Vonage, EYE, Mindspeed repurchase convertibles; NRG lifts outright on Exelon offer, SanDisk gains

By Rebecca Melvin

New York, Oct. 20 - Many convertibles were better in line with higher stocks Monday, as equities surged on optimism over reviving credit markets. But there was still plenty of selling pressure as convertible players continued to eye opportunities to raise cash when they can.

"'Cash is king' is what we're hearing," a New York-based sellside trader said.

Issuer buybacks, for example, which typically spur upward price action, are instead being used as another opportunity to sell, the trader said.

"Buybacks are a good thing obviously, but they aren't creating an artificial bond floor like they used to," he said.

Another New York-based sellsider said that the buybacks are good because they're reducing overall market supply, which should in turn strengthen pricing.

On Monday, Vonage Holdings Corp. said it will buy back $253.5 million of its 5% convertible notes due 2010 in a tender that it began July 30.

Advanced Medical Optics Inc. said it will buy back $181 million - divided between two issues; and Mindspeed Technologies Inc. said it bought back $11.5 million of convertibles last week.

In other news, NRG Energy Inc.'s convertibles were lifted outright by news that Chicago-based Exelon Corp. made an unsolicited, all-stock takeover offer for the Princeton, N.J.-based independent power producer.

If the deal is concluded, the convertibles will be converted into Exelon paper since takeover puts aren't activated in stock transactions, sources said.

SanDisk Corp. convertibles rose even as their underlying shares fell after the California-based chipmaker said it had signed a memorandum of understanding with Toshiba Corp. to sell about 30% of its manufacturing capacity in the parties' existing joint ventures.

The move will significantly reduce SanDisk's capital spending, further strengthen its balance sheet and reduce equipment lease obligations by about $1 billion, the company said.

After the close, SanDisk reported that it swung to a third-quarter loss as consumer spending slowed. But shares were up slightly in after-hours trading.

Nabors Industries Ltd. was weaker ahead of earnings. After the close, the oil and natural gas drilling company posted lower third-quarter profit that beat estimates. Shares, which were higher ahead of the close, moved lower initially in after-hours trading.

NRG gains on takeover offer

NRG Energy's 5.75% mandatory convertible preferred shares, with a par of $250, were quoted at 220 versus a share price of $24.00 but didn't really trade, a New York-based sellside trader said. On Friday, the mandatories were seen at 185 versus a share price of $19.33.

The NRG 4% preferred shares were seen at 1,280 on Monday compared to 991 on Friday.

The sellsider said they didn't trade because NRG's management hasn't yet commented on the offer. "It may not happen, and it may not happen at these terms or for a long time."

Last week the NRG convertibles were 3 to 5 points above parity versus a share price of $18.125, the sellsider said.

Shares of NRG gained sharply to $25.00 on Monday, which was up $5.67, or 29%.

The Exelon offer is to acquire all the outstanding shares of NRG at a fixed exchange ratio of 0.485 of an Exelon share for each NRG common share, or $6.2 billion in stock.

NRG's board of directors will review Exelon's proposal with their advisers and determine the appropriate response in due course, according to a press release.

Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLP are financial advisers to NRG, and Kirkland & Ellis LLP is serving as legal counsel.

SanDisk rises on planned sale

SanDisk 1% convertible senior notes due 2013 rose to 69 versus a share price of $14.42, compared to 65 versus a share price of $15.51 on Friday.

SanDisk 1% convertible notes due 2035 were at 76 in early trade. SanDisk acquired the 2035 paper from M-Systems Flash Disk Pioneers in a $1.55 billion swap-share deal in the middle of 2006.

Shares of the Milpitas, Calif.-based chipmaker fell 7% ahead of earnings and after the flash-memory-card maker said it was selling 30% of its manufacturing capacity to joint ventures that it has had with Japanese chipmaker Toshiba for $1 billion.

Toshiba and SanDisk jointly operate three ventures in Japan to produce NAND flash memory chips, which are used in MP3 players and digital cameras.

"We appreciate Toshiba's strong support for SanDisk through this agreement. This is expected to reduce our capital spending, strengthen our financial position and increase our business flexibility while maintaining the economies of scale of Fabs 3 and 4," said Eli Harari, SanDisk's chairman and chief executive officer, in a news release.

Saying that it's going to sell those assets and will have decent capital expenditure savings and $1 billion is cash were reasons for the rise in the convertibles, a sellsider said.

As for third-quarter earnings: "Nobody expects anybody is going to do very well," he said prior to the company's earnings being posted.

"It's been a tough pricing environment in flash, and we don't know how good it's going to be in the last quarter," he said.

For its third quarter, SanDisk posted a net loss of $155 million, or 69 cents a share, compared to net income in the same period last year of $85 million, or 36 cents a share.

Excluding items, the company's loss would have been $132 million, or 59 cents a share, compared to the third-quarter 2007 non-GAAP net income of $130 million, or 54 cents a share.

Vonage buying back convertibles

Vonage is buying back all $253.5 million of its 5% convertible notes due 2010, which have a put on Dec. 16, for the $1,000 principal amount plus accrued interest.

The tender is being made in connection with a definitive agreement to refinance debt of the Holmdel, N.J.-based broadband telephone services provider.

The agreed upon financing consists of a $130.3 million senior secured first-lien credit facility, a $72 million senior secured second-lien credit facility and the sale of $18 million of senior secured third-lien convertible notes.

Silver Point Finance LLC, other third-party lenders and affiliates of Vonage will be the lenders under the first- and second-lien senior facility and the purchasers of the convertible notes.

EYE, Mindspeed to buy convertibles

Advanced Medical Optics said it purchased about $124 million of its 3.25% convertible senior notes due 2026 for $51.8 million and about $57 million of its 2.5% convertible senior notes due 2024 for about $45.3 million.

These repurchases were consummated in privately negotiated transactions with holders of the notes who had previously contacted the company.

The company funded these repurchases by drawing about $87 million on its senior revolving credit facility.

On Sept. 26, the company's total debt outstanding was about $1.54 billion. Taking into account the drawdown on the revolver and the bond purchases, Advanced Medical achieved a net reduction in its total debt of about $84 million.

The company also has nearly $200 million in remaining borrowing capacity under its senior revolver.

The company said it does not immediately plan to purchase any additional convertible notes.

Advanced Medical's 3.25% convertible senior subordinated notes due 2026 traded at 42.5 compared to 43 on Friday.

Advanced Medical 2.5% convertibles due 2024 were at about 79 on Monday.

Shares of the Santa Ana, Calif.-based medical device maker added 18 cents, to 2.4%, to $7.68 on Monday.

Mindspeed Technologies repurchased $11.5 million of its 3.75% convertible senior notes due 2009.

Newport Beach, Calif.-based Mindspeed produces semiconductor networking solutions for communications applications in enterprise, access, metropolitan and wide-area networks.

Nabors weaker before earnings

Nabors Industries' 0.94% securities due May 2011 closed at about 77 versus a share price of $16.56 on Monday, compared to 76.5 versus at a share price of $15.51 on Friday.

Shares of the Bermuda-based oil and gas drilling company gained $1.05, or 7%.

The company said after the close that its third-quarter profit fell 4%, but results beat the company's expectations on strong revenue.

Net income fell to $210.3 million, or 73 cents per share, from $218 million, or 76 cents a share, a year earlier. Revenue rose 18% to $1.44 billion from $1.23 billion.

Mentioned in this article:

Vonage Holdings Corp. NYSE: VG

Advanced Medical Optics Inc. NYSE: EYE

Mindspeed Technologies Inc. Nasdaq: MSPD

NRG Energy Inc. NYSE: NRG

SanDisk Corp. Nasdaq: SNDK

Nabors Industries Ltd. NYSE: NBR

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