New United Technologies units trade at 51; USEC up on DOE cost-sharing deal; Dendreon flat

By Rebecca Melvin

New York, June 13 - United Technologies Corp.'s new equity units traded up a point to 51 on their debut Wednesday after the Hartford, Conn.-based building and aerospace technology company priced the $1 billion deal at the rich end of talk late Tuesday.

Most of the convertibles market's focus Wednesday was on the United Technologies units, a trader said.

USEC Corp. jumped multiple points to as high as 49 after word that the U.S. Department of Energy has decided to go ahead with a cost-sharing program with the Bethesda, Md.-based enriched-uranium producer to develop next-generation enrichment technology at a plant in Ohio.

The USEC bonds came off their highs to trade around 47.5 bid, 48.5 offered around midsession.

Dendreon Corp.'s convertibles were little changed despite a pop in the underlying shares as takeout rumors circulated and Summer Street research firm initiated coverage of the equity at a "buy" rating and a price target of $18.00 per share, sources said.

"The [Dendreon] bond market not moving like the equity may suggest a small, short squeeze in the stock on an unsubstantiated rumor," a trader said.

U.S. equities fluctuated but ended sharply lower on the day.

In economic news, retail sales in the United States fell 0.2% in May, down for a second month, and prompting economists to cut forecasts for economic growth as limited job and income gains are likely to hold back consumers, which account for about 70% of the economy.

The 0.2% decrease matched April's drop that was previously reported as a gain, the Commerce Department said.

Meanwhile U.S. wholesale prices dropped in May by the most since July 2009 as energy and food costs decreased. The producer price index declined 1%, more than forecast, after falling the prior month, Labor Department figures showed.

Oil dropped to an eight-month low during the session.

United Technologies adds

United Technologies' newly priced $1 billion of equity units were trading a point better at 51, which was a bigger jump than the half-point predicted in the gray market on Tuesday. It also represented a chunkier increase when compared to a 100 par convertible.

But the potential for an even better showing was curbed by heavy flipping upon release for secondary dealings, an East Coast-based buysider said.

That may have kept a lid on things for the short term, the buysider said. But he also said, "I would suspect we see this move higher over time."

United Technologies shares, which were off fractionally during the session, turned lower into the close, and that may have affected where the new convertibles settled.

The registered, off-the-shelf deal came at the rich end of talk, which was for a distribution rate of 7.5% to 8% and a premium of 27.5% to 32.5%.

The deal was sold via joint bookrunners J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Citigroup Global Markets Inc., Goldman Sachs & Co. and HSBC Securities (USA) Inc.

The equity units will initially consist of a contract to purchase United Technologies common stock at a 5% undivided beneficial ownership in $1,000 principal amount of notes due Aug. 1, 2022.

Under the purchase contract, holders are required to purchase United Technologies stock no later than Aug. 1, 2015. The notes may not be redeemed until Aug. 1, 2017.

Proceeds are expected to be used primarily to pay a portion of the cash consideration for the previously announced acquisition of Goodrich Corp. This merger is expected to be completed mid-2012. Remaining proceeds will be for general corporate purposes.

United Technologies has applied to list the units on the New York Stock Exchange under the symbol. "UTX PR A."

USEC jumps

USEC's 3% convertibles due 2014 were trading around 47.5 bid, 48.5 offered around midsession Wednesday, which was up from about 39 bid 40 offered on Tuesday.

The USEC paper had traded as high as 49 while the underlying shares of the Bethesda, Md.-based uranium supplier surged 23 cents, or 31%, to $0.99.

The USEC convertibles trade on an outright basis, however.

Sparking the move up was news that the DOE has agreed to a cost-sharing program of up to $350 million that is meant to demonstrate that the uranium enrichment technology of USEC's American Centrifuge Plant in Ohio will work on a commercial basis.

Given the news, "I suspect we will see USEC drift higher over the next several weeks and settle in the mid 50s to mid 60s," an East Coast-based buysider said.

The buysider said he thought Wednesday's pricing of the bonds was being held down by "a few weak holders clearing positions."

But while the agreement with the DOE reduces financial risks for USEC, risks remain.

Under the program, the DOE will foot the bill for 80%, or $280 million, of the program, and USEC will pay for 20%. For this year's work, the DOE will provide $88 million. The work includes taking and disposing of enriched uranium byproducts. In addition, USEC still hasn't received a $2 billion loan guarantee that the Energy Department has hesitated to provide. But this new agreement increases project involvement, according to a news release.

"I am still not touching it," a West Coast-based trader said of the USEC convertibles. "Nice win, but there's still a lot of heavy lifting to do, and the trade relies on Washington, good luck!"

"USEC will continue to work with Congress and DOE to pursue opportunities for funding the balance of the RD&D program," according to a news release Wednesday. Appropriations bills providing full-year 2013 funding have been approved by the House of Representatives and the Senate Appropriations Committee but have not yet been finalized.

Dendreon mostly flat

Dendreon's 2.875% convertibles due January 2016 traded flat at 68.50 bid, 68.75 offered on Wednesday, according to a trader, despite a surge in the underlying shares to $7.11, which was up 86 cents, or 14%.

At the end of the session, a market source said the paper settled at 69.

Summer Street research firm initiated coverage on Dendreon with a "buy" rating and price target of $18.00 a share on Wednesday. That contrasts with research firm Wedbush Securities, which reiterated an "underperform" rating with a $4.00 price target earlier this month.

The Seattle-based biotech company has struggled launching its Provenge prostate drug therapy and faces competition issues, and has been the subject of takeover speculation in the face of a severely depressed stock price.

On Wednesday there was a rumor that Sanofi might take over the company, a trader said.

But "bondholders are not exactly buying it," he said.

Dendreon was torpedoed last month after positive news that Johnson & Johnson's Zytiga prostate cancer drug had eradicated tumors in some men with high-risk forms of the disease in a mid-stage trial.

Medivation Inc.'s enzalutamide drug has also shown promise to treat prostate cancer.

Mentioned in this article:

Dendreon Corp. Nasdaq: DNDN

United Technologies Corp. NYSE: UTX

USEC Corp. Nasdaq: USEC

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