Conseco falls as CEO exit spurs takeover buzz; AmerisourceBergen, Lowe's decline

By Ronda Fears

Nashville, Aug. 13 - Despite reports of sales surging Friday at stores like Lowe's Cos. Inc. as Hurricane Charley hit the Southeast, the Lowe's convertibles were sharply lower and the stock was weaker. Traders attributed it to less-than-stellar expectations for the company's earnings on Monday.

Weakness prevailed throughout the market with oil prices surging yet closer to the $50 mark, traders said, except for "sporadic" buying in several technology issues that have cheapened from a credit standpoint in recent sessions.

Transportation issues - trucking and airline paper - also plunged as crude oil futures hit yet another record of $46.58 on Friday. Trucking firms Navistar International Corp. and Yellow-Roadway Corp. dropped by up to 2 points, while all the big air carriers - AMR Inc., Continental Airlines Corp., Delta Air Lines Inc. and Northwest Airlines Corp. - dropped at least 1 point.

Delta paper reflected the extenuating circumstances of its pilot negotiations and a target of month's end to come up with a comprehensive restructuring plan to avoid bankruptcy. The convertibles are hovering at about the 30 mark, a trader said, while some of its junk bonds like the long-dated 9.75% due 2021 have dropped to the 26.5 to 27.5 area.

Conseco Inc. also took a sharp dive Friday on the heels of its top executive's sudden resignation less than a year after the insurance company emerged bankruptcy last fall and after a reduced outlook by the company. Together, the events sparked market buzz that the company was a takeover target.

In addition to the general weakness in insurance paper on the rise in claims expected from Hurricane Charley, traders said lots of healthcare and biotech paper was lower on Friday, too.

Amerisource-Bergen Corp. was at the head of the biotech issues beaten down, after the company said fiscal 2005 earnings would be flat. The convertibles dropped, alongside a 5%-plus plummet in the stock, but the bonds were said to be holding up well from a credit standpoint.

Toys "R" Us Inc. selling subsided considerably, however, with the 6.25% mandatory due 2005 still off but to a much lesser degree than earlier in the week. The convertible slipped another half-point to 42.6 with the stock down 14 cents, or 1.25%, to $14.97.

Lowe's convertibles hammered

Lowe's being scheduled to report earnings before the opening bell Monday overshadowed the surge in sales seen and perhaps yet to come from Hurricane Charley, traders said, pointing out that recent retail trends and anxiety about home building patterns have dimmed expectations from the home improvement retailer.

The Lowe's 0% convertible fell 1 point to 77.875 bid, 78 offered, and the 0.861% convertible lost 0.625 point to 94.625 bid, 94.875 offered. The stock closed down 57 cents, or 1.21%, to $46.65.

"Lowe's was getting sold off because people are assuming a bad quarter," to be reported Monday, said a dealer. "On top of that, we're heading into a seasonally slow quarter for retail and particularly home improvement."

A buyside trader said the government retail sales report didn't help the Lowe's story.

"Retail sales, consumer spending, all this is not what you would expect in a recovery period," he said. "There are just too many retailers choking to feel comfortable."

Conseco CEO suddenly quits

The surprise resignation of Conseco chief executive officer William Shea sent the stock to its lowest price since the insurer emerged from bankruptcy last September. The 5.5% mandatory followed suit as the event, plus a lowered guidance from the company, sparked market chatter of a merger or takeover.

Shea had taken the reins of Conseco in late 2002 specifically to guide the company through what was then the third-largest bankruptcy in U.S. history. His resignation was announced after the market close Thursday, with Conseco general counsel William Kirsch as his successor. R. Glenn Hilliard, a director at Conseco, also was elected executive chairman.

A sellside trader said holders were nervous about the situation, particularly the warning and $5 billion in carry-forward losses. Analysts expressed concern about the appointment of the general counsel to the top spot.

Conseco's 5.5% mandatory dropped 1.625 points on the day, or 6.81%, to 22.3 on the New York Stock Exchange with 5.7 million units changing hands. In the last six weeks, another sellside dealer said, the Conseco convertible has lost around 5 points.

Conseco shares hit a new post-bankruptcy low of $15.74, dropping 8.22%, or $1.41 on the day amid extremely heavy volume. Some 17.3 million shares traded, versus the average 1.5 million.

"Under Bill Shea's leadership, Conseco has made tremendous progress through its reorganization, emerging from bankruptcy and delivering three consecutive quarters of profitability," Hilliard said. Bill Kirsch played a key role in the restructuring, he added, helping formulate Conseco's post-bankruptcy business plan and rebuilding its balance sheet.

Kirsch said Conseco has made "tremendous progress in its turnaround."

"Our focus moving forward will be to continue the work to re-establish Conseco's position in the marketplace and restore our A rating," Kirsch said.

Due to the "executive transition," the company lowered its guidance for 2004 net income to $200 million to $210 million, down from its Aug. 4 forecast of $210 million to $220 million.

Conseco events spark chatter

The events together caused a great deal of suspicion regarding Conseco's future.

"There is just too much going on for just normal management transition," one buyside trader said. "They are bringing on an additional director, warning about earnings less than a year out of bankruptcy, and they brought on a vice president for human resources and he happens to have experience in mergers, and now the resignation of Shea, without warning, and only two weeks prior to the annual meeting. Plus, the new CEO is a lawyer."

In any event, the development was a surprise and was perceived as ill-boding.

"We definitely didn't expect this short fused departure [by Shea], but I am more surprised they put a lawyer in charge," said a fund manager in Chicago. "This might be part of a ploy for a buyout or takeover. Whatever it is, such an abrupt change is pretty suspicious if you ask me."

Another buyside trader said, however, that he wasn't convinced there was any credence to the takeover and merger talk, so he was a buyer.

"There were nice fat blocks trading on the preferred [convertible] and strong volume on the common," he said. "This is an irrational selloff, and I'm a buyer."

ABC credit seen holding up

Drug wholesaler AmerisourceBergen warned Friday that fiscal 2005 earnings would be flat, while also announcing a $500 million stock buyback program. The stock was hit hard, falling $3.09, or 5.83%, to $49.91. But the convertibles held up from a credit standpoint, traders said, slipping about 1 point to 106 bid, 106.5 offered.

"The credit is holding up, the bonds should be off only marginally given the credit situation and the limited remaining call protection," said a sellside convertible analyst. "I still like the credit enough to think they'll call the bonds in December."

With the call in December at 102.14, holders basically would be holding onto the current yield of about 4.5%, and essentially getting a cheap, albeit short-dated, call on the stock providing the credit holds, he said.

An outright convertible holder who is holding on said it seems the factors for flat earnings are short-term, one-time items.

"The long-term fundamentals are fine," he said. "The buybacks are smart right now because the stock is cheap, especially when you consider all the excess cash on the balance sheet that can be used for a very aggressive stock buyback program and call the convert in December."

AmerisourceBergen said fiscal 2004 earnings are still expected to be in a range of $4.10 to $4.20 a share and fiscal fourth quarter EPS are still expected to be up by at least 15%. The company did not put any numbers on the fiscal 2005 forecast but said that would be done when 2004 results are reported in early November.

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