Barclays Capital: Seek delta-neutral positions in steel amid consolidation news

By Kenneth Lim

Boston, Feb. 3 - It's time to buy delta-neutral positions in steel convertibles, said Barclays Capital analysts Luke Olsen, Haidjie Rustau and Heather Beattie in a research report this week.

The recent $22.5 million takeover bid by the Netherlands' Mittal Steel Co. for Luxembourg rival Arcelor SA prompted the research team to take a look at trade opportunities within the steel convertibles sector. Three issues were highlighted: Arcelor's 3% 2017 convertibles, Corus Group plc's 3% 2007 bonds and Voestalpine AG's 1.5% 2010 debentures.

While the Barclays analysts view as fair Mittal's current offer to give 0.8 Mittal share plus €8 per Arcelor bond, versus 0.8 Mittal share plus €7.05 per Arcelor share, they believe that Mittal will make a better offer to complete the deal. Meanwhile, Arcelor, whose management is resisting the takeover, could return cash to shareholders as a defense strategy.

"Arcelor 3% 2017 valuation should benefit if the dividend is below €1.10 or above €1.57 per share," the analysts wrote, adding that a dividend between €1.10 and €1.57 would push the convertible's valuation below its current market price. Arcelor paid €0.65 per share in dividends last year, while the IBES consensus forecast is €0.78 per share this year.

"We believe that the dividend risks are skewed in holders' favor and therefore recommend a delta-neutral position in the bond."

Corus, an Anglo-Dutch steel maker, has also been rumored to be a takeover target of Germany's ThyssenKrupp AG, although ThyssenKrupp has rejected the speculation. The Dusseldorf company, however, said Thursday it had acquired Toronto-based VPK Metals Inc. and Britain's Metalfast Ltd.

"While takeover speculation does not necessarily lead to a rise in longer-term implied volatility, we believe a rise in short-term volatility is likely and convertible bondholders could benefit from short-term gamma trading in periods of uncertainty," the analysts wrote.

Corus convertibles now trade with a conversion premium of around 39.1%, and are protected from takeovers through a conversion price reset mechanism and a change-of-control put option for investors. There is also protection if dividend payments exceed 10p per share.

Voestalpine, which has just completed a 10-year privatization process by the Austrian government, is also a likely M&A player either as a buyer or a target, Barclays said. The company's 1.5% convertibles due 2010 offer dividend and takeover protection, and could give buyers exposure to the upside if Voestalpine is the target of a bid.

If Voestalpine were the buyer in a deal - the company has said it wants to make up to five acquisitions within the year - investors could still benefit from the positive upsilon, or the convertible's sensitivity to change in the market's risk expectations, Barclays said.

© 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.