Schering-Plough adds on merger news; energy names firmer; banks better; Johnson Controls to price

By Rebecca Melvin

New York, March 9 - The convertibles of Schering-Plough Corp. traded higher Monday after news that the Kenilworth, N.J.-based drug maker has entered into a definitive agreement with rival Merck & Co. in a reverse merger.

Schering-Plough, which would technically be the surviving corporation, saw its 6% mandatory convertible preferreds trade higher in tandem with its common shares, which jumped 14% in heavy volume.

Elsewhere, some convertible energy names were firmer in trade as oil prices rose 3.4% to a two-month high of $47.97 a barrel in New York.

Nabors Industries Inc.'s 0.94% convertibles due 2011 traded at 86.75 and 87, and Cameron International Corp.'s 1.5% convertibles due 2024 were up at 118.5 versus a stock price of $19.00.

In financials, there was "better tone all around," a New York-based sellside trader said. Wells Fargo & Co. convertible preferreds were called 390 at the end of the session, having traded at 400 and up from 345 or 350 on Friday.

Overall, it was a "relatively quiet day," a West Coast-based sellsider said of Monday's session, citing the end of earnings season and the economic recession as factors behind "people [being] unsure what to do ... so they do nothing."

Another source said he had "nothing of size" to report.

But in the primary arena, the convertible market rejoiced to see a new deal emerge after the close - the first in more than five weeks.

Milwaukee-based Johnson Controls Inc. said it plans to price $500 million of mandatories and convertible senior notes. The offerings were seen pricing after the close on Tuesday.

Schering-Plough adds on merger news

Schering's 6% mandatory convertibles climbed to 190 versus its common stock at $20.25, early in the day, compared to 171 versus a stock price of $17.63 on Friday.

Schering has $2.5 billion face value in the 6% mandatories outstanding, or 10 million shares, at $250 each.

Under the stock-and-cash merger agreement, valued at $41.1 billion, Schering shareholders would receive 0.5767 of a share of Merck and $10.50 in cash for each share of Schering, or 44.5% cash, 55.5% stock based on the March 6 close.

The companies have structured the deal as a reverse merger, in which Schering-Plough would technically be the surviving corporation, although it would take Merck's name.

The move avoids triggering a change-of-control provision in an agreement between Schering and Johnson & Johnson to co-market Remicade and a promising follow-up drug, golimumab. The provision would give J&J certain rights in connection with the drugs.

Mandatory 'more attractive'

Barclays Capital convertible analysts published research early Monday in which they said, "We believe the SGP mandatory looks far more attractive than the stock from a risk-arb perspective. Our recommendation is based on the most recent prices at the time of publishing.

The mandatory's annualized spread is 19.3% versus 12.9% for the stock, and the breakeven is 49.8% for the mandatory versus 71.2% for the stock.

On the mandatories, the low strike is $27.50, with a conversion ratio of 9.0909 and the high strike is $33.69, with a conversion ration of 7.4206. If the make-whole provision were to kick in, preferred holders would convert into common as per a "make-whole acquisition" table and receive the present value of the remaining dividends discounted at a rate of 6.75% in cash.

"It is not fully clear to us whether upon conversion SPG mandatory holders will receive SGP shares and the PV cash dividend or whether they will directly receive Merck shares plus merger cash consideration...," the Barclays research note stated.

Another source said, "We don't know if it's a change of control."

The deal marks continuing consolidation in the pharmaceutical industry, which faces competition from generics and uncertainty about exactly what policy is going to look like under the Obama administration's universal health care plan.

Just six weeks ago, Pfizer Inc.'s $68 billion takeover of Wyeth was announced.

According to Barclays Capital risk arbitrage analyst Evren Ergin, pharma transactions with second requests have taken 214 days to close on average. Large completed pharma ($10 billion) transactions have taken slightly longer at around 250 days.

Under the assumption of a second request in the Schering-Merck deal, the transaction could close in October or November, the Barclays analyst said.

Johnson Controls to price

Johnson Controls said after the close Monday that it plans to price a registered offering of convertible senior notes and mandatories. The deal was expected to price late Tuesday.

The offerings will include $400 million of three-year mandatories to yield 11% to 11.5%, with an initial conversion premium of 15% to 20%, and $100 million of three-year convertible senior notes to yield 6.5% to 7%, with an initial conversion premium of 20% to 25%, according to a syndicate source.

There is a 15% greenshoe on each offering, which Johnson Controls, an automotive supplier, said would take the total offering up to $575 million, if the over-allotment options are exercised in full.

There are no calls or puts.

The mandatories, or $50 equity units, will consist of a forward purchase contract and a 5% undivided beneficial ownership interest in a $1,000 principal amount subordinated note due 2042, according to a release.

Under the purchase contract, holders are required to purchase shares of the company's common stock no later than March 31, 2012.

The convertible senior notes will be convertible at the option of the holder at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

Upon conversion, the company will deliver a number of shares equal to the total principal amount of the notes to be converted divided by $1,000, multiplied by the then-applicable conversion rate.

Proceeds are intended for general corporate purposes, including repayment of short-term debt incurred to finance working capital requirements.

J.P. Morgan Securities Inc., Citigroup Global Markets Inc. and Merrill Lynch & Co. are serving as joint bookrunners for both offerings, with Barclays Capital Inc. acting as a joint bookrunner for the convertible senior notes offering.

Johnson Controls is a Milwaukee-based automotive supplier.

Mentioned in this article:

Citigroup Inc. NYSE: C

Laboratory Corp. of America Holdings NYSE: LH

Qwest Communications International Inc. NYSE: Q

Wells Fargo & Co. NYSE: WFC

© 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.