Cytyc surges on buyout; International Game falls on report, buyout uncertainty; LifePoint launches deal

By Kenneth Lim

Boston, May 21 - Cytyc Corp. surged outright on Monday after the company agreed to a $6.2 billion takeover, and even hedged investors were seen to make gains on its in-the-money convertible, despite a lack of takeover protection.

International Game Technology slipped lower as volume thinned after Lehman Brothers published a report recommending that convertible holders sell on the strength of unconfirmed buyout rumors.

In the primary market, LifePoint Hospitals Inc. announced a $500 million deal expected to price Tuesday after the market closes.

Cytyc gains on merger

Cytyc's 2.25% convertible due 2024 jumped about 40 points outright in line with its stock after Hologic Inc. offered to buy the company in a deal valued at $6.2 billion.

The convertible traded at 147 against a stock price of $43 on Monday. Cytyc stock (Nasdaq: CYTC) rose 22.68% or $7.95 to close at $43.

"They really went through the roof today," a buyside convertible trader said. "We don't hold any of these, but from what I hear both the outright and hedge guys should do OK."

Bedford, Mass.-based Hologic is offering 0.52 share of its own stock and $16.50 in cash for each share of Marlborough, Mass.-based Cytyc. Based on Hologic's Monday closing price, the consideration represents about $44.58 per Cytyc share, or about 27% over Cytyc's closing stock price on Friday. Cytyc chief executive Patrick Sullivan will be chairman of the new Hologic, while Jack Cumming, Hologic's chief executive, will be CEO of the combined company. The deal requires regulatory and shareholder approval and is targeted for completion in the third quarter of 2007.

Hologic and Cytyc make medical devices and equipment for women's healthcare.

The deal was seen turning in a straightforward return for convertible holders, who will likely convert the notes into stock and receive the same consideration as common stockholders.

"There's no cash protection for the converts, so holders will just get will just get stock and cash in the deal," said a sellside desk analyst. "It was in the money, now it's way in the money."

Another convertible analyst said the merger appeared to be a good fit.

"It looks like a pretty good fit," the second analyst said. "Both of them specialize in the same area of women's healthcare, but they have different products that cater to different segments of that market, so there's not a lot of overlap. They'll be a bigger player in the market and they could benefit from cross-marketing and technology sharing."

"I think there's a good chance the shareholders will approve of the deal," the second analyst said. "They're paying quite a generous premium and if you're a Cytyc shareholder and you think that the deal makes sense for Hologic you probably wouldn't mind taking some Hologic shares as well. One concern is whether Hologic may be paying too much for Cytyc, but I've also heard that some people are hoping for a better bid."

The second analyst said a competing bid was not a far-fetched possibility.

"There's been a lot of takeover-type activity this year so there's definitely money out there looking for an acquisition," the analyst said. "For medical devices we're seeing Beckman Coulter and Inverness bidding over Biosite and they're paying a 50% premium, so that kind of gives you an indication of what the going rate is in the sector."

International Game slips amid rumors

International Game's 2.6% convertible due 2036 eased about a point outright after Lehman Brothers recommended selling the paper to take advantage of recent buyout speculation.

The convertible traded at 98 against a stock price of $40.15 on Monday. International Game stock (NYSE: IGT) closed at $40.05, down by 1.4% or 57 cents.

Speculation emerged on Friday that the company could be the target of a private equity bid. No names were mentioned, but International Game stock shot up about 7% on Friday. Reno, Nev.-based International Game, a maker of gaming equipment, could not be reached for comment.

"I think somebody on the desk asked me about this, and I said it could be the case," a sellside convertible analyst said.

"Harrah's kind of broke the ice on gaming buyouts," the analyst said. "The [International Game] stock had corrected so much before this, it was fully valued in my opinion at about $48. They're a fabulous cash flow generator, a fabulous company. Very well managed with great market share. It wouldn't surprise me one bit."

But Lehman Brothers' Venu Krishna and Manoj Shivdasani on Monday recommended that convertible holders "sell the bonds into the takeover speculation-based strength."

"While the bonds are fairly defensive, we find them rather uninteresting given their poor upside participation potential," Krishna and Shivdasani wrote in a report.

The convertibles have takeover protection in the form of a make-whole payment unless the acquisition is in shares of a public company or if the takeout price exceeds 105% of the conversion price of about $61.78, Krishna and Shivdasani wrote.

Assuming that an all-cash deal emerges and the deal closes in September, convertible holders could make from 1.38% to 3.32% for deal considerations ranging from $42 to $50. That pales in comparison to gains of 3.4% to 23.09% for holders of the common stock, the two analysts wrote.

The convertible, however, offers better downside protection if no deal emerges. The convertible could lose only about 1.79% to Thursday's levels while the stock will fall by 6.75%. But that downside protection may not be attractive enough, the two analysts said.

"In our view, even if there were no takeout, the low delta and relatively high premium on these bonds make them unsuitable for outright fundamental holders who want to express a positive stock opinion via the convertible," the Krishna and Shivdasani wrote.

LifePoint launches deal

LifePoint Hospitals plans to price $500 million of seven-year convertible senior subordinated notes on Tuesday after the market closes, the company said late Monday.

The deal is talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 32.5% to 37.5%.

The convertibles will be offered at par.

There is an over-allotment option for a further $75 million.

Citigroup is the bookrunner of the registered offering.

LifePoint, a Brentwood, Tenn.-based non-urban hospital company, said it will use the proceeds of the deal to repay an outstanding revolving loan that bears an annual interest of 7.11% and an outstanding term loan that bears an average annual interest of 6.97%.

LifePoint stock (Nasdaq: LPNT) rose 1.97% or 76 cents to close at $39.26 on Monday. The stock eased 4.43% or $1.74 to $37.52 in after-hours trading following the announcement of the deal.

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