HeartWare surges on takeover news; convertibles lower in light volume; Brexit in focus

By Rebecca Melvin

New York, June 27 – HeartWare International Inc.’s two convertible bond issues surged to near par on Monday on news that Medtronic plc has agreed to buy the Framingham, Mass.-based medical device maker for $58.00 per share, or about $1.1 billion, representing a 93.5% premium to HeartWare’s closing share price on Friday.

Both HeartWare bonds, the longer-dated 1.75% convertibles due 2021 and the 3.5% convertibles due 2017, traded up to 99, a New York-based trader said, while HeartWare shares surged $27.81, or 93%, at $57.79.

Previously, the HeartWare 1.75% convertibles stood at 72, and the 3.5% convertibles were at 92.5 to 93.

The takeout news was a boost to the convertibles market, which was otherwise heavier in line with lower equities, albeit on light volume, as financial markets continued to reel in the aftermath of the United Kingdom’s vote to leave the European Union.

Volume was lacking so it was difficult to measure the market’s real reaction to the broader situation, a New York-based trader said.

“Everything is focused on macro and on instability, and everything is trading down,” a second trader said.

“There is not a lot of stability and the focus is on macro; everyone is trying to work through that,” the trader said.

As for the health-care sector, the trader said that it may be one sector that is somewhat immune to economic concerns related to a U.K. exit from the E.U. Nevertheless, there are health-care companies, including some in the U.K., that have been looking to acquire things, and now acquisitions may take a pause, he said.

“Acquirers are likely going to take a pause until things settle down,” the trader said. That reaction is likely to impact the convertible primary market as well.

“Everyone was caught flat footed by the vote, including governments, companies, and banks. Everyone is hustling to figure out the impact. I don’t know if anyone has called a bottom yet,” the trader said, noting that the hit taken by European banks was affecting the rest of the market.

Among financial convertibles, Steinhoff International Holdings GmbH’s 6.375% convertible bonds due 2017 were indicated down to 144.85 from 162.19 previously, according to a market source. Steinhoff’s shares were down 9% on the Xtra stock exchange.

Elsewhere Red Hat Inc.’s 0.25% convertible notes due 2019 extended losses after moving lower in active trade on Friday. The Red Hat bonds changed hands below 120 early Monday and were down to 118.5 by the end of the session, after dropping more than a point to 123 on Friday.

Shares of the Raleigh, N.C.-based software company were down $2.64, or 3.6%, to $70.98 in the early going. On Friday the Red Hat convertibles were called 123.25 versus a stock price of $75.25.

Also trading notably lower were Priceline Group Inc.’s convertibles. The Priceline 1% convertibles due 2018 traded down more than 5 points to 132.6. The Priceline 0.9% convertible due 2021 slipped below par to 99.625 and 99.8, which was down from 101 to 102 on Friday, according to Trace data. But the Priceline 0.35% convertibles due 2020 traded little changed at 116.

The stock of the Norwalk, Conn.-based online travel services company ended well off its lows for the session but still down $46.09, or 3.7%, at $1,186.05.

The major equity indices ended lower. The S&P 500 stock index closed down 36.87 points, or 1.8%, at 2,000.54, the Dow Jones industrial average closed down 260.51 points, or 1.5%, to 17,140.24 and the Nasdaq stock index lost 113.54 points, or 2.4%, to 4,594.44.

HeartWare surges on takeout

HeartWare’s 1.75% convertibles due 2021 and HeartWare’s 3.5% convertibles due May 2017 both traded up to 99 on Monday. Previously, the 1.75% convertibles had been at 72 and the 3.5% convertibles had been in the low 90s.

“The longer-dated bonds had gone lower, so they went higher,” a trader noted. But both bonds are getting par puts, and hedged and outright players both did equally well.

The deal with Medtronic constitutes a fundamental change, and holders will be able to put or convert the 3.5% convertible senior notes due 2017 and the 1.75% convertible senior notes due 2021 as a result of its planned merger.

There is a lot of volatility in the market right now, but the cash bid has been approved by both boards and is likely to get done, a trader said.

The takeout price was at a 93.5% premium to the previous share price but still 60% below the stock’s 52-week high.

It’s not getting taken out close to 52-week highs, a trader noted. HeartWare stock had been as high as $90.00. The deal is reminiscent of the acquisition of Volcano, which was not taken out at the highs, but there was still value there, a trader said.

“It was good for the people involved,” the trader said.

HeartWare is a medical device company located in Framingham, Mass., and Sydney, Australia. Medtronic is a medical technology company based in Minneapolis.

Mentioned in this article:

HeartWare International Inc. Nasdaq: HTWR

Priceline Group Inc. Nasdaq: PCLN

Red Hat Inc. NYSE: RHT

Steinhoff International Holdings GmbH Germany: SNH

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