Advanced Medical shoots up on buyout; Nabors, Transocean slip with oil; financials lower with stocks

By Kenneth Lim

Boston, Jan. 12 - Advanced Medical Optics, Inc. was a bright spot as the convertible market softened slightly on Monday amid weakness in equities.

Advanced Medical agreed to be bought by Abbott Laboratories at a hefty premium to its market value, giving its convertibles a sizable boost that pleased outright holders and appeared to be enough for hedge funds.

The market in general saw more sellers than buyers.

"I'm starting to see things come for sale," a sellside convertible trader said. "The stock markets, high yield are in a little bit, I'm feeling a little bit of heaviness."

A New York-based desk analyst agreed that the market saw more selling pressure.

"It was definitely more selling activity today than there has been in the last week or two," the analyst said, but added that some consolidation was healthy for the market.

Advanced Medical lights up

Advanced Medical's convertible shot up on Monday to trade close to par after Abbott made a $1.36 billion all-cash offer for the company.

Advanced Medical's 2.5% convertible due 2024 was at 97 bid, up by about 13 points. The 1.375% convertible due 2025 was offered at 95.75, about 40 points above the pre-offer level of 56. The 3.25% convertible due 2026 more than doubled to trade at 95.375, from 40 at pre-offer levels.

Advanced Medical common stock shot up to $21.50 on Monday, up by $12.65 or 142.94%.

Advanced Medical is a Santa Ana, Calif.-based eye medical device maker.

The company said Monday that its board had agreed to a $22 per share tender offer by Abbott. Including debt, the deal is valued at about $2.8 billion. The deal is expected to close in the first quarter.

Barclays Capital analysts Manoj Shivdasani, Venu Krishna and William Gioielli wrote in a research note that traditional holders of the convertibles should take profit or put the bonds back when the deal closes.

"We expect a rotation in the investor base from convert/HY investors to risk-arb investors," the analysts wrote. "The post-announcement appreciation in the converts has been fairly significant and while some more (risk-arb related) upside potential likely remains we recommend that traditional holders of the converts (i.e. non risk-arb investors) consider taking profits. Convert investors who choose to wait for deal closure should put the bonds back at the appropriate time. We believe risk-arb investors should actively evaluate the converts as a way of expressing an opinion on the transaction."

Barclays' risk arbitrage analysts Evren Ergin and Nathaniel Pollack expect the deal to close in February.

The jump in the convertible and stock prices meant that outright holders were sitting on significant profits, observers said.

"You could sell it today, and if the deal falls apart you're laughing all the way to the bank," a sellsider said. "You give up the 7 points, but you've already made 40 from yesterday."

The convertibles have takeover protection in the form of a change-of-control put as well as a make-whole, but the offer price is below the minimum price on the make-whole table. With the offer of $22 well above Advanced Medical's pre-offer $9 stock level, arbitrageurs who had been short on the stock would have taken a hit on that front, but analysts said hedged funds probably emerged better even without the make-whole because most investors were not hedged and the convertible prices shot up so much.

"They'll be fine," a trader said. "It's up 40 or 50 points from where they were before. It's more than enough to cover it."

Another analyst said: "I would think they did O.K. These things are so far out of the money, I doubt anybody had them hedged much."

The sellsider thought that the deal had a good chance of succeeding, noting that the offer had the support of Advanced Medical's board.

"If you're Advanced Medical, why wouldn't you take it?" the sellsider said. "You were at $9, the offer is almost three times where you were."

The sellsider also noted that Advanced Medical had not been doing well, and the offer is relief for investors who had been expecting a tough year.

"This is a company that was struggling," the sellsider said. "They had taken some major hits in the past year and it looked like they were turning it around, and then this global financial crisis hit...They were going to play the 'Can we survive until the market picks up again?' card."

Energy slips on oil prices

Energy names Nabors Industries Ltd. and Transocean Ltd. were lower, dragged down by the price of oil.

The Nabors 0.94% convertible due 2011 slipped about ½ point outright to trade at 85.75, while its stock closed at $11.58, down by 4.38% or $0.53.

Nabors is a Hamilton, Bermuda-headquartered land drilling contractor.

Transocean's 1.625% convertible due 2037 also retreated by ½ point to change hands at 89.8 with the stock down 7.28% or $3.97 for a $50.53 close.

Transocean is a Houston-based offshore drilling contractor.

"Energy was lower with oil prices, no surprise there," a convertible trader said.

Financials still weak

Financials continued to be soft, with the Wells Fargo & Co. 7.5% perpetual convertible preferreds, formerly of Wachovia Corp., dropping about 2 points as the common stock slipped.

The preferred traded at 73.5 on Monday, while Wells Fargo common stock closed at $23.80, down by 5.33% or $1.34.

Wells Fargo is a San Francisco-based bank holding company. It completed its merger with Wachovia on Dec. 31, 2008.

ProLogis' 2.25% convertible due 2037 held up despite a sharp drop in the common stock, traded flat at 56.5 versus a stock price of $12.25. The ProLogis 1.875% convertible due 2037 was also flat at 53 against the same stock price.

ProLogis is a Denver-based real estate investment trust that focuses on distribution and retail properties.

The company's stock decline on Monday puzzled some observers.

"That's interesting," a convertible trader said. "I haven't heard anything on this. The financials are all down today, maybe there's a bit of that going on."

Mentioned in this article:

Advanced Medical Optics, Inc. NYSE: EYE

Nabors Industries Ltd. NYSE: NBR

ProLogis NYSE: PLD

Transocean Ltd NYSE: RIG

Wells Fargo & Co. NYSE: WFC

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