Spansion, Intel rise on flash memory consolidation deal; LifePoint gains in gray despite aggressive talk

By Kenneth Lim

Boston, May 22 - Spansion Inc. rose on Tuesday after the stock surged on hopes that the planned consolidation of flash memory businesses at Intel Corp. and STMicroelectronics NV would bring price improvements to the sector.

Intel also gained slightly on the news with the impact on the giant chipmaker perceived as positive but not significant.

LifePoint Hospitals Inc.'s convertibles offering traded higher in the gray market, although critics described the deal's price talk as too aggressive and expected the deal to arrive near the cheap end of talk.

Meanwhile, Spartan Stores Inc. launched a $75 million offering of 20-year convertible senior notes expected to price Wednesday after the market closes.

Spansion gains as sector consolidates

Spansion's 2.25% convertible due 2016 climbed about a point outright on Tuesday as the stock rose on hopes that the consolidation of Intel and STMicroelectronics' flash memory businesses would bring relief to the sector's low prices.

The convertible was marked at 90.75 bid, 91.75 offered versus a stock price of $11.80 on Tuesday. Spansion stock (Nasdaq: SPSN) closed at $11.45, up 9.67%, or $1.01.

"It's been a while since we traded any Spansions," a convertible trader said.

Intel and STMicroelectronics said they were spinning off their NOR flash businesses into a new NOR flash company that will be controlled by the two companies and private equity firm Francisco Partners. Although the new company will be a competitor to Sunnyvale, Calif.-based Spansion, the deal was expected to benefit all NOR flash memory makers in general.

"The reason the stock is up is people are hoping that with this consolidation you'll see more rational pricing for flash memory," a sellsider said. "Spansion's been making losses because of delays and a poor pricing environment, and any good news is probably going to give the stock a lift."

A convertible analyst said Spansion may also have gotten an extra boost because the company recently had a positive analyst day. The analyst noted that Citigroup issued a buy recommendation on the stock shortly after the analyst meeting a week ago.

The Citigroup report, in fact, noted pricing pressures as a chief concern despite confidence by the company on future contracts and cost reduction measures.

"Spansion was upbeat at a well-attended Analyst Day where the company discussed its strategy and technology roadmap," Citigroup equity analyst Glen Yeung wrote in the report. "SPSN was confident on visibility of socket wins, but remained cautious on pricing due to the competitive pricing environment. We note that June QTD, NOR spot/contract pricing has remained relatively stable, although we expect pricing to remain competitive in the near to medium term as competitors look to gain market share."

Intel gains on flash move

Intel also improved, but its gains were less pronounced with the deal seen as positive but not significant.

The Intel 2.95% convertible due 2035 gained about a quarter-point to trade at 94 against a stock price of $23.05. Intel stock (Nasdaq: INTC) rose 1.59%, or 36 cents, to close at $22.99.

The flash memory deal will see Santa Clara, Calif.-based Intel get $432 million in cash and 45.1% of the new company. STMicroelectronics will receive $468 million for its flash memory units and take a 48.6% stake in the new company. Francisco Partners will invest $150 million in preferred stock for a 6.3% slice. Intel and STMicroelectronics are semiconductor chip makers.

"It's definitely positive for Intel," a sellside convertible analyst said. "They're effectively reducing their exposure to what is by all accounts a loss-making business. They get some cash for it, and if the consolidation goes as planned, the flash business may even improve and eventually turn profitable."

But the analyst said the deal was not expected to have a large impact on Intel.

"In terms of revenue this business wasn't a huge contributor, even less so if you're talking about profit," the analyst said. "It's not going to affect the credit much also, just because Intel's credit is also so strong."

LifePoint gains in gray

LifePoint's planned $500 million offering of seven-year convertible senior subordinated notes rose in the gray market Tuesday with the deal seen as potentially attractive only if it came near the cheap end of talk.

The convertible traded at 100.5 in the gray market and was bid as high as 100.625. LifePoint stock (Nasdaq: LPNT) closed at $37.94, down by 3.36% or $1.32.

LifePoint planned to price its deal Tuesday after the market closed. Price talk guided for a coupon of 3.25% to 3.75% and an initial conversion premium of 32.5% to 37.5%.

The convertibles will be offered at par.

There is an over-allotment option for a further $75 million.

Citigroup was the bookrunner of the registered offering.

LifePoint, a Brentwood, Tenn.-based non-urban hospital company, said it will use the proceeds of the deal to repay an outstanding revolving loan that bears an annual interest of 7.11% and an outstanding term loan that bears an average annual interest of 6.97%.

Convertible analysts said the deal appeared rich at the midpoint of talk and fairly valued to just modestly attractive at the cheap end.

"It looks about half a percent cheap at the cheap end," a sellside analyst said. "It doesn't look like it has enough to come at the mids."

The analyst said a credit spread around the 200 basis points over Libor region and a volatility in the high teens looked like the correct assumptions, and a volatility around 20% would be pushing it.

"Unless they reoffer this thing, it doesn't look that attractive to us," the analyst said.

Another convertible analyst had the deal about 2% rich at the midpoint of talk using similar assumptions, but said the underwriters appeared to be using a more aggressive credit spread and volatility.

"I heard the underwriters are suggesting a spread that's on the tight side, if not too tight, and a volatility that's much bigger than what people are going to use," the second analyst said. "They may have to up the coupon or lower the premium, one would think, just because it's modeling so rich."

But the second analyst said some hedge funds could be interested in the deal even if it was fully valued at issue.

"There is reason to buy it if you can get it where it's not rich or cheap, if it's fully valued, because it sets up very nicely with a positive carry," the analyst said. "A hedge investor could hold it with a positive carry and wait for a vol event. The hospital space is at risk of a lot of legislation changes that could turn into vol events, and I think there are some investors with the appetite; some people would play it, especially in this space where it's reasonable to think that you would get a vol event. That is probably why it could even get done at these terms."

"It doesn't look like it totally stinks in today's market," the second analyst said.

A sellside convertible trader agreed that the health care sector could be facing significant changes.

"My call at the beginning of the year was that the sector that will see the most changes is health care," the trader said. "You got the perfect storm lined up. Governors in different states like California are looking at health care reform and you have a presidential candidate who, when her husband was president, focused on health care."

Fitch Ratings assigned a B rating to the convertible on Tuesday, while Moody's Investors Service affirmed the company's Ba3 corporate family and probability-of-default rating. Moody's also affirmed LifePoint's existing senior subordinated convertible notes due 2025 at B2.

Spartan launches deal

Spartan Stores plans to price $75 million of 20-year convertible senior notes on Wednesday after the market closes, talked at a coupon of 3% to 3.5% and an initial conversion premium of 35% to 40%.

The convertibles will be offered at par.

There is an over-allotment option for a further $15 million.

Banc of America and Bear Stearns are the bookrunners of the Rule 144A offering.

Spartan, a Grand Rapids, Mich.-based grocery distribution company, said it will use the proceeds of the deal to repay an outstanding revolving loan and fund working capital, capital expenditures and other general corporate purposes.

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