Powerwave, Nextel Partners gain from Nextel, Sprint talks, Motorola eyed on volatility

By Ronda Fears

Nashville, Dec. 10 - Merger Monday was eagerly anticipated as Nextel Communications and Sprint Corp. were on the brink of ironing out the details of a $35 billion merger late Friday, according to reports. Several wireless equipment makers such as Nextel Partners Inc. and Powerwave Technologies Inc. were higher as a result, but convertible players also were eying Motorola Inc. - which as it happened took a dive on the Nextel, Sprint development - as a volatility play.

"Three things drive returns in convertible arbitrage - volatility, rates and rebates, and mergers and acquisitions," said a fund manager who was looking at Motorola as a result of its drop on the Nextel, Sprint news.

Hedge funds have continued to post better results in the last couple of months, a sellside desk analyst said, so "they're risk tolerance is up a little bit." Volatility overall remains "dastardly low," he said, but there are "isolated opportunities, if you dig around," such as Motorola.

Elsewhere, convertible players were not convinced that Delta Air Lines Inc. was looking to tap the convertible market again - a rumor from the high-yield trading desks on Thursday - but the troubled Atlanta-based airline's convertibles were lifted again Friday by 1 to 1.5 points.

But deal activity continued to trip along, with the drive-by from Euronet Worldwide Inc., an electronic payment services firm, getting bumped up to $125 million from $100 million. It shot up 5 points in the immediate aftermarket.

Moreover, fund managers say they are in fact swamped, what with the new deal slate and year-end reports coming up, not to mention having to stay on top of trading as a result of earnings and bookkeeping matters. Between the Thanksgiving holiday just passed and the Christmas holiday coming up, time is squeezed even more.

"With a market more active than normal for December and me being out for two weeks - haven't even had time to breathe and catch up," said an outright fund manager in the western United States.

Euronet boosted, goes to 105

Euronet Worldwide Inc. sold the upsized $125 million of 20-year convertible senior notes at par to yield 1.3625% with a 42% initial conversion premium - roughly in the middle area of yield talk for a 1.5% to 2.0% coupon and at the aggressive end of premium guidance of 37% to 42%.

Out of the gate the new Euronet issue shot up to 103.5 bid, after trading at 101.625 in the gray market just before the opening bell, a buyside trader said. The paper continued to gain throughout the session, ending around 105 bid, 105.5 offered, he said. Euronet shares regained $1.25 on the day, or 5.28%, to close at $24.93.

New paper from Dress Barn Inc. continued to gain, adding another 3.25 points Friday to close at 105.5 bid, 106 offered. But CMS Energy Corp.'s new 2.875% convertible slipped again, ending off about 0.125 point to 99 bid, 99.5 offered.

Scientific Games Corp., the lottery ticket printer and online gaming firm, also saw its convertibles get bumped up Friday following several other financing steps this week, right on the heels of the convert that came to market just last week. The company sold $200 million of eight-year junk bonds this week at par to yield 6.25%.

"The [Scientific Games] stock has come in, but looks like the [convertible] bonds are still doing well," a buyside source said, noting the junk bond pricing.

Scientific Games' new 0.75% convertible due 2024 on Friday added 2.5 points to 103.75 bid, 104.25 offered while the stock rose 43 cents, or 1.84%, to $23.81.

Nextel, Sprint seen inking deal

Sprint and Nextel were reportedly close to finalizing a $35 billion merger that would unite the No. 3 and No. 5 wireless carriers, which is seen putting a combined company better positioned against larger rivals Verizon and Cingular Wireless.

"Whatever spin you take on this, it's a positive thing," a sellside convertible trader said.

Nextel's convertibles again Friday were holding steady without a big run on the chatter, he noted. The 5.25% issue due 2010 was described as up a tad to 102 bid, 102.5 offered. Nextel shares closed off a nickel on the day to $29.76 but in after-hours trading the stock was last seen up 39 cents, or 1.31%.

Under the deal, Sprint would issue 1.3 shares for each share of Nextel, according to The Wall Street Journal, which cited sources close to the matter. Some cash would also be involved and Sprint would spin off its local-phone business, the Journal reported.

The terms would value the merger at more than $35 billion and create a company with around $30 billion in annual wireless revenue.

Wireless group up in sympathy

Such a deal would likely provide a boost in business to telecom equipment suppliers, and in the convertible market players were picking up Powerwave and Nextel Partners. There was some speculation that Nextel Partners might even get lumped into the merger, but at the very least is expected to see more business as a result of the union.

Lucent Technologies Inc. and Nortel Networks Corp. - two regularly active convert names - also were active on the news, but little changed, traders said. He pegged Lucent's 2.75% due 2023 at 140 bid and the 2.75% due 2025 at 147 bid. Nortel's 4.25% due 2008 was quoted at 97.5 bid. Both Lucent and Nortel stocks, however, were lower on the day.

Powerwave, which makes radio frequency power amplifiers used in wireless phones, and Nextel Partners saw big gains Friday, following sharp moves upward on Thursday as well.

The Powerwave 1.25% convertible due 2008 gained 2.25 points to 106 bid, 106.5 offered and its 1.875% due 2024 added 2.375 points to 102.875 bid, 103.375 offered. Powerwave shares gained 38 cents on the day, or 4.61%, to close at $8.62.

Nextel Partners' old 1.5% convertible due 2008 was pegged at 262.5 bid, about 6 points over parity, and the new 1.5% convert due 2008 at 159.5 bid, or parity plus 15 points. The underlying stock closed up $1.11, or 5.97%, at $19.71.

Motorola a volatility play now

By contrast, a union between wireless carriers Sprint and Nextel wasn't seen as good news for one equipment supplier - Motorola.

For years Motorola has had an almost exclusive relationship with Nextel, supplying networking equipment and handsets, but some industry experts speculate that relationship would end if Nextel merges with Sprint.

Motorola shares Friday plunged $1.38 on the day, or 7.79%, to $16.34.

"I'm a buyer of MOT at some point here," a fund manger said. "A vol play seems likely now!"

Against the sharp drop in the stock, the Liberty 3.5% exchangeable due 2031, which converts into Motorola shares, was described as steady at 96.625 bid, 97.125 offered.

Market wary of new Delta deal

Delta's convertibles were higher again Friday, but players remained skeptical of a new convertible offering from the airline.

"Personally, I think a new deal from Delta would fly, I mean fly, because those terms would have to be pretty sweet," said a convertible hedge fund manager in New York. "But I don't really think we're going to see one, at least not anytime soon."

Several traders, both buyside and sellside, echoed the manager's remarks. Capital market sources continued to be mum on the chatter, but one speculated that Delta might be smarter to wait until the beginning of the New Year to try to market a new deal.

"Right now, they [Delta] probably could get a deal done, especially since the stock has made such a fantastic run in the past several weeks," one convertible origination source said. "But, I think they'd probably have an easier time of it in early 2005, when the market isn't so hectic."

Delta's 8% convertibles rose another point to 67.75 bid, and the 2.875% converts gained another 1.5 points to 71 bid. Delta shares closed up Friday by 20 cents, or 2.66%, to $7.72.

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