Verizon issue quiet on MCI deal; Juniper, Powerwave, Corning off while Lucent gains amid merger noise

By Ronda Fears

Nashville, Feb. 14 - Looking for love in the convertibles universe this Valentine's Day was a challenge as the markets wavered following the Merger Monday news of Verizon Communications Inc.'s nearly $7 billion acquisition of MCI Inc. Verizon's convertible ended virtually unchanged, much like the underlying stock, but also seesawed during the session.

In addition to the attention on several telecom and wireless issues because of the recent surge in mergers, coming to the forefront of convertible players' radar screens were telecom equipment names like Lucent Technologies Inc., Motorola Inc., Juniper Networks Inc., Powerwave Technologies Inc., Corning Inc. and Nortel Networks Corp.

"It'll also be interesting to see if the telecom mergers spawn mergers in related sectors," a buy-sider said. "There has been some speculation about mergers in the telecom equipment space recently."

Level 3 Communications Inc. posturing continues among capital structure players, too, with its 2.875% convert off a quarter-point while the 5.25% rose a half-point.

The lack of takeover protection is a major focal point regarding most of those convertibles, so they were generally easier on Monday.

European telecom concerns, however, were finding better buyers for most of their convertible paper with Siemens AG and Alcatel mentioned specifically.

Capping off the focus on telecom-related names Monday, after the closing bell Sybase Inc. tossed out a $400 million new deal for Tuesday's business. The 20-year convertible notes, to be sold on swap, were talked with a 1.75% to 2.0% coupon and 32.5% to 37.5% initial conversion premium.

The wireless software company for mobile and wi-fi technologies said that, after using up to $125 million of proceeds to buy back stock from short-selling note buyers, it would use proceeds for working capital and general corporate purposes, including acquisitions.

Verizon fluctuates with stock

Verizon's zero-coupon convertible was described at the close as unchanged in the 61/61.25 context, but traders said it moved similarly with the stock after the day opened in response to the $6.75 billion cash and stock merger with MCI.

For much of the session, Verizon shares were higher but the stock ended off by 12 cents, or 0.33%, at $36.14. Shares of MCI dropped 82 cents, or 3.85%, to close at $19.93.

Verizon also agreed to assume an estimated $4 billion of MCI's net debt above the purchase price. The cash portion - $488 million up front plus $1.46 billion in a special dividend - is to come from MCI's cash cushion.

Convertible market onlookers said there seemed to be "a lot of execution risk weighing on the decisions of investors," but Verizon's top executives said in the conference call on the announcement that they are not worried about the prospect of a competing bid from the likes of Qwest Communications International Inc. or other potential buyers.

Motorola, Lucent noise louder

Recent speculation of potential merger scenarios in the telecom area, particularly in the telecom equipment sector, has proliferated with the surge in activity. A combination of Lucent and Motorola - dubbed "Mucent" by market watchers - has been perhaps the subject of the loudest chatter being bandied about.

On Monday, Lucent's 2.75% convertibles were higher, with the 2023 issue up about 1 point and the 2025 issues gaining about 1.5 points, dealers said, while the stock ended up by a nickel, or 1.49%, at $3.41. The Liberty Media 3.5% convert linked to Motorola stock was quoted off 2 points while the underlying shares gained 29 cents on the day, or 1.82%, to end at $16.20.

"I don't know if anything will actually happen, especially in the near term," said a buyside convertible analyst. "This isn't the first time consolidation amongst the equipment guys has been discussed or rumored. Remember that a deal between Alcatel and Lucent fell apart a few years ago."

European telecom names were very active Monday, too, by the way, and mostly were higher on the day.

Wall Street equity analysts have been shuffling a good deal of position papers on the possible targets and rationalization of a consolidation in the telecom equipment sector, the buyside analyst added.

Merrill Lynch telecom equipment analyst Tal Liani said in a report Friday that, while there is no specific knowledge of a Lucent/Motorola combination, such a merger could lead to meaningful operating expense synergies and incremental revenue upside. Moreover, such a deal would be viewed positive for Lucent and near-term negative but long-term positive for Motorola.

Nortel, Juniper, Corning et al

Other U.S.-based names mentioned as merger candidates in the telecom communications sector include Nortel, Corning, Juniper, Powerwave and even more still, but those four were the most frequently mentioned.

"Immediately, the Verizon/MCI news is seen as a negative for Nortel," said a dealer, citing a Forbes.com report of that nature.

Nortel's converts were described as unchanged in the 97 area while the stock slipped 4 cents, or 1.26%, to close Monday at $3.13.

"Juniper has been talked about as a potential deal candidate for a while now, and to some extent Corning too," the trader said. "There have been lots of smaller names like Powerwave mentioned again and again. Everyone is trying to get ahead of the news right now."

The convertibles of both Juniper and Powerwave were off about a half-point, he said. Corning's 3.5% issue also lost about a half-point, he said, and its mandatory dropped "a bit more" while the 4.875% issue was basically unchanged.

Tougher competition in a slowing revenue growth environment has strained margins for telecom equipment makers, analysts have said, and stock valuations running pretty close to fair value may be a major factor to spur consolidation.

"Some of the thinking is that maybe one of the few ways left to improve profitability further for a lot of these companies [telecom equipment makers] is a merger, because they have all been going through major restructurings," a sellside trader said.

Alcatel, Siemens paper bid up

Moreover, the entire telecom sector has taken on a more global view, the trader said, and there are lots of popular names in that group in Europe. Siemens and Alcatel were both mentioned as ongoing merger candidates.

The Siemens 1.375% euro convert due 2010 was quoted up a half-point to 114.75 bid, 115 offered with a good two-way market, while the stock ended on the XETRA down by €0.20, or 0.33%, to €61.20.

German conglomerate Siemens "appears to be looking for a buyer of its mobile phone unit," the trader said. "They [Siemens executives] seemed to be suggesting, at conference last week [on European telecoms], that they would be looking to maybe do some restructuring beforehand, since the mobile unit has been losing money, but they also seem ready to shed it."

France's Alcatel remains a likely candidate despite the foiled union with Lucent, the trader said.

Alcatel's 4.75% convertible due 2011 was quoted at 18 bid, 18.125 offered with a better buyer and the 0% mandatory convertible due 2005 unchanged at 9.875. Alcatel shares closed unchanged on the Paris stock exchange at €9.92.

Level 3 posturing continues

Level 3 positioning by capital structure players is chiefly based on a belief that the company is a survivor. Level 3 executives have said as much, plus that the company considers itself more of a potential predator rather than prey in the consolidation frenzy.

"I am just mostly looking at the usual suspects, like Level 3. I know these guys will do anything to survive, but they'll eventually need to come up with a real business," said one source.

Level 3's convertibles also continue to see heavy interest from crossover high-yield players, following big post-earnings slippage in both the converts and junk bonds.

Convert traders said interest in Level 3 converts does not view a bankruptcy filing as a near-term threat, what with the company holding enough cash for two years of operations.

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