OSI takeout protection falls short on 3% convertibles; GLG jumps on takeout; Sybase steady

By Rebecca Melvin

New York, May 17 - The convertible bond market saw activity sparked by merger-related news on an otherwise quiet Monday, market participants said.

OSI Pharmaceuticals Inc.'s two convertible issues slipped outright Monday after word that the agreed takeout offer from Astellas Pharma Inc., though sweetened, was lower than expected.

The OSI-Astellas agreement looked robust enough to make whole OSI's 2% convertibles, which were trading near double par; but not quite enough to make good on the OSI 3% convertibles, according to a New York-based sellside trader.

GLG Partners Inc. jumped to well over par from just under that level after news that hedge fund giant Man Group plc plans to acquire the U.S. listed, U.K.-based alternative asset manager for $1.6 billion in cash and new shares.

Sybase Inc., which agreed last week to be acquired by German software giant SAP AG, traded flat on previous levels.

Also in trade were several issues that are not frequently seen in routine trade. They included Allegheny Technologies Inc. and Textron Inc., as a spark of trading interest early lit up an otherwise sluggish Monday.

There was "a small amount of interest out there this morning," a New York-based sellside desk trader.

Otherwise it was a quiet Monday, which followed a quiet Friday, as stocks were under pressure amid uncertainty about global economic recovery subsequent to the European debt crisis and questions about China's growth.

"It's kind of typical that it would be kind of slow on a Monday, but then add the downdraft in stocks, and people just don't want to do anything, except maybe adjust hedges and trade stock," another New York-based sellsider said.

However, a late rally Monday pulled equity indices into positive territory. The Dow Jones Industrial Average on Monday closed up 5.76 points, or 0.05%, to 10,625.83, after earlier trading down as low as 10,436.06. The Nasdaq Stock Market added 7.38 points, or 0.31%, to 2,354.23; and the S&P 500 index ended up 1.26 points, or 0.11%, at 1,136.94.

OSI convertibles slip

The OSI 3% convertibles due 2038 traded at 112.283 versus a share price of $57.37 on Monday, which was down about 3.4 points from previous levels.

The OSI 3% paper was one of the most actively traded issues in the market Monday.

"I think they got dinked 3 points," a sellsider said of the OSI 3% convertibles. "Parity on the 3s is 78."

OSI's 2% convertibles due 2025 traded at 194.5, which was down between 3 and 4 points, but that issue made out better on the takeout because "there was a thin sliver of premium to begin with," the sellsider said.

The takeout protection is a function of assumptions made about the stock and volatility over a particular time period. "If the valuation of the bond changes from what was baked into those tables, you can end up coming out with less," a sellsider said.

The Melville, N.Y.-based pharmaceutical company saw its common stock slip $2.44, or 4%, to $57.36 on Monday subsequent to the agreed merger price.

Market players were looking for OSI to command a higher price of about $60 per share, not the $57.50 per share that the company agreed to in its definitive merger agreement with Astellas, the sellsider said.

Astellas, Japan's second largest pharmaceutical maker, did lift its offer from $52 a share, or $3.5 billion, originally put forward, and the new price equals about $4 billion in an all-cash deal.

The new bid represents a 55% premium to OSI's last closing price of $37.02 before the announcement of the tender offer on March 1, according to the companies' news release Sunday.

Astellas first approached OSI about a possible takeover more than a year ago, but OSI had resisted its early advances.

GLG jumps on takeout

GLG's 5% convertible subordinated notes due 2014 traded at 125 versus a share price of $4.35, compared to 98 versus $3.00 per share late last week, according to a New York-based sellside desk analyst.

Shares of the U.K. based company surged $1.45, or 50%, to $4.36.

GLG shareholders will receive $4.50 for each of their shares, a 55% premium to Friday's closing price of $2.91.

Several market sources hadn't seen the GLG 5% convertibles in trade on Monday, and the issue, which priced in 2009, wasn't generally traded.

GLG's top executives will receive 1.0856 new Man shares for each of their GLG shares, valuing each GLG share at $3.50.

The three principals, along with other GLG employees, hold just under half of GLG's shares. Together, they will have about a 10% stake in the enlarged Man Group.

Three top GLG executives, who are expected to remain in top posts in the combined company, have agreed not to sell the new shares for at least three years, to keep minimum levels of their own money in GLG funds, and not to compete against Man Group for three years from the closing date if they decide to leave.

Man is buying GLG as a way to create scale in the hedge fund sector and kick start growth. GLG's main focus is equity funds, and part of the strategy of both companies since the financial crisis of 2008 has been to take advantage of investors' interest in more-liquid and transparent products.

Mentioned in this article:

Allegheny Technologies Inc. NYSE: ATI

GLG Partners Inc. NYSE: GLG

OSI Pharmaceuticals Inc. Nasdaq: OSIP

Sybase Inc. NYSE: SY

Textron Inc. NYSE: TXT

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