Caesars eases back to levels before Harrah's deal; EDS off 1.75-2.25 points on cut to junk

By Ronda Fears

Nashville, July 15 - Caesars Entertainment Inc. dropped back to levels seen before news of its takeover by Harrah's Entertainment Inc., as the impact of the $9.4 billion stock and cash transaction on the convertible floater was not immediately clear.

Electronic Data Systems Corp. fell to junk land, "finally" as one trader commented, and its convertible dropped as much as 2.25 points on the development. Even though it was widely anticipated, traders pointed out that EDS credit had been tightening as recently as a week ago.

CNET Networks Inc. was lower, too, trading down by about 1 point, one trader said, on news late Wednesday of an acquisition as well as earnings.

Overall, the convertible market was weaker again Thursday, with lots of paper for sale, traders said.

But there were a few names heading north, although slightly, including gains related to activity in Genzyme Corp., Amgen Inc. and Agilent Technologies Inc.

Caesars convert fate uncertain

Under terms of a merger agreement between Caesars and Harrah's, Caesars stockholders will receive $1.8 billion in cash and 66.3 million shares of Harrah's stock. But because Caesars shareholders can choose to receive stock or cash, subject to availability, the impact on the convertible is uncertain.

Also, with no refinancing details but vague plans to cut post-merger debt by $11 billion with free cash flow, there was speculation that the company would want the convertible floater to go away, given the rising interest rate climate.

Early Thursday, the Caesars convert was at 101.5 with the stock at $15.10, after trading as high as 104.5 on Wednesday when the deal was just market buzz and the value was estimated at $10 billion.

"We were very active in Caesars this morning," said a sellside market source. "By this afternoon the activity in the name died down."

Caesars shares on Thursday dropped by 95 cents, or 6% on the day, to $15.05.

"I think the activity on the Caesars floaters may have something to do with the fact that there has been no definitive statement from Harrah's as to what holders of the issue will receive - stock and cash, all cash or all stock," the sellside market source added.

Tatyana Hube, convertible analyst at Merrill Lynch, said the Caesars convertible indenture suggests there should be a post-merger conversion ratio adjustment for the Harrah's stock dividend and the deal should trigger the change-in-control put and the contingent conversion rights. But since the convert is trading above par, the par put would be moot.

Moreover, Hube said the merger should have a positive effect on the Caesars floater from a credit standpoint and a negative effect from an equity volatility standpoint (see report on page one of this issue).

EDS drops to low 90s

After comments about tightening in EDS credit as recently as a week ago, the convertible bonds snapped back to wider levels Thursday on a downgrade to junk territory by Moody's Investors Service. Standard & Poor's put EDS on watch to possibily be cut to junk.

Still, despite the strengthening signs of late, not many onlookers or players in the name were overly surprised.

A sellside market source on the West Coast saw EDS' 3.875% convertible trade at 93.375 with the stock at $17.25 around midday. A sellside trader in New York said the issue traded as low as 93.25, versus Wednesday's closing level of 95 bid, 95.25 offered. Another sellside dealer in New York closed the EDS convertible bonds down about 2.25 points at 92.5 bid, 93 offered.

EDS shares on Thursday lost 71 cents, or 4$, to $16.97.

Moody's cut EDS' senior unsecured notes to Ba1 from Baa3, with a negative outlook, citing ongoing business risk amid slow progress in its turnaround program and low free cash flow compared to its $4.4 billion debtload.

S&P put its BBB- senior unsecured ratings of EDS on negative watch, citing the company's decision not to proceed with its plans to raise some $1 billion by issuing stock and/or equity-linked securities, in conjunction with reducing it's dividend by two-thirds. The liquidity cushion would have served as an offset to weak operating performance, S&P said.

EDS quarrels with junk status

Although EDS on Thursday reduced its 2004 free cash flow estimate and tightened its project range for earnings per share, the company took issue with the Moody's downgrade.

"We have taken a series of aggressive steps to support our investment-grade rating," the company said in a prepared statement. "Given our progress and sound financial footing, we are in strong disagreement with Moody's decision. EDS has significantly reinforced its financial foundation, improved its competitiveness and fully expects to meet its guidance on second quarter 2004 results."

That said, the company confirmed prior guidance for 2004 revenue of $20 billion to $21 billion, with a narrowed range for 2004 pro forma earnings to 20-30 cents per share from prior guidance of 20-40 cents. EDS also lowered its 2004 free cash flow estimate to $200 million to $300 million from prior guidance in the $300 million to $500 million range.

For second quarter, EDS said it anticipates posting GAAP EPS of 54 cents and a pro forma loss of 3 cents per share - at the mid-point of prior guidance of break-even to a loss of 6 cents per share. Second quarter revenue will reach the high end of prior guidance of $5.1 billion to $5.2 billion, the company said. Also, EDS said it expects to post positive free cash flow of about $30 million, versus its previous projection for a cash outflow of $200 million to $300 million in the quarter.

Furthermore, EDS said in the statement that it expects to end 2004 in a zero net debt position - total debt minus unrestricted cash and marketable securities - with a liquidity position approaching $5 billion. By yearend 2006, the company said it anticipates cutting cost of sales by some 20%, and asserted its success rate at winning contracts is improving dramatically.

Currently, EDS said it has "several deals of $1 billion or more in its pipeline," and through the first half of 2004 the value of contracts signed is 29% higher than the same period a year ago. It contract backlog was estimated at three times annual revenues.

EDS is scheduled to report second quarter earnings July 28.

Titan on positive watch

Titan International Inc. may get a credit upgrade as a result of its convertible offering and new bank revolver, as Standard & Poor's on Thursday put the credit on positive watch because of the refinancing news.

But S&P also commented that Titan's financial performance and liquidity position have begun to improve.

"Titan's credit protection measures improved for the March 31 first quarter, and the company was profitable for the first time in many years,' said S&P analyst Nancy Messer, noting that EBITDA interest coverage for the 12 months ended March 31 reached 1.5 times and total debt to EBITDA declined to 7.5 times.

Margins improved because of higher volumes that absorbed fixed costs, and customer surcharges have partly offset higher steel costs. Also, the company has raised product prices, inventory levels have been reduced and certain capacity has been shuttered. S&P said enhanced market conditions are expected to continue into 2005.

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 for Monday's business.

The Titan convertible will have full dividend protection and a change-of-control premium make-whole provision. The senior notes will be non-callable, with no puts or contingent features, however.

After a 12%-plus drop Wednesday, Titan shares closed Thursday up 31 cents, or 3%, to $10.71.

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