Hologic drops outright, slips on hedge on acquisition news; NextEra to price $600 million

By Rebecca Melvin

New York, April 30 - The name of the day in the convertible bond market Monday was Hologic Inc.

All three of the Hologic convertibles traded actively and lower on an outright and hedged basis after news that the Bedford, Mass.-based diagnostic imaging and surgical products company planned to buy diagnostic test firm Gen-Probe Inc. for $3.75 billion.

Hologic also reported weak quarterly results; but it was the acquisition news, which involves Hologic taking on additional debt, that weighed on bond players, sources said.

"It surprised some people. The thinking was, 'Why complicate your life with a takeover?'" a New York-based convertibles trader said. "They did it because it was accretive to EPS and their diagnostics was in secular decline."

Goldcorp Inc. was also seen in trade after the Vancouver, B.C.-based mining company reported earnings on Friday.

"They were OK," a trader said about the Goldcorp earnings. "Production volumes were a little light and people are reacting to that."

The primary market was quiet during the session, but after the market close, NextEra Energy Inc. launched an offering of $600 million of three-year mandatory convertible equity units that it plans to sell overnight at a discount to par.

The registered NextEra units were seen coming at $48.75 to $49.00 versus their $50.00 par.

Overall, convertible bond trading volume was light, and Hologic made up a big chunk of the volume.

"Hologic was 10% - maybe more," a trader said. "Otherwise, it was the usual assortment of investment-grade and medium-grade securities."

For April, market players were divided on how returns would come in. One trader thought returns would be "flat to up a touch" for April. But a second trader suggested returns for the month would be negative for "more than a few players."

The trader said his prediction for returns of anywhere from negative 0.5% to negative 2% was based on the fact that volatility has come in during the month and Treasuries rallied, going against interest rate risk hedges many players had on in which they shorted Treasuries.

"We went below 2% on the 10 year, and that went against them," he said.

Equities lagged on Monday, with the Nasdaq slipping 23 points, or 0.74%, to 3,046.36. For April, the Dow Jones industrial average and Standard & Poor's 500 stock index ended the month with declines for the first time since autumn.

Worries about a slowing U.S. economy and renewed worries about debt troubles in Europe were behind the pull back.

Hologic trades down

Hologic's shortest-dated convertibles, the 2% convertibles due 2037, came in about 0.25 point to 0.5 point on Monday to 99.5 bid, 99.75 offered.

"We've been active in the shortest dated ones, playing for the put," one trader said.

Hologic's 2% convertibles due 2042, or the 2012 C series, traded down by a greater magnitude, trading down from the high 90s to a 93 handle. The paper settled at 93.5 bid, 94.25 offered, shedding multiple points outright and coming in about a point on a dollar-neutral basis.

A second source said that by the end of the session, the Cs were down only about 0.5 point dollar neutral.

The Hologic 2% convertibles due 2037 traded at about 100.

Hologic shares ended down $2.11, or 10%, to $19.12, after trading down as much as 11% during the session.

"The way I saw it: the shortest dated paper, or the olds, came in only 0.25 point. Initially it was down 0.375 point to 0.5 point. It's short dated and the credit is fine," a trader said.

The Cs, or the longest paper, putable in 2018, came in 0.5 point, according to this same trader, but he thought the issue was still expensive.

"I widened the credit, but I'm not taking the vol. up," he said.

"The Bs are in 1.25 points," he said.

The losses sustained by the convertible bonds were attributable to the additional debt Hologic will take on to fund the purchase of test-maker Gen-Probe for about $3.7 billion.

Hologic is paying a 20% premium to Gen-Probe's closing share price Friday, and it is financing the deal with a combination of cash and debt.

The company is seeking to expand and diversify its diagnostics business, and Gen-Probe makes tests for sexually transmitted diseases and blood screening.

Hologic said the transaction will add about 20 cents per share to the earnings in the first fiscal year after the deal closes. The company expects annual cost savings of about $75 million within three years of the closing, and about $40 million in the first year.

Hologic also swung to a loss for its fiscal second quarter, citing higher costs that offset increased revenue and the company posted a smaller gain on the sale of intellectual property.

On an adjusted basis, earnings rose to 33 cents a share for the period ended March 24, from 30 cents.

Revenue rose 7.4% to $471.2 million.

Analysts expected earnings of 33 cents and $474 million in revenue.

For the current quarter, Hologic estimates per-share earnings of 34 cents and revenue of $475 million to $480 million, both just short of estimates for 35 cents and $482 million.

NextEra to price

Juno Beach, Fla.-based NextEra, a power generation and transmission company, said it plans to sell $600 million of three-year mandatory convertible equity units with a $90 million greenshoe.

The registered units were being sold via bookrunner Bank of America Merrill Lynch at a discount to their $50.00 par value.

The overnight deal was expected to be priced before the market open on Tuesday at between $48.75 and $49.00.

The distribution rate was seen at 5.599% with a 20% initial conversion premium.

The bonds are non-callable for life with no puts. They have full dividend protection and change-of-control protection.

Mentioned in this article:

Goldcorp Inc. NYSE: GG

Hologic Inc. Nasdaq: HOLX

NextEra Energy Inc. NYSE: NEE

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