Peabody climbs on stock upgrade; Beckman Coulter up as bidding war looms; Conexant slips on warning

By Kenneth Lim

Boston, April 9 - Peabody Energy Corp. improved outright on Monday on an equity upgrade, while sellers dominated the rest of the convertible market in a slow session.

Beckman Coulter Inc. dipped but recovered for a modest gain after a company that it plans to acquire brushed off a competing bid, but observers remain cautious on the possibility that the company may be in for a bidding war.

Conexant Systems Inc. fell following a sales warning that will bring the company below estimates for the second straight quarter.

The convertible market came back to a lackluster session after a three-day weekend.

"It's so quiet today," a sellside convertible trader said. "Believe me, there's nothing going on."

Another sellsider explained that some of the sluggishness may have rubbed off from Europe.

"The European markets are closed post-Easter," the sellsider said.

Sellers outnumbered buyers in general.

"It's kind of better on the sell side overall," the sellsider said. "But again, it's pretty weak. There's not much follow through."

Peabody gains on upgrade

Peabody Energy's 4.75% convertible due 2066 rose about three points outright on Monday following a stock upgrade.

The convertible traded at 106.75 against a stock price of $46.40 while Peabody stock (NYSE: BTU) gained 4.87% or $2.13 over the day to close at $45.87.

"We saw better sellers of BTU as the stock moved up today," a sellside convertible strategist said.

Friedman Billings Ramsey equity analyst David Khani on Monday upgraded Peabody stock to outperform from market perform, citing a recent decision by a judge to revoke four mining permits of rival Massey Energy Co. St. Louis-based Peabody and Richmond, Va.-based Massey are coal mining companies.

The court ruling will limit coal supply and could help to drive up coal prices, Khani said.

A sellside convertible analyst said the Peabody convertibles continue to be an interesting outright instrument.

"It's a pretty interesting sector right now," the analyst said. "Coal prices have been up and down but mostly climbing along with natural gas prices and a company like Peabody with their leading position in the market is going to benefit from any price increases. If you're outright this is pretty much your main exposure to the coal sector and it's not a bad piece of paper to hold. Their credit is solid and if you're hedge it's still possible to set this up."

Beckman Coulter advances

Beckman Coulter's 2.5% convertible due 2036 eased but bounced back for a slight gain on Monday after Biosite Inc., a company that it is trying to acquire, ignored a rival bid by Inverness Medical Innovations Inc.

The Beckman Coulter convertible was ½ point lower early Monday but settled about ¼ point better outright at 104.625 bid, 105.125 offered against the closing stock price of $63.71. Beckman Coulter stock (NYSE: BEC) rose 0.31% or 20 cents.

"We're seeing some good two-way flow in Beckman Coulter," a sellsider said. "It's kind of in line with the Biosite news from a week or so ago. It's trading in line."

Biosite, a medical device maker, on Monday ignored a $90 per share takeover bid that was offered by Inverness on Thursday. Biosite had earlier accepted Fullerton, Calif.-based Beckman Coulter's $85 per share offer.

"Given the higher offer by Inverness, it looks like Biosite may have to reconsider the Beckman Coulter offer," a convertible analyst said. "The thinking was that Beckman Coulter would then have to raise its offer and pay even more for Biosite. That's probably why the stock was down today."

The analyst said the battle for Biosite is probably not over.

"Biosite will probably respond at some point, so I'm not sure why the stock came back up today," the analyst said.

The analyst said that a Biosite acquisition will likely lower Beckman Coulter's credit profile.

"They've already said that they're planning to issue a convertible to help fund the acquisition, which means they'll be levering up," the analyst said. "If they have to get into a bidding war, they'll probably have to add even more debt.

"There's also some concern on the Street about whether Biosite is such a good fit for the company, so there's a good chance that their credit could widen some more if it hasn't already. But that's if they go ahead and put up a fight for Biosite, which is almost certain, and if they win, which is less certain."

Conexant drops on warning

Conexant's 4% convertible due 2026 slipped a point on Monday after the company warned of lower than expected second-quarter sales.

The convertible was 86.5 bid, 87 offered against a stock price of $1.50. Conexant stock (Nasdaq: CNXT) fell 8.48% or 14 cents to close at $1.51.

"They were slightly lower but there were only a few trades," a convertible trader said. "This isn't normally a very active name."

Conexant said Monday that its fiscal second-quarter revenue fell 18.5% to $200 million from the $245.5 million in the first quarter. It expects to break even on a core operating basis. Conexant, a Newport Beach-based maker of communications chips, attributed the drop to seasonal weakness, schedule delays and generally lower than expected demand. Conexant will report its financial results on April 26.

Conexant in January forecast a sequential revenue drop of 8% to 10% for its second quarter, after reporting first-quarter earnings that also fell short of Street expectations.

"This was really disappointing," a sellside convertible analyst said. "This is the second time they're below consensus, and they're missing their own estimates by a pretty significant amount."

The analyst said hedge investors may have made some money from the news, but the outright outlook is not so rosy.

"They're obviously facing some issues with demand, and even if they meet expectations in the third quarter it's going to be a long climb back in terms of the share price and investor confidence," the analyst said. "There's probably going to be more details when they report on the 26th, but I'm not expecting any miracle."

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