Open Solutions soars on buyout; Bausch and Lomb, Wyeth slip on rate fears; SanDisk gains on outlook

By Kenneth Lim

Boston, Oct. 16 - The convertible bond market had a sluggish session on Monday, but Open Solutions Inc. came to life after the company received a $38 per share privatization offer.

Open Solutions jumped several points outright on news of the offer, which will allow convertible holders to receive the merger consideration payable for their underlying shares.

Floating-rate convertibles from Bausch and Lomb Inc. and Wyeth were slightly weaker amid ongoing concerns that short-term interest rates will be lowered within the next six months.

SanDisk Corp. improved with its stock after a bullish analyst note fueled optimism about the company's third-quarter results.

"It's pretty quiet today," a sellside convertible bond trader said. "Typical Monday...It'll probably get better with the companies reporting their results."

Open Solutions climbs on buyout

Open Solutions' lightly traded 1.467% convertible due 2035 jumped about 15 points from fortnight-ago levels on Monday after two private equity groups offered $1.3 billion in cash and debt assumption to take the company private.

The convertible traded at 77 against a stock price of $33.375 on Monday. Open Solutions stock (Nasdaq: OPEN) climbed 24.04% or $7.28 to close at $37.56.

"They look like they were trading around parity with the matrix plus the make-whole adjustment," a Connecticut-based sellside convertible trader said.

The Carlyle Group and Providence Equity Partners are offering $38 in cash for each Open Solutions common stock in a buyout bid that Open Solutions' directors have approved. That represents a 25.5% premium to Open Solutions' closing stock price on Friday.

Open Solutions is a Glastonbury, Conn.-based provider of software and services for financial institutions.

Holders of the convertible may convert their bonds and receive cash.

The conversion ratio for the convertibles, which were issued at a dollar price of 53.356 in 2005, is about 18.39 shares per convertible, but there is a premium make-whole that will give each $1,000 note about 2.2 additional shares if the deal is completed by February 2007.

The deal still needs shareholder approval to be completed. Open Solutions' directors are recommending the deal, and expect completion during the first quarter of 2007.

Convertible bond holders have an option of putting the convertibles back at the accreted value of about 53.56, "but I don't think it would make sense," a convertible bond analyst said.

"Even if the deal is completed in January or year-end, they would do much better to convert," the analyst said.

The analyst said outright holders of the bonds are collecting a hefty return because of the deal, and even hedged investors could benefit.

"If you had a hedge on it, if you were pretty much delta neutral, I think you'd probably still make a little bit...about a point or a point and a half," the analyst said.

The offer also has a good chance of securing approval from shareholders, the analyst noted.

"It was a pretty decent premium to where it stock was, about 25% of a fully valued stock to begin with," the analyst said. "This is a pretty good premium to that...it's probably as good as they'll get."

A convertible bond trader said the market seemed confident of the deal.

"It looks like the takeover's definitely going to go through at this point, based on where these are trading," the trader said.

But the trader noted that the volume of the trades on Monday was muted.

"It doesn't look like that many traded," the trader said. "Looks like there's maybe a few enormous holders. People are probably going to wait to take the make-whole."

Bausch and Lomb, Wyeth slide on rate fears

Bausch and Lomb's floating-rate Libor plus 50 basis points convertible due 2023 was slightly weaker on Monday amid concerns that interest rates will be lowered in the next six months.

The Bausch and Lomb convertible, which currently pays a coupon of 6.048%, came in by about half a point at 116.5 bid, 117 offered against a stock price of $51.14. Bausch and Lomb stock (NYSE: BOL) gained 1.19% or 61 cents to close at $51.75 on Monday.

"A lot of the floating-rate paper has gotten cheaper with the expectations of...rate cuts in the next six months," a convertible bond trader said.

Meanwhile, Wyeth's Libor minus 50 bps convertible due 2024, which currently has a 5.109% coupon, was about a quarter-point lower outright at 109.25 versus a stock price of $51.50. Wyeth stock (NYSE: WYE) slipped 0.04% or 2 cents and finished the day at $51.64.

Bausch and Lomb is a Rochester, N.Y.-based maker of eye health products, while Wyeth is a Madison, N.J.-based pharmaceutical company.

A buyside convertible bond analyst said the market currently believes that rate cuts are looming in the outlook for the next year, but declined to speculate on how big the cuts will be. That outlook has taken some of the shine off floating-rate convertibles, the analyst said.

"If you think that rates are going to fall, then it means the coupon on a piece of floating-rate convertible is going to fall as well," the buysider said. "If you put your money in something with a fixed coupon, you're not going to be negatively affected by falling rates."

SanDisk higher on outlook

SanDisk's 1% convertible due 2013 gained about 2 points on Monday in line with the stock, after an analyst said the company could beat expectations for its third-quarter results.

The convertible traded at 102 versus a stock price of $61.50, while SanDisk stock (Nasdaq: SNDK) added 2.86% or $1.69 for a $60.85 close.

"SanDisk was pretty active," a sellside convertible bond trader said. "There was a report that the company could beat estimates."

W.R. Hambrecht equity analyst Daniel Amir on Monday maintained his buy rating on SanDisk stock, saying the company could beat third- and fourth-quarter estimates because of strong sales in MP3 players and mobile phones.

SanDisk is a Milpitas, Calif.-based maker of flash memory chips. It reports its third-quarter results Thursday after the market closes.

"Overall, we believe that the Street is underestimating the potential strength in product gross margin in the third and fourth quarters," Amir wrote in a note.

A buyside convertible bond analyst was more cautious, citing widespread concern about inventory build-ups and a slowdown in consumer spending.

"A number of companies have issued warnings, and a lot of the concern now is that sales in the second half may be slower than expected," the buysider said. "I think the key is also what kind of guidance we'll get for the fourth quarter."

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