LabOne, Priceline deals emerge; Postbank sets €1 billion deal; Simon to distribute $900 million convert

By Ronda Fears

Nashville, June 21 - The tone was soft in convertibles Monday as players began the daunting task of marking their books for the end of second quarter as well as the first half of 2004. That in itself was depressing enough to cast a pall on trading volume, helped by a sluggish bond market and weakness in stocks.

"Tradingwise, it was pretty dead," said a convertible trader at a huge fund-of-funds in New York. "Everyone is, or would rather be, golfing. It's summer, liquidity is going to dry up and there's just no catalyst on the horizon to make one want to leverage up."

There is still concern about making strategic moves over the course of the summer, he said, because of the potential for terrorist attacks in the United States. Government officials have already put the country on a heightened alarm for the summer.

Recent bombings linked to terrorist activity like the train blasts in Spain, which had an impact on elections there, he said, have caused many to fear that Al Qaeda would like a similar showing in the United States what with the presidential election coming up in November.

"That's going to be the real wildcard this summer," the trader said, referring to geopolitical events and the presidential race.

More bombings in Iraq and the arrest of eight British soldiers in Iran lent enough uncertainty to the geopolitical front and, compounded with the upcoming Federal Reserve meeting, players elected to just sit on the sidelines, another buyside convertible trader said.

Meanwhile, a couple of small deals emerged in the United States and a jumbo surfaced in Europe. Too, there will be a new $900 million convertible preferred distributed by Simon Property Group Inc. as part of its $5 billion acquisition of Chelsea Property Group Inc.

Postbank airs in cool climate

Postbank AG amended its plans to break away from Deutsche Post World Net AG by lowering its IPO range and adding a €1 billion exchangeable amid a softer market tone in Europe, as well.

The convertible is talked to yield 2.5% to 3.0% with a 38% to 42% initial conversion premium. Postbank's IPO was reduced to €1.6 billion from €1.9 billion, lowering the range for the stock to €28 to €29 by the end of the day Monday. That is lower than the revised range early Monday of €28 to €32, which was cut from the original range of €31.50 to €36.50.

Noting there were three new convertibles/exchangeables in Europe in the past week - Dusseldorf-RWE, Switzerland-Swisscom and the Postbank offering - a sellside market source in London said the climate for new deals has cooled off.

"Conditions for issuance aren't as good as they were in recent weeks, given the implied vol sell-off," he said. "But, of course, the question - to which we don't know the answer - is whether they will worsen further as interest rates rise. Much depends on the future direction of vol."

LabOne, Priceline emerge

LabOne Inc. launched before the opening bell Monday and Priceline.com Inc. launched after the close - both opting for a full day of marketing, which buyside sources said was a smart idea.

"We're not looking at any overnighters right now," said a hedge fund manager in New York. "With the end of month, end of quarter, midyear stuff, not to mention Kroll and Mandalay, we're just not going to accept that risk."

He was referring to cash takeover protection regarding Kroll and Mandalay, two recent blow-ups among hedge fund players in convertibles.

Another buyside source agreed that it's not the time to try to transfer risk to buyers.

LabOne was at bat after the close with $90 million of 30-year convertible notes talked to yield 3.25% to 3.75% with a 35% to 40% initial conversion premium. Nothing was seen on the deal in the gray market, buyside traders said.

The LabOne deal was printed with a 3.5% coupon and 35% initial conversion premium - at the middle of yield talk and cheap end of premium guidance.

Priceline will market all day Tuesday $75 million of 20.5-year convertible notes talked to yield 2.0% to 2.5% with a 34% to 41% initial conversion premium, for pricing after the close.

Arbs set up Simon-Chelsea

Risk and/or merger arbitrageurs were setting up for the Simon acquisition of Chelsea, and some were even looking at the new Simon convertible that will be put into circulation by the merger.

"From a risk arb perspective, it does set up real well," said a trader at a hedge fund in New Jersey. "We aren't interested in the convert because of the dividend."

Simon is buying Chelsea in a $4.8 billion deal, including the assumption of some $1.3 billion of debt. It is a cash and stock deal, plus the $900 million new convertible preferred.

Simon will pay $66 each for all of Chelsea's outstanding common stock and units - $36 in cash, $15 of Simon shares at a fixed ratio of 0.2936 and $15 of new convertible preferred stock with a par of $50.

The convertible preferred will carry a dividend of 6% and conversion price of $63.86, with a contingent conversion feature of an additional 25%. The $63.86 conversion price is a 22% conversion premium over the closing price of $52.30 for Simon shares on Friday.

Simon shares closed Monday off 32 cents, or 0.61%, to $51.98. Chelsea shares ended up $7.01, or 12.04%, to $65.25.

The deal is expected to close in October.

"Our risk guys are already looking at it from that angle but as far as the convertible goes, we're just starting to take a look at it," said a trader at a hedge fund in New York. "It hasn't been a priority since it won't be final [until] way down the road."

Simon "finally gets a deal"

A contact in the risk arb community getting involved in the Simon-Chelsea situation said it was a chance to recoup some of the losses seen as a result of Simon's desire to get a deal done, recalling the saga that lingered for nearly all of 2003 between Simon and Taubman Centers Inc. only to end in futility.

"Simon finally gets a deal," the manager said, parroting news headlines on the tape. "We were neck deep in the Taubman situation and had to unwind that on a moment's notice. We didn't come out so well on that, but this looks like a pretty sure shot. I don't know what could come up to nix it but, of course, I guess that's why they call it risk arb."

For much of 2003, Simon was embroiled in a heated takeover battle with Taubman that officially came to an end in October after Simon repeatedly made unsolicited advances. The year-long drama, featuring a colorful battle between the shopping mall moguls spurred a steady markup in the Simon 6.5% convertible preferreds. Then, last November, Simon called all of the $431.6 million issue.

Moody's rated the proposed new Simon preferred at Baa3 with a stable outlook on the merger news. The rating agency said there were several strategic benefits in the transaction, counterbalanced by materially higher debt leverage and weaker coverage measures over the short term.

Magnum Hunter floater sinks

Magnum Hunter Resources Inc. announced an asset purchase Monday, and a sellside trader said the drop in the stock pushed its floating-rate convertible down by 2.5 points.

To pay for the $243 million in oil and gas properties in New Mexico from EnCana Corp., Magnum Hunter is seeking a $100 million increase in borrowing base, plus plans to sell 15 million shares of common stock.

After financing the acquisition, Magnum Hunter is targeting availability of $105 million under the credit facility and to cut its debt to 51% to 54% of its market capitalization.

Otherwise, amid a tepid flow on convertible desks, traders said Oscient Pharmaceuticals Corp. was up about 1.25 points on some positive headlines on the tape about tests for one of its drug candidates. Massey Energy Co. also was "a tad better" as coal stocks gained favor on Wall Street.

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