Textron rises on tender; Intermune gains on debut despite tighter talk; Avis up as bid pulled

By Kenneth Lim

Boston, Sept. 14 - Textron Inc.'s convertibles rose sharply Wednesday after the company made a tender offer to buy up its 4.5% convertibles due 2013 for cash, as the rest of the convertible market saw good flows concentrated in a handful of names.

The new Intermune, Inc. convertibles rose right out of the gate even after the deal arrived at levels richer than initial price talk.

Avis Budget Group, Inc. convertibles also improved after the company walked away from a bid for rival Dollar Thrifty Automotive Group.

The convertible market in general had a positive day as stocks rose on modest optimism about the debt crisis in Greece. Trading volumes were decent, but activity was driven by headlines and dominated by a small number of issues.

"Not a ton of different names trading, but those that have been trading have really been pretty active," one sellsider said.

Intel Corp.'s 2.95% convertible due 2035 gained about 1.5 points outright to trade at 102.5 against a common stock price of $20.90 early in the day after the company announced plans to sell $5 billion of straight debt to fund stock buybacks.

Intel common stock rose 1.71%, or $0.35, on the day to close at $21.11.

The Santa Clara, Calif.-based semiconductor chip maker on Wednesday sold $1.5 billion of 1.95% five-year notes, $2 billion of 3.3% 10-year notes and $1.5 billion of 4.8% 30-year notes.

The move was seen as slightly negative for the company's credit quality.

"They're taking on debt to give back to shareholders," a convertible trader said. "So you're looking at $5 billion of additional debt jumping in front of you...But keep in mind this is Intel. Their credit is not in question."

MF Global Holdings Ltd. convertibles also rose with its stock on news that the company was shedding about 50 to 60 employees in its equity sales, trading and research business in Europe and Asia.

The layoffs will represent about 30% of the staff in those businesses.

The MF Global 9% convertibles due 2038 gained ½ point outright to change hands at 109 versus a $4.85 stock price. The 1.875% convertibles due 2016 also rose with the shares, being quoted at 83.25 against the same stock price.

The common stock added 2.67%, or $0.13, to close at $4.99.

MF Global is a New York-based commodities and derivatives broker.

Textron gains on offer

Textron's 4.5% convertible due 2013 rose about 10 points outright to 144.25 against a stock price of $16.45 on Wednesday after the company offered to pay cash for the notes.

The Providence, R.I.-based diversified manufacturer saw its stock rise to $16.76 on Wednesday, up by 6.41% or $1.01.

For each $1,000 convertible note, Textron is offering to pay holders 57.1429 times the 20-day volume weighted average price plus $504.50. The payment will have a floor of $1,075.93 per note and a ceiling of $1,790.22 per note, implying exposure to common share prices between $10 and $22.50.

The notes are convertible at $13.125.

Investors have until midnight, Oct. 12 to accept the offer, which is also contingent on Textron being able to sell at least $600 million of straight debt to fund the offer. Textron priced $500 million of notes on Wednesday.

The offer is interesting because the offer exposes investors to the underlying stock price, but caps any participation in stock price increases at $22.50, a sellside analyst said.

"Basically they're capping you out," the analyst said. "You're only getting three-quarters exposure to the equity that the bonds convert into and there's a cap at $22.50 per share."

Although bondholders' payouts will outperform a straight conversion if the stock price stays within the specified range, they will be better off converting the bond into stock and selling the shares on the market if the stock price goes above about $23.50. Still, convertible holders could simply withdraw their acceptances if such a scenario happens, the analyst said.

"If the stock goes up $6 and change in the next month, you'll be maxed out, but you can just pull out if you're a convertible holder," the analyst said.

The contingent straight bond sale is unlikely to be a significant hurdle.

"Honestly I don't see them going through this whole thing if they weren't comfortable they could issue that bond," the analyst said.

The offer seems reasonably positive for convertible holders.

"It doesn't necessarily have to have any upside, but it doesn't have a downside," the analyst said.

Intermune up on debut

Intermune's new 2.5% convertibles due 2018 had a strong start Wednesday after the deal arrived richer than original price talk.

The new notes shot up to 102.5 bid, 103 offered right out of the gates, with the stock opening at $24.92.

The $135 million deal priced with an initial conversion premium of 32.5%.

Price talk was originally at a coupon of 3.25% to 3.75% with an initial conversion premium of 27.5% to 32.5%, but that was changed later to 2.5% to 2.75%, up 32.5%.

Goldman Sachs & Co. and J.P. Morgan Securities LLC were the bookrunners of the registered deal. There is a greenshoe for an additional $14.4 million.

There was a concurrent $96 million stock offering at $24 apiece.

Brisbane, Calif.-based Intermune is a biotech focused on lung, liver and infectious diseases.

"The deal went really well," one trader said. "Very strong interest, they managed to price it very aggressively and guys were still happy to mop it all up."

One analyst said views on how attractively priced the deal was may have split depending on views of the company's credit quality.

"I thought initial talk was very cheap, so I wasn't surprised that they tightened," the analyst said. "Some people thought it was actually rich at the new price talk...I think it came down to what kind of credit you assigned to it."

The deal may also have been helped by the fact that the convertible market has not had a new deal in over a month.

"I don't know if people view it as cheap, or they're just so desperate to find a place to put some convertible dollars," the analyst said.

Avis gains on abandoned deal

Avis's 3.5% convertible due 2014 added about 4 points outright after the company said it was withdrawing its $1.67 billion cash-and-stock offer to buy Dollar Thrifty.

The convertible traded at 107.5 against a stock price of $12.40. The Parsippany, N.J.-based car rental company saw its stock add 6.3%, or $0.74, to close at $12.48 Wednesday.

Avis said a change in market conditions prompted its move, even though a hurdle of antitrust approval had been cleared.

The move also sent shares of Hertz Global Holdings, Inc. higher on the day, but the Hertz 5.25% convertible due 2014 was quiet. Hertz, a Park Ridge, N.J.-based car rental company, had been a rival bidder for Dollar Thrifty.

"I think it's positive for the [Avis] stock and converts because they're not going to be saving some money by not going through with the acquisition," one trader said. "There was concern about them overpaying because of the competing bids, and I think it's just a sound move now that the economic outlook isn't looking as bright now."

Mentioned in this article

Avis Budget Group, Inc. Nasdaq: CAR

Hertz Global Holdings, Inc. NYSE: HTZ

Intel Corp. Nasdaq: INTC

Intermune, Inc. Nasdaq: ITMN

MF Global Holdings Ltd. NYSE: MF

Textron Inc. NYSE: TXT

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