Sirius soars on numbers; XM rides wave higher too; Disney easier; Par Pharma trades up

By Ronda Fears

Nashville, Nov. 23 - Convertible players Tuesday were tuned into a sharp gain in listeners for Sirius Satellite Radio Inc. that signaled heavy buying in its converts. Alongside Sirius, XM Satellite Radio Inc.'s new issue was getting picked up too.

Otherwise, traders said volume was not great since there was no conviction steering the market as the broader markets were relatively unchanged.

"It's a short holiday week," one sellside dealer said. "There's just not going to be a whole lot going on."

A few retail names were getting nibbles ahead of Thanksgiving, however, as the day after the holiday traditionally marks the beginning of the Christmas shopping season. Saks Inc., Men's Wearhouse Inc. and Charming Shoppes Inc. were specifically mentioned as marking nice gains Tuesday.

Sirius issues up 12, 14 points

The headline grabber of the day, though, was Sirius as it reported a new subscriber milestone, hitting 800,000. Though still short of its goal for 1 million by year-end, it was enough to boost its shares by as much as 14% during the session and made the stock the most heavily traded issue on the Nasdaq.

Sirius' newest 3.25% convert, sold last month just after the broadcaster announced shock jock Howard Stern would join its airwaves in January 2006, shot up 12 points on the day to 156.5 bid 157 offered. And, its older 2.5% convert marked a 14-point gain to 171.5 bid, 172 offered.

Sirius shares ended the day up 74 cents, or 12.4%, to close at $6.71.

"Stern and the NFL are the two most important things in radio and Sirius has both," said one Sirius holder. "I am building my position, sure, and it's going to go higher."

Stern reportedly has 2 million listeners to his racy radio program, the holder said, and analysts think some 3 million of those, or 25%, should follow him to Sirius. "That's reasonable, I think," he said.

News last week that Sirius had taken on Mel Karmazin, a former president at Viacom Inc. - owner of Infinity Broadcasting which Stern is departing to join Sirius - was another feather in the New York City-based broadcaster's hat.

Sirius champions turned on

Sirius said that with more than 800,000 subscribers now it is on track to hit 1 million by the end of the year. Sirius defenders agree.

"The announcement that they reached 800,000 subs is a good indication that they will reach, and likely surpass, their 1 million target, though I don't think there was much doubt that they would, even before Mel [Karmazin] came aboard," said a buyside analyst:

The analyst said the numbers for Sirius are astounding and December, with strong holiday sales anticipated, is historically a very good period.

"They went from 600,000 to 700,000 in 42 days, versus the 35 days it took to get from 700,000 to 800,000," he said. During the last three weeks of December 2003, Sirius marked a 30% gain in its subscriber base, he added, so it is reasonable to see them gaining the 25% needed to hit 1 million during the five weeks until the end of 2004.

"Obviously the law of small numbers helped last year on a percentage growth basis, but it'll be hard to believe that they don't get there," the analyst said. "This also highlights the importance of the holiday season. The question now is how much higher are expectations now for the year-end subs numbers."

XM's new issue up 2.75 points

Still, Sirius' subscription numbers are still far behind those of Washington, D.C.-based XM Satellite, the top rival to Sirius, with 2.5 million so far, some convertible players point out.

"SIRI is perceived to be the sexy one, especially with Stern coming on board. I bought SIRI and recently sold, then I put the profits in XM," said a convertible fund manager. "I bet a lot of others will do the same as the hype becomes a hangover within the next two weeks. XM is not exciting but it's consistent.

"There's no rational reason why SIRI should have a market cap $300 million more than XMSR, the market leader."

XM Satellite gained Tuesday, too, with some equity analysts upgrading its stock alongside Sirius, in part due to the forecasts of strong holiday sales this year.

XM's newest convert, the 1.75% issue from last week, rose 2.75 points on the day as was quoted at the close at 100.875 bid, 101.875 offered. XM shares gained $1.94, or 5.59%, to end at $36.66, also seeing heavy volume.

"The big barrier that the market has to XM is price, specifically compared to SIRI," said another buyside source, a convert trader at a hedge fund in New York. "I'm not sure I would unload all of my SIRI, but we are adding a little XM."

Par Pharma up on Lehman call

Par Pharmaceuticals Cos. Inc. saw a nice pop Tuesday following a conference call right after lunch by Lehman Brothers.

The Par Pharma 2.875% convert due 2010 has flagged among generic drugmakers, which a buyside trader said was because of the regulatory scrutiny of Big Pharma and the company's affiliation with Bristol-Myers Squibb Co.

Par Parma's convert Tuesday ended at about 92.5 bid, 93 offered, a gain of 1.875 points outright or about 0.75 point on swap, using a 45% delta hedge. The stock shot up $2.67, or 6.93%, to $41.18.

The issue is busted, the trader said, but for yield-seekers is appealing because of a yield to maturity of about 4.5%. It also has call protection for life, he added, but doesn't have the takeover protection of virtually all new convertibles.

In a report last week, Lehman convertible analysts said the issue was about 1.2% rich at 90.375, using a credit spread of 250 basis points over Libor and a 35% volatility input.

Given the fairly decent credit metrics - cash and equivalents of $223 million, last 12 months EBITDA of $194 million, and interest coverage of 33 times as of Sept. 30 - Lehman analysts said the convert was fairly defensive and provides a 318 bps income advantage over the common stock.

Disney easier on profit taking

The Walt Disney Co.'s convertible slipped a little on profit taking Tuesday as analysts panned the run-up in the credit, traders said, while the stock ticked up slightly.

Disney's 2.125% convert dropped about a quarter-point to 110 bid, 110.5 offered. The stock closed up 13 cents, or 0.48%, to $27.32.

The Disney headlines about the stockholder trial taking place are sensational, a sellside dealer said, but the verdict is unlikely to affect the entertainment giant much one way or the other. Rather, he said, it appeared like there was some profit taking on the gains seen in the Disney issue this year, partly still a hangover from the days when Comcast Corp. made a play for it.

In any event, he said, there wasn't a lot of volume in the convert but speculated that it might be one that could see a sell-off as year-end nears.

As a backdrop to the stockholder trial, the trader also said that some Disney holders were frowning on the entertainment giant's news that it will open its latest theme park in Hong Kong on Sept. 12 next year - a date chosen by a feng shui expert. The lawsuit contends that Disney's board was negligent in hiring Michael Ovitz to a lucrative deal, then paying him a severance package valued at $140 million to get him out in December 1995.

GimmeCredit analyst Dave Novosel suggested in a report Tuesday that holders of Disney credit "sell at these tight levels," but did not specifically mention the Disney converts.

"Amid the bantering between Michael Eisner and Michael Ovitz about what was said or thought eight or nine years ago [in the stockholder suit], Walt Disney reported solid fourth quarter results," Novosel said in the report. "We believe management has been distracted by the Ovitz trial, although from a credit perspective the potential impact from the verdict is likely to be minimal.

"Eisner's planned departure has also created uncertainty, but we maintain that creativity is the key to Disney's success, not the CEO. The major risk is that Eisner might seek to leave his mark on the company with a merger or joint venture that might not be in the best interests of bondholders."

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