Andrew, ImClone fall on failed buyouts; BRE, Digital Realty climb on debuts; Cephalon firm as drug flops

By Kenneth Lim

Boston, Aug. 10 - New deals and scrapped deals kept the convertible bond market busy on Thursday, with Andrew Corp. falling a couple of points outright after it called off a merger with ADC Telecommunications Inc. and rejected CommScope Inc.'s higher bid.

ImClone Systems Inc. also fell outright when the company revealed that it failed to find a buyer after putting itself on the block in January.

The newly priced convertible bonds from BRE Properties Inc. and Digital Realty Trust Inc. did better, with both pieces of paper improving on their debuts.

Meanwhile, Cephalon Inc. picked up on a dollar-neutral basis amid a sharp drop in the stock after the company said an attention deficit hyperactivity drug for children was rejected by the U.S. Food and Drug Administration.

Airlines take early dive

The morning also saw airline convertibles active as jittery investors reacted to a security clampdown aimed at foiling an alleged terror plot targeting trans-Atlantic flights.

"There were a lot of airlines trading this morning," a sellsider said. "But they were mostly in line. Stocks were down quite a bit early on, but they've pretty much climbed back."

British and U.S. authorities early Thursday launched new security measures at airports to try and thwart an alleged terror plot that targeted trans-Atlantic flights. Airlines and passengers were faced with delays and long lines at security checkpoints after both countries raised their security alert levels and the United States banned nearly all liquids from carry-on baggage.

American Airlines parent AMR Corp. 4.25% convertible due 2008 slid about 16 points outright in early trading, changing hands at 131.25 against a stock price of $19.50. Shares of Fort Worth, Texas-based AMR (NYSE: AMR) closed unchanged at $20.29.

Houston-based Continental Airlines Inc.'s 6% convertible preferreds traded at 31.25 against a stock price of $23.875, about 0.7 point below the previous close. Continental stock (NYSE: CAL) finished the day at $23.86, down by 1.45% or 35 cents.

UAL Corp., parent of Elk Grove, Ill.-based United Airlines, also saw its convertibles decline early Thursday. Its newest 4.5% convertible due 2021 traded at 92.5 against a stock price of $23, while its 5% convertible due 2021 changed hands at 88 versus the same stock price. UAL stock (Nasdaq: UAUA) retreated 1.3% or 31 cents to close at $23.52.

Budget carrier JetBlue Airways Corp. was unchanged. Its 3.5% convertible due 2033 traded at 90.25 against a stock price of $10.125. Shares of Forest Hills, N.Y.-based JetBlue ended flat at $10.15.

Standard and Poor's on Thursday maintained its credit ratings for American Airlines, United, Continental and Delta Air Lines Inc., all of which serve London airports. The agency said the security concerns could lead to lower revenue and higher costs for airlines, but the impact this year will not be as significant with the peak summer travel season almost over. But further threats and any successful terror attack could have credit implications for the airlines, the agency said.

Andrew slips on dashed merger

Andrew Corp.'s 3.25% convertible due 2013 eased about 2 points outright on Thursday after the company's rejection of two takeover bids dashed hopes of an early take-out.

The convertible traded at 97.375 versus a stock price of $8.75. Andrew stock closed at $8.94, down by 6.39% or 61 cents.

"They traded down a couple of points on the news this morning, but then they firmed up as the day went on," a sellside convertible bond analyst said. "They kind of opened out, there was good two-way flow."

Westchester, Ill.-based Andrew said late Wednesday that it had agreed to end a planned merger with Eden Prairie, Minn.-based ADC after Hickory, N.C.-based CommScope earlier this week offered a higher $1.5 billion all-cash bid to buy Andrew. The deal with ADC would have swapped 0.57 ADC share for each Andrew share. But Andrew also rejected CommScope's bid - valued at $9.50 per Andrew share - saying the offer did not "adequately reflect the value of Andrew."

Andrew, ADC and CommScope all provide cable and networking products for the telecommunications industry.

"I don't think it was a surprise that they walked away from the ADCT offer in light of all the problems with ADCT," the analyst said. "It was more of a surprise that they had no interest in the CommScope offer as well...It looks like they're really not interested in selling."

The analyst said Andrew could possibly be hoping for CommScope to come up with a better offer, but noted that the company's rejection was quite strong. Andrew said in a statement that CommScope's offer was "wholly inadequate" and that it is "confident" about its own outlook.

"From the way that it was worded it would seem that it [a new offer] would have to be significantly higher for them to want to consider it," the analyst said.

Standard and Poor's on Thursday revised downwards its CreditWatch implications on Andrew, to negative from developing, citing the company's rejection of the bids.

A Connecticut-based convertible bond analyst said Andrew remains a name to watch, partly because "clearly there are companies that would like them."

"It's going to be interesting," the analyst said. "I think it has yet to play out."

ImClone loses take-out shine

ImClone's 1.375% convertible due 2024 slid about 2 points outright after the company said it failed to find a buyer for itself.

The convertible traded at 87 versus a stock price of $32.375. ImClone stock (Nasdaq: IMCL) closed at $28.05, down by 13.35% or $4.32.

"I think they're in about a buck," a sellside convertible bond trader said.

ImClone said Thursday that it will remain independent after a six-month search for a buyer turned up empty. The New York-based biotech company said it is now looking for a new chief executive to replace Joseph Fischer, who was named interim CEO in January.

The convertible had been trading at a premium since January, when the company announced plans to sell itself, as investors hoped that a cash acquisition would let them put the convertibles back to the company. A number of analysts had expressed reservations about the company's ability to find a good deal, citing a lack of suitable buyers and concerns about the company's product pipeline.

"Everything I read says something about how this might be better," the convertible bond trader said. "If nobody wants to buy you for the long term, how am I supposed to think it's better longer term?"

The convertible may not have much upside catalyst now, but may be worth holding, the trader said.

"I think it's still pretty solid credit," the trader said. "It's just that the reason they got bid up the way they did was because of the put."

BRE, Digital Realty up on debuts

The newly priced deals from BRE Property and Digital Realty gained on their first trading day on Thursday as investors cited attractive pricing for the demand.

BRE Property's newly priced 4.125% convertible due 2026 was at 100.375 bid, 100.75 offered versus a stock price of $55.85 early Thursday. BRE stock (NYSE: BRE) had a modest 0.13%, or 7 cent, gain to close at $55.92.

"We traded a small amount of the BREs," a convertible bond trader said. "It looks like they did OK. The stock held up well."

Digital Realty's new 4.125% senior exchangeable debenture, also due 2026, did even better, trading at 101.5 early in the day. Digital Realty stock (NYSE: DLR) closed at $27.73, up by 0.4% or 11 cents.

"We saw a lot of these trading today," a sellside convertible bond analyst said.

The $150 million Digital Realty deal priced late Wednesday within talk, at a coupon of 4.125% and an initial exchange premium of 18%.

The debentures were offered at par, and were talked at a coupon of 3.875% to 4.375% and an initial exchange premium of 15% to 20%.

The debentures are exchangeable into Digital Realty Trust Inc. common stock, but are issued by Digital Realty's operating partnership subsidiary, Digital Realty Trust LP. Digital Realty Trust Inc. is guaranteeing the convertibles.

There is an over-allotment option for a further $22.5 million.

Citigroup and Merrill Lynch are the bookrunners for the Rule 144A offer.

Digital Realty, a San Francisco-based real estate investment trust that focuses on technology-related real estate, will use the proceeds of the deal to reduce its debt under an unsecured credit facility due 2008. It also plans to reborrow to fund acquisitions and for general corporate purposes.

A convertible bond analyst said the deal seemed fairly priced, but was surprised by how well it was bid.

"I'm not sure why people would pay so much for the vol for the DLRs," the analyst said.

Cephalon firms on failed drug

Cephalon's convertibles were lower outright but better on a dollar-neutral basis after the drug maker said its Sparlon drug was rejected by the U.S. Food and Drug Administration for treating attention deficit hyperactivity disorder in children.

Cephalon's 2% convertible due 2015 improved the most on a dollar-neutral basis, trading at 137 versus a stock price of $56. Versus the same stock price, the A tranche of zero-coupon convertibles due 2033 changed hands at 110.75, while the B tranche of zero-coupon convertibles also due 2033 traded at 114.5.

"Obviously they [the 2s] were pretty active, but they were all active pretty early, opened up about a point," a convertible bond trader said.

Frazer, Pa.-based Cephalon said late Wednesday that it will stop developing Sparlon after the FDA rejected the drug because one of the patients in trials was suspected of developing Stevens Johnson syndrome, a potentially fatal skin disease.

A sellside convertible bond analyst said Sparlon's failure was disappointing and raised concerns that Nuvigil, a Cephalon drug in development that uses a similar key ingredient as Sparlon, would also face difficulty in getting approval. With a hazy outlook for the company's future revenue stream, there are also credibility issues with management, the analyst said.

But another convertible bond analyst also pointed out that the credit held up against the stock, partly because Sparlon was seen as contributing only about a tenth of Cephalon's revenue in five years. The company still has a number of drugs in development and continues to see steady revenue, the analyst said.

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