General Mills issue rises; Chiron, Henry Schein fall on flu scare but MedImmune gains

By Ronda Fears

Nashville, Oct. 5 - The Lehman Brothers Inc. convertible that is exchangeable into General Mills Inc. shares rose immediately after breaking to trade Tuesday. Then, market chatter about another potential deal - coming in conjunction with the Lazard LLC initial public offering that has been abuzz for the past week or so - began to heat up.

Lehman sold the $750 million of three-year non-callable mandatory exchangeables at par of 25 with a 6.25% dividend and 20% initial conversion - at the tight end of dividend talk of 6.25% to 6.75% and at the middle of premium guidance of 18% to 22%.

It shot up out of the gate from a gray market bid of 0.17 point over issue price to close Tuesday at 25.25 bid, 25.75 offered as General Mills stock slipped 16 cents, or 0.35%, to $45.10.

"We are participating in the [Lehman/General Mills] deal," said a fund manager in California. "It's not too steamy, but fits with many customer requirements."

In other secondary dealings, Chiron Corp. was the big headline maker as its influenza vaccine, which accounts for the majority of flu shots in the United States, was pulled from the market for three months due to possible contamination. Henry Schein Inc., which delivers the Chiron flu vaccine, and MedImmune Inc., which makes an inhalable alternative, FluMist, were impacted as well.

AtheroGenics Inc., another biotech name, continued to slide sharply Tuesday as questions arose about tests on its heart treatment, which last week sent the stock skyrocketing.

Amid a rather flat stock market, other decliners or bad news consumed discussions with convertible traders. Tower Automotive Inc. was the latest casualty to the downdraft in auto sales, warning Tuesday of weaker earnings, and hedge fund holders of DuPont Photomasks Inc. were bemoaning damage from its cash takeover.

As some market onlookers expected, L-3 Communications Inc. on Tuesday launched a full redemption of its 4% convertible to avoid the impact of the new accounting rule for contingent conversion issues adopted last week, which would require reporting diluted earnings per share as if the issue were converted.

Though not specifically because of the CoCo rule, many market watchers had been anticipating L-3 would call the issue at the Oct. 24 call date. Yet, there also were some willing to risk buying it at 1 point over parity as recently as two weeks ago, so on the news Tuesday the 4% convertible snapped back by 1 point.

Nothing new was launched in the primary market, but rumblings were growing louder about the Lazard convertible possibility. The only other deal firmly on the calendar is Boston Private Financial Holdings' tiny $75 million issue, and it still wasn't due to price until after Wednesday's close.

Lazard issue $250-$400 million

Lazard's board reportedly made no decision at a regular meeting in Paris on Tuesday about a possible IPO, estimated by some Wall Street pundits at upwards of $3 billion, plus a debt issue - including speculation of a convertible - in the area of $700 million.

A convertible market syndicate source in London said on Tuesday that the convertible market was anticipating $250 million to $400 million of the debt portion would be in the form of a convertible. That was echoed by a syndicate source on a convertible desk in the United States, who added that the structure of the convertible has not been a matter of speculation, though potential buyers are curious.

"We have been asked about it but, frankly, we just don't know yet what is going to happen," said a high-ranking capital markets source at an international investment bank. "Until there is a firm decision, we don't really know any more than what is on the tape."

Chatter about the IPO has been circulating since last week, centered on smoothing over the friction between Lazard chief executive Bruce Wasserstein and Lazard board chairman Michel David-Weill who had become at odds regarding strategy for Lazard, which is the world's largest closely held investment bank.

Sources inside Lazard told Prospect News that talk at the shop, at least in New York, basically mirrored what has been reported on the tape.

Chiron crashes on flu snafu

Chiron's lowered earnings guidance, directly related to its announcement that it will not be able to release any of its Fluvirin flu vaccine because the British government suspended its manufacturing license at its Liverpool plant, sent its stock and convertibles plunging along with other flu-related names like Henry Schein and MedImmune.

But, traders said there were contrarian buyers on the weakness in Chiron, and one sellside trader noted that the news was not all that bad for Henry Schein and not all that good for MedImmune.

In abbreviated trading because Chiron trading was halted until around midday, Chiron shares plunged $7.44, or 16.38%, to $37.98. The 1.625% convertibles dropped about 3.25 points to 95.5 bid, 96 offered, and the 2.75% issue fell 4.5 points to 100.5 bid, 101 offered.

"For long-term investors, this is probably a good buy here," said a buyside trader at an outright convertible fund in New York. "This stock has sold off purely due to this flu vaccine news, which is affecting just this flu season. They won't have the same problem next year, so the stock should trade back up."

Chiron said that as a result of the development eliminating Fluvirin sales for the current flu season, it expects 2004 earnings per share to be reduced by $1.10 per share to $1.15 per share and now sees 2004 earnings of 70 to 80 cents a share, or 35 to 45 cents on a GAAP basis, versus its previous 2004 guidance of $1.80 to $1.90, or $1.50 to $1.60 on a GAAP basis. Standard & Poor's put Chiron's A- ratings on negative watch on the news and lowered earnings guidance.

The buyside trader pointed out, however, that Chiron and U.S. health officials were meeting with U.K. health officials, because of the severity of the situation "to see what can be worked out to alleviate the situation. They can hand package this vaccine if necessary. I see the three-month ban getting lifted; there's too much at stake in terms of public health."

Chiron is one of the world's leading manufacturers of flu vaccines and a major supplier of flu shots to the United States, United Kingdom, Germany and Italy, plus the U.S. market accounts for an estimated 90% of Fluvirin sales.

Companies with a relationship with Chiron, like Henry Schein, which had been contracted to ship its flu medicine, suffered as well, while the news was initially seen as a boon for others like MedImmune, which makes a spray-mist version of a flu vaccine, FluMist.

Henry Schein loses 2.5 points

While Henry Schein stock and its convertibles were shot down by the Chiron news, a sellside trader was also optimistic that measures would be taken to shorten the gap in Fluvirin availability and asserted the selloff was overdone since Henry Schein also ships MedImmune's FluMist.

Henry Schein shares fell $4.25 on the day, or 6.65%, to $59.64, and its 3% convertible dropped 2.5 points to 101 bid, 101.5 offered.

"This is not the only business for Henry Schein," the trader said. "It's dramatic, because they were, by the company's account, 'the only source to obtain influenza vaccine from all three Food and Drug Administration-approved manufacturers,' but they also are the exclusive distributor for MedImmune's FluMist."

On Aug. 27, Henry Schein said it expected to begin shipping Fluvirin influenza vaccine orders in early October - after a previous delay on Chiron's end - and reaffirmed its 2004 guidance. At that point, the company said it confirmed its 2004 guidance of $3.55 to $3.61 per diluted share, assuming timely receipt of orders of Fluvirin influenza vaccine from Chiron.

Henry Schein did not amend the guidance Tuesday, however, but players expected a revision on Wednesday or sometime soon.

MedImmune reaction too slow

Since MedImmune has a flu drug, with Chiron's flu shots off the market, many stock players initially expected that it stood to gain some market share otherwise out of reach. Thus, its securities shot up. But, onlookers, including MedImmune, said it was a lost chance.

MedImmune itself said it couldn't produce more than the 1.5 million doses of its FluMist that it had planned to make for this year's flu season. MedImmune CEO David Mott said in a CBS interview that he did not see any market opportunity in Chiron's misfortune, adding, "It's not like they lost their entire supply."

Even if MedImmune saw an opportunity and wanted to take advantage of it, analysts said its shot at gaining market share for FluMist was "blown" since increasing manufacturing requires four-month lead times, so it's too late to change its plans.

Indeed, a MedImmune holder said, "Nothing's changed [for MedImmune]. They aren't even planning to bump up the price for FluMist, and even if they did it wouldn't be that big a deal."

Still, with MedImmune shares gaining $1.41 on the day, or 5.79%, to $25.78, the 1% convertible was marked up 1.25 points to 95 bid, 95.5 offered.

AtheroGenics test questioned

Elsewhere in the biotech and drug sector, there were several fluctuations as investors became leery about their business prospects. Questions had already come up with regard to AtheroGenics Inc., which saw a huge spike last week on news from the company about positive test results.

A Barron's magazine article on Sunday said that doctors connected with AtheroGenics' recent atherosclerosis heart drug trial are now questioning those results. Last Wednesday, the Atlanta-based company said results were encouraging from a Phase II clinical trial for its drug candidate AGI-1067, which is being tested to treat hardening of the arteries caused by the build-up of cholesterol and plaque.

Last week, AtheroGenics share climbed more than 60% on that drug data, and the 4.5% convertible gained sharply for outright holders although convert arbs were hurt by a short squeeze as the stock skyrocketed.

This week, AtheroGenics securities are pulling back, with the stock down $2.60 on Tuesday, or by 7.5%, to $31.90, which pushed the convertible down by 16.875 points outright to 225.5 bid.

Holders were not panicking but showing concern and beginning to see it as a potential volatility play.

"I'm thinking the vol [volatility] is looking pretty good," said a fund manager who holds a big position in the AtheroGenics convertible. "I still like the name. Our analyst feels that the report was a bit 'fluff,' but in the right direction. Let's hope it is not fraud. Hedged they [the 4.5% convertibles] look a shade rich."

DuPont Photo hit hard on swap

Similar to the AtheoGenics situation, in that good news slammed hedge fund holders, the arbs were hit hard Tuesday on the cash takeover of DuPont Photomasks, which sent the stock shooting up by a whopping 44%.

Hedge fund players were caught in a short squeeze as DuPont Photomasks agreed to a $650 million cash takeover by Toppan Printing Co. of Japan, which valued its shares at $27 each - about a 48% premium to Monday's close.

DuPont Photomasks stock shot up $8.06 to close Tuesday at $26.34. The 1.25% convertible due 2008 - a lightly traded issue - added about 5.5 on an outright basis, but on a 60% hedge fell some 13.25 points, a sellside market source said.

"Assuming a delta hedge of 60% when stock was at $18.28, we estimate the loss per bond for a hedged investor is approximately 13.25 points. This assumes you cover your short stock at DPMI's close of $26.34, while your bond is priced at parity (102.9%)," the sellside source said.

"Meanwhile, outright investors profited about 5.65 points per bond (i.e., 97.25% yesterday to 102.9% parity today)."

The companies, which said the combination will create the semiconductor industry's "most extensive global photomask production network," expect to complete the deal in early 2005. DuPont added that its largest shareholder, DuPont & Co., which holds a 20% stake, has agreed to vote in favor of the deal.

On the news S&P put DuPont Photomasks' B- rating on positive watch.

Tower Automotive drops 2 pts

In the latest in a string of auto parts suppliers warning about weak results, Tower Automotive said on Tuesday its third-quarter loss would be twice as bad as previously expected, blaming the cuts to vehicle production levels in North America and higher steel costs. Ford Motor Co. and General Motors Corp. have each cut production levels by 10% or so for the 2005 model year.

Tower said it now expects a net loss of $22.5 million, or 39 cents a share, to $25 million, or 43 cents a share, for third quarter, excluding restructuring charges and noncash charges. Previously, the company estimated a net loss of $10.4 million, or 18 cents a share, to $12.8 million, or 22 cents a share. Revenues for the quarter are now forecast at $710 million to $720 million, down from a prior estimate of $725 million to $735 million.

S&P said the news had no immediate impact on Tower Automotive's ratings. Rather, the rating agency said it expects earnings and cash generation should strengthen for the company starting in fourth quarter.

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