Rayovac issue to fund Remington deal; aaiPharma off as Cephalon horns in on CIMA acquisition

By Paul Deckelman

New York, Aug. 22 - The late entrepreneur Victor Kiam once declared in a famous television commercial that he liked his Remington electric razor so much that "I bought the company." On Friday, batterymaker Rayovac Corp. indicated that it likes Remington Products Co. so much that it plans to buy the company from Kiam's heirs and Vestar Capital Partners - and it hopes that debt investors like the idea enough to be willing to buy $300 million of new bonds to fund the deal.

In the secondary market, the possibility that another merger deal may fall through -this one between aaiPharma Inc. and Cima Labs Inc., now endangered by Cephelon Inc.'s unexpected offer for Cima - caused aaiPharma's bonds to lose about two points on the otherwise fairly quiet session.

Madison, Wis.-based Rayovac (senior Ba3/BB-), the third-largest U.S. battery maker after Eveready and Duracell, plans to buy privately held Bridgeport, Conn.-based shaver-maker Remington (Caa2/CCC) for a total of $322 million - $165 million in cash, plus the assumption of $158 million of outstanding Remington debt. It plans to fund the acquisition by issuing $300 million of new senior subordinated notes, plus a $50 million add-on to its existing credit facility (see related story on page one of this issue).

Remington's 11% senior subordinated notes due 2006 have a change-of-control indenture provision calling for investors to be able to put the bonds back to the company at par within 90 days of a change of control; a trader also mentioned that the bonds are currently callable at 101.833. The bonds were quoted as having firmed to 101 bid, up half a point from recent levels.

Apart from what excitement was generated from the Rayovac/Remington deal, the primary side continued to hang out the "gone fishin'" sign - and a trader said "it'll likely only get worse" in the upcoming week as the market goes into its traditional total wind-down phase ahead of the Labor Day holiday weekend (The Bond Market Association is calling for an early close at 2 p.m. ET this coming Friday Aug. 29 with a full close on Labor Day, Monday Sept. 2).

One factor which could produce a little activity, though, is a revived sense of investor confidence in the wake of the relatively small ($83.8 million) high yield mutual fund outflow number reported for the week ended Wednesday by AMG Data Services. While more money left the funds this past week than came into them, the small number pales in comparison to the massive outflows of $1.06 billion, $2.56 billion - a record - and $1.2 billion which had been seen in the respective previous three weeks, throwing a giant wet blanket over both new-deal activity and what was up till then a healthy secondary rally (the mutual fund changes are a closely watched barometer of overall high yield market liquidity trends and their ebb and flow coincides closely with the downs and ups of the secondary market).

After three straight weeks of huge outflows, traders had been cautiously predicting that the latest week's number would likely be either an inflow or, at worst, a relatively small outflow, based on the way secondary prices had been going up - a sign that investors somewhere were putting money into the market - and they were pretty much on the mark.

"It's a good sign," one sell-side source said of the relatively small outflow number. He said it shows that things "are getting better. Hopefully, it will go positive next week, or the week after that."

A trader was a bit less certain that the small outflow signals some kind of turning point.

"I don't know - we had nothing but 'up, up up' for six or seven months - then we had three weeks where everything loosened up again. Is it a turn? I don't know."

He noted that the Treasuries market is continuing to get beaten up (although it ended mixed Friday after some up-and-down activity) but opined that "maybe people are more comfortable to once again buy some paper. Maybe they still have a lot of cash one hand - we've heard that in the past, big accounts have had cash and don't know where to put it."

The trader suggested that "maybe we can run back up to the levels where we were a month ago, but I don't know if we can go through that." He said investors might now say 'we were buying bonds at 108, now let's buy 'em at 104,' and they're gonna run them back up again. Maybe that's what's going on. But I don't know if high yield will again be trading at 6%, 5% [as some issues were yielding just before the big downturn began]. I don't know if that's the right frame of mind."

A trader at another shop noted that recently, "things have been gapping up. There's been almost nothing in new issues and people are just snapping up things that they think have value in the secondary When you had those huge outflows, things were weakening five or 10 points. So now with the better economic numbers and Treasuries stabilizing a bit, if something had been beaten down 10 points it's been bid back up five. [Investors] are putting money to work out there."

One example of a credit which "had gotten beaten down so badly" but which has now been moving back up, a trader said, is Lucent Technologies Inc., whose longer-dated issues "have had a nice little turnaround."

He quoted the Murray Hill, N.J.-based telecommunications equipment maker's 6½% notes due 2028 as having moved up as high as 67 bid from recent levels at 61 bid, 63 offered (where, he said, they had been "hovering and hovering and hovering" for the longest time) and up as well from Thursday's close at 63 bid, 64 offered. "They made a nice little run today."

He saw Lucent's 6.45% bonds due 2027 as having been offered at 67 "but nothing happened there. People were looking more at the 61/2s."

Don't forget, he said, "a month ago, these issues were trading 71 bid, 73 offered," before sliding to levels 10 points below that, from which they have moved up this past week. "They ran back [up] in the morning."

Lucent's shorter paper also go in on the rebound, its benchmark 7¼% notes due 2006 quoted at 95 bid, 96 offered, up from 91 bid, 93 offered a week earlier.

At another desk, a market observer quoted the 6½% notes ending at 65, up from 64.5 Thursday; the 6.45s firmed to 66.75 bid from 64.5; and the 7¼% notes gained more than a point on the session to 95.25

A trader saw Gap Stores bonds higher, after the San Francisco-based apparel retailer released favorable quarterly earnings results, continuing a stellar comeback which began last fall after several years of declining same-store sales numbers and quarterly earnings figures. "They just continue to improve," he said, quoting Gap's 10.55% notes due 2008 up a point at 118 bid, 119 offered, while its 6.90% notes due 2006 were also up a point, at 104.25 bid, 105.25 offered.

On the downside, aaiPharma's 11% notes due 2010 were quoted at 109 bid, down two points from prior levels, although one market participant said they had actually fallen on Thursday and merely remained lower on Friday.

The Wilmington, N.C.-based pharmaceuticals maker's bonds had firmed smartly earlier in the month on the announcement of its plans to buy Eden Prairie, Minn.-based drugmaker Cima Labs, creating a larger company better able to compete in its specialty pharmaceuticals markets.

But the wedding plans may have to be put on hold, with appearance of an unexpected interloper trying to woo Cima away. West Chester, Pa.-based biopharmaceuticals maker Cephalon on Thursday made a $26 per share cash bid for Cima - topping by several dollars aaiPharma's stock-swap deal.

The Cephalon offer is valued at $384 million; aaiPharma's offer is estimated to be worth $339 million, based on the current values of the companies' stocks.

In a statement, aaiPharma asserted "we are confident that the definitive merger agreement entered into by aaiPharma and CIMA offers superior value to CIMA shareholders."

Dr. Philip S. Tabbiner, aaiPharma's president and chief executive officer further declared that its deal with Cima "will be immediately and substantially accretive to CIMA shareholders. Moreover, it will be a strategic combination that creates a more powerful science-based specialty pharmaceutical company with enhanced future growth prospects and the potential to generate significant value for shareholders for both companies over the long term."

Meanwhile, a major Cima shareholder - 2.5% owner West Coast Asset Management - said Friday that it would not support either takeover offer - because both, in its opinion, undervalue the company, which it says would do better as a stand-alone.

And even if the merger with Cima falls through, Wall Street firm Thomas Weisel said in a research note that it wouldn't be the end of the world for aaiPharma - because the latter would walk away with an $11.5 million breakup fee, which it could use to help "easily meet or exceed" its current debt reduction goal for fiscal 2003 of $25 to $35 million.

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