LNR convertible leveled by $1.9 billion cash takeover; United Rentals falls on SEC inquiry

By Ronda Fears

Nashville, Aug. 30 - LNR Property Corp.'s convertible was lower by as much as 9 points on the Merger Monday announcement that Cerberus would buy the real estate company for $1.9 billion in cash, or $3.8 billion including the assumption of debt and stock options.

United Rentals (North America) Inc. also plunged sharply, by more than 12 points, in tandem with the underlying stock, on the revelation of accounting questions from the Securities and Exchange Commission. But buyside contacts said it appeared to be a knee-jerk reaction and some were buying on the weakness.

Otherwise, market sources said it was a painfully light Monday, with many players out due to the Republican National Convention along with last-chance vacations ahead of the Labor Day holiday.

"Everything was magnified today because of low volume. A lot of Wall Street traders are out for the Republican National Convention. So you have to take anything that happens today with a grain of salt, so to speak," a sellside trader said. "This is going to be one of the slowest weeks we've seen. Some desks are half-staffed, or even lighter."

A few biotech issues were "getting interesting" on general softness in that group, a convertible fund manager said, noting he was looking at Chiron Corp. and Ligand Pharmaceuticals Inc. but had made no firm decision yet.

Generic drug issues were another weak spot in the biotech and healthcare sector, as Mylan Laboratories Inc., which is making a play for convertible issuer King Pharmaceuticals Inc., dropped its lawsuit against the U.S. Food and Drug Administration over authorized generic drugs from the Big Pharma drugmakers. Mylan said it now believes that additional claims may be available to the generic drug industry.

Players also were anxiously watching oil prices and "wondering what bonds will do if - big if - we break $40 oil," as one buyside source said. October crude oil futures traded as low as $41.65 a barrel at midday but ended down 90 cents at $42.28.

LNR 5.5s drop 8.25 points

LNR Property's convertible became the latest older issue to fall victim to the lack of any provisions for cash takeovers, dropping as much as 9 points, following a handful of similar transactions that prompted virtually all new deals now to include protection measures such as premium make-whole features.

In addition to the crack in the convertible, LNR's takeover caught convertible arbitrage players in a tight short squeeze as the stock soared on the news.

LNR's 5.5% convertible due 2023 was down by 9 points early on the pre-market news but by the end of the day had come off the low to close off by 8.25 points at 141 bid, 141.5 offered. LNR shares soared $3.71 on the day, or 6.28%, to $62.81 on the news.

LNR Property, which was spun off from home builder Lennar Corp. in 1997, said New York-based Cerberus Capital's Riley Property Holdings will pay $1.92 billion in cash, or $63.10 per share, which was roughly a premium of about 7% over the stock's Friday close of $59.10.

Including assumed debt and stock options, the total value of the deal was estimated at $3.8 billion.

"The price tag was not that much of a premium, which helped ease the pain," said a sellside convertible trader.

While somewhat pleased with the offer, outright holders of the LNR paper were disappointed.

"It's going to be hard to replace this with anything of equal quality and upside potential," one outright holder said.

Miami Beach, Fla.-based LNR said the new company will be partly owned by LNR's current management, including controlling shareholder and chairman Stuart Miller, who controls 77.4% of the LNR vote through trusts and partnerships and will trade some his shares for a 20.4% stake in the new company, LNR said. Also, LNR management will buy 4.6% of the new company.

Moody's put LNR's ratings on review for possible downgrade on the news, saying that while the merger was designed to provide greater financial and operational flexibility, it will likely result in additional pressure on LNR's fixed charge coverage and leverage.

Peer real estate issues were lower in sympathy as the LNR deal was the second mega merger in real-estate in the last two weeks following the $9.75 billion merger of General Growth Properties and Rouse Co.

United Rentals falls 12.75 pts

United Rentals announced Monday that it received notice of an SEC non-public, fact-finding inquiry of the company, accompanied by a subpoena requesting documents relating to certain accounting records.

Greenwich. Conn.-based United Rentals said it intends to cooperate fully with the SEC.

Buyside traders said there was buying on the weakness by those who thought it was an over-reaction by the markets.

"It looks to be a so-called routine SEC inquiry, so we're buyers today. The most significant accounting practices item would be a write-down of goodwill, but that's a non-cash, non-operating item, which does not impact operating profits," said a buyside convertible trader at a fund based in Greenwich, Conn. "Given that management has made some great moves in refinancing debt, there should be a rebound once the knee-jerk reaction is over."

United Rentals' 1.875% convertible due 2023 plummeted 12.75 points on the day to 91.75 bid, 92.25 offered. The underlying stock plunged $4.39 on the day, or 21.53%, to $16.00.

The junk bonds dropped as much as 4 to 5 points on the news but recovered with little trading. The 6.5% notes due 2012 ended the day down by about 2.25 points at 95.25 bid, 96.25 offered.

Standard & Poor's put ratings of United Rentals, including the B+ convertible, on negative watch as a result of the development. S&P credit analyst John Sico said that the lack of specific information and the possibly broad parameters of the investigation are a cause of concern.

Generic drug names dropping

A federal judge was scheduled to rule Monday on the dispute between the U.S. Food and Drug Administration and generic drug giant Mylan Laboratories Inc. and then Mylan suddenly dropped the lawsuit. While initially it was perceived as a negative for the generic drug industry, Mylan said that it dropped the suit to pursue potential additional claims.

News of Mylan dropping the suit caused mixed reactions to generic drugmakers, but those issuers - Watson Pharmaceuticals Inc., IVAX Corp., Teva Pharmaceuticals Industries Ltd. and KV Pharmaceutical Co. - were all lower along with basically the entire biotech, drug and healthcare field of issues.

Generally, the first generic company to successfully challenge a brand-name patent has six months of marketing exclusivity - a provision designed as an incentive to get lower-cost drugs to market more quickly.

Since around September 2003, however, brand-name drugmakers have been introducing authorized generics, renaming their own product and selling it through a licensed distributor - a practice Mylan challenged as unfair as it virtually gives Big Pharma total control over the market.

Mylan's attorney said that counsel for both FDA and Procter & Gamble disclosed facts and positions when answering the lawsuit that have a significant bearing on the matter.

"Mylan dismissed this lawsuit without prejudice in order to have the ability to re-file the lawsuit taking into consideration the additional facts presented during oral argument. We have every intention of taking all necessary steps to end this practice," said Mylan chief executive Robert J. Coury.

Those with Big Pharma supported generic drug applications pending were damaged by Mylan's challenge, while independent generic drugmakers saw it as a boon.

Watson was at the heart of the Mylan dispute with P&G, and its converts have been falling on selling pressure for months now. On Monday, the Watson 1.75% convertible lost another 1 point or so, a sellside trader said. The issue was quoted at 97.75 bid, 98.25 offered with Watson stock down 60 cents, or 2.14%, to $27.40.

Mylan filed the lawsuit on learning shortly before the launch of its generic version of a drug that P&G had licensed Watson to sell as an authorized generic.

The IVAX convertibles were down by around 1.5 points, traders said, and Teva's convertibles were similarly lower. The small KV Pharma convertible lost about 1 point.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.