Omnicare down on acquisition plan; James River lower; Kodak improves with lower shares

By Rebecca Melvin

New York, Aug. 23 - Omnicare Inc.'s convertibles sold off Tuesday even as the underlying shares pushed higher on news the Covington, Ky.-based provider of geriatric pharmaceuticals is attempting to acquire PharMerica Corp. for $15.00 a share, or $441 million, which represents a 37.2% premium over PharMerica's previous closing share price.

The credit worthiness of the deal was in question although equity holders like the plan, sources commented.

At least several outright, low-delta names in the convertible bond market succumbed to weakness Tuesday, playing catch up with the high-yield straight bond universe amid a general lack of activity and as equities rallied, a New York-based sellside trader said.

"In general, today was a slower day compared to the last few days, and we finally started to see some significant weakness in our product that mirrors the weakness the high yield market has felt," the trader said.

Not everyone agreed with the trader, however.

"I think there is selective buying by both dealers and investors," a Chicago-based trader said.

A third trader, based in New York, said, "It looks to me like a balance of buyers and sellers overall, and a mixed bag of names on each side."

Quake unsettles some

Meanwhile, a strong earthquake with origins in Virginia struck shortly before 2 p.m. ET, rocking office buildings in New York and further afield, but was not reported to have created major damage outside of the center of the quake.

Shocks from the 5.8 magnitude earthquake were felt as far south as Florida and as far north as Ontario, according to reports.

One convertible player, who sits high in a Manhattan skyscraper, said his whole building was shaking, and attention was diverted from trading. But another convertible player, in a different building on the relatively low, sixth floor, said he didn't feel anything, and that the quake created virtually no disruption in his day.

Equities jumped, with the S&P 500 stock index ending up 38.5 points, or 3.4%, to 1,162.35. Those stock gains were said to spark dealer sales of convertibles to shed some risk on their convertible books.

But Level 3 Communications Inc.'s 3.5% convertibles due 2012 were said to be up 0.125 point, albeit on a customer sale.

"I don't think they have gotten much better or worse lately and [a] 5% gain [in the] share price shouldn't have anything to do with it," a New York-based trader said of the outright name.

James River Coal Co.'s convertibles were down 3 points outright with the underlying shares higher, backing the dealer de-risking theory.

Meritor Inc.'s convertibles were also mentioned in trade. The Meritor 4% convertibles due 2027 traded at 70.50 at the close of markets Tuesday, on a customer sale, and the Meritor 4.625% convertibles due 2026 traded at 80.50 at the close. Shares of the Troy, Mich.-based automobile component maker gained 58 cents, or 8.3%, to $7.60 on the day.

In addition, Eastman Kodak Co.'s convertibles were seen a little more improved, or up 0.375 point on a delta-neutral basis, with shares of the Rochester, N.Y.-based digital photography company down 6% to $2.62, after falling more than 8% on Monday.

Omncare lower

Omnicare's 3.25% convertibles due 2035, which trade outright, fell to about 90.50 from about 92.5 on Monday.

One pricing source said his firm traded the paper at 91 versus a share price of $29.25, compared to a Monday trade at 92.5 versus an underlying share price of $27.00.

"Shares were better, but credit concerns pushed the bonds down," he said.

Omnicare's 3.75% convertibles, which trade on an 83% delta, traded down about 0.5 point on a hedged basis, a second New York sellside source said.

PharMerica, the company that Omnicare is proposing to buy, provides drugs to nursing homes and assisted living centers. The offering price represented a 37% premium over Monday's closing price, including debt. Omnicare said the deal is worth $716 million.

Shares of PharMerica initially jumped to near the $15.00 target but subsequently slipped off that level, closing at $13.89, suggesting, according to one convertibles analyst, that the proposed buyout is not a done deal.

"I don't know what sticking the two together will do credit-wise. But I think part of the problem is that it is almost bordering on a hostile offer; it was not a joint press release; and PharMerica might be pushing back on Omnicare to pay a higher price," the analyst said, adding that he was "just speculating."

Kodak adds on hedge

Kodak's 7% convertible due 2017 was seen in the 64 bid, 66 offered range, versus an underlying share price of $2.60 near the close Tuesday.

One pricing source said a trade went off at 68 versus a share price of $2.78.

The gain was said to be 0.375 point on a delta-neutral basis.

"That gets better every day," a new York-based trader said.

But shares of the Rochester, N.Y.-based digital photography company moved lower for a second day, shedding 16 cents, or 6%, to close at $2.62.

The Kodak convertibles traded at 66.5 versus a share price of $2.75 early Monday.

"There's a group of people that think that Kodak patents are worth a lot," a trader said regarding the improvement in the convertible.

An analyst said, "If you want to call it a bond floor holding in, it looks like converts are deliverable into that."

Mentioned in this article:

Eastman Kodak Co. NYSE: EK

James River Coal Co. Nasdaq: JCRR

Level 3 Communications Inc. Nasdaq: LVLT

Meritor Inc. Nasdaq: MTOR

Omnicare Inc. NYSE: OCR

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