Red Hat gains 8 points outright on acquisition; Oscient keeps sliding; Rentech deal sees poor interest

By Kenneth Lim

Boston, April 10 - Red Hat Inc. saw its 0.5% convertible bonds due 2024 trade about 8 points higher outright on Monday in line with a surge in the stock price after the software company announced a $350 million acquisition.

Oscient Pharmaceuticals Inc.'s 3.5% convertible due 2011, meanwhile, continued to slide with the stock on its third straight day of decline after a $35 million private share placement was reported.

In the primary market, Rentech Inc.'s pending $50 million offering of seven-year convertible bonds continued to be panned by market observers concerned about its business model and the small issue size.

Meanwhile, the new Allergan Inc. 1.5% convertible due 2026 remained below par for the second straight session after a lackluster debut on Friday. A sell-side trading source said the convertibles, which were priced at the cheap end of talk, were offered at 99.5 versus a stock price of $104.90 on Monday. Allergan stock (NYSE: AGN) closed at $103.70 on Monday, down by 39 cents or 0.37%.

Allergan priced its $700 million convertible deal late Thursday after talk guided for a coupon of 1% to 1.5% with an initial conversion premium of 20% to 25%. The initial conversion premium on the convertible was set at 20%. Allergan is an Irvine, Calif.-based specialty pharmaceuticals manufacturer whose products include Botox.

Also seen on Monday was Mercury Interactive Corp.'s 4.75% convertible due 2007, which was bid lower by just under a point on a slight retreat in the stock. The convertible was seen bid at 98.875 early in the day, when the stock opened at $36.85. The stock, which is traded under the MERQ ticker on the Pink Sheets, closed at $36.30, down 55 cents or 1.49%.

An analyst was puzzled about the movement of the stock, but said it was probably a correction in the share price, which gained about $2 last week.

Mercury is a Mountain View, Calif.-based developer of enterprise software.

Agere Systems Inc.'s pullback on Monday was also seen as a stock correction. The company's 6.5% convertible due 2009 was bid about half a point lower at 98.75 at the start of the day, when the stock opened at $15.34. Agere stock (NYSE: AGR) retreated 47 cents, or 3.05%, to end at $14.92 on Monday after reaching a year-high of $15.85 in the previous week.

Agere is an Allentown, Pa.-based maker of telecommunications equipment components.

Red Hat up 8 points with stock

Red Hat's 0.5% convertible due 2024 changed hands about 8 points higher on Monday in line with the stock, which rose 8.82% over the day after the company announced a $350 million acquisition.

"Looks like the market liked the deal," said a sell-side analyst.

Red Hat's convertible was seen trading at about 125.5 on Monday against a stock price of about $29.75. It was marked at 126.24 against the closing stock price of $29.85 by a major trading desk. Red Hat stock (Nasdaq: RHAT) rose $8.82%, or $2.42 on Monday.

Raleigh, N.C.-based Red Hat said it would acquire privately owned software developer JBoss for $350 million, plus an additional $70 million if certain performance targets are met. Cash will be used to pay 40% of the consideration, with the remaining 60% to be paid in Red Hat common stock. Red Hat expects to complete the deal by the end of its first fiscal quarter, which ends in May 2006.

The analyst said Red Hat, which develops open-source software on the Linux platform, has been trying to build up its middleware division, but "they weren't really getting anywhere." JBoss, which is considered a leader in middleware application servers, is "probably a good fit for Red Hat," the analyst said.

"Red Hat is an open-source company, and they're acquiring an open-source company," the analyst said.

But the analyst pointed out that the acquisition is not an immediate solution for Red Hat's challenges. Critics of JBoss's software say the company's solutions are inferior, lower-end products. Also, Red Hat and JBoss still face broader concerns about the quality of open-source products.

"They got the same sort of problem," the analyst said. "If they're trying to get more into the enterprise market, it's an uphill battle for them, because with Linux there are questions about support and all that."

But the analyst said the acquisition, is unlikely to affect Red Hat's credit.

"They had more than $1 billion in cash and marketable securities as of February, so this doesn't really make a dent," the analyst said. "They generate decent cash - a couple million of cash flow each year, and no capex against that, so there's no negative impact there."

"Net-net, it's probably a good thing," the analyst said.

Oscient slides for third session

Oscient Pharmaceuticals saw its 3.5% convertible due 2011 fall back about another point outright on Monday in line with a stock that slid 3.35% on the tail of a private share placement last week.

The convertible was seen bid at 73 early Monday, when the stock opened at $1.80. A convertible shop marked the security at 73.35 bid, 74.35 offered against the closing stock price of $1.73. Oscient stock (Nasdaq: OSCI) fell 3.35% or 6 cents on Monday.

Oscient's convertible is now trading about 3 points lower on an outright basis from levels a week ago, when it was marked at 76.17 bid, 77.17 offered versus a $1.95 stock price.

Oscient said on Thursday last week that it was issuing a private $35 million placement of 18 million shares at $1.93 per share. The investors will also receive warrants for an additional 9 million shares at a strike price of $2.22 per share exercisable for five years.

Waltham, Mass.-based Oscient is a pharmaceutical company.

Oscient did not say why it was raising the money, but analysts pointed out that the company has been desperately short of cash. Oscient was bleeding about $97 million in negative cash flow from operating activities for 2005.

A convertible analyst said investors in the company's securities were making a straightforward bet on the company's prospects.

"It looks like binary play," the analyst said. "Either it's going to make it and the converts are going to take off, or it's going to go belly up."

Rentech deal meets more caution

Rentech Inc.'s proposed $50 million of seven-year convertible senior notes are being viewed as a risky investment by a number of analysts on the Street ahead of its expected pricing Tuesday after the market closes.

The deal is talked at a coupon between 3.5% and 4% with an initial conversion premium of 18% to 22%. It has a greenshoe option of a further $7.5 million. The deal is being offered concurrently with an issue of 12.5 million shares with an over-allotment option of 1.875 million shares.

Credit Suisse First Boston is running the books.

A sell-side analyst said the convertible was about 1.75% cheap at the midpoint of talk with a credit spread assumption of 600 basis points over Libor and 45% volatility.

"The credit's not all that great and it's a small-cap name in a space that's reasonably unproven," the analyst said.

The analyst said it was difficult to get a handle on the company's actual credit spread partly because the company has no listed options.

"When we don't have a great handle on the credit, the way to backstop your assumption is to lower your vol assumption, even though the realized vol of this is really high, like maybe 70%," the analyst said. "But nobody would pay for a 70% vol. 50% vol is the max that you would use, and then you cap it at 45% to take into account the credit."

The analyst said interest in the deal is further dampened by its small size, which would suggest "very limited liquidity."

"I'm sure somebody will find it appealing, but they may just place it with a handful of people," the analyst said. "Who knows?"

Rentech shares (Amex: RTK) closed at $3.64 on Monday, down by 6 cents or 1.62%. Rentech is a Denver, Colo.-based developer of alternative fuel technology.

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