Cubist's upsized $400 million convertibles price, seen 1% cheap before pricing; EMC mixed

By Rebecca Melvin

New York, Oct. 19 - After the market close, Cubist Pharmaceuticals Inc. priced an upsized $400 million of convertibles at the middle of price talk to yield 2.5% with an initial conversion premium of 25%.

The Cubist deal, which was upsized from an initially talked $250 million in size, was seen in the gray market during Tuesday's session at 100.5 bid, 101.5 offered, which was in line with valuations which put the deal about 1% cheap.

"I saw a plus 0.75 point bid for the new ones," a New York-based sellsider said of the new Cubist deal.

Cubist's existing 2.25% convertible due 2013, which will be repurchased with proceeds from the new paper, expanded on news of the deal and were seen better by about 0.625 point than they were marked the previous day on a dollar-neutral basis.

EMC Corp. continued to trade heavily, as has been the case for several sessions. The paper of the Hopkinton, Mass.-based computer storage maker saw its shorter-dated 2011 paper trade down 2 points and its longer-dated 2013 convertibles trade little changed. The data storage company reported third-quarter net income that was up 58% on sales that were up 20% to $4.21 billion.

NetApp Inc. and Symantec Corp. were also big traders on the day, with NetApp up a few points and Symantec flat to lower.

Otherwise, the secondary market was "pretty quiet," a New York-based sellside trader said, with "still not enough paper and too much money chasing...."

The trader said he senses money coming into the asset class because performance has been strong for the last 18 months. "So valuations are not very attractive, but technicals are still strong," he said.

A drop in equities - the worst in two months - didn't seem to affect convertibles much, but the credit market overall "came in a little bit" in the aftermath of Bank of America Corp.'s quarterly loss related to a charge for credit and debit card reform legislation, a New York-based sellsider said.

"Things widened out," the sellsider said.

Cubist up in the gray

Cubist's newly priced 2.5% convertibles, all $400 million of them, were seen 0.9% cheap at the midpoint of price talk, using a credit spread of 600 basis points over Libor and a vol. of 30%, according to a New York-based sellside trader.

Another source, a Connecticut-based analyst, saw the paper more than 2.5% cheap at the midpoint of price talk, using a tighter spread and lower vol.

The pricing, which was considered pretty aggressive, fit with the recent trend given robust demand.

"Deals have been pricing aggressively for two-, three- or four months, and cheapness is coming down. The new issue cheapness is down because demand has been robust," the analyst said.

Proceeds of the new convertibles will be used to repurchase the company's 2.25% convertibles maturing in 2013.

Pricing compared to those existing convertibles, which were sold four years ago in 2006 with a 2.25% coupon and a 30% premium.

And the deal as a whole was reminiscent of Ciena Corp.'s $320 million of eight-year convertible senior notes, priced a week ago, with a 3.75% coupon and a 32.5% premium, that were sold for the purpose of repurchasing existing convertibles.

Ciena is a Linthicum, Md.-based supplier of communications networking equipment and software.

Issuers are "extending out the maturity of their debt because demand has been robust. [Cubist] issued convertibles four years ago and now they are essentially extending out the maturity. And its also pushes out the impact of dilution," a New York-based sellside analyst said.

"There are a large number of smaller deals that are pricing aggressively because of robust demand," the sellsider said.

The Cubist deal was seen in the gray market Tuesday at 100.5 bid, 101.5 offered.

Shares of Cubist, a Lexington, Mass.-based drug developer, fell $1.91, or 8%, in trade to $23.34 in active dealings.

As for Cubist's fundamental picture, it's known essentially as a "one-drug company," an analyst said, which increases its risk. The company's main drug is Cubicin, an antibiotic for injection.

Whether that makes it a target of M&A in the pharmaceutical space is possible. "A lot of Big Pharma might want to look at this. We've seen a lot of M&A activity in market caps below $2 billion to $3 billion," the analyst said.

Cubist's market capitalization stands at $1.4 billion.

Cubist launched a $250 million offering of seven-year convertibles after the close of markets on Monday. The deal, which was sold via Goldman Sachs & Co. and Morgan Stanley, was upsized to $400 million.

Deal talk was for a coupon of 2.25% to 2.75% and an initial conversion premium at 22.5% to 27.5%, according to market sources.

Cubist's 2.25% convertible due 2013 were seen higher by about 0.625 point on a dollar-neutral basis.

EMC remains active

EMC's 1.75% convertible notes due 2011 were seen settling at 132.25, which was down 2 points compared to a 134.456 settlement on Monday, according to Trace data. Shares of the company ended little changed.

EMC's 1.75% convertibles due 2013 traded late at 141.77 on Tuesday, compared to 141.75 on Monday.

On Friday, the EMCs of 2011 were seen closing at 135.64 versus a share price of $21.09, and the EMCs of 2013 traded last at 143.125 on Friday.

Shares of the company rose intraday but settled back down by the close to essentially unchanged at $20.83, which was up 3 cents. The broader market fell heavily.

Both issues were among the top volume names of the day, according to Trace data.

EMC, a data storage giant, said that for the latest quarter it earned $472.5 million, or 22 cents a share, up from $298.2 million, or 14 cents a share, in the year-earlier period.

Revenue was $4.2 billion, up from $3.5 billion.

Excluding restructuring and other costs, net income was 30 cents a share, up from 23 cents a share a year earlier.

EMC said it expects $1.25 in full-year earnings per share on $16.9 billion in revenue. Analysts are looking for $1.21 in full-year earnings per share on $16.7 billion of revenue.

Mentioned in this article:

Ciena Corp. Nasdaq: CIEN

Cubist Pharmaceuticals Inc. Nasdaq: CBST

EMC Corp. NYSE: EMC

NetApp Inc. Nasdaq: NTAP

Symantec Corp. Nasdaq: SYMC

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