Morning Commentary: Cubist jumps outright, falls on swap on Merck takeout; Cobalt down again

By Rebecca Melvin

New York, Dec. 8 – Cubist Pharmaceuticals Inc.’s three convertible bonds jumped in active trade on an outright basis early Monday, but the two balanced convertibles contracted on swap after news that Merck & Co. has agreed to buy the Lexington, Mass.-based biopharmaceutical company for $102 per share, or $9.5 billion including debt.

The proposed purchase price represents a 35% premium to Friday’s Cubist stock close.

Cubist’s 1.125% convertibles due 2018 were trading at 132.22 versus an underlying share price of $100.67 on Monday, a New York-based trader said.

That was up about 17.5 points on an outright basis from 115.125 versus a share price of $74.36 on Friday. On a swap basis, holders lost about 3.65 points, assuming a delta of 65%.

But value market players would not be long these issues on swap, the trader said. Therefore there wasn’t much pain among hedged players.

Cubist’s 1.875% convertibles due 2020, or the B tranche, traded at 136, according to Trace data. That was up from about 120.75 heading into Monday.

This issue would also be down 3 or 4 points on swap.

Cubist’s in-the-money 2.25% convertibles due 2017 “is a 3-point winner with the make-whole table,” he said, assuming the $102 cash takeout price and that the deal closes in three months.

The Cubist 2.25% convertibles jumped to about 347 on Monday from 262 ish on Friday, according to Trace.

Cubist shares were up $26.35, or 35.4%, at $100.71.

Elsewhere, the convertibles market was mostly quiet. Cobalt International Energy Inc.’s 2.625% convertibles extended losses, trading down another couple of points to 61.7 from Friday’s 64.75 to 65. Cobalt shares were also sharply lower.

Illumina Inc.’s 0% convertibles due 2019 traded at 111, which was down 0.3%, according to Trace.

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