Nextel converts gain as stock sold short; Arch Coal buried by warning, Massey down, too

By Ronda Fears

Nashville, July 9 - Nextel Communications Inc. convertibles got a little pop in the wake of the company's winning the controversial spectrum swap designed to resolve interference problems associated with public safety frequencies - but the company's stock dropped amid short selling. Nextel Partners Inc., however, dropped on the news, as it chilled market buzz that there might be a merger for the two in the offing.

While the news is expected to result in an appeal from the likes of Verizon Wireless, traders said most of the telecom paper followed the broader market higher. Juniper Networks was a particularly strong riser in the crowd, traders said, but one noted that Motorola Inc. also edged up although the Nextel news was a negative event for Motorola.

Most of the market ended on a higher note. One buyside source on the West Coast noted that the chip sector was looking forward to a big time next week starting with earnings from Novellus Systems Inc. Monday morning followed by an Applied Materials Inc. talk later that day.

Protein Design Labs Inc. and several other biotech issues were lower, which one dealer said might be due to the possible contingent conversion accounting rule that would make those issuers account for the dilution to earnings per share immediately rather than when the conversion trigger is hit.

Merrill Lynch & Co. equity analysts sketched the rule's impact on a range of pharmaceuticals. In other reports related to the CoCo rule, Merrill stock analysts estimated a 14%-plus dilutive effect for General Motors Corp. and a potential 5% to 6% dilution for SPX Corp. Merrill's convertible analysts also looked at the matter, noting that small cap, particularly busted, converts are most vulnerable to the new rule.

Nextel converts better bid

There were buyers for the Nextel convertibles, although traders noted that the stock was getting sold short. But the price move was slight as there is still some uncertainty about its spectrum swap win with the U.S. Federal Communications Commission.

Nextel's 5.25% convertible was quoted up 0.5 point to 97 bid, 97.5 offered at one sellside shop, and at 98 bid, 98.375 offered at another. The stock closed off 23 cents, or 0.9%, to $25.29.

The FCC approved the controversial spectrum swap with wireless carrier Nextel on Thursday and it ruffled the feathers of competing bidders - Verizon Wireless being the most vocal.

"There's a lot of unknown about the new airwaves deal, the exact costs associated with it, litigation. There are more costs associated with the deal than what was thought, and it's not something that's easy to look at and see the price tag on," a trader said.

"There was also some speculation that Verizon people are really bent out of shape about this and maybe they were the heavy hands shorting the stock."

The FCC determined that the airwaves Nextel would receive were worth $4.8 billion and the spectrum it is swapping for it is worth about $1.6 billion.

Nextel will have to establish a $2.5 billion letter of credit to cover costs incurred by public safety groups whose operations will be reorganized in the 800 MHz band, plus cover any costs beyond that.

To balance the valuation differences in the transaction, Nextel would also incur cash requirements of an estimated $3.2 billion to fund rebanding costs for public safety, retuning costs for Nextel's network and relocation costs for 1.9 GHz incumbents, according to an industry report quoted by the trader.

Verizon Wireless, the largest U.S. carrier, has argued that the coveted 1.9 GHz airwaves should be auctioned to the highest bidder.

Nextel Partners shunned

As an outcrop from the spectrum swap event, Nextel Partner took a dive as the cost uncertainty made a takeover by Nextel Communications less viable, a buyside trader speculated.

Nextel Partners' new 1.5% convertibles were quoted down 6 points and the new 1.5% convertibles down 3.5 points, while the stock ended lower by 49 cents, or 3%, to $15.80.

"There was lots of hoopla about it [Nextel Communications buying Nextel Partners] a couple of weeks ago and now that's died out completely with them winning the spectrum swap," the trader said. "I personally still think it's a possibility, though. The new bank revolver [$4 billion] gives Nextel some room beyond what they are going to be paying for the [spectrum] space."

He said fundamentals at Nextel Partners remain strong, though, and the company recently boosted its second quarter guidance, so some buying on the weakness is expected.

"We will be lading up again, when the dust settles," he added.

On June 23, Nextel Partners boosted its guidance for 2004 adjusted EBITDA to $340 million from $325 million, implying an 85% increase over 2003 adjusted EBITDA of $183.8 million.

Nextel Partners reports earnings July 28.

Arch Coal warning weighs

Arch Coal Inc. made a warning that went contrary to general optimism in the coal industry, blaming rail service disruptions in both the eastern and western United States, and it was punished severely - in points, but not volume.

The 5% convertible preferred fell 5.15 points, or 5.42%, on the New York Stock Exchange, ending at 89.85. A dealer quoted the convert at 90.375 bid, 90.875 offered. On the exchange only 30,500 shares of the preferred changed hands, compared with a three-month running average of 32,561, and dealers reported very little volume too.

Arch Coal shares were more active, though. The stock closed down $1.95, or 5.35%, to $34.47 with 3.32 million shares trading versus the average 843,181.

Arch Coal said it expects to report earnings per share of approximately 20 cents for second quarter - at the low end of its previous guidance for 20 to 30 cents. Both estimates exclude charges related to the termination of hedge accounting for interest rate swaps.

"In total, missed shipments and production curtailments resulting from high mine inventory levels cost the company an estimated $8 million after tax, or $0.13 per share, during the period," said Steven Leer, Arch chief executive, in a news release.

Leer said Arch is actively working with the railroads in an effort to improve the level of rail service in the year's second half.

Arch plans to announce its second quarter results before the market opens on July 26.

The news weighed on Massey Energy Co., too, with its converts losing 1 to 2 points.

© 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.