VeriFone improves on debut; Companhia Vale do Rio Doce gains in gray; Bristol-Myers rises on legal win

By Kenneth Lim

Boston, June 19 - VeriFone Holdings Inc. gained slightly on Tuesday to overcome early concerns that a lack of authorized capital could limit interest in its new convertible.

Companhia Vale do Rio Doce was slightly better in the gray market with onlookers expecting strong outright support despite its deal modeling fair to slightly rich.

Bristol-Myers Squibb Co. gained about half a point after the drug maker won a patent fight to block a generic version of its blood-thinning drug Plavix.

The convertible market was mostly quiet Tuesday on a combination of lackluster equity markets and the usual summer slowdown.

"It's extremely quiet," a buysider said. "The stock markets aren't doing much so there's not much volatility either way for us to act on and the bond markets are kind of soft so nobody's in a mood to buy much...It's that time of year. The summer's here and a lot of guys are out of the office, even on a Tuesday."

VeriFone up slightly

VeriFone's new 1.375% convertible senior note due 2012 gained about a point outright after deal priced at the cheap end of talk.

The convertible traded at 100.75 against a stock price of $36.68 early Tuesday and was seen about 1% high on swaps. The convertible was offered at par. VeriFone stock (NYSE: PAY) closed at $36.64, down by 0.11% or 4 cents after trading even lower for most of the day.

"They did quite well," a buyside convertible trader said. "It came at the cheaps and volatility picked up a little today. It was an OK deal."

VeriFone priced its $275 million offering with an initial conversion premium of 20% on Monday after the market closed. The deal was talked at a coupon of 0.875% to 1.375% and an initial conversion premium of 20% to 25%.

There is an over-allotment option for a further $41.25 million.

Lehman Brothers and JPMorgan were the bookrunners of the Rule 144A offering.

VeriFone, a San Jose, Calif.-based provider of electronic payment systems, said it will use the proceeds to fund the convertible note hedge and warrant transactions, and to partly repay a senior secured bank debt of VeriFone Inc., VeriFone's principal operating subsidiary.

VeriFone currently can issue only up to 3.25 million shares of its common stock for the convertibles, which may cap the convertibles' participation in future increases in the common stock price. If VeriFone cannot get shareholder approval after a year to increase its authorized capital to satisfy the convertibles' requirements, the coupon will increase by 200 basis points. The coupon will increase by a further 25 bps per year thereafter until VeriFone can get the required approval.

"It's definitely a risk, but I don't think it's a big risk," the trader said. "I think the stock price will need to go up to something like double the conversion price before you start having problems with the authorized capital assuming the greenshoe is taken up. That's a long way away for a five-year piece of paper, so even if the shareholders don't grant you the additional shares you might not ever have to deal with this problem."

The trader said it helped that the deal came at the cheap end of talk.

"It was actually looking about fair to a little rich at the mids, and if it didn't come where it did they may not have been able to move it," the trader said. "I think the underwriters did the right thing."

CVRD gains in gray

Companhia Vale do Rio Doce's planned $1.9 billion two-tranche offering of three-year mandatory exchangeable notes drew modestly positive bids on Tuesday with its deal expected to see strong outright interest despite unflattering reviews from analysts' models.

The exchangeables were 100.125 bid in the afternoon. The exchangeables were being offering at par. Companhia Vale do Rio Doce stock (NYSE: RIO) slipped 3.68% or $1.75 to close at $45.80 on Tuesday.

Both tranches of the deal were talked at a coupon of 5.25% to 5.75% and an initial exchange premium of 22% to 28%, market sources said.

The exchangeables will be issued by Companhia Vale do Rio Doce finance subsidiary Vale Capital Ltd. The first series of notes will be exchangeable into American Depository Receipts representing Companhia Vale do Rio Doce common stock while the second series will be exchangeable into ADRs representing Companhia Vale do Rio Doce class A preferred stock. The size of each tranche has not been determined.

There is no over-allotment option.

JPMorgan and Citigroup are the bookrunners of the registered offering.

The exchangeables will have a dividend pass-through feature that will pay additional interest if the company pays dividends to holders of the common and preferred stock.

Companhia Vale do Rio Doce, a Rio de Janeiro, Brazil-based diversified metals and minerals mining company, said the proceeds of the deal will be used for general corporate purposes.

One convertible analyst said the deal looked just under half a point rich at the mids using a volatility assumption in the mid- to low-30% range and a two to three point skew.

"I'm actually getting them a little rich," the analyst said. "The credit doesn't really matter, so it's the volatility...They do have the dividend pass through, so you don't have to worry about adjusting for the volatility of the dividend, so some people may like that."

"So it's a little rich, but I think there might be good outright demand," the analyst said. "It's a nice coupon and exposure to a somewhat underrepresented space. FCX [Freeport-McMoran Copper & Gold Inc.] did well when they came out because of that as well."

Another convertible analyst had the deal modeling less than a point cheap using a slightly lower volatility assumption and a credit spread assumption just tighter than 100 basis points over Treasuries. The analyst agreed that outright interest could be strong in the deal.

"This is the first big internationally diversified investment-grade mining deal we've seen in a long time," the second analyst said.

The second analyst said there is no mining company with a convertible right now on the same scale as Companhia Vale do Rio Doce.

"They're massive," the second analyst said. "It's just a massive market cap and not that heavily leveraged at all, and they may be taking out debt with this, so it looks like a pretty conservatively structured company. Their strategy is not to hedge their metals, but they're very diversified...It's a nice space and there's not a lot of paper in it."

Bristol-Myers rouses with court win

Bristol-Myers' floating-rate convertible due 2023 gained about ½ point on Tuesday after the company won a court fight to stave off generic versions of its Plavix drug and speculation emerged of a possible merger with partner Sanofi Aventis.

The Bristol-Myers three-month Libor minus 50 basis points convertible due 2023 traded at 101.625 against the closing stock price of $31.58 on Tuesday. Bristol-Myers stock (NYSE: BMY) finished 4.19% or $1.27 higher.

"We saw better buy interest in BMY," a sellsider said.

A U.S. judge on Tuesday blocked sales of a generic version of Plavix, a blood thinner, until at least 2011, saying that the Plavix patent was still valid. Plavix is Bristol-Myers' best selling drug.

The ruling also raised speculation that Sanofi Aventis may be interested in a merger with Bristol-Myers, a convertible analyst said.

"I did hear about the rumors, but these rumors have been circulating for some time and I don't know if they're any more likely," the analyst said. "BMY is definitely in a better position because of the ruling, but if you look at it from Sanofi's standpoint it just makes BMY that much more expensive."

"So I'm not so sure that any deal will emerge, and even if it did one of those companies will probably have to convince its shareholders that it's not overpaying or underpaid," the analyst said. "The market's probably thinking the same think as well because the share price hasn't gone up that much."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.