Kmart hangs in even as takeover talk fizzles; Steel Dynamics sells $200 million issue

By Paul Deckelman and Paul Harris

New York, March 14 - Kmart Corp. bonds showed surprising strength Thursday, traders said, even as the French retailing giant which had been rumored as a possible purchaser said thanks - but no thanks.

In primary market activity, Steel Dynamics Inc. brought a $200 million seven-year issue to market, while Avaya Inc.'s upcoming $300 million senior secured note offering took shape, with pricing now anticipated for March 22.

The Steel Dynamics deal, which sources in the market believed would benefit from the new three-year antidumping tariffs imposed by the Bush administration on steel from the European Union, Japan and Korea, priced Thursday in the primary.

The company sold $200 million of seven-year senior notes at par to yield 9½%, according to a syndicate source who commented that Steel Dynamics priced "at the low end" of the 9½%-9¾% price talk.

Morgan Stanley was bookrunner on the Fort Wayne, Ind.-based mini-mill producer's new notes.

New business emerged Thursday from Basking Ridge, N.J.-based voice and data networks service provider Avaya, Inc, which was spun off by Lucent in September 2000.

A syndicate source told Prospect News that the roadshow on Avaya's new $300 million of senior secured notes due 2009 (Ba2/BB-) began Wednesday evening and that the deal figures to price on March 22.

Salomon Smith Barney and Credit Suisse First Boston are joint bookrunners on Avaya's deal.

Also on Thursday word came of a new offering from Perry Ellis International of $50 million of senior secured and guaranteed notes due 2009 (B1/B+).

The company will use the proceeds to acquire assets of swim suit-maker Jantzen, Inc. and to pay down its revolver.

Although information on Perry Ellis was in scarce supply as Thursday's session drew to a close, Tim Page, the company's CFO, responded to Prospect News's inquiry about the deal's timing by saying "It's imminent."

However, he declined to identify the bookrunner.

And late in Thursday's session no terms were heard on the Resorts International Hotel and Casino $175 million of seven-year first mortgage notes, via Merrill Lynch. The deal was initially expected to price Wednesday.

Price talk of 11½%-11¾% was heard Monday, on Resorts International.

In the secondary market, Kmart has been the focus of attention for much of the week, between the plans it announced late last week to downsize its workforce and long roster of stores, the management changes announced early this week, which saw the ouster of Charles C. Conway as chief executive officer and his replacement by turnaround specialist James B. Adamson, and most recently, the speculation that French-based international supermarket giant Carrefour (thought to be the world's second-largest retailer after Kmart's main rival, Wal-Mart Stores Inc.) might be mulling making an offer for Kmart.

That latter possibility was credited Wednesday with having pushed the bankrupt Troy, Mich.-based discount retailer's bonds up s high as bid levels in the 48-49 area from prior levels around 43-44.

But Carrefour moved to throw cold water on any such speculation, reiterating the assertion made by its chairman, Daniel Bernard, in an interview earlier this month, that Carrefour has no plans for expanding its operations into the U.S. A spokesman said the U.S. "is a big country in which we're not present and for which we have no current projects,"

Despite that denial, which would seem to spike the possibility that Carrefour might step forward to purchase Kmart out of bankruptcy, Kmart's bonds were "kind of stagnant after the news," a trader said, quoting them just about one to two points lower, but on not much activity - a development he thought was somewhat surprising.

"I didn't see a lot of activity today, especially compared with what there's been in the last coupled of days." Noting the absence of any dramatic plunge from Wednesday's inflated levels as the Carrefour balloon came back down to earth, he observed: "Hey, I guess when these guys buy something, they don't want to sell it right away at a loss."

Another trader said that seeing the Kmart bonds hanging onto most of Wednesday's gains even after Carrefour's denial of any interest "really surprised me."

He said that when he talked to his firm's salesmen, he pointed out that "we ran up five points on the bonds (Wednesday) and the stock was also way up, all based on that speculation. The speculation got squashed, and look at this - it's still hanging in there, maybe down about a point. I'd have thought we would have reverted back to the levels prior to the rumor."

He quoted Kmart's 9 3/8% notes due 2006 as having gone out on Wednesday quoted at 49 bid/50 offered, and as having traded Thursday at 47 bid/49 offered, down two points on the day.

"So they're down two points on the bid - but they should have been back where they were when they were being quoted at 43-45" before the Carrefour rumors hit the market, so I was a little confused about that.

One possibility behind Kmart's continuing to hang in - perhaps investors don't fully believe Carrefour's avowed lack of interest, feeling that the French firm perhaps sees Kmart as a logical way of establishing a sizable presence in the massive U.S. market in one fell swoop, but does not want to tip its hand too soon. According to such reasoning, Carrefour might still emerge at some point in the bankruptcy process - perhaps after Kmart has already done all of the dirty work of trimming its unprofitable store locations and burdensome lease agreements (the Bankruptcy Code gives it some leeway for breaking the otherwise enforceable lease contracts).

Given the uncertainty surrounding Kmart - versus the possibility for sudden strong gains like Wednesday's , the trader said, "you don't want to be long too much and you don't want to be short too much."

Equity players, however, had no such qualms - Kmart shares, which had shot up nearly 12% Wednesday in heavy New York Stock Exchange dealings of 78.1 million shares, plunged 25 cents (14.04%) to $1.53, on volume of 65 million shares, over twice the usual turnover.

Elsewhere, Conseco Inc. paper "bounced up a bit today" after having slid earlier in the week, a trader said. He quoted the troubled Carmel, Ind.-based insurer's long-dated securities, such as its 8.70% notes due 2026 and its similarly dated 8.796% paper as good as 24 bid/25 offered, versus Wednesday's levels around 22.5 bid/23 offered. Among Conseco's shorter-dated bonds, its 8¾% notes due 2004 moved up to 55.5 bid/56.5 offered from 51 bid/52 on Wednesday, while its 9% notes due 2006 firmed to 50.5 bid/51.5 offered from 49 bid/50 offered previously.

The trader also saw Xerox Corp. and Crown Cork & Seal bonds having "firmed up a little bit," although he said there really wasn't that much activity in either credit.

On the downside, he said, Lucent Technologies Inc.'s bonds were "off a little," its 2006 notes closing at 85 bid/86 offered, its 2008 paper ending around 76.5 bid/78.5 offered and its 2029 bonds at 66.5 bid/67.5 offered.

Also in the telecom sphere, a trader saw Nextel Communications Inc. bonds get "a little bit of a jump," its benchmark 9 3/8% notes due 2009 pushing up to 70 bid/711 offered from prior levels round 68.5 bid/69.5 offered. Level 3 Communications Inc.'s bonds were also up, its 11% notes improving to 48.5 bid/49 offered from 47 bid/48 offered.

The trader noted that at a recent Merrill Lynch conference, Nextel and Level 3 were among several companies mentioned as possible beneficiaries of a coming consolidation trend in the telecom industry.

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