Merrill Lynch analyst finds Novellus merger beneficial to SpeedFam-IPEC convert holders

By Ronda Fears

Nashville, Tenn., Aug. 12 - Novellus Systems' acquisition of SpeedFam-IPEC in an all-stock merger valued at around $220 million will not trigger the put on the Integrated Process/SpeedFam 6.25% convertible due 2004 and is very beneficial to holders from a credit standpoint, said Merrill Lynch & Co. convertible analyst Tatyana Hube.

"This transaction will be highly beneficial for the holders of the SpeedFam convert from a credit standpoint. Although Novellus is not rated by the credit agencies, we have recently used a 562 bps credit spread over the two-year Treasuries (approximately, a BB+ level in our system) to value the recently put Novellus LYONS. At the same time, the SpeedFam 6.25% bond is currently rated CCC- by S&P, and we have valued it using a 3,120 bps credit spread over the two-year Treasuries," Hube said in a report Monday.

"Taking into account the current SpeedFam stock price of $4.65, a 562 bps spread and assuming 50% volatility, the SpeedFam convert's theoretical value improves drastically from 61.32 to 97.18. Therefore, we see the Novellus /SpeedFam merger as a positive event for the SpeedFam convert bondholders. The bond was seen trading at 90.5 this morning."

Under terms of the merger, SpeedFam stockholders will receive 0.1818 shares of Novellus common stock per SpeedFam common share owned, a 72% premium based on Friday's closing prices.

Given the all-stock nature of the transaction, the change in control put provision of the Integrated Process/SpeedFam 6.25% convertible bond due 2004 is not expected to be triggered, Hube said.

Post-merger, the SpeedFam 6.25% bond will become convertible into Novellus common shares at an adjusted ratio of 3.3097.

The merger will be accounted for as a purchase transaction and is intended to qualify as a tax-free reorganization under IRS regulations.

The transaction has been approved by the board of directors of both companies and is expected to formally close in the fourth calendar quarter of 2002 following SpeedFam-IPEC shareholder approval. Novellus shareholder approval is not required.

The transaction is expected to be accretive to Novellus earnings on a per-share basis by fiscal third quarter 2003.

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