Deals emerge for $860 million; Juniper spikes 4.5 points on call; Anthem falls on WellPoint merger

By Ronda Fears

Nashville, Oct. 27 - A couple of new deals emerged Monday, bringing the week's slate so far to $860 million, so traders expect activity will pick up in the convertible market on Tuesday. Meanwhile, a spike in merger and acquisition activity boosted volume in converts Monday although traders mostly described the session as quiet.

Also, renewed concern about calls elevated on Juniper Networks Inc.'s partial call of its 4.75% issue, which triggered a 4.5-point spike in the issue, and traders mentioned the market weakening, in general, as several issues have been called recently.

M&A activity picked up, lead by the high-profile merger of Banc of America and FleetBoston, and several convertible names were seeing some action, too.

Anthem Inc.'s convertible saw a massive sell-off on news of its $16.4 billion merger with WellPoint Health Networks Inc., which will create the largest health insurance and managed care company in the U.S.

CommScope Inc. got a slight pop on its acquisition of some cable and wiring assets from Avaya Inc., although traders said the negative watch by Standard & Poor's related to the deal capped the rise for the convertible.

Juniper Networks (B+) announced a cash redemption on Nov. 26 of $400 million of its 4.75% convertible subordinated notes due 2007, which currently has $542 million outstanding. Alternatively, holders can convert each note to about 6.1 shares of common stock.

"The Juniper convert shot up to right around the call price, just under it because of some risk getting priced in," said a dealer.

"Some risk got priced into the market as a whole, really, because there's sort of a new call threat sweeping through the market."

The call price is 102.714 plus accrued interest.

Juniper's 4.75s gained 4.5 points to 102.5 bid, 103 offered, with the stock closing up 37c, or 2.24%, to $16.86.

Amazon.com Inc. last week made a partial call for its 4.75% convertible due 2009, and there have been several other calls recently.

In addition to M&A activity giving rise to risk arb activity among some convertible players, it has involved several convertible names recently with a mixture of responses.

Last week, First Data Corp. took a hit as an anti-trust obstacle popped up in its acquisition of Concord EDS Inc., and the convertible and stock were weaker again Monday.

Anthem was slammed hard Monday on its merger with WellPoint, but traders said there was a corresponding sell-off in several insurance names on consolidation risk. Also, a couple of dealers noted some weakness in several biotech names, like MedImmune Inc., "because there's lots of room for consolidation in this sector, so a higher level of risk is getting priced into these issues."

Anthem's 6% mandatory fell 7.25 points to 84.5 bid, 84.625 offered while the stock plunged $6.21, or 8%, to $71.05. On the New York Stock Exchange, the convert dropped 7.24 points, or 7.91%, to 84.3 on volume of 1.28 million shares, versus the three-month average of 20,968 shares.

Standard & Poor's placed Anthem Inc. on positive watch and WellPoint on negative watch while Fitch Ratings put both Anthem and WellPoint on negative watch.

S&P acknowledged the potential for an enhanced business position of the combined Blue Cross and Blue Shield organizations, but said the surviving company looks prospectively weaker because of increased debt and reduced quality of capital.

Fitch said the combined balance sheet of the two companies will be weakened by the incremental debt required to fund the cash portion of the transaction, although the extent to which the additional leverage will limit financial flexibility is not yet entirely apparent. Fitch also expressed concern regarding integration issues involved with merging companies of such considerable size.

Fitch said the merger, however, will provide important benefits to both Anthem and WellPoint, including diversification of earnings, revenues and total enrollment.

CommScope, however, was getting a positive response to its $263 million mostly cash purchase of assets from Avaya, although traders said it was muted somewhat by S&P's reaction.

CommScope's 4% convertible due 2006 was closed up 0.25 point to 93 bid, 94 offered, according to a convert dealer at one of the big shops, while the stock gained $1.70, or 13.13%, to $14.60.

S&P puts CommScope on negative watch, expressing some concern on the impact of leverage and liquidity, as well as the prospect for cash earnings accretion from potential restructuring charges as CommScope eliminates overhead costs attributed to the business by Avaya. S&P expects that any potential impact would likely be limited to a one-notch downgrade.

While there was renewed concern over calls and redemptions, traders said the market sighed in relief with the sweetener offered up by CSX Corp. to avert the upcoming Oct. 30 put on its 0% convertible in the form of a cash payment plus another put date.

CSX offered a one-time cash payment of $23 per $1,000 principal amount of notes to holders who don't exercise the put. CSX raised $586 million in short-term commercial borrowings recently to fund the potential $400 million put. CSX also added an additional put date of Oct. 30, 2005.

On the new deal front, two emerged to join PMI Group Inc.'s $250 million mandatory on this week's calendar.

Valero Energy Corp. is selling $211.5 million principal amount of 2% mandatory convertibles talked with an offering price of $21 to $22 for the $25 par securities. The convert was originally issued to Orion Refining Corp. as part payment for a refinery acquired from the company in its bankruptcy case, when all the terms were set. (For full terms, see story elsewhere in this edition.)

The Valero mandatory does not have any dividend protection features, and Valero stock has a 1.22% common dividend yield. Thus, it is being offered at a discounted price.

Speaking of discounting, JDS Uniphase Corp. was in the overnight market pricing $400 million of seven-year convertible notes at par to yield 0% with a 37.6% initial conversion premium and market sources said underwriter Morgan Stanley was reoffering it below par.

PMI's three-year mandatory, talked to yield 6.0% to 6.5% coupon with a 20% to 24% initial conversion premium, is set to price after the close Tuesday.

At the middle of guidance, Merrill Lynch & Co. analysts put the new PMI convert 7.24% cheap, using a credit spread of 100 basis points over the five-year Treasury and a 20% stock volatility.

The new convertible deal is pricing concurrently with a public offering of approximately $150 million in common stock.

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