Planned Ciena deal adds 0.5 point in the gray; existing Ciena notes mixed; King Pharma up

By Rebecca Melvin

New York, Oct. 12 - Ciena Corp.'s $175 million offering of eight-year convertible senior notes, which launched early Tuesday, were seen in the gray market during the session at 100.5 bid. Ciena's existing paper was mixed in trade, with the Ciena 0.25% convertibles trading much better and the two other sister issues mixed, sources said.

King Pharmaceuticals Inc.'s convertibles gained 1.5 points on a dollar-neutral basis after news that the Bristol, Tenn.-based maker of EpiPen and abuse-resistant narcotics will be taken over by Pfizer Inc. for about $3.6 billion, or a 40% premium over King's last closing share price.

The Ciena and King convertibles were the primary focus of trade in the secondary market on Tuesday, a New York-based sellside trader said.

Saks Inc. was also mentioned in trade again after trading Monday, and its 2% convertibles were higher in line with the underlying shares.

Intel Corp.'s newer 3.25% convertibles saw a 117.75 bid versus a share price of $19.56, according to a Connecticut-based sellside analyst. The Santa Clara, Calif.-based chipmaker reported earnings after the close that beat estimates, and shares were higher in after-hours trading.

Equities kicked higher late in the session after minutes from the Federal Open Market Committee's Sept. 21 meeting were released. The minutes showed that the FOMC is committed to more quantitative easing, and the only questions that remain are how much should be done and how to structure it.

The next meeting of the FOMC is set for Nov. 2-3.

New issue terms tighten

Citigroup Global Markets' convertibles monthly report for September showed that the weighted average terms for new issues were for a yield of 5.2% and an initial conversion premium of 24.6%, compared to 4.0%, up 27.4% for the year to date.

September's new issues came slightly cheap, and while they remain favorable for investors, the advantage has diminished somewhat, Citigroup's analysts wrote in a report published Tuesday.

The higher 5.2% yield resulted from several small-cap issuers coming to market, Citi said. And premiums moved up as well to 24.6% from around 22% in August.

The Citigroup report Tuesday follows on Standard & Poor's Global Fixed Income Research published Monday that showed global convertible bond deal volume stands at $49 billion in 2010 year to date, compared to $91 billion in 2009 and $143 billion in 2007.

Ciena plans new issue

Ciena's planned $175 million of eight-year convertibles were launched early Tuesday for pricing after the close. The deal was seen in the gray market up 0.5 point bid.

The new paper was talked at a coupon of 3.5% to 4% with an initial conversion premium of 30% to 35%.

The offering was seen as cheap by about 0.8%, using a credit spread of 700 basis points over Treasuries and a vol. or 30%, according to a Connecticut-based sellside analyst.

Another sellsider saw the paper 1.5% cheap.

There is an over-allotment option for up to an additional $35 million of notes for the Rule 144A offering, which was marketed by Morgan Stanley & Co. Inc. and Deutsche Bank Securities Inc. as joint bookrunners.

The notes will be non-callable for life.

Ciena intends to use the proceeds for general corporate purchases, including the repurchase at maturity of its outstanding 0.25% convertibles due 2013.

Linthicum, Md.-based Ciena is a supplier of communications networking equipment and software.

Ciena mixed on new deal

The Ciena 0.25% convertibles due 2013 traded better on the news. They were seen outright bid at 91.75 and also reported in trade at 92.5 versus a share price of $15.15.

"The 0.25s were all over the place, so I believe both levels," a New York-based sellside trader said. "They obviously were a lot better today."

The Ciena 0.875% convertibles due 2017 were at 73 versus a share price of $15.15. A second sellsider said he saw them higher than 73.

The newer Ciena 4% convertibles due 2015 traded and were also bid at 107.5 versus the $15.15 share price. When the shares were at $13.00, the 4% convertibles were at 98.

One source called the 0.25% convertibles 2.5 points better, with the 0.875% convertibles in line delta neutral, and the 4% convertibles maybe a point better.

A second sellsider said he heard the second two issues were worse on a dollar-neutral basis.

Shares of Ciena ended the session down 32 cents, or 2.1%, at $15.22 in heavy volume.

King gains 1.5 points dollar neutral

King's 1.25% convertible senior notes due 2026 traded at 99.75 on Tuesday, which was up compared to a previous level of 93.375.

Shares of the pharmaceutical company surged $3.99, or 39%, to $14.14 in heavy volume.

The convertibles are mostly an outright name, but they could also be traded on a hedged basis. The deal news would have been good for both varieties of players.

Pfizer's all-cash offer for about $3.6 billion represented a 40% premium over the King share price at Monday's close. The acquirer said that the deal, which is supposed to close in one or two quarters, will be accretive to earnings in 2011.

"These should be putable at par when the deal is consummated," a Connecticut-based sellsider said. "Once the news is out, the levels shift and the money is made and there's nothing left to do."

King is a maker of drugs for cardiovascular and thyroid disorders as well as opiates that are non-addicting.

"They were not partnered with Pfizer in any way," the sellsider said, so the link up was not exactly expected.

King itself wasn't seen specifically as a takeout candidate. "Nobody had them on their tight list," the sellsider said. But the deal makes sense, he said, given that Big Pharma is not developing their own pipeline very well, and older products are going generic.

Mentioned in this article:

Ciena Corp. Nasdaq: CIEN

Intel Corp. Nasdaq: INTC

King Pharmaceuticals Inc. NYSE: KG

Saks Inc. NYSE: SKS

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