Cubist flat to lower amid takeover chatter; Medtronic 'for sale' after disappointing earnings

By Rebecca Melvin

New York, May 24 - Cubist Pharmaceuticals Inc.'s 2.25% convertible bonds were flat, while a sister Cubist 2.5% convertible was slightly lower on a hedged basis Tuesday amid takeover speculation fueled by a report that Shire plc has been in talks with the Lexington, Mass.-based drug developer.

Medtronic Inc.'s convertibles came in about 0.25 point on a hedged basis - but remain slightly overvalued, according to a New York-based sellsider - after the Minneapolis-based medical device maker reported disappointing earnings for the most recent quarter and forecast lower-than-expected full-year earnings.

Elsewhere, Micron Technology Inc. traded pretty actively, with the older bonds continuing to get richer, amid no particular news, according to a sellside trader.

Meanwhile, Cheniere Energy Inc.'s convertibles extended gains, adding about another 0.25 point on Tuesday, after the 2.25% convertibles settled higher by 1 or 2 points on Monday on government moves supporting potential for LNG exports. Cheniere shares dropped back after two straight days of strong gains.

Transocean Inc. 1.5% convertibles due 2037 were bid at levels steady on previous trades after word that the offshore oil drilling-services company confirmed plans to pay off those series B convertibles by the end of 2011. The $2 billion of paper is callable on Dec. 20, 2011 and putable on Dec. 15, 2011.

Cubist in focus on M&A talk

Cubist's older 2.25% convertibles due 2013 traded at 130 versus a share price of $36.65 during the session, and were seen around 129 to 129.625 versus a stock price of $36.21 at the close.

That was roughly unchanged on a hedged basis from previous levels.

Compared to a 127 trade last week versus a $35.20 share price, the bonds were about 2 points lower on a premium to parity basis.

Last week, the Cubist 2.25% convertibles were at 12.6 points on this basis and now they are 10.6 points, a New York-based sellside desk analyst said.

Cubist's newer 2.5% convertibles due 2017 were marked at 140 to 141 versus the $36.21 close on Tuesday, which represented a 0.5 point drop on a hedged basis, a New York-based sellside trader said.

Shares of the Lexington, Mass.-based drug developer slipped slightly from the 52-week high notched Monday to settle down 43 cents, or 1.2%, to $36.21.

The reason that the newer Cubist 2.5% convertibles suffered more on a hedged basis on the takeover rumors is that their takeover protection isn't as beneficial to holders as that of the older paper, the trader said.

Cubist is a drug company that discovers, develops, and commercializes drugs to treat infections. The company's lead product is an agent with bactericidal activity that addresses the need for new antibiotics with potent activity against life threatening infections.

Medtronic slips 0.25 on hedge

Medtronic's 1.625% convertibles due 2013 traded between 103 and 104 and were lower by about 0.3 point outright, but down by 0.25 point on a hedged basis, according to a New York-based sellside trader.

"Those bonds were for sale today after earnings," the trader said.

Shares of the Minneapolis-based medical device maker ended down 38 cents, or 0.9%, at $40.88, after being down more than 2% earlier.

Medtronic forecast full-year earnings of $3.43 to $3.50 a share, which was below analysts' expectations, on overall revenue growth of 1% to 3%, and its outlook was cautious with expectations of continued weakness in key device markets.

The 19% drop in the most recent quarter's profit was linked to continuing weak implant sales and restructuring costs stemming from 2,000 layoffs to bolster its financial position in February.

For the quarter ending April 29, net income fell to $776 million or 72 cents a share. Excluding special items, Medtronic's earnings were 90 cents a share, which missed consensus estimates of 92 cents a share.

Sales were actually slightly better than expected in the most recent quarter at $4.3 billion, which was up 2%.

Micron 'opens up'

Micron's older 1.875% convertibles due 2014 traded at 104.5 versus a share price of $9.70, and they were called 104.75 versus a share price of $9.62 at the close.

They expanded on a hedged basis.

"I have no clue; we keep looking at it and wondering why," a sellside trader said of the bond's improvement.

"They were better, staying well north of par. With the stock dropping, the bond opened up," he said.

A second Micron issue, a 1.875% convertible due 2027, which is the newer bonds that were exchanged, was trading around 112 to 113 and it is holding on the way down.

Shares of the Boise, Idaho-based semiconductor device maker ended down 9 cents, or about 1%, at $9.62. The shares are down 3.8% from their Friday close at $10.00.

"I don't know why they have held," a sellside trader said. "The stock is going down. If you're looking for upside you might as well own the stock. The yield is so low and the premium is so high, so you don't participate a lot."

The exchanged bonds have a lower strike and are more equity sensitive.

There didn't appear to be any news spurring trading action in these bonds, the trader said.

Mentioned in this article:

Cheniere Energy Inc. NYSE: LNG

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Medtronic Inc. NYSE: MDT

Micron Technology Inc. NYSE: MU

Transocean Inc. NYSE: RIG

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