SBA expands some, Clearwire lower on AT&T/T-Mobile announcement; Beckman, Best Buy steady

By Rebecca Melvin

New York, March 21 - A pair of wireless telecom convertibles were active in trade Monday after market players were greeted by news that AT&T has agreed to acquire T-Mobile USA from Deutsche Telecom in a $39 billion deal that would create the single largest carrier in the United States.

Wireless infrastructure company SBA Communications Corp. was active in trade, and lower outright, along with the underlying shares, as investors worried the AT&T deal might mean less business for companies that rent space on cell towers. But SBA's 4% convertibles were higher on a hedged basis.

Mobile broadband network provider, Clearwire Corp., which has ties to Sprint Nextel Corp., traded lower on an outright and hedged basis, market sources said.

Neither SBA nor Clearwire has much borrow, so it would have been difficult to lock up enough stock to have gained on these moves, a New York-based sellside analyst said.

Beckman Coulter Inc. was steady in trade, with its 2.5% convertibles trading around 118.5, the level to which they rose - from about the 114 mark - after Danaher Corp. agreed to buy the maker of diagnostic research equipment for biomedical companies.

Also little changed on Monday was Best Buy Co. Inc., which is a potential takeover target, according to a recent Citigroup convertibles report.

Best Buy's 2.25% convertibles due 2021 were seen trading most recently at 102.625 outright, a sellsider said.

Hawaiian Airlines Inc.'s 5% convertibles, which debuted strongly Friday, looked to be higher by about another point on Monday, listed on Trace at 105.372, compared to 104 bid, 104.5 offered last.

In the primary market, James River Coal Co. launched a new deal after the market close. The coal company plans to price $125 million of seven-year convertible senior notes after the close of markets Wednesday, talked at a coupon of 3.25% to 3.75% and an initial conversion premium of 25% to 30%.

M&A implications

Merger and acquisition activity is picking up, both in the United States and abroad, and the implications of such activity on the convertible bond market has been a topic of interest.

On the positive side, above-market bids boost the dollar prices of high-delta converts while those issues trading near par could see price improvements as a result of a higher theoretical bond floor, two Citigroup analysts wrote in a recent report.

Convertibles trading below par would likely move toward par in anticipation of a par put upon completion of a deal, wrote analysts Stu Novick of the Citi convert trading desk and David Venture of the Citi event-driven desk.

The terms of the convertible itself plays a role since equity deals often remain outstanding and become convertible into the acquiring company's shares, while cash deals often are putable at par or possibly convertible into stock at the acquisition price and could also include additional shares in the form of a make-whole provision, according to the Citi report.

Increased M&A activity could also be a rationale for convert issuance. "The convert market represents a source of cheap capital for companies to fund acquisitions. Funding of specific acquisitions as a stated use of convertible generated proceeds comprised almost 10% of total convert dollars raised back in 2007, according to the Citi report. But lower interest rates and cheaper non-convertible financing costs have pushed that level to nearly zero over the last few months."

On the negative side, more M&A activity might mean premium compression: a cash takeover would leave holders with a non-convertible instrument, representing no value in the option component, post-transaction, the analysts said. "Moreover, investors that hold the security on a hedged basis stand to lose on the short stock position as well."

In addition there could be "inventory drain," as recent issuers of converts have typically been smaller companies, making them more likely to be acquisition targets rather than acquirers.

Nevertheless, it seems cheap funding, reasonably valued targets, and the search for new avenues of growth mean increased M&A is inevitable.

Furthermore, increased regulatory costs are driving some activity for some of the biggest convertible-issuing sectors, including the financials and healthcare, and the push for economics of scale is driving telecom and tech link ups, the Citigroup analysts wrote in a report published earlier this month.

SBA expands

SBA Communications' 4% convertible senior notes due 2014 expanded "about 70 cents if you were on a 90% coming into the day," a New York-based sellsider said.

The 4% bonds traded late in the day at 139.776 versus $37.18 on an 85% delta, and that compared to 148.634 versus $40.41 on a 91% delta, on March 15.

SBA Communications' 1.875% convertibles due 2013 traded down about 4 points to 108.625, according to Trace data.

Shares of the Boca Raton, Fla.-based fell $3.57, or nearly 9%, to $37.03 in heavy volume.

"All these different wireless companies lease out space, and with the prospect of the increased heft of AT&T and its greater negotiating leverage, it will be able to command better prices on better terms," to the detriment of companies like SBA, a New York-based sellside analyst said.

"There were six major players before this and now we're down to five," the analyst said.

Nevertheless the bond floor of companies like this one "has held in pretty well, and with stable cash flows, almost like a real estate investment trust, it doesn't look like the bond floors are going to get wacked," the sellsider said.

Clearwire drops

Clearwire's 8.25% convertibles due 2040 were last at 103.5 versus a share price of $5.10 on Monday, according to a New York-based sellside analyst.

A second New York-based analyst reported a trade at 106 versus a share price of $5.15 earlier in the day, and said that compared to 110 versus a share price of $5.25 on Friday, the bonds were "in about a point" on Monday.

Shares of the Kirkland, Wash.-based mobile broadband network operator settled at $5.06, which was down 23 cents, or 4.4%, on the day.

"Clearwire is linked with Sprint at the hip; and Sprint is the odd man out," the analyst said.

For the bond, which has a big, 8.25% coupon, that feature comprises both a blessing and a curse. "If you believe they are going to pay that thing, the reality is that it will constantly knock away your cost of capital, constantly eat away at whatever points you paid upfront," the analyst said. "But if that starts coming into doubt, that's a bad thing."

Clearwire has been facing a cash crunch, and potential investors appear to be skittish about the heft AT&T could wield with T-Mobile. Some believe that the value of Clearwire's spectrum portfolio has decreased with this deal, and the likelihood of a spectrum sale has become less as has an equity deal.

Observers say economies of scale will be critical as AT&T continues its rollout of the next generation wireless network, known as 4G. The carrier has been slower than rivals to deploy the 4G technology.

The acquisition requires approval from both the Justice Department and the Federal Communications Commission, and faces regulatory hurdles.

"At a minimum, AT&T and T-Mobile will likely have to divest customers to satisfy anti-trust concerns," a sellside analyst said.

AT&T has 95.5 million wireless subscribers and T-Mobile has 33.7 million customers, and together that accounts for about 42% of all wireless subscribers in the United States. In comparison, Verizon has about 31%.

But the players appear committed. The breakup fee is $3 billion, or nearly 8% of the deal's deal value.

James Coal to price

Richmond, Va.-based coal producer James Coal planned to price $125 million of seven-year convertible senior notes Wednesday along with $250 million of senior straight notes due 2019.

Both offerings will be distributed under Rule 144A and Regulation S via joint bookrunners UBS Securities LLC and Deutsche Bank Securities Inc.

In addition, James River plans to sell 6,000,000 shares of common stock.

The convertible notes are non-callable, with net share settlement. There is contingent conversion at a price hurdle of 130%.

Proceeds are earmarked to pay a portion of the purchase price of its previously announced acquisition of International Resource Partners LP with any remaining proceeds for general corporate purposes, including acquiring or investing in businesses or repayment of debt.

If the deal is not consummated, James River can redeem the convertibles or use them for general corporate purposes including acquisitions or repaying debt.

Mentioned in this article:

Beckman Coulter Inc. NYSE: BEC

Best Buy Co. Inc. NYSE: BBY

Clearwire Corp. Nasdaq: CLWR

James River Coal Co. Nasdaq: JRCC

Hawaiian Airlines Inc. Nasdaq: HA

SBA Communications Corp. Nasdaq: SBAC

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