Armor gains on buyout rumors; Yahoo! surges on merger talk; Beazer slips on probe; Savvis debuts up

By Kenneth Lim

Boston, May 4 - Takeover rumors kept the convertible market busy Friday, with Armor Holdings Inc. gaining on unconfirmed speculation that it was a buyout target that could trigger its takeover protection.

Yahoo! Inc. improved outright with its stock after reports first said the company was in merger talks with Microsoft Corp., although the rumors were discounted in later reports.

Beazer Homes USA Inc. slipped on the company's announcement that regulators were investigating whether any securities laws had been violated.

Savvis Inc. made a strong debut to increase a couple of points after its new convertible priced within talk.

Armor up on buyout rumors

Armor Holdings' 2% convertible due 2024 surged on unconfirmed rumors Friday that Lockheed Martin Corp. could be interested in buying the company.

The convertible improved slightly on a dollar-neutral basis on initial confusion about the extent of its takeover protection, a convertible analyst said. The convertible closed at 165.75 against the closing stock price of $82.15. Armor Holdings stock (NYSE: AH) rose 5.74% or $4.46.

"There's been takeover chatter the last couple of days," an equity trader said.

Armor Holdings, a Jacksonville, Fla.-based maker of tactical wheeled vehicles, and Lockheed Martin, a Bethesda, Md.-based defense company, could not be reached for comment.

Also giving the stock a boost on Friday was a raised price target from Prudential Equity analyst Byron Callan. Callan raised his price target for Armor Holdings stock to $80 from $72 with an overweight rating. Callan cited expectations that Armor Holdings will benefit from the United States' plan to double the size of its mine-resistant ambush-protected vehicle fleet.

But the convertible analyst said Armor convertibles were up early Friday mostly because of rumors about a possible buyout.

"The Armor Holdings convertibles was up because the takeover make whole is really good on the convertible," the analyst said.

"The premium had widened out a little bit even though the bonds are way in the money based on the thinking that they'd be taken out for cash, and then you'd have this big takeover premium," the analyst said. "But with the stock where it is, with 22 points of make whole and the premium right now is only like 12 points, so people got all excited and thought, well gee, I'm going to set this up and I'll take the extra 10 points. But what people need to remember is that there needs to be some kind of discount because there's a public acquirer waiver."

The analyst explained that because Lockheed Martin is a publicly traded company, if it acquires Armor Holdings it can elect to change the notes so that they are convertible into Lockheed Martin common stock and avoid paying the make-whole.

"If they're a public acquirer I can't imagine why they would want to pay 20 points over parity as a make-whole if holders convert because they'd be converting into cash and they would have to pay 20 extra points so they end up paying an extra for no reason."

Xtract Research managing partner Michael Knox said it would make sense for a company like Lockheed, if it were actually acquiring Armor Holdings, to exercise the public acquirer waiver. Xtract is research firm that provides access to bond indentures.

"This is a situation where the make-whole is very favorable to holders at the existing prices," Knox said.

"However, this indenture has public acquirer language which allows the company to simply adjust the conversion rate so that the bond converts into the acquiring company's stock, even if the deal is for cash. This is an example where it's critical for the investor to have all the information at their fingertips before making any sort of trading decisions.

"Based on the yield of Lockheed stock and the coupon on the AH bonds, it would be reasonable for Lockheed to elect the public acquirer clause as opposed to paying the make-whole and issuing stock which yields 1.5%. There are often other factors that go into this decision, but I would not want to count on getting the make-whole."

Yahoo! rumors fizzle

Yahoo!'s zero-coupon convertible due 2008 surged about 20 points outright, tracking the stock as reports emerged of merger discussions with Microsoft, although those talks were reported to be over near the end of the day.

TheYahoo! convertible traded as high as 163 against a stock price of $33.25 on Friday. Yahoo! stock (Nasdaq: YHOO) finished the day at $30.98, up by 9.94% or $2.80.

Reports by the Wall Street Journal and the New York Post early Friday said Sunnyvale, Calif.-based Yahoo!, an online services provider, and Redmond, Wash.-based Microsoft, the maker of the Windows operating systems and the Xbox game consoles, were in talks to discuss a merger between the two companies. The reports placed a possible $50 billion value on Yahoo!, or about $37 per share.

The convertibles stayed mostly in line with the stock with a deal seen as unlikely to yield any extra points for holders.

"This is probably a parity item," a convertible analyst said. "It's trading right now at parity plus three-quarters of a point or something like that, and it's not all that exciting. There's no takeover protection at these levels because you're already in the money so it's not really interesting."

There was also skepticism that a deal will actually take place.

Another analyst said a merger could face antitrust issues.

"Given Microsoft's track record and the kind of clout a combined Microsoft-Yahoo! would have in the market, I wouldn't be surprised if the antitrust people block the deal," the analyst said.

Microsoft and Yahoo! also have a significant amount of overlap in terms of their online businesses, which makes the benefits of a merger less clear-cut, the analyst said.

"Microsoft's got its own MSN and Microsoft Live services so there's significant overlap here, although Microsoft's main business is still traditional software," the analyst said. "But I wouldn't say that a merger is obviously a good move."

Beazer Homes slips on probe

Beazer Homes' 4.625% convertible due 2024 eased half a point Friday after the company said the Securities and Exchange Commission is conducting an informal investigation into whether anyone related to the company violated securities laws.

The convertible traded at 97 against a stock price of $34.40 Friday. Beazer Homes stock (NYSE: BZH) closed at $33.33, down by 3.14% or $1.08.

Atlanta-based Beazer, which is facing class-action lawsuits over its mortgage lending practices and is already under federal investigation, said Thursday that the SEC has also started an informal probe. Beazer said it will cooperate fully with investigations.

A convertible analyst said the news was not a surprise for the market.

"That sort of came out that this might happen a couple of weeks ago," the analyst said. "The stock was down pretty big that day. People were already expecting that there would be some kind of investigation launched. I guess I'm saying that most of this is already priced in."

Savvis gains on debut

Savvis' new 3% convertible senior note due 2012 was at 102 bid against a stock price of $50.22 at the close Friday with the deal seen as reasonably cheap.

The convertible was offered at par. Savvis stock (Nasdaq: SVVS) rose 1.68% or 83 cents to close at $50.22.

The $300 million deal priced Thursday after the close with an initial conversion premium of 42.5%. It was talked at a coupon of 2.5% to 3% and an initial conversion premium of 40% to 45%.

There is an over-allotment option for a further $45 million.

Morgan Stanley and Goldman Sachs were the bookrunners of the registered offering.

Savvis, a Town & Country, Mo.-based provider of information technology services, said it will use the proceeds to fund general purposes.

"They were a little better," a sellside convertible trader said. "It looks like they should trade on about a 70% delta. They got about a point better from issue and they kind of stayed there. They traded pretty OK. They didn't trade like water, but they traded OK."

The trader said that while investors, who were mostly hedged, had different views on the company's credit spread, the volatility of the stock was attractive.

"I think guys saw that on a vol basis that they looked OK," the trader said. "But the opinion on the credit was anywhere from 300 to 400 basis points. I think when people plugged in even the higher 400 assumption that they looked pretty cheap. There's not a lot of sellers."

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