Sepracor news wakes a raging bidding war in converts; 4 new deals emerge, including Amdocs

By Ronda Fears

Nashville, March 1 - Sepracor Inc., already a popular name in the convertible universe, announced its insomnia treatment had received an "approvable" letter from regulators and that sparked a massive run-up in the convertibles, with traders reporting "crazy, wild" bidding. By the close, the biotech's two new convertibles were up nearly 40 to 47 points, outright, with the stock up a whopping 56.5%.

There was a lot of competition for convertible investors' attention, however, with four new deals thrown into the pot, including Amdocs Ltd. - which just last week denied a new deal was in the works. Amdocs launched an overnighter for $450 million expected to price at 0.5%, up 54% to 58%.

Walt Disney Co., a top headline grabber in the last fortnight, was active, as has been the case since Comcast Corp.'s hostile takeover bid was aired after Presidents Day. But the convert was little changed. The convert gained 0.75 point to 113 bid as investors position ahead of the media giant's stockholder meeting on Wednesday when the chief executive, Michael Eisner, will be called to defend his post.

Deal calendar grows

Four deals emerged Monday to start off the month, totaling $920 million.

"It's going to get interesting now that earnings season is over," said a convertible origination professional at one of the busy shops.

"We are looking to stay pretty busy through at least the middle of the year."

Pricing on Monday's close, along with Amdocs, was Avnet Inc.

Avnet launched a quick-sale $270 million of 30-year convertible notes talked to yield 1.625% to 2.125% with a 50% to 55% initial conversion premium. Along with cash on hand, proceeds are earmarked to redeem its 7.875% notes due 2005, a $360 million issue for which a tender began Monday.

For Tuesday's business, there are PSS World Medical Inc. and Bell Microproducts Inc.

Bell Microproducts is selling $75 million of 20-year convertible notes talked to yield 3.5% to 4.0% with a 27.5% to 32.5% initial conversion premium. The stock ended down 91 cents, or 10.46%, to $8.27.

PSS World Medical is pitching $125 million of 20-year convertible notes talked to yield 2.25% to 2.75% with a 40% to 45% initial conversion premium, to be sold on swap, with $35 million of proceeds earmarked to buy back stock. The stock closed off 15 cents, or 1.23%, to $12.

Sepracor gets drug nod

Sepracor said it achieved what it called a "pivotal development milestone" in the form of an "approvable" letter from the U.S. Food and Drug Administration for the use of its Estorra tablets in treating insomnia.

"The news started a massive run up. The bidding was crazy, wild," a dealer said.

"It was sort of delayed in the converts, I think, because some people were just sitting back and thinking it would level off. But it didn't.

"It just kept going. There were some profit-takers, but the bidding was endless. There were mostly buyers for these."

Sepracor's newest converts, the zero-coupon issues, soared off the charts. The 2008 issue was quoted at the close up 39.75 points, outright, at 151.375 bid, 151.875 offered. The 2010 issue was quoted up 46.875 points, outright, at 158.5 bid, 159 offered.

Sepracor's 5% convertible due 2007 added 5.625 points on the news to 101.5 bid, 102 offered.

The stock was a big factor in the run up, with the shares closing up $15.99, or 56.48%, to $44.30.

"The FDA has not requested additional clinical or preclinical trials for final approval," the company said, suggesting that a revenue stream from sales of the product could be in the immediate offing.

Thus, as a result of the development, Sepracor said it is finalizing commercial launch plans for Estorra, including making additions to its sales force with a goal of 1,250 salespeople.

Health flagging at Universal

While Sepracor soared to new heights, Universal Health Services Inc. warned that first-quarter earnings could be as much as 25% below year-ago profits, implying earnings per share as low as 63 cents a share - which would miss Wall Street's estimates by a long shot.

The company blamed continued decline in inpatient admissions at acute care hospitals, negative shift in pay or mix, also at acute care hospitals, a decline in intensity and an increase in length of stay.

In addition, Universal Health said the rising level of uninsured and self-pay patients continues to unfavorably impact on bad debt expense.

There were a few downgrades to Universal Health shares that followed, which traders said led to a selloff in the stock and the converts, as well.

The Universal Health 0.426% convertible due 2020 plunged 6.625 points, outright, to 59.125 bid, 59.625 offered. The stock fell $9.05, or 16.78%, to close at $44.88.

Several other convertible issues in similar lines of business, or specialty hospitals like those in rural areas, were lower in sympathy, including Community Heath Systems Inc. and LifePoint Hospitals Inc., but to a far lesser degree.

Community Health's 4.25% convertible due 2008 dropped 1 point to 108.25 bid, 109.25 offered with the stock losing 65 cents, or 2.32%, to $27.40.

LifePoint's 4.5% convertible due 2009 slipped 0.5 point to 103 bid, 105 offered as the underlying shares ended off 70 cents, or 2.09%, to $32.80.

AMR on radar for Tuesday

On Tuesday, a couple of traders commented that there might be a backlash to a discrimination claim against AMR Corp., parent of American Airlines Inc., although the two AMR converts gained some ground Monday on a good traffic report from the airline.

The Transportation Department said late Monday that it found American Airlines "acted in a manner inconsistent with federal laws that prohibit discrimination" and the airline will have to provide more civil rights training to its workers during the next three years.

Passengers alleged they were taken off American Air flights after Sept. 11, 2001 because they were perceived to be of Arab, Middle Eastern, South Asian descent, or Muslim.

There is no penalty or fine in connection with the finding, but traders said investors will be anticipating the likely civil lawsuits that will follow such an official finding.

Earlier, American Airlines reported a load factor gain of 0.2 points in February from a year ago to 68.9% while traffic rose 12.2%, including the leap-year effect. Capacity, or available seats miles, rose 11.9% for the month. Regionally, revenue passenger miles were up sharply in Latin America as well as the Pacific region.

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