Earnings send Sepracor higher, but UnumProvident, Goodyear lower; Huntsman adds on takeout talk

By Rebecca Melvin

Princeton, N.J., Jan. 31 - The convertibles market was mixed on Tuesday as players weighed corporate earnings and eyed news from Washington, D.C., including the Federal Reserve's latest quarter-point rate hike and possible indications for the U.S. economy's direction provided in Tuesday night's planned State of the Union speech.

Positive earnings news sent the convertibles of Sepracor Inc. higher outright, with its 0% convertibles of 2024 expanding 0.5 point to 0.75 point on a hedged basis, as its stock surged.

But UnumProvident Corp.'s convertibles turned lower by 5 to 7 points after a shortfall in the disability insurer's earnings and subsequent downgrades of its shares. And Goodyear Tire & Rubber Co.'s release of fourth-quarter projections, indicating earnings will fall short of expectations, sent its convertibles tumbling by more than 20 points on a 16% drop in its shares.

Meanwhile, the post-close release of earnings from Google Inc. sent shares of the Mountain View, Calif.-based internet company down in after-hours trade.

"Google isn't a convert issuer, but it doesn't look good for tech," a New York-based sellside trader said.

Google said late Tuesday that its fourth-quarter earnings rose 82% on advertising business. But excluding certain charges, it earned only $469 million, or $1.54 a share, falling short of expectations of earnings of $1.76 a share.

Separately, the convertibles of Juniper Networks Inc. edged lower after initially moving higher in response to Thomas Weisel Partners' upgrade of its shares to "outperform" from "peer perform."

The convertibles of Huntsman Corp. were up after an article in Tuesday's Wall Street Journal reported that the company was in discussions to be sold for more than $4.3 billion, potentially to private equity firm Apollo Management LP. The Huntsman 5% mandatories gained about 3 points to 46.

The convertibles of Omnicare Inc. were down again on a hedged basis by about another 0.375 point, according to a New York-based buyside trader. But a sellsider characterized the paper as "stabilized" after disturbing news Monday of a raid by Michigan's attorney general's office of the company's offices in Livonia, Mich.

On Monday, the 4% preferred convertible bonds dropped in line with its shares to 64.25, versus $48.96, a drop of $6.09, or 11.06%. On Tuesday, its shares (NYSE: OCR) edged slowly higher to close up 74 cents, or 1.5%, to $49.70.

No new information emerged on the rumored GMAC deal with Citigroup private equity unit and Cerberus Capital Management, the pair reported to be considering an $11 billion to $15 billion offer for GMAC. Wachovia and Kohlberg Kravis Roberts may also have a competing bid.

"We wouldn't be surprised by either transaction. Wachovia has been clear about its interest in expanding its auto finance business after the purchase of Westcorp," independent research firm Gimme Credit said Tuesday.

Sepracor 0s trade actively

Of Sepracor's four convertible issues, the 0% paper due 2024 seemed most active, traders said. The 0s closed at about 100 bid, 100.375 offered, up more than 5 points outright and up about 0.50 point to 0.75 point on a hedged basis, depending on the delta, according to a New York-based buyside trader.

The 5% convertibles due 2007 traded little changed at about 99.5. But neither the 0% convertibles due 2008 nor the 0s due 2010 were reported in trade.

"There is a lot of room to run for this issue," a convertible market source said.

Marlborough, Mass-based Sepracor reported its first profitable year, with a 116% surge in full-year revenue, compared with the year earlier, on strong sales of its insomnia treatment Lunesta, launched in April, and asthma treatment, Xopenex.

As of Dec. 31, Sepracor had about $976 million in cash and short- and long-term investments.

Timothy Barberich, chairman and chief executive, said that 2005 was the company's first profitable year and that the company is "positioned for continued growth and profitability for 2006."

Sepracor has submitted a New Drug Application for arformoterol, a nebulized long-acting beta-agonist for the treatment of chronic obstructive pulmonary disease (COPD), advanced its early stage pipeline of pharmaceutical products, and presented and published data related to Lunesta and Xopenex product franchises, Barberich said in a release.

Sepracor shares (Nasdaq: SEPR) jumped $8.53, or 17.6%, to $56.91.

UnumProvident pressured

The convertibles of UnumProvident, the largest U.S. disability insurer, dropped between 5 and 7 points as its shares fell 15% after the company reported disappointing quarterly earnings and issued a warning on 2006 profit.

The 8.25% mandatory convertibles of UnumProvident, which mature in May, closed at 32.1 bid, 32.5 offered, according to one New York-based sellside shop, compared with 37.375 bid, 37.875 offered on Monday versus a closing share price of $24.03.

The 8.1675% convertibles closed at 38.99 bid, 39.09 offered, compared with 45.96 bid, 46.06 offered on Monday.

The Chattanooga, Tenn.-based company posted higher fourth-quarter earnings on Monday but fell short of expectations, hurt by underperformance in one of its units. It also said it anticipated a slower rate of earnings growth in 2006.

Banc of America Securities cut its rating on UnumProvident shares to "neutral" from "buy" on Tuesday, saying the quarterly results "missed on margins as costs were disappointing in group disability for the fourth quarter in a row."

UnumProvident shares (NYSE: UNM) dropped $3.70, or 15.4%, to $20.33.

Goodyear tumbles

Investors also sold Goodyear shares (NYSE: GT), pushing the stock down $3.12, or 16.6%, to $15.64 after the Akron, Ohio-based tiremaker said that higher raw materials costs are likely to cut into its bottom line.

Goodyear 4% convertibles tumbled more than 20 points to 143.75, versus the close, on this earnings disappointment, a buyside trader said.

In its press release late Monday, Goodyear said that it expects fourth-quarter operating income to be about $238 million, excluding the effects of last year's Gulf Coast hurricanes, which is about the same level as 2004's fourth quarter. Its raw material costs increased about 13% in the quarter, more than anticipated, the company said.

Huntsman gains on possible sale

The mandatory preferreds of Huntsman "traded a little on speculation of it being taken out," a New York-based sellsider said.

The convertibles gained about 3 points to 46, versus a share price of $21.50, the sellsider said, at about halfway through the session. Shares (NYSE: HUN) actually closed a little higher, up $2.22, or 11.4%, at $21.62.

The Wall Street Journal reported that Huntsman was in serious discussions to be sold for more than $4.3 billion.

The Salt Lake City-based chemical company confirmed after the bell that it received an indication of interest in late 2005 regarding an acquisition of all outstanding stock of the company.

Such a plan "would provide an exit strategy for both MatlinPatterson (which owns about one-third of the stock) and the Huntsman family (which owns about one-quarter of the stock," according to a Credit Suisse research note.

MatlinPatterson has owned a major stake in Huntsman since 2001 and sold some shares in the initial public offering of the company in February 2005.

The Credit Suisse note said that a move by private equity, in this case potentially Apollo Management, is typical in a situation like this in which investors have been unwilling to buy the stock. Chemical stocks have "significantly underperformed" other basic materials groups in recent weeks, the research note said.

Huntsman closed at $19.30 on Monday and the initial public offering price of February 2005 was $23. The stock reached $30 by the end of February 2005, but has been weak since then. Credit Suisse does not think the company would agree to be taken private below the IPO price.

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