Citadel gains on rumors of put-seeking hedge funds; Amgen's new issues continue week's climb

By Ronda Fears and Kenneth Lim

Boston, Feb. 17 - The convertible market tuned into radio broadcasters on Friday, with speculators stepping into Citadel Broadcasting Corp. on rumors that major bondholders may actively seek a change of control put out of a pending merger with Walt Disney Co.'s ABC Radio.

XM Satellite Radio Holdings Inc. regained about a quarter point on an outright basis mid-day, but its rival Sirius Satellite Radio Inc. stayed quiet despite reporting a wider fourth-quarter loss.

Off the airwaves, Amgen Inc.'s new convertible bonds continued their climb on Friday with trades about half a point above Thursday's levels, while Wild Oats Markets Inc. continued the upward momentum from positive earnings results a day earlier.

Citadel's put in new rumor twist

Citadel's 1.875% convertible bonds due 2011 gained about a point on Friday, trading at 81.5 against an $11.80 stock, fuelled by fresh rumors that a group of major bondholders, including hedge fund Whitebox Advisors, had a conference call earlier in the week and discussed the possibility of a class action to enforce the change-of-control put option on those convertible bonds.

"In the short run, I think that's the perceived odds that the change of control put at par will get through," said a convertibles analyst who covers the sector, referring to the rise in the price Friday.

Confirmation of the conference call and any involvement by Whitebox could not be obtained. Whitebox, a Minneapolis-based hedge fund that seeks short-term arbitrage opportunities, declined to comment, and attempts to reach Citadel's acting chief financial officer were unsuccessful Friday.

Citadel has experienced a spike in trading interest on its convertible bonds ever since it emerged that it would merge with Disney's ABC Radio to form the third-largest radio network in the United States in a $2.7 billion deal. Driving the speculation is whether the deal with Disney, which will break off the ABC Radio arm before combining it with Citadel, will trigger a put option on those convertibles.

In a research bulletin last week, Merrill Lynch analyst Tatyana Hube said it was possible that a part of the merger process where Disney distributes ownership of the split-off ABC Radio entity to Disney shareholders could trigger the put option, but she stopped short of making a final conclusion on a situation she called "quite vague."

The other convertibles analyst, who does not think the option will be triggered based on the language of the bond and merger terms, said some people might think that the put could gain support because of Securities and Exchange Commission filing earlier in the week suggesting that Disney had control over a large portion of Citadel stock. The Feb. 15 filing shows Disney deemed to be in control of 67.6% of Citadel stock.

Even if there is no class action, speculators may be betting on "a bunch of holders [who can] get together and make enough noise to extract some kind of payment from Citadel," the analyst said.

The convertible's valuation is further complicated by a special dividend in the merger that will be paid to Citadel shareholders. Although the convertible bonds are dividend protected, the merger agreement could add a cash component to the conversion rather than adjust the conversion ratio.

"Whether that's good economically or not, I'm still trying to work it out," the analyst said, and added: "There's been a lot to absorb...it's never worded in a way that's clear except to a lawyer."

"There are four different moving pieces here, giving it a lot of volatility," the analyst said.

Another sell-side analyst, who also does not think the convertibles will be putable, pointed out that the bond now trades below par, so a put would raise the bond's value back to par immediately. If the put is not triggered, however, the bond's value could fall back to its 76 to 77 pre-merger level, he said. But trying to value the convertibles is tough.

"Right now it's not trading on fundamentals," he said. "It's high risk, I think."

Las Vegas-based Citadel (NYSE: CDL) stock closed at $11.67 on Friday, down 13 cents or 1.1%.

XM catches midday break, Sirius silent

Elsewhere in the radio arena, XM Satellite Radio's 1.75% convertibles due 2009 were traded at 85.5 versus a $24 stock on Friday, compared with 85.25 against the same stock price late Thursday. But XM stock (Nasdaq: XMSR) ended lower at $21.57, down 10.05% or $2.41.

The Washington, D.C.-based broadcaster said earlier in the week that fourth-quarter net loss increased to $268.3 million from a net loss of $188.2 million in the year-earlier period. For 2005, XM's net loss was $666.7 million, from a net loss of $642.4 million in 2004. The company cited higher subscriber acquisition costs - a net average cost of $141 to add each subscriber in the latest fourth quarter compared to $104 a year ago - for the bigger losses.

Nevertheless, one sell-side analyst said the convertible is still trading "OK."

"If you like the company, the convert's the way to play it," he said. "You get a little bit of a coupon, 86 cents to the dollar. Although I wouldn't come out and recommend it outright."

Higher subscriber acquisition costs were also cited by XM competitor Sirius Satellite Radio for wider fourth-quarter losses. New York-based Sirius reported on Friday that its fourth-quarter loss sank to $311.4 million, or 23 cents per share, from $261.9 million, or 21 cents per share, in the year-ago period.

The company said the costs of getting new subscribers more than doubled to $145.2 million, from $64.9 million in the same quarter last year. It ended 2005 with 3.3 million subscribers, from 1.1 million the year before.

In sharp contrast to the activity surrounding XM convertibles, Sirius (Nasdaq: SIRI) convertibles were silent on Friday, while the stock dropped 6.9%, or 39 cents, to $5.26. The analyst said the convert has "still got some juice on it" because it is "pretty deep in the money." But investors may be having a hard time assessing Sirius' credit quality, he said.

Another analyst said it could simply be the terms of the bonds that make XM's securities easier to trade than Sirius'.

Amgen keeps climbing

Biotech giant Amgen's 0.125% convertibles due 2011, which were issued earlier in the week, traded at about 103 versus a stock price of $74.25 on Friday, said a sell-side source.

Another trading desk had the convertible marked at 103.26 bid, 103.76 offered against a $74.89 stock. It marked the 0.375% convertibles due 2013 - also issued earlier in the week - at 103.48 bid, 103.98 offered against the same stock price.

Thousand Oaks, Calif.-based Amgen stock added 92 cents, or 1.24%, on Friday and closed at $74.89.

Wild Oats continues rise

Wild Oats Markets Inc.'s 3.25% convertible bonds due 2011 also continued the momentum of Thursday's gains, which came after the Boulder, Colo.-based grocer said reported that it returned to the black in its fourth quarter.

A sell-side source said the convertible changed hands at 114 points against a $17.25 stock on Friday. On Thursday, the bonds closed at 108.62 bid, 109.12 against the closing stock price of $17.21 at another trading desk.

Other names in play on Friday included chipmaker Intel Corp.'s 2.95% convertible bond due 2035, which slid about one point during the day and was crossed at 89.5 points against a $20.75 stock. Intel (Nasdaq: INTC) stock was down 74 cents, or 3.47%, at $20.61 by the end of the day amid pressure on the technology sector sparked by computer retailer Dell Inc.'s disappointing forecasts. Intel is based in Santa Clara, Calif.

Cephalon Inc.'s convertibles slid after its collaborator on the alcoholism drug Vivitrol, Alkermes Inc., said it had submitted a response to the Food and Drug Administration regarding its New Drug Application. Cephalon's two zero-coupon convertibles were active on Friday and were both off about 1.5 points on an outright basis, one convertible trader said. The 2% convertible due 2015 was marked lower by about 2 points, he said. Frazer, Pa.-based Cephalon's stock (Nasdaq: CEPH) lost 82 cents, or 1.09%, to $74.39.

Cambridge, Mass.-based Alkermes' 2.5% convertible bonds were quoted lower in tandem with the stock, although the trader saw no trades in the paper. He pegged the issue closing out at 171.625 bid, 172, 125 offered, off 1.5 points from Thursday. Alkermes shares (Nasdaq: ALKS) dropped 20 cents, or 0.84%, to close Friday at $23.55.

Vivitrol is under review for the treatment of alcoholism in combination with a program that includes psychosocial support. In March 2005, Alkermes submitted an NDA for Vivitrol. In June 2005, Alkermes and Cephalon, Inc. entered into a collaboration agreement to develop and commercialize the drug in the United States.

Meanwhile, Hong Kong-based VST Holdings Ltd. priced HK$66 million of two-year zero-coupon convertible bonds at 7.5% yield and an initial conversion premium of 36.03%.

ABN Amro is the bookrunner for that deal.

The notes mature on March 2, 2008. At the initial conversion price of HK$0.72 cents per share, they may be exchanged for just under 1.39 million VST shares.

VST stock closed at HK$0.82 on Friday, 32.26% more than its HK$0.62 close on Wednesday. VST stock was suspended on Thursday for the announcement of the deal.

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