Continental, UAL climb on merger speculation; Beckman Coulter quiet as talk cheapened; ON plans deal

By Kenneth Lim

Boston, Dec. 11 - Airline names improved on Monday in line with their stocks, climbing above an otherwise slow session for the convertible bond market.

Continental Airlines Inc. and UAL Corp. were among the airline gainers, improving amid renewed speculation that the rivals may merge.

Meanwhile, Beckman Coulter Inc.'s planned $525 million convertible offering was quiet in the gray market amid grumblings that the deal was too aggressively priced at initial talk. Price talk was revised later in the day, toward the cheap end of initial guidance.

The new issuance market continued to churn, with ON Semiconductor Corp. announcing a $400 million overnight deal after the market closed.

Continental, UAL rise on rumors

Continental Airlines' 4.5% convertible due February 2007 improved about 2 points outright on Monday, while UAL's 4.5% convertible due 2021 also gained a couple of points outright.

The Continental convertible was marked at 109.75 bid, 110.25 offered against a stock price of $44.50. Continental stock (NYSE: CAL) jumped 8.19%, or $3.44, on Monday to close at $45.42.

UAL's convertible was marked at 143.875 bid, 144.375 offered versus a stock price of $43.95. UAL stock (Nasdaq: UAUA) closed at $44.53, a 3.7% or $1.59 gain.

"The airline stocks were all up today," a sellside convertible bond trader said. "There was a positive report on the sector by one of the sellside shops...I also saw something about Continental possibly merging with United Airlines. That probably helped to drive up the stock, although the rumors have been around ever since the U.S. Airways-Delta bid."

Benchmark Co. analyst Helane Becker on Monday wrote in a report that Elk Grove, Ill.-based UAL, the parent of United, could be interested in making a counter bid for Delta Air Lines Inc. or a merger with Continental.

"The stock is up $3 today, so I guess it's not out of the realm of possibility," a sellside convertible bond analyst said. "I don't personally have any information on that, but it makes sense [for a merger]."

Beckman Coulter quiet, changes talk

Beckman Coulter's planned $525 million of 30-year convertible senior notes were quiet in the gray market on Monday as investors panned original price talk as too aggressive.

The deal was expected to price Monday after the market closed. Price talked was changed to a coupon of 2.5% to 2.625% and an initial conversion premium of 27.5% from a coupon of 2.25% to 2.75% and an initial conversion premium of 27.5% to 32.5%. Beckman Coulter stock (NYSE: BEC) lost 2.3%, or $1.40, on Monday, finishing at $59.37.

The convertibles were being offered at par.

There is an over-allotment option for a further $75 million.

Morgan Stanley is the bookrunner of the Rule 144A offering.

Beckman Coulter, a Fullerton, Calif.-based developer of biomedical test systems and supplies, said $100 million of the proceeds will be used to concurrently buy back its common stock, while another $245 million will be used to tender for its outstanding 7.45% senior notes due 2008. A further $185 million will be used to repay a bridge facility it entered into to buy Lumigen Inc., with the remainder earmarked for paying off an outstanding revolving debt.

"It looked awfully rich," a sellside convertible bond trader said of the earlier price talk.

A convertible bond analyst said the company was "a decent credit" with a credit spread of Libor plus 60 basis points and a volatility in the low 20s.

But "it's kind of fully valued at the mids and modestly cheap at the wide end," the analyst said. "I expect it to come closer to the cheap end because of that."

Another convertible bond strategist noted that the company's existing high-yield paper looked more interesting than the new convertible.

"They were marketed at Libor plus 60 and 23% vol," the strategist said. "The existing high-yield was traded around 90 over. That's shorter than you and pays better than you."

Another sellsider agreed.

"I can't make them [the credit spread] any tighter," the sellsider said. "It just models really rich. I'm stretching my credit spread and volatility, but you can't make this thing look attractive."

Even at the new price talk, the offering is still relatively uninteresting, the sellsider said.

"At 21% vol it would be fair," the sellsider said. "It just models fair."

ON plans overnight deal

ON Semiconductor plans to price $400 million of 20-year convertible senior subordinated notes on Tuesday before the market opens, talked at a coupon of 2.375% to 2.875% and an initial conversion premium of 37.5% to 42.5%.

The notes will be offered at par.

There is an over-allotment option for a further $60 million.

Morgan Stanley and Citigroup are the bookrunners of the Rule 144A offering.

ON Semiconductor, a Phoenix-based maker of power and data management semiconductors, said it will use the proceeds of the deal to repay about $199.1 million of an outstanding senior secured debt, as well as to concurrently buy back up to $230 million of its common stock.

A sellside convertible bond analyst said the offering also appeared aggressive.

"It looks OK if it comes at the cheap end," the analyst said. "They're putting the bond on swap, but as much as you're protected from the move down on the equity...it's 101.5 at the cheap end of talk. So if it comes at the cheap end it looks interesting."

ON Semiconductor stock (Nasdaq: ONNN) gained 0.27%, or 2 cents, to $7.52 in after-hours trading, after the deal was announced.

A sellside convertible bond trader said the offerings by ON Semiconductor and Beckman Coulter were a sharp change from deals that came a week ago.

"Looks like the terms are getting awful again," the trader quipped. "What happened to the Fords and MannKinds?"

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