Kodak snapped up; Novell easier; Overstock issue gains on holiday outlook; GenCorp off

By Ronda Fears

Nashville, Nov. 22 - Monday kicked off what was expected to be a slow week in convertibles, given the Thanksgiving holiday, but a capital markets source said there could be a quick-sale or overnight deal put on the table to feed the healthy demand for fresh paper.

"There could be at least one deal pop up," he said.

Nothing turned up Monday, and traders said it was a "disappointingly quiet" session that "was over before it started." Illustrating the market's quietness Monday, one sellside trader added, "I hope tomorrow has a pulse."

"Well, I'm not optimistic about a busy week this week. We should be happy for a quiet week, right? I think if anything was going to come it would have been announced today [as] post-close tomorrow would leave an overnight issue trading on the day before Thanksgiving - not too likely, I think," said a sellside desk analyst

"As for December, I'm hopeful, given the way the middle of November went, that there will be some activity - maybe another $3 to $4 billion, in line with this month. I'm not basing that on any special knowledge, just a guess."

Meanwhile, the new issues that rushed the market last week were broadly mixed, with a decline in Level 3 Communications Inc.'s new 5.25% convert mentioned by several traders. The issue, a notable straggler among new issues since it broke to trade, lost another 1.25 points Monday to settle at 99.5 bid, 100.5 offered, while the internet access provider's stock slipped 9 cents, or 2.61%, to $3.36.

Secondary dealings otherwise were steered by earnings and holiday shopping forecasts.

Kodak paper snapped up

With an industry report over the weekend suggesting that digital camera sales were up 40% in the third quarter, traders said Eastman Kodak Co. paper firmed nicely.

The Kodak 3.375% convertible added 2 points to 126 bid, 126.25 offered. Shares of Kodak, which has been staging a transition to digital products and services, shot up $1.13, or 3.57%, to $32.80 on Monday.

According to research firm IDC, U.S. shipments of digital cameras rose 40% in the third quarter from a year ago, with Kodak gaining market share on Sony Corp. That point, a buyside dealer said, was key to buying in the convertible.

"They've already made moves other companies are lagging behind on, and this was the first real proof of that paying off," he said. "Yes they are in transition, but they are also already ahead of the competition in providing a service for digital camera users to get quality prints without having to buy [or] supply ink and photo paper to get prints.

"A quick trip to the pharmacy or Wal-Mart or any number of other places, and depending on how many photos you want to do, within minutes you are out of there. Have you checked one of those kiosks out yet? The newest ones read directly from every sort of storage media used by most cameras, they read from CD-Rs and floppy drives. They allow you to size, crop, and do some image editing right on the spot. These kiosks will eventually become as popular for digital camera buffs as the Xerox machines have been for business."

Overstock up on holiday view

Holiday sales are already on the market's collective minds, too. Retail convertibles were described as "higher but not by a lot" by a sellside trader, who added, however, that online shopping for the 2004 Christmas holiday is expected to be robust.

To that end, he said, Overstock.com Inc.'s new convertible was still very active although it was a small-sized deal. The 3.75% issue due 2011 added another 1.25 points to 104.25 bid, 104.75 offered, while the underlying stock gained 92 cents, or 1.67%, to $56.05.

Shopping.com, an online price comparison website, on Monday made its first holiday forecast for online retailing, saying it expects to see its revenues gain 33% year-over-year in the fourth quarter because of strong holiday e-commerce sales.

That prediction translated into gains for several online retailers.

Priceline.com Inc.'s converts also were higher, by about a quarter-point, the trader said, as a AAA report also out on Monday predicted the best holiday travel volume since before Sept. 11, 2001.

Greater Bay noise dies down

Greater Bay Bancorp has come off its recent highs, which have been attributed to merger noise, but the company is still seen over-valued in terms of where the stock is trading. A convertible trader noted Monday, too, that its 0% issue, which is the subject of an exchange to eliminate contingent conversion features, traded down by about a point.

The 0% due 2024 was quoted at 90.625 bid, 91.125 offered, while Greater Bay shares lost 54 cents, or 1.8%, to $29.40.

Another sellside trader pointed to an equity analyst report Monday asserting that while Greater Bay may still pursue a sale, the chance of such a deal occurring is unlikely, at least with the stock at current levels. He said Greater Bay's insurance brokerage business also is a negative for the company, given recent regulatory and criminal investigations into that sector.

Greater Bay CoCo a wildcard

Greater Bay valuations ran up due to recent merger speculation but with the chatter dying down, the convertible trader said it is due to take a dive. The wildcard for the convert, he noted, however, is the pending CoCo exchange offer, which he said "doesn't seem to be all that spectacular."

Under the exchange offer, filed last week, Greater Bay is offering takeover protection in the form of a conversion ratio adjustment for a change in control prior to March 23, 2009, where 10% or more of the consideration consists of cash.

"As far as we read it, they are not offering any cash, and there seems to be an outcry among the holders of all the CoCo issues that are being exchanged for some cash," the trader said.

GenCorp trouble still brewing

The unsolicited takeover bid for GenCorp Inc. was officially withdrawn by Steel Partners II LP, a big stockholder in the aircraft components maker, but traders said trouble with the shareholder is expected to continue and it could cause some pressure on the company's new convert.

GenCorp's new 2.25% convert slipped 0.875 point to 108 bid, 108.5 offered, while the underlying stock closed down 16 cents, or 0.93%, to $17.10.

The investment firm had opposed the issuance of new convertible, the proceeds of which are targeted to take out its old 5.75% convertible. GenCorp also has a 4% convertible outstanding.

In a letter to the GenCorp, Steel Partners said it continues to evaluate all options with respect to its investment in GenCorp including, among other things, commencing a proxy contest to obtain board representation.

"We may also communicate with other shareholders on our laundry list of concerns with the board's corporate governance practices so that this board understands that its shareholders demand reform," Steel Partners said in the letter.

Novell selling continues

Novell Inc. continued to weaken Monday in the wake of disappointing results reported last week.

The 0.5% convertible dropped another 1 to 1.5 points to 92.5 bid on Monday, while the stock lost 27 cents, or 4.10%, to $6.32.

On Friday, Novel reported a fiscal fourth-quarter profit but the numbers didn't meet analysts' expectations, and a buyside trader said it basically comes down to "a matter of people not wanting to carry this issue into the new year."

"Novell is still in a transition period and, given the wishy-washy outlooks in tech, there's no near-term end to it all," he said. "There will be some [holders] get rid of this for now and probably pick it back up early in 2005."

Novell has been trying to remake itself as its struggling NetWare operating system continues to lose market share to Microsoft Corp.'s Windows platform, focusing on Linux software, a version of the Unix operating system that has gained popularity because of its stability in running web servers.

Another buyside trader said Novell just doesn't seem to be making the strides that were expected.

"They [Novell] have spent a bunch of money to buy up small Linux companies, but have been piecemealing their approach to integrating it all," he said. "They don't have the corner on any market or technology. They need to develop some niche. They are making a profit and have some cash, but they are a takeover target themselves."

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