Washington Mutual, State Street up as possible Citigroup targets; Huntsman slated for next week

By Ronda Fears

Nashville, Jan.31 - Takeover risk continued to occupy a spotlight in the convertible market as Merger Monday revealed the MetLife Inc. acquisition of Travelers Life & Annuity from Citigroup Inc. for $11.5 billion. MetLife left the door open to return to tap convertible investors to raised funds to pay for the deal, and it also lifted some banking names that could be targets for Citigroup with the new funds.

Washington Mutual Inc. and State Street Corp., which have both been named as potential targets for Citigroup, were both higher Monday. St. Paul Travelers Cos. Inc., which bought other Travelers units from Citigroup last year, was higher, too, on its plans to spin off a financial adviser unit.

A Merrill Lynch conference call Tuesday will focus on the accelerated pace of M&A activity and the impact on convertibles. It is scheduled at 11:30 a.m. ET and will be hosted by Merrill equity analyst Sayta Pradhuman with special guests Yaw Debrah and Tatyana Hube from the U.S. convertible research team.

Meanwhile, Huntsman Corp.'s $250 million three-year mandatory convertible was firmly put on the forward calendar for next week's business.

New issues recently put into circulation were higher for the most part, dealers said. Rite Aid Corp.'s new 7% mandatory gained a half-point or so to 48.75, one trader said, while the Rambus Inc. zero-coupon issue was marked up a couple of points to 97. The Open Solutions Inc.'s discount cash-to-zero convertible senior was described as unchanged to maybe a tad lower at 53.25.

MetLife may revisit convertibles

With the Travelers addition, MetLife will become North America's biggest seller of individual life insurance while bolstering its product reach, and so many convertible investors made money on its last issue that the news was well-received.

Under the terms of the transaction, Citigroup will receive $1 billion to $3 billion in MetLife equity securities and the balance in cash, which will result in an after-tax gain of $2 billion. MetLife said it would finance the cash portion of the transaction with a combination of cash, debt, mandatory convertibles and selected asset sales.

"MetLife's other mandatory was hot and a lot of people made money on it, so I'd think a new one would be just as popular," said a buyside market source, referring to the 8% mandatory sold when MetLife went public in 2000.

Moody's said that MetLife will gain a number of benefits from the Travelers acquisition, not the least of which was an expected boost to annual after-tax operating earnings in excess of $850 million plus annual cost savings of at least $150 million. MetLife estimates the transaction will be immediately accretive and increase earnings per share by 4% to 6% in 2006.

CreditSights analyst Rob Haines said, however, that the MetLife acquisition makes strategic sense for stockholders but builds risk for bondholders.

"While we had been expecting MetLife to be acquisitive this year, we are surprised by the size of the transaction. In our opinion, the deal makes strategic sense but comes with considerable risk to bondholders," Haines said in a report Monday, adding that he estimates MetLife's leverage will increase to around 30% due to the purchase, even after giving some equity consideration for a convertible.

State Street, WaMu climb

On the heels of Citigroup's sale of Travelers Life & Annuity to MetLife, a fresh batch of speculation was circulating about what Citigroup might do with the booty and, of course, banking names seen as targets were in play. Notably in convertibles, State Street Corp. and Washington Mutual Inc. were higher.

State Street's 6.75% mandatory due 2006, which priced at par of 200, rose 3 to 4 points to 203 bid, 204 offered, a dealer said. The stock rose $1.03 cents, or 2.35%, to end Monday at $44.81.

WaMu's 5.375% convertible trust preferred added 0.25 point by about a half-point to 54.375 bid, 54.875 offered while the stock added 14 cents, or 0.35%, to close at $40.35.

Citigroup chief executive Charles Prince said in the conference call on the MetLife transaction that $6 billion in Tier one capital was expected to be freed up by the sale for growth but offered few details as to where the company might be looking specifically.

"We've said that our priorities for the next couple years are to be the most respected company, to grow international, to grow consumer and to make sure global corporate investment bank is best in class, so the acquisition opportunities obviously fit in those various categories," Prince said. "International as a separate category is obviously very high on our list, but not to the exclusion of domestic opportunities."

On the subject of timing, Prince said that Citigroup will be in no hurry to sign deals given its pricing discipline, a commitment to positive operating leverage and a lag in the receipt of the Travelers sale proceeds. The MetLife transaction is not due to close until the summer.

St. Paul divestiture a plus

Analysts were saying Citigroup's final divestiture of Travelers would market the end of the banking industry's ties with insurance companies, so dealers said there was a positive reaction to St. Paul's decision to spin off its majority interest in Nuveen Investments Inc. even as St. Paul announced a drop in earnings on a big boost to reserves.

St. Paul's zero-coupon convertible notes were quoted up about one-quarter point to 84.5 bid, 86.5 offered, a dealer said. The 9% mandatory due August 2005, gained about 1 point to 67.125 bid, 67.5 offered. The 4.5% convertible trust preferred added 0.125 point to 23. St. Paul shares ended Monday up 59 cents, or 1.6%, at $37.49.

St Paul Travelers said that it strengthened net reserves by $868 million on a pretax basis, or $581 million after taxes, in fourth quarter 2004 and, thus, earnings dropped 38% for fourth quarter, but it also said it was exploring strategic alternatives to divest 79% ownership of Nuveen, a third-party asset-management firm.

"Asset management is not one of St. Paul Travelers core businesses, and the Citi deal with MetLife is being described as the end of the link between banks and insurance companies," a convertible trader said. "We can look for a new list of M&A candidates in the insurance and financial services group now, it seems."

Standard & Poor's analysts said Monday in affirming St. Paul's ratings that its capital adequacy as of year-end 2004 remains somewhat low, and that the "sale of Nuveen would generate a significant amount of capital that could be used to strengthen the capital adequacy of the insurance operations."

Huntsman price talk emerges

Huntsman launched its $250 million three-year mandatory convertible on Monday with guidance for a 5.0% to 5.5% dividend and 18% to 22% initial conversion premium. The convertible is scheduled to price alongside the Salt Lake City-based chemical company's initial public offering of stock - 55.7 million shares at an estimated range of $21 to $23 a share - next week.

Convertible players still say it is likely to be well-received, in part because of its chemicals industry segment, which has little representation in the convertible universe, again pointing to German chemical concern Celanese Corp.'s convertible that priced earlier in January alongside its IPO.

Celanese's 4.25% perpetual convertible preferred added another 0.25 point on Monday to 25.25, as the underlying stock rose 13 cents, or 0.81%, to close at $16.13..

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