MCI gyrates as it accepts new Verizon bid; Adelphia up as Cablevision seen joining bidder group

By Paul Deckelman and Paul A. Harris

New York, March 29 - MCI Inc. bonds were seen higher Tuesday, after the Ashburn, Va.-based long-distance operator announced that it had accepted an improved acquisition offer from Verizon Communications Inc. - yet another rebuff to its other would-be buyer, Qwest Communications International Inc.

Also in the communications sphere, Adelphia Communications Corp.'s bonds were being quoted solidly higher amid news that rival cable operator Cablevision Systems Corp. may join one of the two syndicates bidding to acquire the bankrupt Greenwood Village, Colo.-based cabler.

Primary activity was seen extremely slow, with no new deals having priced by the close, although some price talk was heard on Navarre Corp.'s upcoming issue of seven-year notes.

MCI bonds "shot up at least two points right off the bat" on the Verizon news, although he saw those bonds "kind of settle back in" with considerably smaller gains by day's end.

He saw the most actively traded issue, the 8.735% notes due 2014, jump to around a 112-113ish context early on, before settling back in around 110.5 bid, 111.5 offered later in the day - still up from prior levels around 109.75 bid, 110.25 offered.

He saw MCI's 7.688% notes due 2009 settle in around 104.5 bid, 105.25 offered, "up a little bit" on the day, and "didn't see as much [trading] in the three-years [the 6.908% notes due 2007]," which reached 101.75 bid, 102.25 offered earlier in the day before going home offered at 101.75.

Another trader saw the MCI issues "up a point-plus intra-day, up half a point at the end of the day."

A market source at another shop was quoting the 6.908s essentially unchanged on the day at 102, the 7.688s up maybe a half at 104.75, and the 8.735s up 1¼ point at 111.5.

At another desk, a source said the 10-years had initially pushed up nearly two points to around the 112 area, but saw them going out up maybe a point, around 111. The 2009 bonds were seen at 105 bid, up a point.

MCI's Nasdaq-traded shares were up 84 cents (3.66%) to $23.78, on volume of 34.2 million shares - more than three times the norm.

MCI issued a mid-morning statement, saying that after having studied both Verizon's revised offer and the latest of several offers from Qwest - all nominally higher than Verizon's bids - it continues to anticipate being acquired by New York-based regional Bell operating company Verizon, rather than by its Denver-based RBOC rival, Qwest.

Verizon upped its offer to MCI to $7.64 billion from the $6.746 billion proposal originally accepted by MCI, an engagement which was announced, appropriately enough, on Valentine's Day.

Since then, though, the overall value of Verizon's cash-and-stock offer has declined as Verizon's stock fell from $36.31 at the close of trading on Feb. 11 - the price used to calculate the stock portion of its original offer - to $34.72 at Monday's close. The per-share value of the offer had declined from $20.75 on Feb. 14, to $20.12 on March 24.

To remedy that - and to fend off the continuing challenge by the pesky Qwest, which raised its own earlier bid for MCI to its present level of over $8 billion of stock and cash - Verizon did two things.

It raised the cash component of its offer by $900 million to approximately $2.84 billion, thus also raising the total value of its offer to $23.50 per MCI common share. And it put a floor under the original $4.8 billion stock component of the offer, guaranteeing MCI shareholders that they will receive the greater of either 0.4062 Verizon shares for every share of MCI stock - the original deal terms, assuming a Verizon share price of at least $36.31 - or, they will receive Verizon shares valued at $14.75 for each MCI common share, should the value of Verizon's shares stay below that $36.31 figure.

Under this price protection feature - which was not included in its original offer - Verizon may elect to pay additional cash to the MCI holders instead of issuing additional shares over the 0.4062 exchange ratio to make up the difference.

As was the case with Verizon's original offer, much of the cash to be paid out to the MCI holders will be in the form of special dividends which MCI itself has agreed to pay to them as part of the merger transaction. The cash portion of the offer was increased by $2.75 per MCI share to $8.75 from the original $6. Of that $8.75, up to $5.60 is expected to be paid upon approval of the transaction by MCI's shareholders.

Another change in the Verizon offer is an increase in the breakup fee MCI will have to pay Verizon should Qwest's offer prevail or should the MCI-Verizon deal otherwise fall through, from $200 million originally to a revised $240 million plus an additional $10 million in expenses.

Qwest's most recent proposal - also revised upward from its original bid - totals about $8.45 billion in cash and stock and values MCI at $26 per share - $10.50 in cash (including MCI's March 15 dividend payment of 40 cents per share, which is also included in the Verizon cash component) and 3.735 Qwest shares, subject to adjustment under a collar which fixes the value of the Qwest shares at $15.50 per MCI share, provided Qwest's share price is between $3.74 and $4.57. The revised Qwest offer included increased financing by $500 million to $5.75 billion. Qwest set April 5 as a take-it-or-leave-it deadline, apparently hoping to pressure MCI into taking the offer, although MCI has now apparently elected to leave it.

In evaluating the competing bids, MCI's board said it looked beyond comparisons of the mere total and per-share amounts of the respective bids and considered other factors which seemed to weigh in the more financially solid Verizon's favor, including the strength of the capital structure of the combined company, the combined entity's ongoing ability to sustain network service quality and invest in new capabilities; and ensuring ongoing customer confidence among MCI's existing large enterprise and government customers.

MCI also cited the increasing need in the evolving telecommunications industry for scale and for comprehensive wireless capabilities, since wireless is the burgeoning new frontier of telecom and may eventually eclipse traditional wireline service. Wireless capability is something which Verizon has, in spades, as co-owner with Britain's Vodafone plc of Number-2 U.S. cellular operator Verizon Wireless, while Qwest - which sold its own wireless assets to Verizon last year for $418 million and now merely re-sells the Sprint PCS service to its customers - does not.

Qwest, reacting to MCI's acceptance of Verizon's improved offer, asserted that it still believes its own offer is superior, and said it would "assess" the situation.

Adelphia higher

Elsewhere, Adelphia's bonds were up points across the board at most desks. A trader saw the company's 10¼% notes due 2011 open at 91 bid, 93 offered, then push as high as 95 bid, 96 offered at around mid-day, before coming off that peak to close at 93 bid, 95 offered.

He saw Adelphia's 10¼% notes due 2006 firm to 88 bid, 90 offered from 86 bid, 88 offered, but did not see those bonds peak anywhere and come back down like the other 10¼% issue.

Another market source saw the 2011 101/4s up two points on the day at 94, and the 2006 101/4s up a point at 88. He also saw Adelphia's other issues "pretty much up three or four points," with its defaulted 8 1/8% notes due 2003 three points better at 86, its 8 3/8% notes due 2008 up 3½ points to 87, its zero-coupon notes due 2008 up four points to 59.5, and its 7 7/8% notes due 2009 3 1/8 points better at 84.

Yet another source saw Adelphia's 9 7/8% notes due 2007 up 1½ points to around the 87 level.

Tuesday's editions of The New York Times were reporting that Cablevision is "in advanced talks" to join a bidding syndicate consisting of Kohlberg Kravis Roberts & Co. and Providence Equity Partners. That group was one of two - the other being a combination of TimeWarner Inc. and Comcast Corp. - to submit bids to buy all of Adelphia at a bankruptcy auction earlier this year.

KKR and Providence submitted an all-cash bid worth about $15 billion for Adelphia - but the Times quoted executives involved in the process as saying that they would submit a "substantially higher" offer if Cablevision decided to join them.

If that higher bid is successful - TimeWarner and Comcast are reported to have bid more than $17 billion for the company, although their bid was all-stock - Cablevision envisions a merger of the two cable companies to create a national operator with 8.4 million subscribers. The two equity firms would end up with a significant stake in the resulting publicly traded combined entity.

But Cablevision lower

However, Bethpage, N.Y.-based Cablevision's investors seem underwhelmed by the idea. Its corporate 8% notes due 2012 were seen down nearly two points on the day at 102.625, while its CSC Holdings Inc. 8 1/8% notes due 2009 were seen down 1¼ points at 105.5 bid, and 7 5/8% notes due 2018 were quoted off two points at 104.5 bid. Cablevision's Rainbow National Services unit's 8¾% notes due 2017 sank to 107, down more than a point. On the equity side, Cablevision's New York Stock Exchange-traded shares fell $1.65 (5.69%) to close at $27.35, on volume of 6.4 million shares, more than double the usual turnover.

Apart from gains in such story stocks as MCI and Adelphia, a trader said that "the word of the day is 'heavy.' High yield is heavy."

Another trader observed that there was "some volatility in the market."

Toys down again

Toys "R" Us bonds continued to slip for a third consecutive session, negative momentum accruing following the Wayne, N.J.-based toy retailer's statement late last week indicating that a tender offer to take out its outstanding junk bonds probably was not imminent. That statement took the wind out of the sales of some investors who had bid the bonds up on expectations that the company would tender for the notes as part of its pending acquisition by another KKR-led investment syndicate.

In Tuesday's dealings, Toys "were lower," a trader said. "There was some pressure."

He saw the company's 7 5/8% notes due 2011, which had been "hanging in there," were ending the day at 95.5 bid, 96.5 offered.

He saw its 7 3/8% notes due 2018, "which had been holding up pretty well - I guess there was some retail [investor] interest in those '18s, for whatever reason, as everything else was crashing around while that one kind of hung [in]" - as having given up a little bit of ground Tuesday to close at 84 bid, 85 offered.

An observer at another shop saw the 7 3/8s down 1¾ points at 85.25, while Toys' 7 7/8% notes due 2013 lost 1½ points to finish at 91.5, while its 8¾% notes due 2021 finished 2¾ points in the hole at 90.25.

Pathmark drops back further

Pathmark Stores Corp.'s 8¾% notes due 2012 continued to come in, down for a second straight session from the highs they hit last Thursday, when the Carteret, N.J.-based supermarket operator would get a badly needed $150 million equity infusion from a company controlled by billionaire supermarket tycoon Ron Burkle.

That initial news had pushed those bonds up four to five points to almost par, but they had come off the high down to about 98.5 Monday. On Tuesday, the bonds were dropping back further, to 97.25 bid, 98.25 offered.

Primary quiet as risk looms

Once again, the high-yield primary market produced practically no news Tuesday, with investors awaiting the upcoming employment numbers as they assess the inflation outlook, among other risks.

And whereas six weeks ago high-yield syndicate sources were maintaining that the weekly high-yield mutual funds flows numbers generated by AMG Data Services were not conveying an accurate picture of the liquidity of the junk market, lately those numbers seem to be commanding greater attention.

In part, one sell-side source said Tuesday, that is because the most recent weekly flow, for the week to March 23, came in just shy of negative $1.5 billion.

It trailed the previous week's $680 million outflow, and was the sixth consecutive negative number.

"This year got underway with a continuation of the chronically short supply of paper that had been going on for months, and which helped companies to raise capital in high yield at phenomenally low rates," the source said.

"It also caused existing issues to be bid up to sometimes extraordinary levels in the secondary market.

"Now supply is no longer the main concern," the source added.

"The concern now on the buy-side is risk.

"People appear to be backing away from risk."

Navarre talked at 10¼%-10½%

The only solid piece of news that circulated on Tuesday was price talk on Navarre Corp.'s planned sale of $125 million of seven-year non-call-four senior notes (B3), which are talked at 10¼% to 10½%.

One source told Prospect News that pro forma on the deal, at the start of the roadshow on March 17, was 9½% to 9¾%.

Bear Stearns & Co. is the bookrunner for the acquisition financing.

Diane Keefe, portfolio manager of the Pax World High Yield Fund, told Prospect News she has put in for Navarre's bonds.

She commented that the acquisition of Fort Worth, Texas-based FUNimation Productions Ltd., makes good sense for Navarre.

Keefe said that FUNimation's properties include such hot Japanese anime titles as Dragon Ball Z.

FUNimation, a brand management and independent home video entertainment company, licenses popular kid's titles such as Teenage Mutant Ninja Turtles and Arthur.

"Navarre's margins are much better when you combine FUNimation with what Navarre has done historically," said Keefe.

"I don't typically like distribution businesses because they tend to have low margins. But when you combine their distribution with the FUNimation publishing and licensing business the margins get better.

"Navarre is making itself a higher margin business by making this acquisition. That is why they are so motivated that they will even price it in this environment."

As to "this environment," Keefe simply commented that at present the high-yield primary market - in which deals have been delayed, restructured and battling to get done - is "now repricing itself every day."

"The market still feels weak," the portfolio manager said. "The Brazil 10¼% notes due 2013, which I look at as a benchmark of what is going on in emerging markets, closed on Monday around 107.75. Near the top it was trading at 117-plus.

"That's 10 points off. I know that emerging markets is off more than high yield. But the two markets are related."

Passing on Dacom

Keefe also told Prospect News on Monday that she has owned Hanaro Telecom, but sold it, and that she has lately taken a close look at the Dacom Corp. deal, which has been delayed but that remains in the market.

The company is selling $300 million of five-year notes (expected ratings Ba3/BB-) in a debt refinancing deal via Credit Suisse First Boston.

Keefe specified that she will not be playing Dacom.

"Their market position is good," the Pax World High Yield Fund portfolio manager said. "Dacom has a lot of fiber optic network in Korea, which has the highest broadband penetration in the world, I believe, with something like 78%."

Keefe, however, said she is wary of the huge Korean industrial conglomerates known as chaebols.

"Dacom has a complicated capital structure, in that it has less than 100% of a lot of its holdings," Keefe said. "Its largest shareholder has a bunch of related businesses.

"The problem with Korea, on a macro basis, is that there are too many chaebols that, when one of their businesses is lagging, their other businesses give money to that business.

"LG Group is the largest shareholder of Dacom. LG Group has a networking business and a consulting business and a wireless business.

"And Dacom itself has a bunch of businesses that it owns between 50% and 80% of. Whenever you have more than 50% you can consolidate the numbers. But you don't own the whole thing.

"I think that's a little messy for this market environment. It will be interesting to see if and where it gets done."

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