Albertson's, Dick's trade on acquisition news; United Auto launches $250 million deal

By Rebecca Melvin and Kenneth Lim

Princeton, N.J., Jan. 23 - Acquisition-related news drove some trading in the convertibles market on Monday, with heavy volume in Albertson's Inc. mandatories, which were higher, on news that a consortium led by private equity outfit Cerberus Capital Management and retailer SuperValu Inc. has agreed to buy the grocery store company, including its debt, for $17.4 billion.

The convertibles of Dick's Sporting Goods Inc. were also trading in response to news that rival Sports Authority Inc. was being bought for $1.3 billion, including debt.

The Dick's convertibles gained about 1.5 points outright, but were lower on a hedged basis by about 0.25 point, sources said.

The convertible preferred shares of Ford Motor Co. were higher in heavy volume after the No. 2 U.S. automaker reported earnings and outlined a restructuring plan that will involve closing 14 plants and cutting up to 30,000 jobs.

Lucent Technologies Inc. saw modest action ahead of earnings announcements expected Tuesday, a trader said.

The convertibles of Avnet Inc. also traded after Lehman Brothers initiated coverage of the stock, and the firm's convertibles analyst Venu Krishna said in a published comment that the Avnet 2% convertibles have a "compelling 3:1 risk/reward profile" and should be considered an option to the stock.

In addition, United Auto Group Inc. launched a new convertibles deal, with pricing seen Wednesday. The $250 million issue of 20-year convertibles that UAG plans to price brings the total number of deals for pricing Wednesday to two, including NRG Energy Corp.'s planned $500 million of mandatories.

Internationally, the U.K.'s Vedanta Resources plc priced $750 million of convertibles at the cheap end of talk.

United Auto to price

United Auto's Rule 144A deal, being sold via bookrunner Merrill Lynch with co-manager Thomas Weisel, was talked at 3% to 3.5% for the coupon, and 25% to 30% for the initial conversion premium.

The convertible senior subordinated notes will have a greenshoe of $50 million. The notes are non-callable for five years, and will have puts in years five, 10, and 15. Other features include contingent conversion, contingent payment, dividend protection, and takeover protection.

"Yeah, the stock is kind of interesting. It's at a 52-week high," a West Coast-based outright buysider said of the United Auto convertible deal.

As far as the terms go, the buysider said they aren't very different from an upsized $225 million of 20-year convertibles that Hutchinson Technology Inc. priced last week.

The 3.5% Hutchinson convertibles have an initial conversion premium of 30%. Those bonds are also non-callable for five years, but have puts starting in year seven instead of year five, as is the case with the proposed United Auto deal.

"It worked for Hutchinson, and this has a shorter put," the buysider said of United Auto. "They have comparable gross margins, although they are totally different industries. We'll see. It's tough to get too excited about the autos."

Proceeds of the United Auto deal are expected to be used to repay its existing long-term debt under its revolving senior credit facility, which may be re-borrowed, and to purchase, simultaneously with the offering, up to 500,000 shares of common stock.

Based in Bloomfield Hills, Mich., United Auto Group is a U.S. automotive retailer.

Vedanta prices $725 million deal

Vedanta Finance (Jersey) Ltd. priced $725 million of 20-year convertible bonds at par to yield 4.6% for the coupon and with an initial conversion premium of 48%, according to market sources. The bonds will be guaranteed by Vedanta Resources plc.

They priced at the cheap end of talk which was 4.1% to 4.6% for the coupon and 48% to 55% for the initial conversion premium.

The bookrunner was Barclays Bank plc. There is an investor put in year seven.

"The market seemed to be having problems with the structure. In other words, conversion into non-voting stock, and how to assess the appropriate discount that the non-voting stock should trade at, given that is would be a completely new class of stock," a market source wrote via email.

Since Vedanta did the convertible issue, it looked "unlikely" that it will now issue a previously expected sale of straight bonds, according to a market source.

U.K.-headquartered Vedanta is a zinc and aluminum mining company with its principal operations in India.

Albertson's in the "flat zone"

The 7.25% Albertson's mandatories closed at 25.30, in the middle of the "flat," or "dead" zone, a range from 23 to 28, after the Boise, Idaho-based grocery store chain agreed to be bought by an investor group including retailers Supervalu Inc. and CVS Corp. as well as an investor group led by Cerberus.

"Looks like $25 plus dividends. At 7.25%, not bad overall. A high yield, outperformed the benchmarks, relatively high quality, good liquidity, good story," a New York-based buysider wrote in an email.

Under the terms of the agreement, Albertson's shareholders will receive $20.35 in cash and a fixed exchange ratio of 0.182 shares of Supervalu stock for each Albertsons share, on a fully diluted basis.

The value of the Supervalu stock, based on a $32.65 average stock price using the 20-day trading average of the closing price is $5.94. The $20.35 in cash, plus $5.94 in Supervalu stock yields a total consideration of $26.29 per share.

Supervalu will acquire about 1,124 operating stores and 100% of the support operations for Acme Markets, Bristol Farms, Jewel-Osco, Shaw's, and Star Markets, as well as all Albertsons banner stores in Idaho, Southern Nevada, Utah, Southern California, and the Northwestern US.. Also included are all of the combo-store pharmacies, which operate under the Osco and Sav-on banners.

CVS will acquire 100% of the stand-alone drugstore business, which includes about 700 freestanding stores.

The Cerberus-led consortium will acquire 655 operating stores and 100% of the distribution centers and offices in the Albertson's Dallas/Fort Worth division, and in the Florida, Northern California, Rocky Mountain and Southwestern regions.

Dick's moves in

Dick's Sporting Goods' (NYSE: DKS) 1.61% convertibles gained about two points outright amid news that rival Sports Authority Inc. was being bought for $1.3 billion, including debt. But on a hedged basis, they contracted by about 0.25 point.

The five-year convertibles, which mature in February 2009, were trading around 73.25 Monday, against a share price that rose 5.46%, to 36.50.

A New York-based analyst said the share movement made Dick's convertibles "quite cheap" because the stock, in line with the acquisition theme, was "getting pushed out a little bit."

Some traders noted that the convertibles came "in" a little, or dropped relative to the stock, by about a quarter point, because the bonds do not have takeover protection and there was concern that Dick's could be the target of an acquisition.

But an analyst who covers Dick's stock said he did not see Dick's as an acquisition candidate. "If anything they could acquire someone else in the future," the analyst said. "The company has ambitious growth plans."

Avnet 2s gain

The 2% convertibles of Avnet traded up about 0.50 point to 0.75 point on Monday after Lehman Brothers initiated coverage of the stock and Lehman convertibles analyst Venu Krishna said the issue "has a compelling 3:1 risk/reward profile.

"Our estimates suggest that for a 25% up or down move in the stock over the next year, the convert is likely to participate in 51% of the upside (i.e. 12.75% return), and 15% of the downside (i.e. negative 3.75% return," Krishna said.

He recommended that equity investors consider the convertible as an attractive alternative to the common.

The 2% convertible is puttable in March 2009 at par or 3.15 years from now making it a relatively short maturity instrument. It is also callable in March 2009 resulting in relatively long call protection, Krishna said.

Since bonds have dividend protection but lack cash takeover protection, which may partly explain their underperformance relative to the underlying shares.

Since issue 1.8 years ago, Avnet shares (NYSE: AVT) have appreciated 12.6% while the convertible has declined 2.1% in price.

While the convertible was issued with a 2% yield and 51% premium, it now trades at 2.7% yield to put and 31% premium.

Lucent trade ahead of earnings

The 7.75% convertibles from Lucent Technologies Inc. saw modest action, trading at around 950 against a share price of around $2.55 ahead of earnings announcements expected Tuesday.

The stock closed at about $2.50, down 1.96%. The trust preferreds came down about 1%.

A technology-sector analyst said the movement was likely in anticipation of the earnings, but he had not expected much trading volume in the convertibles Monday because few expect Lucent to depart far from its guidance of $2.05 billion in revenue for the first quarter. Lucent reported revenue of $2.43 billion in the previous quarter ended Sept. 30.

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