Biovail gains on merger with Valeant; Amgen up on competitor's drug safety; PPL on tap

By Rebecca Melvin

New York, June 21 - The convertible bond market was somewhat energized Monday by merger news and word of a new deal, but the stock markets' intraday turnaround, which left the major indices in negative territory, dampened action among credit investors, sources said.

"There was a lot of stock trading and watching. I got the sense it was a lot of dealers moving inventory around," a New York-based trader said.

Biovail Corp.'s convertibles gained about 2.5 points on a dollar-neutral basis after news that the Mississauga, Ont.-based specialty pharmaceutical maker is merging with Valeant Pharmaceuticals International, also a convertible issuer - but the Valeant issues weren't seen rising, especially one issue because it matures in August.

The merger news was, and is, good for business, however, sources said.

"We continue to see consolidation in the pharmaceutical space, and that encourages players to look at it, and see whether the right premium is 15%, or 50%, or something in between," a trader said.

Amgen Inc. strengthened after news that competitor Affymax faces some safety concerns related to late-stage studies of its Hematide anemia drug candidate.

"That is going to directly affect Amgen, and the Bs [Amgen's 0.375% convertibles due 2013] were up a little, but the As [Amgen's 0.125% convertibles due 2011] were up about an eighth to three teenies, which is a big move for that paper," a New York-based trader said.

The same type of news boosted Amylin Pharmaceuticals Inc. last week. Amylin saw its 2.5% convertibles jump about 3 points on word that a competitor's diabetes drug is going to be pushed back 12 months to 18 months on drug trial problems. The Amylin 2.5% paper was in trade and a little higher again on Monday.

PPL deal emerges

On the new issue front, PPL Corp. said it plans to price $1 billion of mandatory convertible equity units, at a par of $50 per unit, after the close of markets on Wednesday.

The registered, off-the-shelf PPL mandatory securities were talked to yield 9.25% to 9.75% with an initial conversion premium of 17.5% to 22.5%, according to market sources.

There was no gray market reported in the new deal, but they were seen cheap by market observers.

"It has a nice yield with good equity; that's what we like to see," a trader said of the planned mandatory.

Transocean Ltd. was still among the most actively traded names, but Amgen was a close second and ahead of one sister Transocean issue.

Biovail gains on merger news

Biovail's 5.375% convertibles due 2015 traded at 127 versus a share price of $16.25 on Monday, according to a sellside source. The $300 million deal priced in June 2009.

The market later in the Biovail 5.375% paper was about 127.5 bid, 128.125 offered versus a share price of $16.50. A source said they were up about 2.5 points dollar neutral.

Shares of Toronto-based Biovail traded up $2.07, or 14%, to $16.67 on Monday.

Valeant's 3% subordinated notes, tranche A, which is due Aug. 16, 2010, wasn't heard in trade. The Valeant 4% convertibles, tranche B, which are due November 2013, also were not heard.

Shares of Aliso Viejo, Calif.-based Valeant rose $1.03, or 2.3%, to $46.90.

"The Biovails are long enough that anyone in the VRX's can swap out into these. It's a decent set up," a New York-based trader said. "And the overall question is are they [the new company] going to get a rating after the merger. A lot of companies in the space are investment grade."

The trader thought the company might not be in the running for investment grade but certainly for a rating.

The combined company will be called Valeant Pharmaceuticals International Inc. Under terms of the agreement, Valeant stockholders will receive a one-time special cash dividend of $16.77 per share immediately prior to closing of the merger and 1.7809 shares of Biovail common stock upon closing of the merger in exchange for each share of Valeant common stock they own, according to the companies' release.

The transaction is intended to qualify as a tax-free reorganization for Valeant stockholders. Upon completion of the merger, which is expected to occur before the end of the year, Biovail stockholders will own about 50.5% of the company and Valeant stockholders will own approximately 49.5% of the shares of the combined company on a fully diluted basis.

For Biovail stockholders, this transaction represents a 15% premium based on a calculation of the stock prices over the last 10 trading days. It is anticipated that by Dec. 31, contingent upon the closing of the merger and subject to approval by the new Valeant's board of directors and to applicable law, the combined company will pay an additional one-time $1 per share dividend to all stockholders of the new combined entity, after which the new Valeant does not intend to pay dividends.

To finance the transaction, the companies have secured a commitment of $2.8 billion through a term loan facility provided by Goldman Sachs Bank USA, Morgan Stanley & Co. Inc. and Jefferies & Co. Inc. Existing Valeant 7.625% and 8.375% senior unsecured notes will be refinanced as part of the transaction.

Biovail spread wider

While the Valeant convertibles have little or no premium, the spread on the Biovail convertibles could actually be widened because of all the debt the companies are taking on to do the transaction. The huge dividend is going to be funded by debt, one convertibles analyst said.

The $2.8 billion loan facility may not be fully taken, however, since refinancing the two existing straight bonds and paying the dividend come to only just over $2 billion, according to a source.

"It's still not a risky company; the market cap on the combined company is over $6 billion," the source said.

Valeant and Biovail believe the new Valeant's scale, financial strength and complementary product lines will enable it to pursue substantial growth opportunities. The combined company will have a significantly expanded presence in North America and operations in eight other countries, working across four growth platforms, according to the companies' news release.

Following completion of the merger, the new Valeant will be based in Mississauga, Ont., and will remain a Canadian domiciled corporation, listed on both the Toronto and New York Stock Exchanges.

PPL mandatory

PPL plans to price a $1 billion convertible mandatory issue and also sell 90 million shares of its common stock.

The deal, which is expected to price after the close of markets Wednesday, is seen appealing to growth and income cross over hedge players. And although mandatories don't typically appeal to hedge players, the deal - a large one - was seen having some buy in from everybody, fundamental and hedge players alike.

Proceeds will fund a portion of the purchase price of the company's $7.6 billion acquisition of E.ON U.S., LLC, the parent company of Louisville Gas and Electric Co. and Kentucky Utilities Co.

The acquisition is subject to certain regulatory approvals and is expected to close later this year.

Credit Suisse, Barclays Capital, JPMorgan, Bank of America Merrill Lynch and UBS are the joint bookrunners of the equity unit offering, with Citigroup Global Markets Inc., Morgan Stanley & Co. Inc. and Wells Fargo Securities acting as the senior co-managers.

Allentown, Pa.-based PPL produces and distributes electricity to about 6 million customers in Pennsylvania and the United Kingdom.

Mentioned in this article:

Amgen Inc. Nasdaq: AMLN

Amylin Pharmaceuticals Inc. Nasdaq: AMLN

Biovail Corp. NYSE: BVF

PPL Corp. NYSE: PPL

Transocean Ltd. NYSE: RIG

Valeant Pharmaceuticals International NYSE: VRX

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