Novellus, Lam Research add on a hedge on merger; SonoSite up outright, flat dollar neutral

By Rebecca Melvin

New York, Dec. 15 - Mergers and acquisitions action sparked trade in the convertibles market on Thursday. Novellus Systems Inc. saw its 2.625% convertibles, which priced initially in May, jump on both an outright and hedged basis after news that rival Lam Research Corp. agreed to acquire the San Jose, Calif.-based chip equipment company in an all-stock deal worth about $3.3 billion.

Lam Research's convertibles were lower outright, but gained about 0.5 point on a hedged basis as well.

In other M&A news, SonoSite Inc.'s convertibles jumped outright, but were more or less flat on a dollar-neutral basis, after word that Japan's Fujifilm Holdings Corp. agreed to acquire the Bothell, Wash.-based ultrasound technology company for $995 million, including the convertible debt, in an all-cash deal.

Elsewhere, AMR Corp.'s convertibles were trading actively and higher by about a point after a credit default swap auction that saw settlement at 23.5. The bonds traded around that level and up at 24.

"They've been creeping up," a New York-based trader said of the recovery play.

Archer-Daniels-Midland Co. continued to trade actively and moved up slightly in line with the underlying shares of the Decatur, Ill.-based agricultural commodity company.

Positive economic data helped lift equities, snapping a three-day losing streak. Workers filing initial jobless claims in the week ended Dec. 10 fell to a seasonally adjusted 366,000 workers, according to the U.S. Labor Department. That level was well below forecasts and the lowest since May.

In addition, the Federal Reserve Bank of Philadelphia's gauge of mid-Atlantic manufacturing activity rose to 10.3 in December from 3.6 in November, which was much stronger than forecast.

In other data, U.S. wholesale prices rose slightly but core prices were steady; and U.S. industrial production fell in November for the first time in seven months, owing to lower output of cars, electronics and clothing.

The Dow Jones industrial average had been up by as much as 144 points during the session but pared gains to close higher by 42 points, or 0.6%, at 11,870.78; the Standard & Poor's 500 stock index ended higher by 4 points, or 0.3%, at 1,215.86; and the Nasdaq Stock Market ended just above the flat line, up 1.7 points, at 2,541.01.

Novellus gains on hedge

Novellus' 2.625% convertibles due 2041 traded at 123 versus an underlying share price of $43.00 on Thursday, according to one sellsider.

Another source said the bonds traded at 121, which was up from 105.5 bid, 106 offered on Wednesday.

Novellus shares surged, $5.67, or 16%, to $40.37 on Thursday.

On a hedged basis, the Novellus convertibles, of which there are $700 million outstanding, gained 1.5 points to 2.5 points dollar neutral, depending on the amount of delta, or stock borrowed against the bonds that market players held. Generally, the delta had been between 87% and 92% on Wednesday, an analyst said.

Spurring the move higher was the news, which came after the closing bell on Wednesday, that Lam Research had agreed to pay Novellus stockholders 1.125 shares of Lam Research stock for every share of Novellus that they own.

Because it is an all-stock transaction, change-of-control provisions in the Novellus bond indenture won't be triggered.

The link up with Lam Research was something of a surprise to the market.

"Some guys were surprised that Novellus was willing to sell themselves down there," a trader said.

Based on the closing price of Lam stock on Wednesday, the transaction values Novellus at $44.42 per share. Upon closing of the deal, Lam and Novellus stockholders will own about 59% and 41%, respectively, of the combined company, which will be called Lam Research.

Closing is seen in the second quarter of 2012. At that time, the combined companies will have $3.1 billion of cash and $1.7 billion of long-term debt.

Lam Research flat

Lam's $900 million of convertibles, which priced in May, including Lam's 0.5% tranche A convertibles due 2016 and Lam's 1.25% tranche B convertibles due 2018, slipped slightly, with both issues seen closing at 92.75 bid, 93.75 offered, which was down from 95.5 bid, 96.5 offered on Wednesday.

Shares of the Fremont, Calif.-based semiconductor equipment maker fell $3.31, or 8.4%, to $36.17 on Thursday.

News of the all-stock transaction didn't spur the Lam convertibles as much as they did the Novellus convertibles.

"They were down outright, but better on swap by about 0.5 point," a trader said.

Lam also announced a $1.6 billion stock repurchase program.

Following the acquisition news, Standard & Poor's placed Lam Research's BB+ corporate credit rating on CreditWatch with positive implications.

S&P said it expects the proposed acquisition to improve the view of Lam Research's business risk profile, the agency said, as the company expands its leadership positions beyond its previously narrow business focus in plasma etch- and single-wafer clean segments of the semiconductor wafer equipment addressable market. Lam Research anticipates significant cost synergies as a result of the transaction, the agency added.

SonoSite adds outright

SonoSite's 3.75% convertibles traded up to 146, up from previous levels in the low 120s, a New York-based trader said. But the paper hadn't been seen in trade in recent sessions. One trader said he hadn't seen them in months.

Versus the surge in the underlying shares to $53.70, up $11.46, or 27%, the gain on a hedged basis was flat to slightly higher.

"Maybe it was a wash to maybe a slight winner, depending on the delta," the trader said.

About half of the issue had been bought back by SonoSite previously, with only about $100 million to $115 million left outstanding.

Fujifilm's all-cash tender for all SonoSite shares for $54 per share represented a 50% premium over SonoSite's average closing share price over the last three months and a 750% premium over SonoSite's closing share price on Nov. 2, the last day of trading before news reports relating to a possible sale transaction were first published, according to a news release.

Fujifilm will make the tender through a U.S. subsidiary.

Mentioned in this article:

AMR Corp. NYSE: AMR

Archer-Daniels-Midland Co. NYSE: ADM

Lam Research Corp. Nasdaq: LRCX

Novellus Systems Inc. Nasdaq: NVLS

SonoSite Inc. Nasdaq: SONO

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