Cephalon comes in on hedge after Valeant bid; new InterDigital up; Greenbrier adds in gray

By Rebecca Melvin

New York, March 30 - Cephalon Inc. convertibles jumped outright, but came in on a hedged basis Wednesday after Valeant Pharmaceuticals International Inc. launched a hostile takeover bid for the Frazer, Pa.-based biotechnology company for $73 per share.

"With the hostile takeover, obviously the convert was up outright, but on an arb basis, the make whole didn't compensate you enough for loss of premium," a New York-based sellside analyst said.

The Cephalon 2.5% convertibles due 2014 came in about 6 points, but because that paper is held mostly by outright players, damage was limited, a New York-based sellside trader said.

The Cephalon 2% convertibles due 2015 came in about 2 points.

Valeant has two convertible issues, including an old Biovail 5.375% convertible and a 4% convertible, but neither of those issues was heard in trade Wednesday.

In the primary arena, two new issues were released for secondary dealings and traded above par, and a third deal was launched and bid higher in the gray market ahead of pricing.

Of the two new issues, InterDigital Inc.'s newly priced 2.5% convertibles traded up along with a 10% climb in the underlying shares after pricing on the rich end of talk Tuesday.

Given the higher share price, the new InterDigital convertibles were viewed as about flat on a dollar-neutral basis near the close.

Mentor Graphics Corp.'s newly priced 4% convertibles traded up to 103.5 after having priced at the rich end of coupon talk, but at the midpoint of premium talk.

Greenbrier Cos. Inc. launched a planned $200 million offering of seven-year convertibles in a private deal that was talked to yield 3.5% to 4%, with an initial conversion premium of 30% to 35%.

In addition, Goodyear Tire & Rubber Co.'s $435 million of 5.875% mandatory preferreds improved after slipping on their first day of trade.

The Goodyear 5.875% mandatories traded at 50.75 versus a share price of $14.85 during Wednesday's session, according to a New York-based sellside desk analyst.

They were marked a little higher at 50.7625 bid at the market close, compared to 50.0775 bid on their debut Tuesday, according to a pricing source.

Cephalon loses on hedge

Cephalon's 2% convertibles due 2015 traded up about 30 points to 165 during the session, but they were lower on a hedged basis by 2 points, using Tuesday's 135.81 versus a share price of $58.74 on an 85% delta, according to a New York-based sellside trader.

Cephalon's 2.5% convertibles due 2014 traded up to 120.3 bid, up from 110.3 on Tuesday. But that was in about 6 points on a hedged basis, using 110.34 versus a share price of $59.10 on a 55% delta, the trader said.

"The $73 bid with a Sept. 30, 2011 horizon works to a 2.1 loss on the 2s and a 6.2 loss on the 2.5s," a New York-based sellside trader said.

A second New York-based sellside trader concurred with the pricing, saying, that it "sounds roughly right."

Because Cephalon shares actually traded up beyond the $73 bid by Valeant, Canada's biggest drug maker, there was speculation that the Valeant bid might be sweetened or another suitor might step in.

In order to break even on a hedged basis, holders need the takeout price to be roughly $80 per share for the Cephalon 2% paper to break even, and higher still at $87 per share for the Cephalon 2.5% convertibles to break even, a trader said.

The $80 price is possible; but the $87 price is unlikely," he said.

Some analysts saw a winning bid in the range of $75 to $80 a share.

"A great many of the more painful 2.5% are in outright hands so that damage will be confined, he added.

Valeant plans on using new debt to fund the Cephalon purchase, and Goldman Sachs & Co. has provided a highly confident letter for the full amount of the financing.

With the $73 per share price tag, the transaction is valued at about $5.7 billion.

Valeant said in its release that it had made several private approaches to Cephalon's management and board of directors, but was disappointed by Cephalon's unwillingness to engage in discussions in a timely manner. As a result, it was making the offer public.

In addition, Valeant intends to commence a consent solicitation process during the week of April 4 in an effort to replace Cephalon's current board of directors with its own nominees.

Valeant is a Mississauga, Ont.-based specialty pharmaceutical company. Cephalon is a Frazer, Pa.-based biopharmaceutical company.

Shares of Cephalon closed up $16.69, or 28.4%, at $75.44 on Wednesday.

InterDigital moves with shares

InterDigital's newly priced 2.5% convertibles traded up to a high mark of 106.5 after pricing at the rich end of talk Tuesday. Earlier trades were at 104.75 bid, 105.75 offered, a sellside analyst said.

Common shares of the King of Prussia, Pa.-based developer of digital wireless technologies closed up $4.64, or 10.25%, at $47.97.

A syndicate source said the new paper was flat on a dollar-neutral basis.

Barclays Capital Inc. is the bookrunner for the Rule 144A deal.

InterDigital's deal had been bid up by about 1 point in the gray market ahead of pricing.

Mentor trades up

Mentor's newly priced 4% convertibles due 2031 traded at 103.5 versus a share price of $14.95 during the session, moving up from a 101.5 level out of the chute, according to a syndicate source.

Shares of the Wilsonville, Ore.-based provider of electronic design software settled below the "versus" for the high mark, but still up 5 cents, or 0.3%, at $14.72.

The Rule 144A deal came at the rich end of coupon talk, which was 4% to 4.5%, and at the midpoint of 37.5% to 42.5% conversion premium talk.

Citigroup Global Markets Inc. and Merrill Lynch were bookrunners of the offering.

Proceeds will be used to buy back up to $25 million of common stock, to repay an $18.5 million term loan due 2013 and to retire the company's existing 6.25% convertible subordinated debentures due 2026.

Greenbrier adds in the gray

Several sources heard a plus 1.5 point bid in the gray market for Greenbrier's planned $200 million offering of seven-year convertible senior notes, and one source saw a plus 2 point bid.

The deal was seen fairly valued at 107 at the midpoint of talk, using a credit spread of 700 basis points over Libor and an implied 27% volatility, a New York-based sellsider.

He also said that the underwriters said the deal was "way oversubscribed."

Bookrunners were Merrill Lynch and Goldman Sachs & Co.

Another market source said, "Having debt out at CCC rating and issuing seven year [paper] makes it tough. It will probably get done, but we don't expect big upside in the secondary market."

Proceeds will be used together with additional cash in hand to purchase Greenbrier's outstanding $235 million of 8.375% senior notes due 2015 that are being tendered as per an announcement Wednesday.

Greenbrier is a Lake Oswego, Ore.-based maker of railcars.

Mentioned in this article:

Cephalon Inc. Nasdaq: CEPH

Goodyear Tire & Rubber Co. NYSE: GT

Greenrier Cos. Inc. NYSE: GBX

InterDigital Inc. Nasdaq: IDCC

Mentor Graphics Corp. Nasdaq: MENT

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