Convertibles quiet; AMR steady; Newmont strengthens; Aspect Medical change of control eyed

By Rebecca Melvin

New York, Sept. 28 - Trading activity in the convertibles market Monday was doused by the fact that it was a Monday, when convert market activity tends to be slack, and because of the observance of Yom Kippur.

"It was pretty quiet," a New York-based sellsider said. Another source said "It was dead."

New issues, which dominated market trading last week, were mostly quiet. AMR Corp.'s 6.25% convertibles due 2014, which priced Sept. 22, were quoted at 105.75 versus a stock price of $8.02 and at 105.5 bid, 106.5 offered versus a stock price of $8.05, which was little changed from Friday.

Newmont Mining Corp., which has been trading mostly outright, saw its 3% convertibles due 2012 trade at 119.75, which was indicated higher by 0.875 point. The Newmont 1.25% convertibles due 2014, which are not as actively traded, were seen higher by about 3 points at 117.

It was mostly the large, liquid names like Amgen Corp. Transocean Inc. and Medtronic Inc. that were in trade otherwise and not much else.

Merger Monday excitement pushed up equity markets and affected a convertibles name: Aspect Medical Systems Inc., which announced that it signed a definitive agreement to be acquired by Covidien for $12 in cash per share. The convertibles weren't heard in trade but were indicated at 72.394, which was up from about 60 earlier this month.

Another small convertible issue, Ambassadors International Inc.'s 3.75% convertible due 2027, which has been active recently, remained quiet after news Friday that the Newport Beach, Calif.-based cruise and travel company began an exchange offer for the $97 million of those convertibles outstanding.

There was no activity in the primary market. Last week's busy new issue calendar saw some paper priced very cheap. At the same time, stock prices of some issues dropped, leaving some investors with positions that they are stuck with until those stock prices regain ground.

"AMR was a perfect example," a sellsider said. "The deal came and then the common issue, and the stock dropped like a stone. There are people with positions that they are paralyzed in."

AMR mostly steady

The new AMR convertible paper was little changed from Friday but lower than when it was first released for secondary dealings when it reached a high of 109.

Whether the paper is destined to cheapen further or hold gains wasn't clear.

"The stock has to get back up to the level on an outright basis where they were when the convertibles issue first came," a New York-based sellsider said.

Last Monday - when the convertible issue was launched - shares of the Fort Worth-based airline holding company closed at $9.03, compared to this Monday's close of $8.02, which represented something of a rebound after closing as low a $7.74 last Thursday.

The general trend in cheapness of new issues is expected to abate, according to one New York-based sellside analyst, who said, "Things will become less and less cheap until the primary market dies down because the cheapness is gone. It follows a cycle."

Aspect Medical gets taken out

On news of the takeout of Aspect Medical on Monday, convertibles players eyed the company's 2.5% convertibles due 2014 in regard to whether their change-of-control feature would be triggered.

But there is only $58 million outstanding of the issue, and no activity in the paper was seen.

"It totally flew under the radar. It was not quoted anywhere," a New York-based sellsider said.

Covidien and Aspect Medical announced that Covidien has reached a definitive agreement to acquire Aspect.

The boards of both companies have unanimously approved the transaction in which a wholly owned subsidiary of Covidien will pay $12 in cash per Aspect share for a total of about $210 million, net of cash and short-term investments acquired, according to a news release.

Aspect Medical sells an anesthesia monitoring system named the BIS System (bispectral index). The BIS system provides information that allows anesthesiologists to assess and manage a patient's level of consciousness in the operating room, ICU and procedural sedation settings.

The possibility of such an acquisition was being weighed by New York-based sellsider Jonathan Iseson of Matrix Capital Group earlier this month.

"There are three potential scenarios," Iseson said earlier this month. "Either the BIS sensor will achieve de facto standard of care, or the company right-sizes the business to achieve profitability, or they sell themselves to a larger company."

"A strategic buyer (like COV for example), a large multinational, multiproduct company could add these products and revenue streams without adding much incremental costs as they already have a sales force presence in the operating room," Iseson said.

The actual transaction, which will take the form of an all-cash tender offer followed by a second-step merger, is subject to customary closing conditions, including receipt of certain regulatory approvals, and is expected to be completed by the end of calendar 2009.

Assuming a Dec. 31 closing, Covidien expects this transaction to dilute fiscal 2010 GAAP earnings per share, primarily due to a one-time charge for restructuring. On a non-GAAP basis, excluding the restructuring charge, the transaction is expected to be slightly dilutive to 2010 earnings per share; however, the underlying strength of Covidien's existing businesses is expected to offset this dilution. As a result, Covidien does not anticipate this transaction will have a material impact on its fiscal 2010 sales or operating margin outlook.

Aspect Medical issued $125 million of the 2.5% convertibles in 2007 at a conversion price of $19.07. In 2008 they bought back $67 million of face value at about $0.60, Iseson said.

A medical technology company trading at 1.2x recurring gross profit is very cheap. And 2.5x recurring gross profit would not be an unreasonable valuation ($12.00 stock price).

"The problem they have faced is that it is expensive for a single product company to evangelize a market selling through a high touch/high cost direct sales force. The company has spent over 50% of revenues on sales and marketing. This is unsustainable," Iseson had said.

Ambassadors quiet

Ambassadors' 3.75% convertibles were quiet. They last traded at 48.5, according to a West Coast market player.

The book value is 2.45, said the market player, who likes the bonds. He gets the bonds to be worth 65.

Under the terms of the exchange offer, the company is offering for each $1,000 bond tendered 230.3766 shares of common stock, plus $273.1959 principal amount of the company's 10% senior secured notes due 2012.

Concurrently with the exchange offer, the Newport Beach, Calif.-based cruise and travel company is also soliciting consents to remove certain covenants and make other amendments to the indenture for the convertible notes.

The company is not offering any separate or additional payment for the consents to the proposed amendments. Under the terms of the indenture for the convertible notes, the proposed amendments require the receipt of consents from holders of at least a majority of the outstanding convertibles.

The exchange offer and consent solicitation will expire Oct. 23, unless extended.

Mentioned in this article:

Ambassadors International Inc. Nasdaq: AMIE

Amgen Corp. Nasdaq: AMGN

AMR Corp. NYSE: AMR

Aspect Medical Systems Inc. Nasdaq: ASPM

Medtronic Inc. NYSE: MDT

Newmont Mining Corp. NYSE: NEM

Transocean Inc. NYSE: RIG

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