Amgen prices upsized $5 billion issue; Transocean takes a dive on flat outlook; Akela Capital calls it quits

By Kenneth Lim

Boston, Feb. 14 - Amgen Inc.'s upsized $5 billion convertible bond offer - $1 billion more than planned - kept investors excited on Tuesday. Transocean Inc.'s convertibles fell with the stock after the company warned of a flat first half in 2006, sending its securities into a sharp turnaround from a slight rally a week earlier.

General Motors Corp. announced that it would invest $545 million in five Michigan plants, but the news had little effect on the auto maker's convertible bonds, with analysts saying they saw no reason to review the company's credit.

The circle of convertible arbitrage strategists also got smaller this week with the closing of Akela Capital, a North Carolina hedge fund that specialized in convertible arbitraging. Started in 2001 by former Morgan Stanley trader Anthony Bosco, Akela will return its assets under management to investors.

Amgen prices upsized deal

Keeping convertible investors on their toes Tuesday was biotech heavyweight Amgen, which priced an upsized dual-tranche offering of $5 billion of convertible bonds at the more expensive ends of talk.

The $2.5 billion tranche of five-year convertibles was priced at 0.125%, up 11%, while the equally sized seven-year securities were priced at 0.375%, up 10.5%. The initial conversion premium for both tranches was guided at 10% to 13%, while the coupons were talked between 0.125% and 0.625% for the five-years, and between 0.375% and 0.875% for the seven-year.

The greenshoe option, initially $600 million on a $4 billion deal, was also removed with the enlarged issue.

Morgan Stanley, Merrill Lynch, Citigroup, JP Morgan and Lehman Brothers are the bookrunners.

Buy-side market sources said the gray market for the five-year convertibles was 0.15-0.25 point above par, while the seven-year convertibles were 0.05-0.15 point above par in the gray.

A syndicate source said the issue was oversubscribed, and the positive response to the deal let the bookrunners fix the coupons at the low end of the initial range in the middle of Tuesday's session, before final pricing was set after the market closed.

Thousand Oaks, Calif.-based Amgen, the world's largest biotech company, plans to use $3 billion of the proceeds to repurchase shares. The remaining proceeds will be used for general purposes and for hedging transactions, which could raise the effective premium to 50% from the company's point of view.

One sell-side biotech analyst complained ahead of the pricing that even though the offering was a "Happy Meal of a deal" that gave investors bonds while buying back stock, the coupons were tragically priced on the low end of talk.

"If it [the deal] comes out at that coupon and mid-premium level, it's not that attractive," the analyst said. "There's very little left on the table.

"I would wait around a little first," he added.

Despite misgivings about the pricing, the analyst said the size of the deal and Amgen's strong credit could be a good spark for the market.

It would also be good for Amgen. He noted that the debt-for-share deal would only have a small impact on Amgen's credit, and could mean Amgen will consider some financial engineering to maintain its earnings-per-share level amid the share buyback.

A convertible buy-sider in Florida, who liked the deal, said it would let Amgen borrow "almost like free money" because bond interest is tax-deductible for the company, which also gets to use the entire bond principal right from the start. "This is a very low-cost, tax-advantaged method for Amgen to raise operational funds and reward shareholders at the same time," he said.

He added that using debt to buy back shares - Amgen has earmarked $3 billion of the proceeds to repurchase stock - would lower the company's weighted average cost of capital, make it easier for the stock to rise and help the company pursue future acquisitions.

"Big Biotechs need to buy smaller biotechs at a price that will be accretive to future earnings - otherwise the business model of the entire industry falls apart," he said. "Every dollar in higher share price for Amgen stock directly corresponds to a fewer number of shares that must be used to acquire other companies when the stock is being used as currency. If shareholders feel they are being rewarded for holding the stock, the price per share will rise and Amgen will need fewer shares for its next acquisition target."

Amgen (Nasdaq: AMGN) has an existing zero-coupon convertible due 2032. It was marked at 75.45 bid, 75.57 offered against the $71.93 closing stock on Tuesday, according to a sell-side trading desk. It was 75.73 bid, 75.85 offered on Monday, when the stock closed at $71.45.

Love them or hate them, the Amgen deals kept the market buzzing on Tuesday. One buy-side market source involved only in the underlying shares remarked, "Amgen shows up for Valentine's Day to show us some love."

At its increased $5 billion size, Amgen's deal also matches the biggest ever convertible in the U.S. market, ranking equal with Ford Motor Co.'s $5 billion, priced on Jan. 24, 2002, according to Prospect News' records.

TransOcean caught in turnaround

Houston-based Transocean saw its 1.5% convertibles lose about five points on Tuesday after the company warned of a flat first half of the year.

Transcoean's 1.5% convertibles due 2021, which were up last week, last changed hands at 108 against a $72.25 stock price, said a sell-side source. The convertible traded at 113 against a $78.50 stock on Monday.

The offshore contract drilling services provider said on Tuesday that it returned to profitability in the fourth quarter, earning net profit of $151.6 million from a year-earlier loss of $73.4 million. But it warned that the first half of 2006 would be "generally flat" compared to the fourth quarter of 2005 due to higher operating and maintenance expenses and lost revenue from out-of-service time for rigs.

This was different tone from what investors got the week before, when Transocean announced that it had landed contracts totaling 15 years for five of its jack-up rigs, with revenue from those contracts estimated at $805 million. Transocean stock (NYSE: RIG) was pummeled on Tuesday, ending $6.49, or 8.26%, lower at $72.10.

An oil-and-gas analyst said part of the sell-off on Tuesday was due to people "underestimating the costs" that rig companies face. While Transocean's costs could affect the company's credit, the analyst said he would be more concerned if there were a drop-off in demand. He did not think the recent fall in oil prices would necessarily lead to less drilling and explorations, noting that any slowdown in drilling would be at the margins first. He added that other analysts have mentioned that the drilling activities of large oil companies are less sensitive to prices because they are exposed to more stable rates of return from government exploration agreements.

General Motors unmoved on news

General Motors said on Tuesday that it will invest more than $545 million in five Michigan assembly and component plants that will result in more than 280 new jobs at its Pontiac, Mich., truck assembly plant. The news came on the back of earlier cuts announced by the company - the Detroit auto maker will halve its dividend payout and slash employee wages and benefits - aimed at improving profitability.

But the market hardly batted an eyelid. General Motors' 4.5% convertibles due 2032 (NYSE: GXM) slid 0.05 point or 0.22% to close at 22.45 against a $21.92 stock. The 5.25% notes due 2032 (NYSE: GBM), however, were 0.01 point or 0.07% higher at 15.37, while the 6.25% convertibles due 2033 (NYSE: GPM) were just a hair higher than the 17.01 close from Monday.

General Motors (NYSE: GM) stock closed at $21.92, up 17 cents or 0.78%.

A sell-side analyst said "the converts are effectively trading where people think the credit is going."

He said investors need more clarity about the company's proposed sale of finance arm General Motors Acceptance Corp., or signs of improved operations and cashflow before rethinking the company's poor credit.

"Whether or not they invest $500 million or $1 billion or $2 billion, if they can't sell or make a decent car or lower healthcare costs for retirees or job banks...today's news is negligible," the analyst said.

North Carolina hedge fund shuts down

Cary, N.C.-based Akela Capital has closed its doors in the fallout of 2005's damage on the convertible arbitrage strategy, in which Akela specialized. Started in 2001 by former Morgan Stanley trader Anthony Bosco, Akela once had $600 million under management. It is now returning whatever is left to its investors.

A market source said Bosco may be retiring. Attempts to reach him at Akela, which still maintains its phone line, were not successful.

Michael Hennessy, the managing director of Chapel Hill, N.C.-based fund-of-funds Morgan Creek Capital Management, said nobody doing convertible arbitrage was spared in 2005, noting that the strategy had negative returns when even traditional markets stayed in the black. He reckons that more than 30% to 70% of the money in the convert arbitrage space has disappeared or been taken away. The trend now is toward multi-strategy funds, he said.

"There are some very smart managers, very outstanding managers, who have decided to shut down," he said.

He said the poor performance of the strategy in 2005 was because the capital market "was working the way it was supposed to work" with low volatility, tight credit spreads and not a lot of new issues. But the first month of 2006 has been better for convertible arbitrageurs, and some of the redemptions could have been premature, he noted.

"The strategy can be played in so many ways - there's the volatility angle, the credit angle - you just have to be smart about where the opportunities are," he said.

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