Xerox increased to $800 million as oversubscription is achieved ahead of final pricing

By Sara Rosenberg

New York, June 19 - Xerox Corp. upsized its mandatory deal twice on Thursday, first to $750 million and then to $800 million due to overwhelming demand, according to a buy side source, as investors have already shown a willingness to take a chance on the company and its refinancing plan.

"It's definitely oversubscribed already," the buy side source told Prospect News ahead of the pricing, adding that the mandatory was doing very well in the gray market with a 101¾ bid at market close. "It's a well priced deal. Improving credit. [And] there's a lot of money in the convertible market overall."

"From what I understand that's a blow out deal," an analyst said in regards to Xerox. "It's a high profile company, relatively large deal. The premium isn't all that steep. People just feel like it's worth taking a chance on."

The deal, which was originally sized at $650 million, priced Thursday after market hours. The mandatory convertible preferred stock has a dividend yield of $6.25 per share and a conversion premium of 20% over the common stock offering price of $10.25 per share.

Price talk on the convert put the yield in the typical range for a mandatory, at 6.25% to 6.75% with an 18% to 22% initial conversion premium.

Joint bookrunners on the deal are Citigroup, Goldman Sachs & Co., Merrill Lynch & Co. and JPMorgan. Citigroup and Goldman will be taking orders and making allocations.

Xerox will be able to force conversion if its stock is 150% of the threshold conversion price, paying a dividend make-whole discounted to the comparable Treasury yield.

Many buyside sources, however, were somewhat disappointed that the convert materialized in the form of a mandatory - although not surprised since a mandatory looks better on the company's balance sheet.

Proceeds from the offerings will be used by the Stamford, Conn. document company to take out the existing $3.1 billion bank facility. The refinancing package also includes a new $1 billion bank facility, $1 billion in junk bonds and an estimated $434 million of stock.

Xerox said the refinancing package will extend its debt maturities and deleverage its balance sheet.

Xerox's stock closed at $10.40, down 69 cents or 6.22% on the day.

As for other new deals, "I think last night [Wednesday] was the first non-Friday that we didn't have any new deals announced in around six weeks," the analyst remarked. "There were a couple of new deals that came but they were already announced."

But the pace picked up again Thursday. Aside from Xerox, a few new deals were announced and priced after market close Thursday including WebMD Corp., The Cooper Cos. Inc. and WMS Industries Inc.

WebMD priced $300 million of convertible subordinated notes due 2023 at par to yield 1.75% with an initial conversion premium of 35%.

The convertible was offered at 98, according to market sources.

Bank of America is leading the Rule 144A deal.

Proceeds will be used by the Elmwood Park, N.J. provider of connectivity and services to the healthcare industry for general corporate purposes, which may include acquisitions, repurchases of its common stock and for working capital.

Cooper priced $100 million of 20-year unsecured convertible debentures at par to yield 2.625% with an initial conversion premium of 32%.

UBS Investment Bank is leading the Rule 144A deal.

Proceeds will be used by the Pleasanton, Calif. healthcare products company to reduce amounts drawn down under its revolver and for general corporate purposes, including possible future acquisitions.

WMS' $75 million convertible subordinated notes due 2010 are talked at 2.25% to 2.75% yield to maturity, with an initial conversion premium of 15% to 20%.

CIBC is leading the Rule 144A deal.

Proceeds will be used for working capital, capital expenditures and other general corporate purposes, which may include acquisitions and repurchases of shares of common stock.

WMS is a Waukegan, Ill. designer, manufacturer and marketer of video and mechanical reel-spinning gaming machines and video lottery terminal.

The new deals that did price before market open Thursday were said to be doing well as they traded over issue during market hours, according to a market professional. However, not as many quotes were seen on the smaller deals throughout the day, the professional added.

"Seems that many of these new deals are very small and just don't trade at all. If they're trading, they're probably trading on the books of whoever brought them. We're just not hearing them. They're small deals. People on the buy side are saying everything is too expensive. People are just tired and a lot of this stuff just doesn't make it onto people's radar," the analyst said.

The Chubb Corp. priced a $400 million mandatory convertible at par of $25 to yield 7% with an initial conversion premium of 20%, in an overnight deal.

The deal came at the cheap end of yield talk and the middle of premium talk. Guidance was for a yield of 6.5% to 7.0% with an 18% to 22% initial conversion premium.

"There was a lot of demand for that deal," the analyst said in regards to Chubb. "It's a well known company. Terms are fairly attractive."

The new mandatory closed at 25 5/8 bid, 25¾ offered, according to a trader. The stock closed at $59.75, down 46c or 0.76%.

Citigroup, Goldman Sachs & Co. and Merrill Lynch & Co. were joint bookrunners of the deal.

The Warren, N.J.-based property and casualty insurance holding company will use proceeds for general corporate purposes.

Citigroup Global Markets Holdings Inc. sold $234 million, down from a previously estimated $300 million, in a synthetic mandatory as part of General Electric Capital Corp.'s monetization of its $1.2 billion stake in Regency Centers Corp., which it inherited in the acquisition of Security Capital Group Inc. last year.

The issue priced at 32.56 to yield 2% plus the common stock dividend for a total of 8.388%, with an initial conversion premium of 20%. All current dividends on the stock will be passed through to holders, plus 83.333% of any increase in the common dividend.

The issue was talked to yield 1.5% to 2.0% with the initial conversion premium set at 20%.

The three-year issue, in the SynDECS structure, will be convertible into Regency shares pledged by GE.

"It was a little bit of an unusual structure," the analyst said. "There was a quite a bit of demand. They did it concurrent with a common deal and the common deal was well received. Pretty healthy yield, pretty solid credit."

The new synthetic mandatory closed at 33 1/8 bid, 33 3/8 offered, according to a trader. The stock closed at $34.55, up $1.99 or 6.11%.

Citigroup is sole bookrunner for the offering. Merrill Lynch & Co. is co-lead manager.

Advanced Medical Optics priced $125 million convertible senior subordinated notes due 2023, upsized from $100 million, at par to yield 3.5%, with an initial conversion premium of 32.5%.

Original price talk had the deal talked to yield 3.0% to 3.5% with a 32.5% to 37.5% initial conversion premium.

The new convertible closed at par ½ bid, 101½ offered, according to a trader. The stock closed at $15.34, down 16c or 1.03%.

Morgan Stanley led the Rule 144A deal.

The Santa Ana, Calif. maker of ophthalmic surgical and eye care products, plans to use up to $82.3 million of the proceeds to repurchase up to $75 million of its outstanding 9¼% senior subordinated notes due 2010 in a modified Dutch auction cash tender offer and the remainder for general corporate purposes.

Genesco Corp. priced $75 million of 20-year convertible subordinated debentures at par to yield 4.125% with an initial conversion premium of 40%.

Initial price talk had the convertible talked to yield 3.625% to 4.125% with a 40% to 45% initial conversion premium.

The new convertible closed at 101.44 bid, 102.44 offered on Thursday. The stock closed at $15.80, unchanged on the day.

Banc of America Securities led the Rule 144A deal. Co-managers are JPMorgan, Bank One Capital Markets and Wells Fargo.

Nashville-based Genesco plans to use the net proceeds of the offering plus cash on hand to redeem all of its $103.2 million outstanding 5.5% convertible subordinated notes due 2005.

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