Cadence, Mentor lower on buyout bid; Huntington sags; Energy Conversion deal looks cheap

By Rebecca Melvin

New York, June 17 - The convertibles of Cadence Design Systems Inc. were lower on Tuesday on news that the San Jose, Calif.-based electronic design company has made a bid for Mentor Graphics Corp. That bid has so far has been rejected.

Mentor Graphics convertibles were higher outright, but lower on a dollar-neutral basis as its underlying shares jumped more than 20%.

Huntington Bancshares Inc. was a notable loser among financials, which were pressured by a renewal of negative sentiment on Tuesday.

The rest of the market was mostly lower also as the latest batch of economic data pointed to U.S. businesses being hurt by continuing higher oil prices.

The Labor Department's producer price index jumped 1.4% in May, which was the biggest increase in six months. The Federal Reserve reported that industrial production fell 0.2% in May, the second straight monthly decline. And new housing units started in May fell 3.3% to a 975,000 pace, the lowest in 17 years.

There was activity among some oil and oil-services names, including Transocean Inc. as crude oil prices dropped back to about $134 a barrel on the New York Mercantile Exchange.

No gray market emerged in Energy Conversion Devices Inc., which was expected to price $225 million of five-year convertibles after the market close Wednesday. The deal was seen anywhere from between 2% to 4% cheap, according to several analysts.

After the market close, a new proposed deal was announced by MF Global Ltd., which plans to price $150 million of non-cumulative perpetual convertible preference shares and $150 million of convertible senior notes in two private offerings, after the market close Thursday.

The convertible preference shares were talked to yield 4.75% to 5.25%, with an initial conversion premium of 10% to 15%; while the 30-year convertible senior notes were talked with a coupon of 4% to 4.5% and an initial conversion premium of 15% to 20%.

Proceeds of the offerings, together with other components of the company's capital plan, will be used to repay its outstanding bridge loan due in December 2008.

Cadence, Mentor lower on buyout bid

The Cadence 1.375% convertibles due 2011 were seen trading at 87 late in the session, compared to about 90 on Monday.

Cadence shares (Nasdaq: CDNS) moved lower early in the session, but dropped off further toward the close, ending the day down 75 cents, or 6.5%.

Cadence's 1.5% convertibles due 2013 closed at 83, compared to 86.75 on Monday.

Cadence also has a 0% convertible bond, of which not much is left outstanding and which is puttable in August.

"Those are going away," a New York-based sellside analyst said.

Of the Cadence convertibles, the analyst said: "It looks like those come in a little. The credit will widen a bit, but it doesn't warrant the bonds coming in a couple of points. It's the borrow issue, I think," a New York-based sellside analyst said.

"Vol has been collapsing with it being so stable, but vol would pick up," he added.

Cadence made public Tuesday that it offered to buy Mentor Graphics for $1.6 billion, or $16 per share, in cash. The offer represented a 30% premium over the closing price of Mentor Graphics common stock on Monday and a 59% premium over the stock price May 2 when Cadence presented the terms of the proposal to Mentor Graphics.

Both companies make electronic design automation software and hardware, which is used to design and test semiconductors, printed circuit boards and systems used in consumer electronics and other products.

Cadence said a combined copmany would offer customers a broader and more fully integrated product and technology portfolio.

"Together, we will accelerate the rate and efficiency of customers' innovation by making it possible for them to develop products that better meet end-user needs," Michael Fister, president and chief executive officer, said.

Mentor also has two convertible bond issues. Its 6.25% convertible debentures due 2026 were seen closing at 108.34, versus a share price of $14.98, compared to 104.58 versus $12.33 on Monday.

Mentor also has an issue of floating-rate convertibles due 2023 that aren't widely traded, the sellside analyst said.

"It looks like you loose out on both. There's a 2 point loss on the floaters and a 5 point loss of the 6.25s," he said.

Mentor has rejected the offer due to what it sees as too low of a price and the potential for difficulties getting antitrust clearance, according to reports.

Deutsche Bank Securities Inc. is acting as financial advisor to Cadence.

Huntington drops steeply

Financials were down in general despite a less-than-expected decline in Goldman Sachs' second quarter earnings compared to the same period last year.

Huntington Bancshares' stocks and bonds skidded more than most. Its 8.5% perpetual convertible preferred shares closed at 750, versus a share price of $6.10, compared to 800 versus a share price of $6.67 on Monday.

They were down to 780 shortly after mid-session, when a sellside source called them 3.5 points lower on an absolute basis.

Gimme Credit analyst Kathleen Shanley published a report Tuesday, in which she stated: "It wouldn't take much cash for an acquirer to put Huntington Bancshares out of its misery."

Huntington's equity market capitalization had dropped to $2.4 billion as of Monday, despite assets of $56 billion and book equity of $5.9 billion.

The price/book ratio is a dismal 0.41x, or 0.94x excluding goodwill (largely attributable to last year's $3.5 billion purchase of Sky Financial), the Shanley report pointed out.

And although Huntington has strong deposit market shares in its home footprint, with a leading 27% share of its largest sub-market of Columbus, Ohio, "the reality is that HBAN is strongest in the kinds of places where politicians are squabbling over the bitterness quotient of the average voter. Few acquirers are keen to boost their presence in markets like Youngstown (22% share) or Canton (24%), Ohio," the Gimme Credit report stated.

Particularly worrying is the fact that the bank's $40 billion loan portfolio includes $7.3 billion of home equity loans and $4.4 billion of auto loans and leases.

Furthermore, aside from the run-of-the-mill regional bank headaches, Huntington must also contend with the Franklin relationship, which it inherited from Sky. Even after the $424 million charge it booked in the fourth quarter of 2007, the bank still has $1.2 billion of exposure (secured by residential mortgages), classed as restructured (i.e., nonperforming) as of March 31, the Gimme Credit report said.

Shares of Columbus, Ohio-based Huntington (Nasdaq: HBAN) closed down 57 cents, or 8.6%.

Energy Conversion looks cheap

Energy Conversion was called a good credit in the so-called hot space of solar energy by convertibles analysts Tuesday.

Using a credit spread of 850 bps over Libor and a vol capped at 45, the deal looked 3% to 4% cheap at the midpoint of price talk, one New York-based sellside analyst said.

A second analyst said that using those inputs the deal looked 2% cheap, adding that the credit spread used by the issuer is 650 bps over Libor.

Energy Conversion plans to price $225 million of five-year convertibles talked to yield 3% to 3.5%, with an initial conversion premium of 27.5% to 32.5%.

Shares of Rochester Hills, Mich.-based Energy Conversion (Nasdaq: ENER) have been on a bit of a tear lately, but they closed down $1.60, or 2.1%, at $75.26 on Tuesday.

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