GSI up outright, drops on hedge on eBay deal; Goodyear on tap; InterDigital, A123 launch

By Rebecca Melvin

New York, March 28 - GSI Commerce Inc. was higher outright but dropped on a hedged basis Monday after news that eBay Inc. agreed to acquire the e-commerce company for $2.4 billion in cash and debt.

Depending on the size of the GSI hedge, market players lost between 3 and 6 points to as much as 8 points, if the hedge was heavy, a New York-based sellside trader said.

"I think the typical hedge was around 50%, and they were in something like 6 points. There are a lot of bonds that look like that: they have expanded a lot since issuance and consequently are vulnerable to a takeout," the trader said.

There are about $150 million of the GSI Commerce 2.5% convertibles outstanding.

Eastman Kodak Co. plowed higher again on an outright and hedged basis, extending gains from Friday when the International Trade Commission said it would review again Kodak's claim that the makers of iPhone and Blackberry have infringed on a Kodak patent related to its method for previewing images.

In the primary market, Goodyear Tire & Rubber Co. launched a $435 million offering of mandatory convertible preferred stock that was seen pricing after the market close Monday.

The planned Goodyear paper was viewed as "somewhat cheap" to not cheap at all, especially as a mandatory structure. But it was seen doing OK because market players are particularly hungry for yield.

In the gray market ahead of final pricing, there was a near par bid for the planned Goodyear paper.

Also in the primary market, InterDigital Inc. launched after the market close a $150 million offering of five-year convertible senior notes that was seen pricing after the market close Tuesday.

The InterDigital paper, talked to yield 2.5% to 3% with an initial conversion premium of 27.5% to 32.5%, looked like it was "priced to move," a market source said.

Also after the market close, A123 Systems Inc. launched an offering of $125 million of five-year convertible subordinated notes in a registered offering that was seen pricing after the market close on Thursday.

GSI drops on hedged basis

GSI's 2.5% convertibles due 2027 traded at 113 versus a share price of $29.25 during the session Monday, according to a trader. A Trace print had it at 113.05, which was up 10.675 points outright. But it also gyrated around, trading down to 111 and back up to 112.

Shares of the King of Prussia-based e-commerce company soared $9.82, or 51%, to $29.20 in ultra-heavy volume.

EBay announced plans to acquire the e-commerce company for $2.4 billion, or $29.25 a share.

"These are all over, kind of crazy," a New York-based sellside trader said of the GSI convertibles.

"It looks like a lot of outright holders. Hedge guys probably got hurt a little bit," the trader said.

A second New York-based sellside trader said, "I think the typical hedge was around 50% and they were in something like 6 points."

EBay's move is aimed at boosting its PayPal online-pay operation and eBay Marketplace service, making it a bigger rival to Amazon.com Inc.

As for GSI, strong ratings were maintained on the company over the past few weeks, but no one predicted this deal.

GSI runs websites and fulfillment centers that service retailers, including Aeropostale, DKNY, Adidas, Nautica, Toys R Us and Dick's Sporting Goods, among others.

GSI has struggled to integrate its recently acquired shopping site RueLaLa, which eBay plans to divest, and possible lost revenue related to a canceled or truncated NFL season.

The acquisition "will significantly strengthen our ability to connect buyers and sellers worldwide," eBay president and chief executive John Donahoe said in a release.

EBay will pay $29.25 per share, or a 51% premium to Friday's closing stock price for each share of GSI. GSI can solicit other offers through May 6.

As part of the transaction, eBay will divest 100% of GSI's licensed sports merchandise business and 70% of ShopRunner and RueLaLa.

These assets, which eBay believes are not core to its long-term growth strategy, will be sold to a newly formed holding company, which will be led by GSI founder and CEO Michael Rubin.

EBay expects the transaction to result in synergies of about $60 million by 2013; the company expects the transaction to be earnings neutral in 2011 and accretive in 2012.

Goodyear 'somewhat cheap'

Price talk on Goodyear's $435 million offering of mandatory convertible preferred stock was revised to 5.75% to 6.25% for the yield and 25% for the initial conversion premium.

Original talk was for a dividend of 6% to 6.5% with an initial conversion premium of 20% to 25%.

"This may not trade well if it comes on the new rich end," a Connecticut-based sellside trader said.

Another trader in New York said he didn't "think it looks that cheap."

Based on the original talk, it looked "somewhat cheap," a Connecticut-based sellside analyst said.

Using a credit spread of 450 basis points over Libor and 45% volatility at the lower strike and 40%-42% volatility at the upper strike, the planned Goodyear mandatory at the midpoint of original talk modeled 51.02 on the five- vol.-point skew and 51.58 at the three-vol.-point skew, according to the analyst.

"It looks 2%-3% cheap at the mids," the analyst said. That's "somewhat cheap; but not out of line with other mandatories."

But comparing this deal to recent mandatory deals like MetLife and Nielsen, which came with initial public offerings of common stock, isn't valid, a New York-based sellside trader pointed out.

The deal was seen pricing after the market close on Monday.

It's an SEC-registered offering with a greenshoe for an additional $65 million of shares.

The deal has a $50.00 par.

Proceeds will be used to redeem $350 million of Goodyear's 10.5% senior straight notes due May 15, 2016 at 110.5% of the principal amount plus interest.

Remaining proceeds will be used for general corporate purposes, which may include repaying debt.

Goldman Sachs & Co., J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Credit Agricole Securities (USA) Inc. will be joint bookrunners for the offering, with BNP Paribas Securities Corp., HSBC Securities (USA) Inc. and Natixis as the co-managers.

Goodyear is an Akron, Ohio-based tire maker.

InterDigital to price

Meanwhile, InterDigital Inc. launched after the market close a $150 million offering of five-year convertible senior notes that was seen pricing after the market close Tuesday.

The InterDigital paper was talked to yield 2.5% to 3% with an initial conversion premium of 27.5% to 32.5%.

Barclays Capital is the bookrunner for the deal, which was predicted by one source to be a deal well-received by the market and one likely to expand upon release for secondary dealings.

The Rule 144A offering has a 15% greenshoe for up to an additional $22.5 million of notes.

The notes have contingent conversion at a price trigger of 130%.

In connection with the offering, InterDigital plans to enter into convertible note hedge and warrant transactions with affiliates of the initial purchaser.

A portion of proceeds and the proceeds from the sale of the warrants will be used to fund the cost of the call spread. The remainder of the proceeds will be used for general corporate purposes, including acquisitions of intellectual property-related assets or businesses or securities in such businesses; capital expenditures; and working capital.

King of Prussia, Pa.-based InterDigital develops digital wireless technologies for use in cellular and wireless related products.

The company also develops solutions for enhancing bandwidth availability and network capacity, wireless security and seamless connectivity, and mobility across networks and devices.

A123 to price

A123 Systems plans to price an offering of $125 million of five-year convertibles that were talked to yield 3.25% to 3.75% with an initial conversion premium of 20% to 25%.

A123 Systems also planned to price 18 million shares of common stock.

The convertibles offering has an $18.75 million greenshoe, and there is a greenshoe on the common stock of up to 2.7 million shares.

The registered, off-the-shelf deal is being sold via Deutsche Bank Securities Inc. and Goldman, Sachs & Co. as joint bookrunners, with Morgan Stanley & Co. Inc. and Barclays Capital as the joint lead managers and Lazard Capital Markets and Pacific Crest Securities acting as the co-managers.

A123, a Watertown, Mass.-based developer and maker of lithium ion batteries and systems, has a market capitalization of $826 million.

A123 cuts outlook

A123 also cut its first-quarter outlook after the market close, citing the Japanese earthquake that has caused a Japan-based supplier of battery-coating materials to suspend operations.

The supplier, whose factory is about 70 kilometers from the damaged Fukushima nuclear plant, will likely resume operations within six months, A123 said in a statement.

A123 has enough stock of this material to take it though late May.

A123 expects first-quarter revenue of $16 million to $18 million, which is down from its prior outlook of "upper teens to low twenty million dollars."

Full-year revenue is forecast in the range of $210 million to $225 million, and the company expects second-quarter revenue to be double that of the first quarter.

Analysts had expected first-quarter revenue of about $20.4 million and full-year revenue of $211 million.

Mentioned in this article:

A123 Systems Inc. Nasdaq: AONE

Eastman Kodak Co. NYSE: EK

Goodyear Tire and Rubber Co. NYSE: GT

GSI Commerce Inc. Nasdaq: GSIC

InterDigital Inc. Nasdaq: IDCC

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