XM, Sirius gain on renewed merger speculation; Peabody gains on volatility; Alexandria quiet in gray

By Kenneth Lim

Boston, Jan. 10 - Satellite radio providers XM Satellite Radio Holdings Inc. and Sirius Satellite Inc. rose on Wednesday amid renewed speculation about a possible merger between the two companies.

Meanwhile, Peabody Energy Corp. continued to trade actively, riding a positive stock recommendation and volatility sentiment.

Alexandria Real Estate Equities Inc.'s planned issue of 20-year convertibles, however, was quiet in the gray market ahead of expected pricing Wednesday evening, as analysts described the deal as unexciting.

XM, Sirius up on merger rumors

XM Satellite's 1.75% convertible due 2009 gained about 1.25 points outright on Wednesday as volume spiked after a Citigroup equity analyst raised the target price for the stock and said a merger with rival Sirius was likely before fall of 2007.

The XM convertible traded at 86.5 against a stock price of $16. XM stock (Nasdaq: XMSR) closed at $16.65, up by 10.12% or $1.53.

Sirius Satellite's 3.25% convertible due 2011 also came to life, improving about 3 points from week-ago levels to trade at 103 versus a stock price of $3.875. Sirius stock (Nasdaq: SIRI) rose 7.28% or 27 cents to close at $3.98.

"There were a lot of XMs today," a sellside convertible strategist said.

Citigroup equity analyst Eileen Furukawa on Wednesday raised her target price for XM common stock to $21 from $16 and maintained her buy recommendation. Furukawa expects XM to benefit from tie-ups with auto makers that equip its radio in their vehicles, and sees a potential merger with Sirius as lending downside support for the stock.

Furukawa expects any merger between Washington-based XM and New York-based Sirius to arrive before fall of 2007. She cited an "increased openness" at XM to a merger and probable regulatory approval from the Justice Department for her opinion. But Furukawa noted that approval for a merger by the Federal Communications Commission was less certain.

Speculation about a merger between the two companies has circulated for several months, picking up steam in late 2006 amid analyst reports outlining the benefits of a merger and remarks by Sirius that suggested it was open to a merger.

But there is no consensus in the Street that a merger will happen.

Standard and Poor's equity analyst Tuna Amobi was skeptical that a merger will get regulatory approval, and maintained his sell rating on the stock.

"Despite potential strong synergies, we do not think, given the FCC's recent comments, that the potential combination of satellite radio rivals would pass regulatory muster," Amobi wrote. "Assuming satellite radio will keep its duopoly-like structure near term, we see any takeover premium as unwarranted. It is also not clear to us by how much a 2007 ramp of auto OEM units could help offset further fundamental contractions in the retail channel."

A sellside convertible bond trader said it was not clear whether a merger would give XM convertible holders a change of control put.

"It might only be a stock merger," the trader said.

The sellside convertible strategist called the merger possibility the "million-dollar question."

"I think it is more likely now than it was three or four months ago," the strategist said. "The potential acceptance of it from a regulatory standpoint has lessened somewhat. The combined companies could make a case competition-wise, that there's still competition whether it's iPods, public radio or whatever."

Regardless of whether there will be a change of control put, the strategist said a merger would be good for the XM convertibles. A merger would improve the operational outlook for the company, and XM's notes will be among the earliest maturing debts of a combined entity, the strategist explained.

Peabody remains active

Peabody's 4.75% convertible due 2066 continued to be heavily traded on Wednesday, gaining slightly on positive sentiment about the stock's volatility.

The convertible was 95.25 bid, 95.5 offered versus a stock price of 38. Peabody stock (NYSE: BTU) finished the day at $38.22, a gain of 0.58% or 22 cents.

"The BTUs, they're getting better and better everyday," a sellside convertible bond trader said.

The trader said the name drew interest from investors attracted to the volatility in the stock. But he thought that the aggressive terms and structure of the convertible should outweigh the potential volatility.

"I don't pay much attention to that name," the trader said. "There's not reason. The terms are just too bad. I don't care about the vol. The guys who chase after it, it's like the same partners getting on the floor and doing the same dance over and over again."

Alexandria quiet in gray

Alexandria Real Estate's planned $350 million offering of 20-year convertible senior unsecured notes were quiet in the gray market on Wednesday, as analysts panned the deal as unexciting and speculated that it may have to be reoffered cheaper.

The offering was expected to price after the market closed.

Price talk for Alexandria's deal was for a coupon of 3.5% to 3.75% and an initial conversion premium of 20%. There is an over-allotment option for a further $52.5 million.

UBS Investment Bank, Citigroup and Merrill Lynch were the bookrunners of the Rule 144A deal.

Alexandria is a Pasadena, Calif.-based real estate investment trust that focuses on offices and laboratories that are leased to research entities and government agencies. It will use the proceeds of the offering to reduce the outstanding balance on an unsecured credit line, which will free up the credit line for working capital and other corporate purposes that includes acquisitions and property development.

"To be honest, it's another REIT deal, we didn't spend too much time on it," a sellside convertible bond analyst said. "They're all sort of modeling out around par if not below. I wouldn't be surprised if it gets reoffered."

Another convertible analyst said the deal looked "OK" at the cheap end of price talk.

"Some people think it's a little expensive," the analyst said. "I probably wouldn't be interested at the mids...I think there's a potential for that [a reoffer], but with the recent strength in the market I wouldn't be surprised if they get it done at the cheap end."

A third convertible analyst thought that the company had a decent credit profile, but the offering seemed "fair value at best."

"These days it's not quite enough, especially after so many REIT deals," the third analyst said. "Actually with this one, even for outright investors it might not be that interesting, because the stock looked a little top-heavy to me. I had a little bit of a rich valuation on it. If you were outright, you might just look for something else."

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