Harrah's higher on offer acceptance; Entertainment Properties fails to impress; Titan wakes up on new deal

By Kenneth Lim

Boston, Dec. 19 - Harrah's Entertainment Inc. ticked up slightly on Tuesday, in line with a modest stock rally as the company confirmed earlier speculation that it was accepting a buyout offer.

The rest of the convertible bond market was sluggish, as Entertainment Properties Trust's planned offering failed to spur any activity in the grays. The deal's call protection was improved, and is expected to be reoffered amid limited interest in the issue.

Titan International Inc. saw a rare surge in activity, prompted by its planned $200 million offering of five-year straight notes.

Harrah's gains with deal acceptance

Harrah's floating three-month Libor convertible due 2024 gained ¼ point on Tuesday, in line with its stock amid increased confidence that the company would accept a buyout offer from two private-equity groups.

The convertible traded at 129.25 against a stock price of $82.40, while Harrah's stock (NYSE: HET) gained 0.17% or 14 cents to close at $82.32.

"Saw a couple of trades near the close," a sellside convertible trader said. "It's just slightly better on talk that the company is accepting the takeover."

Harrah's said after the market closed on Tuesday that its board of directors approved the $90 per share cash offer by Apollo Management LP and Texas Pacific Group. The deal is valued at about $27.8 billion, including the assumption of about $10.7 billion of debt. Las Vegas-based Harrah's, a casino operator, may seek better proposals from other parties in the next 25 days. The buyout is expected to be completed in about a year.

Although Harrah's formal announcement came after the close of the market, reports earlier Tuesday and on Monday were already suggesting that the acceptance was imminent. Apollo and Texas first announced their offer early October.

"It wasn't that big of a surprise," the sellside trader said. "It's up slightly mostly because there's just a little bit more certainty now, but most people were expecting them to accept the offer."

A buyside convertible bond trader said the convertible worked out well for outright holders.

"A couple of months ago it was only 120, now it's almost 10 points higher and still in the money, so if you were outright it's fine," the trader said. "And you'll probably still be able to collect on the coupon until 2008. I don't have to say much about the hedge guys...but they took the hit back in October, so now it's not that big of a deal for them anymore."

Citigroup equity analyst Geoffrey Davis on Tuesday downgraded Harrah's stock to hold from buy, but raised his target on the stock to $86 from $80. Harrah's is unlikely to receive a better bid, and the deal is likely to be completed in a year and a half, Davis wrote in a note.

Entertainment Properties brings no joy

Entertainment Properties' planned $125 million of perpetual convertible preferred stock was not seen in the gray market on Tuesday ahead of expected pricing, and the deal was expected to arrive on better terms than original talk.

The offering, which was initially expected to be offered at par, could be reoffered at 24.75, market sources said. Entertainment Properties on Tuesday raised its conversion option hurdle to 135%, from 130%.

The deal was talked at a dividend of 5.5% to 5.75% and an initial conversion premium of 20% to 24%. Entertainment Properties stock (NYSE: EPR) slid 3.71% or $2.29 to close at $59.45.

There is an over-allotment option for a further $18.75 million.

Bear Stearns was the bookrunner of the registered off-the-shelf offering.

Entertainment Properties, real estate investment trust that owns entertainment retail centers, cinemas and other entertainment-related properties, said it will use the proceeds of the deal to fund general corporate purposes, including acquisitions, and to reduce debt under a KeyBank facility.

The deal was widely seen as too rich.

"I don't think it's that good," a buyside convertible bond trader said. "Not only is it another REIT, but it's perpetual preferred. It's just not priced that attractively. It's that simple."

"It's Christmas week," the trader added. "Make my eyes open up here."

The trader noted that for the deal to arrive just as the market was winding down for the year-end holidays, it needed to be more attractive to get enough interest.

"They'd have to bring a bond, not a preferred for starters," the trader said. "And with all the REITs right now, you've got to price it really cheap."

A buyside convertible bond analyst agreed that the offering was not appealing.

"It's just another REIT," the buysider said. "I didn't really look at it. No one here really wants another REIT. And it's perpetual preferred."

The buyside analyst, however, noted that the company itself was interesting.

"It's a little different in that it's mostly movie theaters, cineplexes, rather than the offices or retail buildings of the others," the buysider said. "It's a little different in that respect."

A sellside convertible bond analyst also thought that "the company is more interesting than the issue."

"It's kind of an interesting story," the analyst explained. "They operate in this interesting little niche, cinema megaplexes and so on. They've had good growth, and they appear to be sufficiently well run. They're a little smallish, and if they were rated they would probably be in the DD area."

Still, there is a little bit of concern, the analyst said.

"The leverage is a little high, and the main concerns that people have in looking at them is that movie theaters are seen as highly cyclical," the analyst said. "And also most of their revenue is from AMC, so there's quite a bit of reliance there...It's something that would affect the credit spread. The common is not that volatile, and it looks like it's fairly heavily shorted, so it makes you kind of wonder if there might be any problems borrowing the stock."

"Based on those [originally] terms, even at the cheap end it looked like it would model fair at best," the analyst said. "That I think would explain why it may come at 24.75...but even if it were reoffered at 24.75, that still doesn't seem that generous."

The analyst was puzzled why the deal would be so aggressively priced at this time.

"They're in Christmas week with a convertible preferred in a sector that's already seen so much supply," the analyst said. "And to not price it that attractively, I don't know what's going on."

Titan moves on straight deal

Titan's 5.25% convertible due 2009 traded at 152.40 against a stock price of $18.92 on Tuesday, the first time the paper has traded since July.

"I saw a big block of TWI trading today, and it's a bond that never really trades," a buyside convertible bond trader said. "They are bringing a straight deal tomorrow, but that's the biggest trade I've seen in this name this month. It's the biggest trade I've seen in this name ever."

Quincy, Ill.-based Titan, a supplier of wheels, tires and assemblies for off-highway equipment used in agricultural, construction and consumer areas, on Tuesday priced $200 million of five-year senior unsecured notes, at a coupon of 8%.

Goldman Sachs was the bookrunner of the Rule 144A offering.

Titan plans to use the proceeds of the offering to pay off about $180 million of its existing debt, excluding the convertible notes.

Titan stock (NYSE: TWI) closed at $19.10, unchanged from the day before.

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