LifePoint, Province up on merger, lift takeover risk; American Tower deal seen repriced; Aquila emerges

By Ronda Fears

Nashville, Aug. 16 - The LifePoint Hospitals Inc. acquisition of Province Healthcare Co. initially sent the convertibles of both companies higher, roughly to the 102 area, before they settled back around the par mark. Although the takeover did not pain convertible holders, the event rekindled trepidation about takeover risk to older convertibles that don't have the premium make-whole provision of new deals.

Speaking of new deals, Aquila Inc. returned to tap convertible investors with a $300 million mandatory scheduled for Wednesday's business with talk of a 6.75% to 7.25% dividend and 18% to 22% initial conversion premium.

Also, American Tower Inc. was in the overnight market with a bought deal that was said to be repriced at 98.5 at around 6 p.m. ET by sole bookrunner Goldman Sachs & Co., according to a buyside market source, who added that the deal reoffer price might have to be lowered to 98 to move the paper.

The new American Tower $300 million of eight-year convertible senior unsecured notes have a 3.0% coupon and 38.5% initial conversion premium. The Boston-based communications tower owner and operator plans to use proceeds to refinance a portion of its outstanding 9.375% senior notes due 2009 either through a redemption or repurchases.

American Tower's 2.25% convertible due 2009 was steady at 79.75 bid, 80.75 offered on the stock's 34-cent gain Monday, or a 2.35% move, to $14.80. In after-hours trading, though, the stock dropped 80 cents, or 5.41%. The new convertible has takeover protection in the way of a premium make-whole provision.

LifePoint sparked some activity in other smaller hospital operators like Universal Health Services Inc. and inquiries about others like Community Health Systems Inc., traders said, as well as some market buzz that a merger between nursing home operators Manor Care Inc. and Beverly Enterprises Inc. may be in the works.

"Just in general the healthcare sector, biotechs were rebounding today, pretty much across the board," said a convertible dealer. "But these smaller healthcare issues don't trade much because they are so small. We had a lot of inquiries, people checking on the takeover protection issue, but not a lot of those bonds traded."

A good deal of the rebound in biotechs, the trader said, was due to short covering in the stocks. One of the biggest movers, he said, was Protein Design Labs Inc.

Aquila launches mandatory

Nothing had emerged on the new Aquila deal in the gray market by the session's end, which wasn't surprising with it pricing Wednesday and the emergence of American Tower's deal. The $300 million of three-year mandatory convertibles, in the Premium Income Equity Securities (PIES) structure, was said to be priced to move, with a yield of 6.75% to 7.25% and 18% to 22% initial conversion premium.

"It looks like it's pretty cheap; we haven't really put a pencil to it, but there are some bad memories associated with that name," said a convertible fund manager.

Standard & Poor's is expected to rate the issue at CCC+ and Moody's Investors Service at Caa1.

Aquila fell to junk around mid 2002 and since then has been trying to shed all its merchant energy exposure in the wake of Enron Corp.'s collapse.

On Monday, in fact, Aquila announced an agreement with the American Public Energy Agency, a natural gas supplier, to terminate two long-term natural gas supply contracts on Sept. 30. And, with a contract with Municipal Gas Authority of Mississippi terminated in July, Aquila said it has reduced its long-term prepaid natural gas supply contract exposure by 75%.

In second quarter, the company chalked up a one-time gain of $10.4 million from the sale of assets, chiefly its stake in the merchant energy company BAF Energy, and sold its Canadian utility to Fortis Inc. for $1.08 billion. A year ago, Aquila took a $103 million charge for impairment of assets and losses on asset sales.

Aquila stock dropped 74 cents on the convertible, or 24.03%, to close Monday at $2.73.

LifePoint, Province bid higher

On the $1.7 billion LifePoint/Province merger, early Monday the three convertibles linked to those stocks gained. Before the market opened, the LifePoint 4.5% due 2009 was up about 2 points to 101.75 bid, 102.5 offered with the stock down 16% in pre-market activity. Province's 4.25% due 2008 was up about 5 points to 102 bid with that stock up 44% in pre-market trading.

Province's 4.5% due 2005 issue, which is callable at par, hovered around the par mark, closing at 100.75 bid, 101.25 offered.

LifePoint's convertible dropped back to around the par level as well, a sellside convert trader said. A couple of other sellside traders pegged it at 99.5 at the close. LifePoint shares ended Monday down $5.04, or 15.39%, to $27.70.

Province's 4.25% convertible slipped back to the 101 bid area, a sellside trader said, versus a close Friday of about 97.75. Province stock closed at $19.25, a $5.64 gain, or up 41.44%.

The $1.7 billion acquisition will be satisfied in cash, stock and the assumption of Province debt, but LifePoint plans to refinance all the Province bonds with a new bank facility. Province's 7.5% straight bonds due 2013 were heard gaining to 111 bid, 113 offered from 97.5 bid, 98.5 offered on the news.

LifePoint open to convertible deal

LifePoint is planning to come to market with a fully committed credit facility of up to $1.725 billion, with timing definitely a post-Labor Day event, but chief executive Kenneth Donahey said in a conference call the company may consider convertibles or high-yield bonds.

The credit facility will consist of up to $1.325 billion in term loans and a $400 million revolver, with Citigroup as the sole lead bank on the deal. Donahey stressed that it was permanent financing, not a bridge loan.

Donahey said on the conference call that there is some flexibility in terms of the company's going-forward capital structure, so financing the transaction doesn't have to be all bank debt; the company may consider convertibles or high-yield bonds.

On a pro forma basis, senior leverage will be 3.6x trailing 12 months adjusted EBITDA and total leverage will be 4.2x, Donahey said, but the goal is to get that down to 3x.

Still, S&P put LifePoint's ratings on negative watch, saying that despite the deal nearly doubling its revenue base and broadening its geographic presence, it will significantly increase debt leverage and likely lead to a two-notch downgrade to the BB corporate credit rating. S&P said Province's B rating would not be affected by the deal.

LifePoint said the deal will immediately boost earnings and provide annual synergies of $15 million to $18 million. The combined company will have 50 hospitals, about 5,285 beds and revenue of $1.7 billion in 2003. In the first full year, the company anticipates cash flow in the range of $250 million to $275 million before capex and about $60 million in debt paydowns.

Merger painless despite risk

Although none of the LifePoint or Province convertibles had takeover protection features, holders said the transaction was rather painless. A buyside analyst, whose firm did not have a position in either name, said the LifePoint stock meltdown might have put a kink into the deal, but the market seemed to shrug off the 15%-plus decline.

A convertible fund manager in New York said, "We were long both LifePoint and Province, so we're ahead."

"While any Merger Monday premium bid is good for equities, the cash takeouts are still bad for converts," said another convertible fund manager in California, who holds Province converts. "The Province converts we had were all large premium below par bonds, so there should not be too much hedgie pain, and for outrights it looks OK."

The roughly $555 million cash payment for Province stock represents a 66% premium for Province Healthcare shares based on the closing price of a share of Province Healthcare common stock on Friday and a 47% premium for Province shares based on a 30-day average closing price.

"We like it all the way around but were just involved in LifePoint," said a convertible fund manager in Chicago. "It's a smart deal. Province could sniff out opportunities, but didn't seem to be so good at actually running hospitals. LifePoint gets a whole bunch of hospitals where the hardest part has been done."

Both companies are based in the Brentwood suburb of Nashville, Tenn. LifePoint said of the 50 combined hospitals with Province, 47 will be in markets where they will be the sole community hospital provider.

Healthcare issues scrutinized

Peers in the healthcare sector were getting scoured for takeover risk since older convertibles lack cash takeover protection that has become the norm for new convertible issues, traders said.

Universal Health Services Inc., based in King of Prussia, Pa., which owns and operates acute care hospitals, and Community Health Systems Inc., another Brentwood, Tenn., based rural hospital operator, got the most real action, one sellside trader said. But there were inquiries about several other names, he said.

"This [LifePoint/Province] transaction underscores the risk of smaller issues getting taken out for cash," said the California fund manager.

While mergers always present a risk, another manager said in some cases there has been some over-reaction.

"The healthcare sector has gotten beaten up pretty bad in the last market downturn, so we think there is some opportunity," he said.

Universal's 0.426% convertible due 2020 added a half-point to 58 bid, 58.5 offered with the stock gaining 96 cents on the day, or 2.25%, to close at $43.72.

A sellside convertible analyst said that as for Community Health and other possible takeover candidates like HCA Inc., for example, many of the converts are becoming callable or putable and are trading around the call or put price.

Community Health's 4.25% convertible due 2008, for example, gained about a half-point Monday but was still hovering at the par level. It was closed at one sellside shop at 100.5 bid, 101.5 offered, with the stock ending the day up 33 cents, or 1.39%, to $24.03.

Beverly/Manor merger abuzz

In a similar but yet different area of healthcare, namely nursing homes, buyside traders said there was some specific buzz circulating in the market that Beverly Enterprises - an Arkansas-based nursing home chain - might be looking to make a play for Manor Care Inc. - a Toledo-based nursing home operator. A sellside trader, however, pointed out that Beverly has been rumored to be a takeover target itself.

Beverly's 2.75% convertible added 2 points on Monday, the sellside trader said, to 121 bid, 121.75 offered. The stock gained 31 cents, or 4.47%, to $7.24.

Manor Care's 2.125% convertible, he said, also was up about 2 points to 118 bid, 119 offered. The stock rose 67 cents, or 2.23%, to $30.72.

"Manor Care could acquire Beverly for a song," the buyside trader said. "In the long run, it seems like it would be a smart move. Manor Care has said no on big purchases, but it would grow earnings."

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