DealerTrack, homebuilder merger plans in focus; planned Restoration Hardware looks rich

By Rebecca Melvin

New York, June 15 – Merger news on Monday pulled some convertibles into focus but didn’t spur as much activity as expected, market sources said.

DealerTrack Technologies Inc.’s convertibles surged 48 points on an outright basis in active trade after news that Cox Automotive Inc. has offered to acquire the Lake Success, N.Y.-based auto-retail-software services company for $4 billion, or $63.25 per share.

DealerTrack shares surged 58% to $62.98, and the DealerTrack 1.5% convertibles were the most actively traded issue in the convertibles space, according to Trace data.

Elsewhere, the convertibles of Standard Pacific Corp. and the Ryland Group Inc. weren’t heard in active trade after the two homebuilders, both based in Southern California, announced a merger of equals to create a single company that would have an equity market capitalization of about $5.2 billion, or an enterprise value of about $8.2 billion.

Traders on two convertibles desks in New York said that they were not active in the homebuilders, but one said the firm had fielded questions from holders of what the deal would mean for the paper.

In the primary arena, Restoration Hardware Holdings Inc.’s planned $250 million of five-year convertibles, launched ahead of the market open on Monday, looked rich at the midpoint of talked terms, assuming a credit spread of Libor plus 300 basis points and a vol. of 30%, a Connecticut-based trader said.

Using those inputs at the midpoint of talk, the deal looked to be worth fair value of 98.2. At the cheap end of deal talk, the deal valued at 100.2, the trader said.

Meanwhile, Restoration Hardware’s existing 0% convertibles contracted by about 1.25 points on a swap basis on the heels of the deal. The existing Restoration Hardware deal traded at 101.80 versus a share price of $93.90, a New York-based trader said.

Restoration Hardware shares fell $2.75, or nearly 3%, to $93.47 in the early going but pared those loses by the close.

Overall, the convertibles market was slightly weaker due to no real follow-through with the recovery in rates, a New York-based trader said.

A second sellside source said, “It feels heavy.”

Equities were down sharply at the open amid concerns over a lack of progress on the Greek debt talks. The Dow Jones industrial average lost 179 points, or 1%, to start the session. But the indices pared losses, with the Dow finishing down 107.67 points, or 0.6%, to 17,791.17, the S&P 500 stock index ending down 9.68 points, or 0.5%, to 2,084.43, and the Nasdaq stock index finishing lower by 21.13 points, or 0.4% at 5,029.97.

DealerTrack surges on deal

DealerTrack’s 1.5% convertibles due 2017 traded up and traded heavily at the 168.5 bid, 169 offered level on Monday, which was up from about 120. DealerTrack shares surged $23.13, or 58%, to $62.98.

DealerTrack priced $200 million of the convertible senior notes in early 2012.

The acquisition of DealerTrack by Cox is subject to a minimum tender of at least a majority of the outstanding DealerTrack common shares. It is also subject to customary closing conditions and expected to close in the third quarter.

The combination will create greater economies of scale for these companies that are already considered leaders in the sector.

Standard Pacific, Ryland eyed

The convertibles of the two homebuilders were moved up slightly on Monday on the expectation that the companies’ credit gets better with the deal. But at the same time, the deal is expected to dampen vol.

“That combination of factors can appeal to some people and not so much to others,” a market source said.

The combined company plans to operate as one brand and will announce its new name prior to the closing of the transaction.

Standard Pacific’s 1.25% convertible senior notes due 2032 traded at 222.5 on Monday, according to Trace data.

Shares of the Irvine, Calif.-based homebuilder rose 47 cents, or 5.6%, to $8.83.

Ryland’s 0.25% convertibles were quoted at 97, and the older 1.625% convertibles due 2018 were quoted at about 150, a New York-based sellsider said.

Shares of the Westlake Village, Calif.-based homebuilder and mortgage finance company gained $2.23, or 5.2%, to $45.02.

The tie up of Standard Pacific and the Ryland Group will create the fourth largest U.S. home building company. It expects to extend its territory into eastern markets as well as to continue its presence in California.

At the time of the merger, Standard Pacific will implement a 1 for 5 reverse stock split, so that each 5 shares of Standard Pacific common stock will be combined into 1 share of Standard Pacific common stock. After giving effect to the reverse stock split, Ryland shareholders will receive 1.0191 shares of Standard Pacific common share for each share of Ryland common.

Upon closing the transaction, Standard Pacific stockholders will own about 59% and Ryland shareholders will own about 41% of the combined company.

The companies estimate that synergies will create annual cost savings of between $50 million to $70 million.

The board will consist of 10 people, of which 5 will be the current Standard Pacific directors and five will be current Ryland directors.

Restoration Hardware on tap

The Corte Madera, Calif.-based specialty retailer plans to price the new convertibles after the market close on Tuesday at a 0% to 0.25% coupon and a 25% to 30% initial conversion premium.

Terms are expected to be set after the market close on Tuesday.

The Rule 144A deal has a $50 million greenshoe and was being sold via BofA Merrill Lynch and Goldman Sachs & Co. as joint bookrunners.

The deal modeled fairly rich at the midpoint of talk and at close to par at the cheap end of talk. New deals have tended to come on the rich end and through the rich end of talked terms. But if the Restoration Hardware deal came at the rich end of talked terms, it would be worth only about 96, according to market sources.

“It’s not really compelling. It looks like the existing bond,” a trader said, adding that he was “not sure why you need to buy this one.”

Restoration Hardware shares ended down fractionally at $95.92.

Mentioned in this article:

Dealertrack Technologies Inc. Nasdaq: TRAK

Restoration Hardware Inc. NYSE: RH

Ryland Group Inc. NYSE: RYL

Standard Pacific Corp. NYSE: SPF

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