billion takeover deal signed with private equity firm Warburg Pincus, it looked like Bausch & Lomb had settled its future. With a massive product recall weighing down profits, it appeared that Advanced Medical Optics wouldn't be able to compete. That all changed late Thursday when Advanced Medical announced a $4.3 billion counteroffer for Bausch & Lomb.

With takeover offers flying around and the prospect of a bidding war - traders said Warburg Pincus was considering its own counteroffer - Bausch & Lomb's convertible floater due 2023, which pays six-month Libor plus 50 basis points, moved up Friday and was last seen at 131.784 versus a closing stock price of $72. The last trade of the floaters on June 28, the last time the bonds were traded, saw them at 127.33 versus a closing stock price that day of $68.96.

With all of the news surrounding the two companies, Bausch & Lomb stock (NYSE: BOL) closed Friday unchanged at $72. Shares in Advanced Medical Optics (NYSE: EYE) closed at $35.85, down $0.04, or 0.11%.

Meanwhile, three issues from Advanced Medical Optics traded Friday. The most active was the Santa Ana, Calif.-based eyecare company's 3.25% convertible senior subordinated notes due 2026. Those were last seen on Friday at 88.73 versus a closing stock price of $35.85. They were last seen at 90.695 versus a closing stock price of $35.89 Thursday.

Advanced Medical's 2.5% convertible senior subordinated debentures due 2024 were last seen Friday at 97.804 versus $35.85 after finishing Thursday at 98.4664 versus $35.89.

And the company's 1.375% senior subordinated convertible notes due 2025 were finished the session Friday at 94.781 versus $35.85. When last seen Monday, the convertibles traded at 95.1228 versus a closing stock price of $34.83.

According to traders, the Advanced Medical bid faces steep hurdles. Along with the prospect of an upped bid from Warburg Pincus, Advanced Medical is dealing with the massive May recall of its Complete MoisturePlus contact lens solution after 26 people contracted a rare corneal infection after using the product. The solution accounted for 10% of Advanced Medical Optics revenues in 2006.

Advanced Medical's decreased second quarter revenues made it seem unlikely that it would bid for Bausch & Lomb, but the company announced Friday that it would finance its combined cash and stock bid through bank and public debt.

But the key to the Bausch & Lomb convertibles, analysts said, was whether Warburg Pincus would up its bid and what that bid would be. The original Warburg Pincus bid for the Rochester, N.Y.-based eye care company was an all-cash offer.

"A lot of it depends on the size of that bid and what it does to takeover protection," one analyst said. "It remains to be seen if they respond and what that will do to takeover protection."

A second analyst added that the usual models convertibles traders use might need to be thrown out the window.

"While the whole situation is undefined, it's going to be a very different stock now," he said, referring to Bausch & Lomb. "Now it's going to move on merger news, or expectations of what merger news is going to be. It kind of leaves the realm of expertise of the traditional convertibles investors and moves more into the realm of the risk-arb managers."

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