Saks gains on asset sale buzz; UTStarcom hit by restatement; Elan dives on drug death; ACE starts trading

By Sara Rosenberg

New York, March 31 - Saks Inc. rallied higher Thursday as speculation circulated about the possibility of asset sales, while UTStarcom Inc. went in the opposite direction as investors were hit with the realities of its financial restatement. But Elan Corp.'s convertible took the largest hit of the day by far, as levels dropped over 40 points on more negative news about its Tysabri drug.

In other happenings, ACE Aviation Holdings Inc.'s new convertible began trading on Thursday, reaching heights of 101½ during market hours before settling down in the high-pars by close.

Saks' 2% convertible moved up by about five or six points on the day to 105¾ bid, 106¾ offered versus a stock price of $18 as the market couldn't help but get excited over the newest asset sale buzz, according to a trader.

"Speculation is that they're going to try to sell their different parts or at least do something to create value. They were first talking about selling regional department stores. Now what you're seeing is speculation that they may sell the Saks Fifth Avenue chain, as well as regional department stores. This added to the interest of the stock," the trader explained.

The Birmingham, Ala.-based retailer's stock closed up $1.50, or 9.06%, at $18.05.

"The [convertibles] had real premium contraction but the stock being up $1.50 really helped, the trader added.

Quoting executives close to the company, the New York Times reported Thursday that Saks has put its regional department stores up for sale and is considering selling the Saks Fifth Avenue chain. Goldman Sachs and Citigroup have been hired to explore strategic alternatives for the properties, the executives said, according to the newspaper.

UTStarcom restatement sends bonds crashing

UTStarcom's 0.875% convertible lost a total of about 4½ points on the day, with the paper closing around 81 versus a closing stock price of $10.95, according to a trader, who said that the notes had been off by as much as 5½ points, but rebounded slightly as the stock came off its lows.

The stock was down 89 cents or 7.51% on the day.

"They're doing a restatement of 2003 results to fix errors caused by a lack of accounting knowledge at the company," the trader explained.

On Thursday morning, UTStarcom announced that it has delayed filing its 10-K for the year ended Dec. 31, 2004 and its amended and restated 10-K for the year ended Dec. 31, 2003 beyond the March 31 extended due date.

The company explained that it needs more time to finalize its required review procedures and its assessment of internal control over financial reporting as of Dec. 31, 2004.

The hope is that the 10-Ks will be filed by April 15.

The company is restating its consolidated financial statements for the year ended Dec. 31, 2003 and the quarters ended March 31, 2003, June 30, 2003 and Sept. 30, 2003 to correct errors involving things like the income tax provision, classification of certain incentive payments and correctly identifying a related party that was deemed a variable interest entity.

UTStarcom expects to report restated 2003 revenues of approximately $1.965 billion and earnings per share of $1.75 and 2004 revenues of approximately $2.704 billion and earnings per share of $0.56. The company's 2003 reported results were revenues of approximately $1.964 billion and earnings per share of $1.64.

The filing delay results in a technical default under the company's convertible indenture but the default would not become an event of default unless UTStarcom fails to file the 2004 10-K within 60 days of being provided with a written notice of the default.

UTStarcom is an Alameda, Calif.-based designer, manufacturer and seller of telecommunications equipment and products, and provides services associated with their operation.

Elan plummets

Elan's 6½% convertible crashed considerably on Thursday, falling to around 75 from close to 120 as news of a Tysabri drug-related death in 2003 surfaced, according to a trader.

"The stock got cut in half. The drug has been pulled off as they investigate more about testing results. Today was another negative announcement. I think this is the lowest the convertible has ever been since it's been outstanding," the trader said.

Elan's stock closed at $3.24, down $3.74 or 53.58%.

After the close Wednesday, the Dublin-based biotechnology company and its partner, Biogen Idec, announced that the ongoing safety evaluation of Tysabri has led to a previously diagnosed case of malignant astrocytoma being reassessed as progressive multifocal leukoencephalopathy (PML) in a patient in an open label Crohn's disease clinical trial.

Because of two previously reported cases of PML in multiple sclerosis clinical trials for the drug, Elan and Biogen initiated an additional comprehensive safety evaluation of Tysabri clinical trial patients.

During the safety review it was found that a patient who died in 2003 and was previously diagnosed with malignant astrocytoma actually had PML. The patient had received eight doses of Tysabri over an 18-month period and prior medication history included multiple courses of immunosuppressant agents.

On Feb. 28, the companies announced that they had suspended marketing of Tysabri for multiple sclerosis and dosing in all clinical trials based on two previously reported cases of PML.

Biogen's 0% convertible, although active, was basically unchanged on the day at 62.20 bid, 62.30 offered for two reasons - one, the company is larger than Elan so the news doesn't affect it as much, and two, the convertible are putable in the near future, the trader explained.

"It's a short-dated put on Biogen 0s so it probably has some people who said I'll just walk away at this time," the trader added.

Biogen, a Cambridge, Mass.-based developer and manufacturer of novel therapies, did however see its stock fall $3.84 or 10.01% on the day to $34.51.

ACE sees good first day

Air Canada parent ACE Aviation saw a good first day of trading for its new C$300 million of 4.25% 30-year convertible senior notes as approximately $25 million bonds were traded during the session, all at a premium, according to a market source.

The convertible closed out the session at 100.65 bid, 100.99 offered but traded as high as 101½ during market hours, the source said. The stock closed at $37.90, down 10 cents or 0.26%.

"Good volume. Good premium. And, the stock is only off about 10 cents on the day. It was a decent first day," the source added.

ACE's convertibles priced after the close Tuesday but didn't begin trading till Thursday because paperwork was finalized too late Wednesday for trading to begin.

The deal, which was upsized from C$250 million, priced at par to yield 4.25% with a 30% initial conversion premium.

The Rule 144A offering priced at the low end of yield guidance, which was 4.25% to 4.75%, and came at a more aggressive premium than expected since guidance was only in the 22.5% to 27.5% range.

In addition, ACE Aviation sold 11.35 million class A variable voting shares and class B voting shares at a price of $37 per share for gross proceeds of C$420 million. The stock sale was upsized from C$350 million.

RBC Dominion Securities Inc., Merrill Lynch Canada Inc. and BMO Nesbitt Burns Inc. were joint bookrunners of the deal, which was sold in Canada and the United States.

Proceeds from the convertibles and the shares will be used to refinance the C$540 million credit facility from GE Capital Corp. used as bankruptcy exit financing last September.

Market heaviness prevails

Overall, the market continued to feel heavy on Thursday, a tone that has become somewhat status quo recently.

"It wasn't a very good month," a buy-side source said. "We did not do anything in convertibles all month. The market is very thin. Everything is under pressure still and I don't know when that's going to abate."

"It felt like there were definitely things for sale and they were lower. Don't know if it's because quarter-end and people are trying to clean their stuff up of if it will continue into next week," a second source said.

"There's a continuation of reevaluating the convert market. You have private equity firms that are continuing to find other areas that they are interested in. Companies being taken private is not going to be a good thing.

"Companies continuing to give dividends on older issues out there and that's not a good thing. And the economy seems somewhat schizophrenic.

"[And], you have one number that makes you think rates will go up and then another number comes out that makes you think rates will go down," the source concluded.

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