Amylin convertibles appear attractive in light of a potential Bristol-Myers takeover: Barclays

By Rebecca Melvin

New York, March 28 - The Amylin Pharmaceuticals Inc. 3% convertibles due 2014 are attractive in light of a potential takeover from Bristol-Myers Squibb Co., which reportedly made a rejected $3.5 billion bid for the San Diego-based diabetes drug maker earlier this year, the Barclays Capital convertibles research team wrote in a note Wednesday.

In the event that there is a transaction and it is an all-cash deal, holders should not put the bonds as they have the right, but not the obligation, to do upon completion of a deal, the Barclays research team, Manoj Shivdasani, Venu Krishna, and Piyush Anchliya, wrote.

Given Bristol-Myers' strong credit profile, with two-year credit default swaps of 6 basis points to 16 bps, holders of the convertibles should not put the bonds back since a 3% coupon Bristol-Myers two-year bond would be valued above par.

The Amylin bonds were indicated at around 96.17 bid, 96.67 offered versus an underlying share price of $15.39 late Tuesday. Early Wednesday the bonds were indicated at 98.375 bid, 98.75 offered versus the shares at $22.70, the Barclays analysts wrote.

That level represented a 3.71% yield, 165% premium, and 6% delta, with a 2.2-year maturity.

"At current levels, our analysis indicates that the convert market is pricing in a low probability of a Bristol-Myers transaction with a 3% risk-reward over a six-month horizon," the Barclays team wrote.

The risk-reward of the convertibles is attractive for investors who wish to set up a position on a view that a Bristol-Myers or equivalent transaction is likely, the team said.

Over a six-month horizon, should the deal occur, holders make 6 points, including interest, while if there is no transaction, holders still break even, at plus 0.2 points, including interest, the team said.

In addition, while the upside in the convertibles is capped relative to an uncapped potential in the stock, the risk-reward in the convertibles is significantly better, Barclays said. In Barclays' six-month horizon scenario, the convertible outperforms stock on a deal close until a $24.08 takeover price.

The report of a rejected Bristol-Myers offer has so far been unsubstantiated, but the Barclays team believes that the convertibles are pricing in a very low probability of a potential transaction.

Meanwhile, given the relatively short-dated nature of the convertible, adequate equity market capitalization cushion for a potential refinancing, reasonable coupon of 3%, pull to par and a low-rate environment, the downside appears limited, the analysts said.

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