Human Genome mixed on takeout news; Alpha Natural down after stock downgrade; Regis adds

By Rebecca Melvin

New York, July 16 - Human Genome Sciences Inc.'s 3% convertibles gained 1.5 points to 2 points outright but contracted by about 1.5 points to 2 points on a dollar-neutral, or hedged, basis Monday on news that the Rockville, Md.-based biopharmaceutical company has come to an agreement with GlaxoSmithKline plc on a cash takeout price of $14.25 per share, or about $3.6 billion.

The final price is much higher than Glaxo's original unsolicited bid of $2.6 billion and represents a 99% premium to Human Genome's $7.17 closing share price on April 18, the day before Glaxo's initial offer.

Most convertibles players held Human Genome on an outright basis; but hedged players lost more than a couple of points on a heavy delta and about 1.5 points to 2 points on a lighter, 60% to 65% delta, a New York-based trader said.

A week after Patriot Coal Corp. filed for Chapter 11 bankruptcy, coal companies continued to be a focus in the convertible bond market.

Patriot Coal's convertibles traded in odd lots, up "in line" with the shares at 11 bid, 11.25 offered, which was higher outright compared to a 10.25 bid, 11 offered on Friday.

The latest bit of news in the coal sector was more of a rustling than the bombshell of last week's bankruptcy: Alpha Natural Resources Inc. was downgraded by BMO Capital Markets to "underperform" from "outperform," and the convertibles of the Bristol, Va.-based coal producer dropped about 2 points on an outright basis to 85.5, according to a Connecticut-based trader.

BMO Capital Markets also downgraded Arch Coal Inc.

Elsewhere, Regis Corp. looked about 0.25 point better on swap amid news that the Minneapolis-based hair salon operator agreed to sell its Hair Club unit for $163.5 million in cash to Japan's Aderans.

Eastman Kodak Co.'s 7% convertibles traded at 18, which was in line with trades late last week, a Connecticut-based trader said.

Action in the convertible bond market continued to be light on Monday as summer schedules remained on tap.

"We had light trading volume; Amgen was a good chunk of that and that name improved 0.25 point to 0.375 point outright, unchanged on swap, while HGSI's 3%'s were better outright, but lost on swap following Glaxo's buyout," a New York-based trader said.

Human Genome mixed

Human Genome's 3% convertibles due 2018 were seen at 123 versus an underlying share price of $14.25 on Monday, which compared to 121 versus a share price of $13.58 on Friday.

Monday's price was up 2 points on an outright basis, but was lower on hedge depending on how heavy holders' deltas were. A heavy delta of 80% meant that holders lost more than 2 points. A relatively light delta of 60% to 65% mean the loss was 1.5 points to 2 points.

Human Genome shares gained 62 cents, or 4.6%, to $14.20 in heavy volume.

"The lighter the better," a New York-based trader said of the hedge on this name Monday.

"People expected that these guys were going to get taken out at some point; what they didn't have was the price," the trader said.

Glaxo's previous $13.00 per share offer was rejected by Human Genome as too low, and the final takeout price was $14.25.

"To the extent that the offer was rejected, people could have gotten hurt, if the stock went down. But the fact is, most of this was in outright hands anyway," the trader said.

The "in the money" bonds on Friday had been at 121, while the Human Genome share price had popped to $13.00 by Friday from $5.00 in April.

"If you didn't hedge yourself, what if the thing fell apart and the stock had gone back down?" the trader said.

The transaction has been approved by the boards of directors of both companies. Glaxo says the deal is "well aligned" with its long-term strategy of delivering growth, simplifying its business model, enhancing R&D returns and deploying capital with discipline.

"Through complete ownership of Benlysta, albiglutide and darapladib, GSK can simplify and optimize R&D, commercial and manufacturing operations to advance these products most effectively and efficiently while securing the full potential long-term value of the assets," according to a press release.

Glaxo expects to achieve at least $200 million in cost synergies by 2015, subject to appropriate consultation, and expects the transaction to be accretive to core earnings beginning in 2013.

Alpha Natural drops

Alpha Natural's 2.375% convertibles due 2015 traded at 85.5 on Monday, which was down from 87.5 on Friday.

Alpha Natural shares fell 78 cents, or 10.2%, to $6.85 in heavy volume on Monday.

Torpedoing the shares was a downgrade by BMO Capital Markets, which cut its share price target to $5 from $18, citing weak demand for Appalachian coal, the company's high debt levels and deteriorating margins.

"The bonds are down," a Connecticut-based trader said.

The same trader said that the Patriot Coal convertibles were a little higher by about 0.25 point, but, "in line" with the underlying Patriot Coal shares.

The coal industry in the U.S. is under pressure, with many mine closings announced in recent weeks or months as demand for coal has fallen amid new regulatory policy combined with mild winter weather and lower natural gas prices, which encouraged power plants to switch to natural gas from coal where possible.

BMO analyst Meredith Bandy said in its note Monday that she estimates the average price of Appalachian thermal coal for 2012 will be $60 per tonne, which is down from $79 per tonne in 2011.

The BMO forecasted price of Appalachian thermal coal for 2013 will be $63 per tonne and for 2014 will be $67 per tonne.

Meanwhile, thermal coal production cuts will continue in 2013 and 2014 as high cost thermal mines are idled, Bandy said in the note. And she assumes current curtailments will become permanent.

BMO also assumes thermal production cuts will be offset partially by metallurgical coal production growth.

BMO also estimates that it is unlikely that Alpha Natural will trip covenants on its amended $1.6 billion credit facility announced June 27.

Under the revised covenants, net secured debt must be no more than 2.5x trailing 12-month EBITDA with minimum liquidity of $500 million.

After the market close, there was news out that three environmental groups are suing Alpha Natural again over selenium pollution, this time in nine southern West Virginia operations.

Regis adds on hedge

Regis' 5% convertibles due 2014 traded at 129 on Monday, with shares of the Minneapolis-based hair salon operator gaining 39 cents, or 2.2%, at $17.81 by the close.

"Those look like they got 0.25 point better on swap," a trader said of the Regis convertibles, calling the delta hedge on those bonds about 75% to 80%.

Regis said on Monday that it has agreed to sell its Hair Club for Men and Women hair restoration division to wig maker Aderans for $163.5 million.

Regis said the deal would help lift profit and sharpen its focus on its main business.

Regis chairman Joel Conner said in a news release, "We believe the sale of Hair Club represents an opportunity to exit a noncore business on attractive terms."

The transaction is expected to close later this year. The Regis franchises include Supercuts and Sassoon Salon.

Mentioned in this article:

Alpha Natural Resources Inc. NYSE: ANR

Eastman Kodak Co. Pink sheets: EKDKQ

Patriot Coal Corp. Pink Sheets: PCXCQ

Regis Corp. NYSE: RGS

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