Deutsche finds several European convertibles with possible takeover upside

By Ronda Fears

Nashville, March 17 - With merger and acquisition activity on the rise globally, Deutsche Bank Securities convertible analysts in London took a look at the European convertible universe to find convertible issues with potential takeover upside.

Deutsche convertible analysts Alistair Ling and Clodagh Muldoon in London listed 41 European convertibles with takeover protection and 36 company profiles addressing the likelihood of a takeover.

Those seen most likely as possible takeover targets, and their respective convertibles, were Lonmin 3.75% due 2008, Standard Chartered 4.5% due 2010, Legal & General 2.75% due 2006, Man Group 3.75% due 2009, Friends Provident 5.25% due 2007, Numico 3% due 2010 and OIAG/Telekom Austria 1.125% due 2006.

Also, the analysts said don't rule out Corus 3% due 2007, Adidas 2.5% due 2018, EMI 5.25% due 2010, Givaudan 1% due 2006, ABB 3.5% due 2010, Buhrmann 2% due 2010, International Power 2% due 2005 and 3.75% due 2023, Logica 2.875% due 2008, Scottish Power 4% due 2049, Great Portland 5.25% due 2008, Valeo 2.375% due 2011 and Cable & Wireless 4% due 2010.

Due to specific language in bond indentures, it is first necessary to distinguish between a merger and an acquisition, the analysts said.

"In general, acquisitions tends to trigger the conversion price or premium compensation adjustment 'sweeteners' that represent a vital component of the change-of-control upside," the analysts said in a report.

"In contrast, mergers generally only allow bondholders to convert into shares of the continuing entity at a rate that corresponds to the original conversion ratio."

Change-of-control sweeteners are almost never applied in a merger.

The analysts focused on four types of takeover protections in Europe - average premium, ratchet, French and Swiss premium and K-Sq adjustments

Regarding the average premium adjustment, the analysts noted that while other forms of protection only attempt to compensate the bondholder for a potential loss of optionality, this adjustment operates on a more generous principle, lowering the conversion price to approximately around the pre-bid share price.

The ratchet adjustment is based on the principle of compensating bondholders for potential loss of optionality.

French and Swiss premium compensation is present in a few French and Swiss convertible bonds, the analysts said, and is similar to the ratchet in that bondholders are compensated by receiving more shares.

K-Sq adjustments are stylistically similar to the French premium compensation with the daily amortization of the initial conversion premium, the analysts said, but it has a significant negative feature - an amortization for share price movements as well.

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