Harrah's offer cuts into hedges; Gilead slips outright on Myogen acquisition; World Acceptance plans deal

By Kenneth Lim

Boston, Oct. 2 - The convertible bond market crawled along on a slow Monday, with a surprise leveraged buyout offer for Harrah's Entertainment Inc. leading some to grumble that the last quarter of the year was starting on the wrong foot.

The offer saw Harrah's convertibles fall several points on a hedged basis and stay roughly unchanged on an outright basis as the prospect of the deal erased most of the previous premium in the convertible.

"It's going to leave a mark," a sellside convertible bond trader said.

Meanwhile, Gilead Sciences Inc. was slightly lower on an outright basis after the company said it was buying another biotech, Myogen Inc., for $2.5 billion in cash.

From the primary market, World Acceptance Corp. announced plans for a $100 million offering of five-year convertibles expected to price Tuesday after the market closes.

The market overall had a quiet session on Monday.

"It's very slow," the sellsider said. "You have a Jewish holiday, so a number of people are out of the office."

Harrah's offer hurts hedges

Harrah's floating-rate convertible due 2024 had a modest improvement on an outright basis but took a sharp tumble on a hedged basis after two private-equity firms offered $15.05 billion in cash for the company.

The convertible, which currently pays a coupon of about 5.507%, traded at about 120 against a stock price of $76 at Monday's close. That was about 5/8 point higher on an outright basis from Friday's levels, and about 6 points weaker on a hedged basis. Harrah's stock (NYSE: HET), meanwhile, jumped 13.92% or $9.25 to finish the day at $75.68.

"Outright people didn't lose anything," a buyside convertible bond trader said. "That being said, it's much worse for the guy who had this on a hedge. You're talking about a loss of several points."

Apollo Management and Texas Pacific Group are offering $81 per share in cash for Harrah's, the Las Vegas-based casino operator said Monday. That price represented a 22% premium to Harrah's closing stock price on Friday, and will create the fifth-largest leveraged buyout in history if completed. Harrah's had tasked a committee of independent advisers and UBS Securities to review the offer.

The offer took away most of the premium that the convertible had been trading with, investors said.

A sellside convertible bond analyst explained that the convertible now bore the risk of being put at par.

"If it goes private, it would be taken out," the analyst said. "You'd get a par put."

The buysider said the loss was especially painful for hedge investors.

"They were trading with a lot of premium," the buysider said. "The LBO news came out, the bonds came in dramatically. If you owned them on a swap basis, that is, if you were short on the stock and long on the convertibles, it was pretty bad for you."

The buysider said there may have been faint whispers of a deal in the works a week earlier that pulled the convertible lower slightly, but there was nothing for investors to grasp onto until Monday. A cash buyout of a company as big as Harrah's was a surprise, the buysider said.

"I guess no company's too big to get taken over," the buysider said.

But the buysider noted that the deal still needs to be approved, and whether that will happen remains to be seen.

"The stock's now trading at about $76, and the offer price is $81, so obviously there's a fair amount of uncertainty too," the buysider said.

Standard and Poor's on Monday cut Harrah's credit rating to junk and placed it on CreditWatch with negative implications. The move took Harrah's rating to BB+ from BBB- as the rating agency cited the likelihood of higher leverage.

"If a transaction were ultimately agreed upon, we would expect a marked increase in leverage, which is likely to result in even further ratings downside potential," the rating agency said.

S&P also said that Harrah's could continue to face shareholder pressure to find a buyer even if it rejects the current offer.

Moody's Investors Service also placed Harrah's on a negative outlook after the deal was announced, saying that it could downgrade Harrah's credit rating to B if the offer is accepted at the current price.

Gilead lower on acquisition

Gilead Sciences' two convertibles were lower by about a point outright on Tuesday in line with the stock after the company announced a $2.5 billion cash bid for Myogen.

Gilead's 0.5% convertible due 2011 was marked at 102.375 bid, 102.625 offered against a stock price of $64.25, while its 0.625% convertible due 2013 was marked at 102.25 bid, 102.5 offered at the same stock price. Gilead stock (Nasadq: GILD) slid 6.53% or $4.49 to close at $64.28.

Foster City, Calif.-based Gilead on Monday offered to pay $52.50 per Myogen common share, a 50% premium over Myogen's Friday closing stock price. Gilead, whose main drug products are used to treat HIV, highlighted that the deal will give it access to Myogen's late-stage drug currently under development, ambrisentan. Ambrisentan is being developed for pulmonary arterial hypertension.

A sellside convertible bond trader said that although Gilead was widely known to be looking for acquisition targets, the offer came as a surprise.

"I don't think many people were expecting such a big deal," the trader said. "I think there's also some concern about whether a 50% premium is too much for Myogen."

A convertible bond analyst said the acquisition seemed like a good move for Gilead, and added that its valuation for Myogen may turn out to be reasonable if Myogen's drugs receive approval on time. The analyst noted that Gilead had been seeking takeover targets because it had to fill up its drug pipeline, and an acquisition was largely expected, although not one necessarily of this size. Expectations and the company's strong credit meant that the offer did not have a significant impact on the convertibles, the analyst said.

World Acceptance launches deal

World Acceptance plans to price Tuesday after the market closes $100 million of five-year convertible senior subordinated notes, talked at a coupon of 3% to 3.5% and an initial conversion premium of 30% to 35%.

The notes will be offered at par.

There is a greenshoe option for a further $10 million.

Jefferies & Co. and BMO are the bookrunners of the Rule 144A offering.

World Acceptance, a Greenville, S.C.-based consumer finance company, plans to use $8.7 million of the proceeds to enter into convertible note hedge and warrant transactions, and to buy back up to $50 million of its common stock. It will also repay part of its existing senior secured revolving loan.

World Acceptance stock (NYSE: WRLD) slipped 0.52% or 23 cents in after-hours trading to $44.20 after the deal was announced.

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