Caesars edges up 0.25 point on Harrah's buzz; buyers for Grey Global; Titan new issue emerges

By Ronda Fears

Nashville, July 14 - Caesars Entertainment Inc. provided a distraction for convertible players as buzz circulated that it was in talks regarding a takeover by Harrah's Entertainment Inc. The Caesars floaters were first expected to go lower on such an event, but then went as much as 1.25 points higher before settling up just a quarter-point.

Grey Global Group, however, came in sharply as the stock dropped following further solidification of the news that French advertising agency Publicis Groupe SA is not interested in a merger, plus confirmation that Grey Global has lost the Proctor & Gamble Co. account. With an offer on the Street for the converts, a buyside trader said the bonds - coveted for the underlying stock but scarce - were snapped up in a hurry as selling started.

Delta Air Lines Inc. again headed south, again dragging down peers AMR Corp. and Northwest Airlines Corp. A buyside market source said apprehension that Delta pilots will not make the drastic wage concessions necessary to forestall a bankruptcy are now outweighing any optimism that may have prevailed at one time. All the airline paper was described as 1 to 3 points lower.

In the technology space it was another overall negative session, and Red Hat Inc. lost another 1 to 2 points in the wake of its restatements announcement, which also prompted Standard & Poor's on Wednesday to put the credit on a negative outlook. But dealers said some of the Red Hat sellers were buying Novell Inc.'s new convert as a result.

Meanwhile, the primary market showed signs of life with a tiny $100 million issue getting launched by Titan International Inc. for next Monday's business.

Caesars gains on Harrah's deal

Early in the day, with the news fresh on the tape about Harrah's being near an agreement to acquire Caesars for about $10 billion, including $4.5 billion in debt, buyside market sources thought it would send Caesars lower based on a comparison of the inferred purchase price with Caesars stock price.

"Mandalay was taken over at about 17 times next year earnings," by MGM Mirage, one buyside analyst said. "If you use Caesars' next year estimate of 76 [cents] a share, I come up with about $13 a share, and the stock closed yesterday [Tuesday] at $13.92."

A buyside convert trader said right before the market opened that he figured the Caesars floaters would be coming in as much as 3 points on the news, also based on speculation of a per share offer in comparison to the Mandalay/Mirage deal.

But when reports continued to indicate that the price tag would be greater, Caesars stock shot up and the converts followed suit.

Caesars shares on Wednesday climbed 15%, or $2.08, to $16.

The Caesars convertible floaters, which pay three-month Libor flat, traded as high as 102.125 before midday but closed at 101.75 bid, 102.125 offered, up just 0.25 on the day.

Caesars price tag buzz

Press reports suggest talks between Caesars and Harrah's, which if united would create the world's largest casino operator, could produce a deal in the next day or two. It would result in a company with annual revenues estimated at $8.8 billion from 54 casinos.

"The offer is speculated anywhere from $17 to $19 right now," said the buyside analyst late Wednesday afternoon.

"There was an estimate from a Merrill analyst at $17.10. But, if the Harrah's offer is $10 billion, then that would equate to about $17.92 a share. There is one line of thought, too, that if the Caesars board rejects the initial offer, it might be bumped up another $1."

There also is the possibility that Caesars allowed the rumor to get out as a means of fishing for a higher bidder, he said.

Another buyside source said Harrah's offer could come in as high as $20 a share if the company decides to go for a premium price that would ensure a successful bid, although he said there are fewer players in the gaming space after the Mirage-Mandalay merger.

He said a deal should be announced within the next week, at the latest, pointing out that Harrah's is due to report earnings next Wednesday and Caesars next Thursday.

Grey Global offers snapped up

There had been a few would-be buyers waiting in the wings for a crack in the Grey Global bonds, following news earlier this week that Publicis was definitely not interested in buying the U.S. ad agency. Grey Global had been on a steady climb for weeks on reports in trade magazines that the company hired Goldman Sachs to explore a possible sale.

"Really, these have been prime convertibles ever since they were sold, and difficult to come by because everyone who gets hold of them keeps them," said a convert trader at a convertible fund in New York.

"When I heard there were some bonds offered on the Street, well, I had to jump on that. You don't see these offered very often."

In addition to the negative Publicis news, also pressuring Grey Global on Wednesday was reports that Procter & Gamble had chosen Starcom Mediavest Group and Carat for its North America advertising business, ending a three-month competition that displaced Grey Global. Grey Global had bid on the job, too, and lost.

Grey Global shares on Wednesday finally led the converts to lower ground, the buyside trader said.

The stock dropped $29.59, or 3.25%, to $880.41 and the converts came in about 2.25 points to 109.5 bid, 110 offered, he said.

Titan rouses primary market

Albeit slight, Titan International stirred the primary market, which had been stilled by the flux in interest rates and flap surrounding contingent conversion structures.

In the first new deal for a couple of weeks, Titan launched $100 million of five-year convertible notes talked to yield 4.75% to 5.25% with a 25% to 30% initial conversion premium.

The senior notes will be non-callable, with no puts or contingent features.

The ongoing flap about the viability of CoCo structures going forward in light of a proposed new accounting rule that would require issuers of these type convertibles to estimate potential dilution to reported earnings per share regardless of whether the conversion trigger has been hit, is one of the culprits named for the summer drought in new issues.

Although Titan's deal does not price for several sessions, the stock was very active Wednesday with 541,600 shares trading versus the three-month running average of 108,873.

Titan shares closed Wednesday down $1.51, or 12.68%, to $10.40.

Novell up on Red Hat demise

While Red Hat continued to slide, competitor Novell was picking up some of those sellers.

Red Hat said it would restate accounts for fiscal 2002, 2003 and 2004, amending the way it recognizes subscriptions to its increasingly-popular Enterprise Linux product, resulting in lower "significant percentage changes" to operating profit and net income, plus the Securities and Exchange Commission has raised questions about its fiscal 2004 annual report.

And, because of those things, on Wednesday S&P put the credit on negative outlook.

"Red Hat faces intense competition from established proprietary operating systems such as Unix and Windows, as well as from other Linux distributors, including Novell Inc.," S&P analysts said.

Red Hat's 0.5% converts dropped to 92 bid, 92.5 offered while the stock fell another 68 cents, or 4.52%, to $15.05.

Novell shares, on the other hand, were higher while most of the tech stocks were lower like Red Hat.

The Novell 0.5% convertible added 2 to 3 points to the 93.25 area, a sellside dealer said. Novell shares closed Wednesday up 48 cents, or 7.34%, to $7.02.

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