Continental Airlines moves with shares, UAL quiet; Owens-Illinois to price exchangeables

By Rebecca Melvin

New York, May 3 - Merger Monday brought a deal that will create the world's largest airline, combining Continental Airlines Inc. and UAL Corp. in a $3 billion-plus all-stock transaction, but there was minimal reaction to the marriage in the convertibles market.

Continental's convertibles rose in line with their underlying shares, and the UAL convertibles were little changed.

"Nobody really cared. The rumors had been out there and seemed pretty certain. And previously when there was talk about a US Airways merger, everyone said what we really needed to happen is for Continental and United to merge," a Connecticut-based sellside analyst said.

AMR Corp. was in trade amid speculation of another possible airline sector linkup.

Transocean Ltd. was active again, and Cameron International Corp., which saw its 2.5% convertible trade off on Friday, was a touch better in trade.

In primary action, Owens-Brockway Glass Container Inc., a subsidiary of Owens-Illinois Inc., announced plans to price $500 million of five-year exchangeable senior notes after the close of markets on Monday.

The Owens-Illinois deal was talked to yield 2.75% to 3.25% with an initial conversion premium of 35% to 40% and was seen between 1% and 3.7% cheap, according to sources.

Also in the primary market, Beazer Homes USA Inc. was expected to price $75 million of tangible equity units after the close of markets on Tuesday.

Overall, the convertible market was said to be pretty quiet and Transocean, a market stalwart, accounted for a sizable chunk of the day's volume.

Meanwhile, the equity markets resumed their upward push amid stronger economic reports after dropping Friday.

One such report was that manufacturing continued to show broad improvement. The Institute for Supply Management said that U.S. manufacturing activity expanded last month at the fastest pace in nearly six years.

But the markets shrugged off troubling news, including accounts of how BP plc has yet to come up with a solution for stemming the flow of oil from a damaged well into the Gulf of Mexico.

The Dow Jones Industrial Average gained 143.22 points, or 1.3%, to 11.151.83; the Nasdaq Stock Market jumped 37.55 points, or 1.53%, to 2,498.74; and the S&P 500 index lifted 15.58 points, or 1.3%, to 1,202.26.

Continental follows shares, UAL quiet

Continental's 4.5% convertibles due 2015 lifted to 134 versus a share price of $22.65 on Monday, from a previous level seen at about 132. The Continental 5% convertibles due 2023 traded around 116 versus a share price of $22.00, according to a sellside analyst.

"We saw the CAL bonds were doing a lot better. But because they have such a low premium, they trade in line with the stock," the analyst said.

Shares of the Houston-based airline settled up 51 cents, or 2.3%, to $22.86.

Meanwhile the UAL 6% convertibles due 2029, which are trading way up there in the 260s, remained up at that level.

And the UAL 4.5% convertibles due 2015 and UAL 5% convertibles were both between 100 and 101, trading to their put or maturity dates.

Shares of Chicago-based UAL settled up 51 cents, or 2.4%, to $22.11.

"It's not a drastic credit change. And it looks like it's viewed as positive for the sector as it potentially takes capacity out of the system," a sellsider said.

The merged airline, if approved by regulators, will be called United Airlines and will be based in Chicago, with Continental chief executive Jeff Smisek at the helm.

Owens-Illinois seen slightly cheap

Owens-Brockway Glass Container plans to price $500 million of five-year exchangeable senior notes after the close of markets on Monday.

The deal, which was talked to yield 2.75% to 3.25% with an initial conversion premium of 35% to 40%, was seen between 1% to 3.7% cheap.

Using a credit spread of 325 basis points over Libor and a 30% volatility, one sellside trader said their valuation was about 3.7% cheap, looking "OK."

A second source said the Owens-Illinois paper wasn't "looking that attractive, using 375 bps over Libor and a 30% vol., saying it modeled just 1% cheap.

"I personally don't like the high premium," he said, and others echoed the sentiment.

On the other hand, given the size of the company - $5 billion of $6 billion market capitalization - and its decent rating, it should draw fans, others said.

"It's better rated than what we've seen of late," a New York-based sellsider said.

The Rule 144A offering is being sold via joint bookrunners Bank of America Merrill Lynch, Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Goldman Sachs & Co.

"If it comes at the mids and trades up to fair value, you'll do pretty well," a Connecticut-based sellsider said.

The notes will be non-callable for life with no puts.

Upon exchange, the exchange obligation will be settled in a combination of cash to be paid by Owens-Brockway Glass Container and shares of Owens-Illinois.

Up to $55 million of the proceeds are expected to be used for the repurchase of Owens-Illinois shares concurrently with the closing of the notes, with remaining proceeds for general corporate purposes, including debt repayment and funding of strategic priorities.

There is dividend protection via an exchange rate adjustment and cash takeover protection via a make-whole table.

Perrysburg, Ohio-based Owens-Illinois is a glass container maker.

This company is set up as a holding company and an operating company, with virtually all the assets in the Owens-Brockway Glass Container company, which has been the debt-issuing entity, generally.

"That's how it issued high-yield paper last year," a syndicate source said. He also said that the deal was "unique" to the convertibles market, given its large market cap and "highly-rated" standing.

Beazer plans $75 million equity units

Beazer Homes was expected to price $75 million of 3.25-year tangible equity units, or 3 million units, at $25 per unit, after the close of markets on Tuesday.

The units were talked yield 7% to 7.5% with an initial conversion premium of 20% to 25%, according to a syndicate source.

Beazer Homes, an Atlanta-based homebuilder, also plans to price 12.5 million of common stock and $300 million of senior straight notes due 2018.

The tangible equity units, being sold pursuant to an effective shelf registration, are comprised of a prepaid stock purchase contract and a senior amortizing note due 2013.

Beazer may force conversion of the stock purchase contracts at the maximum conversion rate, or at the minimum rate if the share price is greater than 130% of conversion price, and investors will have the right to require Beazer to repurchase the amortizing note.

Citigroup and Credit Suisse Securities are joint bookrunnes of the units offering, with Deutsche Bank Securities as a joint lead manager and Moelis & Co. as the co-manager.

Proceeds are earmarked for repurchases of Beazer's 2012 notes and the 2024 notes and for other general corporate purposes. As of April 30, Beazer had outstanding $303.6 million of the 2012 notes and $154.5 million of the 2024 notes.

Mentioned in this article:

AMR Corp. NYSE: AMR

Beazer Homes USA Inc. NYSE: BZH

Cameron International Corp. NYSE: CAM

Continental Airlines Inc. NYSE: CAL

Owens-Illinois Inc. NYSE: OI

Transocean Ltd. NYSE: RIG

UAL Corp. Nasdaq: UAUA

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