Cephalon in overnight market; Elan bounces; Beazer better; airline paper dips

By Ronda Fears

Nashville, June 1 - Convertible issuance showed signs of springing back to life Wednesday with a trio of deals now on the docket, highlighted by Cephalon Inc.'s $800 million overnighter that was buoying spirits if for no other reason than being a nice size.

Besides Cephalon, Milwaukee mining equipment maker Joy Global Inc. was at bat after the close with a $260 million issue and San Jose, Calif.-based communications equipment maker Symmetricom Inc. has a small $100 million issue slated for Thursday's business. Already, those three deals - excluding their respective greenshoes - outpace the $1.06 billion of new issues in all of May tallied by Prospect News.

However, well after the close Joy Global abandoned its planned offering, saying the conversion premium was not sufficiently attractive.

In the secondary market, traders noted they were starting to see some reasonable bids but were taking notice the extended rally in Treasuries that knocked yields on the benchmark 10-year note to 3.89%, which one buyside trader observed was the lowest rate since April 2004 and "so low that stock valuations are more attractive relative to bonds, even at the current levels."

Stocks gained on speculation that the Federal Reserve may ease off their interest rate hike cycle, the buysider said, but "oil prices are a big wildcard in the mix." Crude oil for July delivery rose $2.63 on Wednesday to settle at $54.60 a barrel on the New York Mercantile Exchange, the biggest gain since Dec. 15 and the highest closing price since April 22.

Elan, Beazer higher

Oil's spike swatted all the airline convertibles down, with Delta Air Lines Inc. issues both off about a quarter-point, Continental Airlines Inc. and AMR Corp. both losing a quarter-point to a half-point and Northwest Airlines Corp. lower by 0.75 to 1 point.

But, overall, traders said the convertible market continued to be better bid Wednesday.

Elan Corp. plc's 6.5% convertibles gained a point or more, traders said, on news the company bought back a big chunk, around half, of the issue. The Irish drugmaker said it retired $211.8 million of the 2008 bonds, plus about $31 million of the so-called Athena notes assumed in an acquisition, reducing its annual interest costs by about $16 million.

Elan chief finance officer Shane Cooke said in a statement that the buybacks would reduce the company's cash balances at the end of March by about $80 million but leave it with cash in excess of $1.3 billion.

"Can you say flush? They paid 24 points!" one sellsider commented, echoing cheers from the buyside camp.

Elan said it purchased $175 million and agreed to buy a further $31 million of 6.5% convertible guaranteed notes maturing 2008 for about $255 million, representing an average premium of about 4% to the market price. It also bought $36.8 million of its so-called Athena notes, which are also due in 2008, leaving $613.2 million outstanding.

Beazer Homes USA Inc.'s convertible also added 1 to 2 points on refinancing transactions, as the company sold $300 million of new bonds to yield 7% with some of those proceeds earmarked to repay a $200 million term loan. The stock shot up 3% on the day.

Cephalon deal to take out old 2.5s

Mid-cap drugmaker Cephalon Inc. was in the overnight market pitching $800 million of 10-year non-callable convertible notes talked with a 1.5% to 2.0% coupon and 10% to 14% initial conversion premium, with proceeds earmarked to tender for all its 2.5% convertibles due 2006 at 97.5.

There is a call spread overlay involved, however, that will effectively raise the conversion premium while, to Cephalon's benefit, limit dilution. The amount of proceeds to be used for the hedge and warrant transactions has yet to be determined.

Until completion of the tender for the 2.5% convertibles, a $600 million issue when it was sold in December 2001, Cephalon said it would use proceeds to repay or repurchase other debt or for working capital and other corporate purposes.

Cephalon, based in Frazer, Pa., currently markets three proprietary products in the United States: Provigil to treat narcolepsy, Gabitril to treat anxiety disorders and Actiq used to manage breakthrough cancer pain, plus more than 20 products internationally.

Cephalon 2.5s seen at 95

Holders of Cephalon's 2.5% convertibles were elated by the tender price of 97.5 when traders said the issue had dropped a point or more Wednesday to the 95 area before the news hit the tape after the close.

Onlookers were hesitating to call the new deal a blockbuster, but most convertible players seemed happy to see a deal of that size surface after such a long dry spell in the primary market.

"It is a good thing to see a deal this size on the wire," said a hedge fund manager in New York. "Maybe some other stuff comes out of the shadows."

A buyside analyst said the new deal terms might not be all that attractive, even at a premium level not seen on a regular basis for more than half a decade.

"It's just a matter of where the stock goes tomorrow - I suspect $38.50 to $39.00. Thus, the premium will really be higher than 10%, and I'm not sure at that level they are all that attractive. I would rather wait until tomorrow," the analyst said.

Cephalon shares on Wednesday closed at $40.40, down $2.02 on the day, or 4.76%. In after-hours trading, though, news of the new convertible sent the stock tumbling $2.55, or 6%.

Another buysider said, though, he expected that with several new drugs in its pipeline, he expects Cephalon shares to be upgraded soon. Meanwhile, he said, "Buy the convertible; at least you will make a few bucks while you wait."

Joy Global offered plus 0.5 point

Joy Global Inc. spent the day marketing $260 million of 20-year convertible notes talked with a 2.5% to 3.0% coupon and 33% to 38% initial conversion premium, with proceeds earmarked to redeem its 8.75% straight bonds due 2012. Also, it is being sold on swap with $75 million of proceeds earmarked for stock repurchases.

In the gray market, buyside traders reported seeing no bids but an offer in the Street late in the afternoon at 0.5 point over issue price.

Joy Global, which historically gets 40% of its business from the coal mining industry, has received tenders for about 98% of its 8.75% senior subordinated notes due 2012, with roughly $167 million outstanding. The company is offering 111.852 for the notes, which includes a consent fee. In its earnings report late Tuesday, the company said it also is exploring the refinancing of its current revolver over the next several months aiming to lower borrowing costs and increase financial flexibility and liquidity.

For fiscal second-quarter 2005, the company posted net income of $39 million, or $0.47 per fully diluted share, compared with $19 million, or $0.23 per fully diluted share, in fiscal second-quarter 2004. Net sales increased by 43% to $482 million from $338 million. Operating income totaled $65 million, versus $22 million in the year-ago quarter. Per share data reflects a 3-for-2 stock split in January 2005.

Joy Global also boosted its guidance for the coming 12 months, forecasting total revenues at $2.0 billion to $2.2 billion with profitability in the range of 20% to 25% of revenue gains, or earnings per share of $2.00 to $2.25, operating income of $265 million to $295 million and adjusted EBITDA of $305 million to $335 million.

Joy Global as much as 9.5% cheap

Several buyside sources said Joy Global's industry sector was appealing, and sellside analysts away from underwriter UBS were putting the issue anywhere from 3% cheap to 9.5% cheap, but there was some resistance from potential buyers.

"I want to like JOYG, but the premium is too high for a seven-year deal, especially since the yield advantage of the coupon over the common dividend is less then 200 bps (coupon on bond equals 3% and stock yields about 1.25%), and even though there is dividend protection, the dividend is going to go up over time (per the CEO), thus reducing volatility, theoretically," said a buyside analyst.

"They either need to make it five-year paper or bring it as a 27% premium. A lot of people are penalizing the volatility down to 30% because it's seven-year paper."

One sellsider using a credit spread of roughly 200 basis points over Treasuries and a 40% stock volatility pegged it 9.5% cheap at the middle of price talk, but widening the spread to 400 bps with the same volatility input she put it just 2.66% cheap.

Another sellside analyst put it around 3% cheap, using a credit spread of 275 basis points over Treasuries and 33% volatility.

Joy Global critic sees little upside

"Finally," the buyside analyst continued, "I want to like the stock too, but it has had such a great run, and you have to think a lot of the upside in EPS today was baked in. So, I don't want to take risk on a high premium, seven-year deal when I'm not comfortable that the stock will lift and give me a chance to get a short off higher.

"Once the company gets out of the way buying today, I think the stock could go down further, which by the way is probably why the company did not buy more stock today. They have $300 million to buy under their new plan and they said they will buy it. I just suspect they think it could back off some more and want to save powder if it does."

Joy Global shares traded in a range of $35.79 to $38.40 on Wednesday, versus the close Tuesday at $37.54 before the earnings report. Around 2.8 million shares traded Wednesday, with the stock ending at $35.96, off $1.58 on the day, or 4.21%.

"I think the bonds and stock will trade down tomorrow out of the box," the buysider added.

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