Grey Global climbs 7 points on WPP buyout; Delta issues rise, slide to where both at 35

By Ronda Fears

Nashville, Sept. 13 - Grey Global Group finally snagged a merger deal over the weekend, a $1.52 billion acquisition by WPP Group plc, after being on the auction block for several weeks. The 50% cash/50% stock deal enticed outright convertible investors, who pushed the Grey Global convertible up 7 to 8 points, while WPP's sterling-denominated convertible gained a quarter-point.

As Delta Air Lines Inc. executives met with bankruptcy attorneys, its convertibles were bi-polar with the 8% issue moving north and the 2.875% issue heading south in an effort to equalize the trading levels in the 35 area, market sources said, as that's where "realistic recovery levels" are projected for both issues.

Elsewhere in secondary dealings, traders said convertibles were generally better bid with the market in a buying mood. There were a few exceptions, such as CKE Restaurants Inc., which dropped on weak earnings, and Interstate Bakeries Corp., which made another precipitous drop as the company got a credit extension from its bankers but at another boost to its cost of capital.

Calpine Corp. was a notable mention, with its paper continuing to get snapped up by yield seekers, traders said. The 4.75% convertible rose 1.5 points to 84.75 bid while the stock dropped 4 cents on the day, or 1%, to $3.91. Calpine's straight junk bonds also gained, adding 2.75 points to 67.75.

Several issues in the technology space were also higher. Software names like Novell Inc. and Red Hat Inc. were finding bids from bargain-hunters, one sellside trader said, with the Novell 0.5% convertible up about 1.5 points to around 95 and the Red Hat 0.5% convert up 2 points to 95 as well.

Despite the buying mood, alas, the primary market still has not risen to whet the appetite for fresh paper. The new United Industrial Corp. convertible was said to be sharply higher with the 6.25% gain in the stock, but that $100 million deal has been the only deal of any size, albeit small, for weeks now.

Capital markets sources now say the election is a fearsome obstacle, along with the roiling of the markets on crude oil prices, and, more imminently, the Jewish holidays this week.

"Even though it's past Labor Day, the market is not 100% back to normal," one capital markets source said.

Grey Global issue rises to 117

Hedge funds had already fled the Grey Global situation, buyside market sources said, anticipating a cash takeover or that cash would be a significant portion of any deal, which turned out to be the case in WPP's offer as half of the $1.52 billion is in cash.

WPP said the cash portion of its offer valued Grey shares at $1,005 each and included $172 million in Grey's net cash, plus 82.2 million in new ordinary shares. The London-based advertising agency outbid the French ad agency Havas SA for Grey Global.

Thus, hedge funds were relieved to have exited the situation, said a hedge fund analyst Monday, as the merger sparked massive premium expansion on the Grey Global convertible, which ballooned from 4% as recently as last Thursday to around 15% at Monday' price levels. Besides that, he noted that the float in Grey Global stock is so slim it makes setting a hedge up nearly impossible.

Grey Global converts were bid up 7 to 8 points to 117 bid, 118 offered as outright funds elbowed for a position. Grey Global shares soared, gaining $37.90 on the day, or 4%, to $977.90.

WPP's 2% sterling convertible due 2007 also edged higher, by about a quarter-point to 96.75 bid, 97.5 offered, according to a sellside market source in London. WPP shares, however, closed down 6p on the day, or 1.17%, to 508p in London.

Ad paper mixed on Grey deal

Convertibles in the advertising space were mixed in the wake of the Grey Global merger news but generally lower among U.S. ad agencies while those in Europe were higher.

New York-based Interpublic Group of Cos. Inc. convertibles were down by about 0.75 point with the 4.5% issue at 121.5 bid and the 5.375% issue at 42.25 bid. Interpublic shares were off 8 cents, or 0.72%, to $11.09.

Similarly lower were the converts of Omnicom Group Inc., another New York ad agency, with the three zero-coupon issues in the 97 area, a trader said. Omnicom shares were up 29 cents, or 0.42%, to $69.19.

In Europe, the trader said, ad paper was higher as "they seem to have more muscle," which is considered important as further contraction is anticipated in the advertising sector.

Havas, which bowed out of the bidding for Grey Global, saw its 1% euro convertible due 2006 gain about 0.125 point to 24.625 bid and its 4% euro convert rise about the same to 10.375 bid. Havas shares added €0.38, or 9.77%, to €4.27.

The Publicis Groupe SA's, another French ad firm, 1% euro convertible due 2018 rose 0.25 point to 41.5 bid and the 0.75% euro convert due 2008 was up 0.375 point to 29.25 bid, while Publicis shares gained €0.31, or 1.31%, to €23.95.

Delta convertibles equalized

With US Airways Group Inc. filing bankruptcy over the weekend as expected - for the second time in as many years - the markets began adjusting for a bankruptcy situation at Delta as the Atlanta-based airline acknowledged that it was meeting with bankruptcy lawyers to prepare in case the carrier needs to file for bankruptcy protection. But, Delta executives also said recent talks with pilots have lent hope that a pilot agreement can be reached later this week.

Delta has been in the throes of a thus-unsuccessful debt restructuring effort for many months now, but other than the company comments about seeking bankruptcy counsel advice, there was no news on the company Monday.

"They say out of one side of their mouth that they are still talking with the pilots and think a deal can be struck later this week," said a buyside convertible trader selling his Delta position Monday. "Then, out of the other side of their mouth they just happen to mention that they are talking with attorneys about filing bankruptcy.

"We just decided to cut our losses now with this [Delta] situation. Probably by the end of the week the only people involved with Delta will be the special situation guys," the trader said, referring to funds that focus on companies in bankruptcy or extremely distressed debt.

Delta's 8% convertible gained about 1.25 points and the 2.875% issue lost about 1.25 points with both settling Monday in the 35 area. Delta shares closed up 31 cents, or 8.12%, to $4.13.

"Because in a bankruptcy they will be worth the same, the 8s were too cheap and the 2-7/8s too dear," explained a sellside convertible trader.

Last week, Delta announced layoffs - about 6,000 to 7,000 - and other restructuring details but has yet to hammer out a wage concession agreement with its union pilots - a linchpin in the company's goals to slash costs.

Fuel costs also continue to overshadow Delta's cost-savings targets, as crude oil prices shot up by more than $1 a barrel Monday to settle at $43.87.

AirTran, JetBlue up but scarce

Smaller regional airlines were getting media splashes about their profitability all the while the major airline carriers were making headlines about teetering on the brink of bankruptcy or succumbing to bankruptcy.

JetBlue Airways Corp. and AirTran Holdings Inc. are probably the two most coveted names in the airline space outside of the major carriers, a sellside trader said. Weakness in the stocks on Monday - due to the spike in oil prices and Hurricane Ivan's invasion of Florida - sparked a horde of inquiries about the convertibles, but he noted that both issues are scarce.

JetBlue's 3.5% issue was steady at 97.5 bid, 98.5 offered, the trader said, and the AirTran 7% issue was off about 0.125 point while both stocks were lower. JetBlue shares ended off by 7 cents to $24.30 and AirTran lost a penny the close at $11.60.

Hurricane Ivan was as big a factor in the decline in JetBlue and AirTran stock Monday as both heavily fly the airways on the East Coast. AirTran is based in Orlando, Fla., in fact.

"AirTran has dodged the bullet so far," following Hurricane Charley, then Hurricane Frances and now Hurricane Ivan because more than 60% of its flights originate in Florida, said a buyside market source. "They have pre-announced a weak quarter because of fuel prices and the hurricanes, but it's the first time they will not be showing profitability in six quarters. But they have fuel costs hedged through 2005 so that should not be a problem so long as crude oil doesn't get over $50 a barrel."

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