Yahoo! up after rejecting Microsoft; Flotek, Vertex Pharma bringing deals; GM, Schering-Plough earnings ahead

By Evan Weinberger

New York, Feb. 11 - Yahoo! Inc. convertibles rose in early trading after the company officially rejected Microsoft Inc.'s takeover bid.

Kellwood Co. convertibles were up a bit on the announcement of its takeover by a private equity shop. Kellwood had originally vowed to stand and fight.

General Motors Corp. and Schering-Plough Corp. convertibles were up ahead of earnings reports Tuesday.

And Chesapeake Energy Corp. convertibles saw a steep rise Monday.

Market watchers all said trading was quiet on the day.

New deals coming

In new deal activity, Flotek Industries Inc. was set to price $100 million in convertible senior notes due 2028 Monday after market close.

And Vertex Pharmaceuticals Inc. launched $250 million in convertible senior unsecured notes due 2013 after the close.

The convertibles are talked at a 4.75% to 5.25% coupon and a 27.5% to 32.5% initial conversion premium.

There is a $37.5 million over-allotment option on the Securities and Exchange Commission-registered transaction.

The deal is expected to price Tuesday after the market close.

The convertibles have two years of call protection.

The convertibles carry fundamental change protection and a make-whole premium.

Vertex launched a concurrent offering of 6 million shares of common stock. There is a 900,000 share greenshoe on the common stock offering. The two offerings are separate and not contingent upon each other.

Vertex is a Cambridge, Mass.-based drug maker. The company plans to use the proceeds for general corporate purposes, which include the marketing and development of its drug telaprevir and for other purposes.

Stocks end shaky day higher

Stocks were shaky for most of the day, buoyed by some corporate earnings and hopes for a further rate cut. American International Group Inc.'s warning that it may have more credit write downs on the way tamped down the good feelings Monday.

The Dow Jones Industrial Average rose 57.88 points, or 0.48%, to 12,240.01.

The Nasdaq picked up 15.21 points, or 0.66%, for a 2,320.06 close.

And the Standard & Poor's 500 gained 7.84 points, or 0.59%, to close at 1,339.13.

Flotek - the forgotten deal

Houston-based oil and gas driller Flotek launched its $100 million offering of convertible senior notes due 2028 on Feb. 5. In the busy week of new deals that went by before pricing, it appears Flotek may have gotten a bit lost in the shuffle.

Flotek's convertibles are talked at a 3.75% to 4.25% coupon and a 35% to 40% initial conversion premium.

The offering features a $15 million greenshoe and a contingent conversion subject to a 120% hurdle beginning 2013.

The convertibles are callable beginning 2013, and there are puts in each of 2013, 2018 and 2023.

A sellside analyst said the deal looks cheap, no matter volatility or credit spread. "It doesn't matter what numbers you use," the analyst said. "They model really, really cheap."

There are pitfalls to the deal, however.

Because it has a small market capitalization with a corresponding common stock base, Flotek is creating its own stock borrow for the deal with a concurrent issue of 3.8 million shares of common stock. Those shares will be lent to an affiliate of Bear Stearns, the bookrunner on the SEC-registered transaction. "When you have a created borrow, that hurts the liquidity," the analyst said.

It also limits the ability to get out of the convertibles if Flotek runs into problems. "If you want to get out, there's only one place to go," the analyst said, adding that holders of the convertibles would have to hope that Bear Stearns could find a market for them.

Its market cap makes Flotek vulnerable to stock moves, although the analyst said there is a "good upside case" to be made on the stock.

Yahoo moves up on playing coy

Sunnyvale, Calif.-based internet portal Yahoo apparently played hard to get with software giant Microsoft Monday.

Yahoo rejected Redmond, Wash.-based Microsoft's $31-per-share offer for Yahoo, saying it undervalued the company.

Market watchers still expected the deal to go through, with Microsoft possibly sweetening the deal. Yahoo's response was comparatively cordial as far as corporate rejections go, leaving many to assume they would be amenable to a stronger offer.

Microsoft could also lobby Yahoo's board of directors or go through a proxy fight.

An analyst reported some activity in Yahoo's zero-coupon convertible senior notes due April 1. But most of that came in the morning, the analyst said.

"From a converts standpoint, they already had a homerun when their stock went up" on the initial offer, a trader said.

Yahoo's convertibles closed Monday at 147.023 versus a closing stock price of $29.87. They closed Friday at 142.366 versus a stock price of $29.20.

Yahoo stock picked up 67 cents, or 2.29%, on Monday.

Kellwood up on merger

When private equity shop Sun Capital Securities Group first broached its $21-per-share takeover bid for St. Louis-based apparel maker Kellwood, the company vowed to fight.

Kellwood even went so far as to propose a bond tender offer to buy up enough shares to prevent the takeover.

Kellwood's resistance waned over the course of the next few weeks. And on Monday, that resistance proved to be futile.

Sun Capital announced Monday that it was taking over Kellwood for that $21-per-share offer. Sun Capital's tender offer expires Tuesday, when the deal is expected to close.

Kellwood's 3.5% convertible senior notes due June 15, 2034 closed Monday at 98.0363 versus a closing stock price of $20.94. They closed Friday at 96.3239 versus a stock price of $20.53.

Kellwood (NYSE: KWD) gained 41 cents, or 2%, on the day.

GM, Schering-Plough up ahead of earnings

Detroit-based auto maker General Motors is set to announce its fourth-quarter and 2007 earnings Tuesday before the market opens. Its convertibles closed Monday mostly up in anticipation.

GM's 1.5% convertible senior debentures due May 31, 2009 closed Monday at 24.8 versus a closing stock price of $27.12. They closed Friday at 24.43 versus a stock price of $25.80.

GM's 6.25% convertible senior debentures due July 15, 2033 closed Monday at 20.79 versus a stock price of $27.12 after finishing Friday at 20.42 versus a stock price of $25.80.

GM's 4.5% series A convertible notes due March, 11 2032 closed Monday at 19.45 versus a stock price of $27.12 after a 19.9 close versus a stock price of $25.80 on Friday.

And GM's 5.25% series B convertible notes due March 11, 2032 closed Monday at 19.43 versus a stock price of $27.12 after closing Friday at 19.34 versus a stock price of $25.80.

GM stock (NYSE: GM) stretched $1.32, or 5.12%, on Monday.

Kenilworth, N.J.-based drug maker Schering-Plough is also set to announce earnings Tuesday before the market open. Despite well-publicized problems with its anti-cholesterol combo-drug made in tandem with Merck, investors appear bullish on Schering-Plough's earnings.

Schering-Plough's 6% mandatory convertible preferred stock due Aug. 10, 2013 closed Monday at 199.44 versus a closing stock price of $20.62. They closed Friday at 194.4 versus a stock price of $19.77.

Schering-Plough stock (NYSE: SGP) moved up 85 cents, or 4.30%, on Monday.

Chesapeake closes higher

Oklahoma City-based oil and gas exploration outfit Chesapeake Energy saw its 2.75% contingent convertible senior notes due Nov. 15, 2035 close Monday at 121.602 versus a stock price of $41.15. They closed Friday at 116.876 versus a stock price of $38.64.

Chesapeake stock (NYSE: CHK) added $2.51, or 6.50%, on Monday.

In other news, a bitter cold snap in the Midwest and Northeast and a refinery problem in Delaware drove up oil prices Monday.

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