Level 3 gains on takeout rumors; Medis quiet amid borrow concerns; Invitrogen, Red Hat gain slightly

By Kenneth Lim

Boston, Oct. 30 - The convertible bond market was quiet on Monday as October draws to a close, with Level 3 Communications Inc. gaining with the stock amid speculation about consolidation in the sector.

Medis Technologies Ltd.'s planned $50 million offering of perpetual convertible preferred stock was quiet in the gray market ahead of the deal's expected pricing on Thursday, with reports of a tough borrow on the common.

Invitrogen Corp. continued to be active, eking out modest outright gains coming out of the weekend as the stock held firm after last week's drop.

Invitrogen's 2% convertible due 2023 rose half a point outright to trade at 102.25 against a stock price of $58.05, while its 3.25% convertible due 2025 changed hands at 94.5 versus a stock price of $57.50, down by a quarter point in early trading. The 1.5% Invitrogen convertible due 2024 was flat, trading at 85.25 against a $57.50 stock price. Invitrogen stock (Nasdaq: IVGN) closed at $58.10, up by 0.16% or 9 cents.

"There were better buyers of the 1.5s, better sellers of the 2s and better sellers of the 3.25s," a sellsider said. "The 3.25s can be more attractive when the stock falls. The 2s trade significantly near par, but you get hurt most in a takeover. And there's some question now about whether the company's restructuring or looking for alternatives."

Carlsbad, Calif.-based Invitrogen, a provider of biotech and pharmaceutical research tools and services, said Friday it is working to improve its sales strategy, cut costs and refocus its business after reporting a third-quarter loss and missing estimates for its fourth-quarter outlook.

Red Hat Inc. was also active, with slight gains outright in the aftermath of the company's newly announced stock-and-convertible buyback program.

Red Hat's 0.5% convertible due 2024 traded at 97 against a stock price of $16.50, about a quarter-point higher. Red Hat stock (Nasdaq: RHAT) rose 5.63% or 88 cents, to close at $16.51.

"Credit's not a problem for Red Hat," a sellside convertible bond analyst said. "The buyback isn't going to be a big hit on their credit. They're using cash to buy back stock, but they're also buying back their debt, and they've got lots of cash. Oracle is probably going to affect their sales and profits going forward, but it's still too early to know exactly how big of an impact it's going to be."

Raleigh, N.C.-based Red Hat, a developer of open-source software, said Friday that it will be buying back up to $75 million of the 0.5% convertibles and up to $250 million of its common stock until Oct. 31, 2007. Its announcement came a day after rival Oracle Corp. unveiled a new set of services that directly competes against Red Hat's offerings.

Credit ratings agency Standard & Poor's on Monday maintained Red Hat's credit rating at B+ with a stable outlook, saying the company has enough liquidity to absorb the buyback.

Level 3 gains on rumors

Level 3's 2.875% convertible due 2010 improved about a point outright on Monday amid speculation that the company could be a takeover candidate, although analysts largely dismissed those rumors.

The convertible traded at 104 versus a stock price of $5.40 on Monday. Level 3 stock (Nasdaq: LVLT) closed at $5.38, gaining 3.46% or 18 cents.

"I saw that there was some speculation that they may be an acquisition candidate, but that's pretty unlikely in my opinion," a sellside convertible bond analyst said. "They've got a lot of debt, so it doesn't necessarily seem to me that they're a natural acquisition candidate. And also they've been acquiring companies, like Broadwing, so it seems somewhat unlikely that they'll be an acquisition candidate."

Broomfield, Colo.-based Level 3, which provides internet access protocol services, could not be reached for comment. The company announced two weeks ago that it was buying rival Broadwing Corp. for $1.4 billion in cash and stock.

A convertible bond trader, who had not heard the rumor, agreed that it was unlikely Level 3 would be taken over soon.

"I don't know if anyone would be interested in buying them at this point," the trader said. "They're highly levered, so if you acquire them you're acquiring a bunch of debt. I suppose there's a chance someone might want to do that, but it's probably a pretty slim chance."

Medis quiet, borrow a concern

Medis' planned $50 million of perpetual convertible preferred stock was quiet in the gray market on Monday amid reports of a tough stock borrow.

The convertible, which is slated to price Thursday after the market closes, is talked at a dividend of 6.5% to 7.25% and an initial conversion premium of 28% to 32%.

The 5,000 preferred shares in the deal will be offered at par of $10,000 apiece. There is a concurrent shelf offering of up to 1.5 million shares of Medis common stock, which have yet to price.

There is an over-allotment option for a further $7.5 million, or 750 preferred shares, in the convertible deal.

Citigroup is the bookrunner for the Rule 144A offering.

Medis, a New York-based maker of fuel cell batteries used in consumer and military electronics, said the proceeds of the offering will be used for developing and commercializing products, which may include capacity expansion, and for general purposes.

"I'm hearing that you have to go through Citi on their share lending agreement to get any borrow," a sellside convertible bond analyst said.

Despite possible problems with the borrow, the deal appeared to have an attractive coupon, the analyst said.

"It's got a nice yield," the analyst said.

A sellside convertible bond trader said interest in the deal may be limited.

"The coupon looks interesting, but it's a small deal given the large market cap," the trader said. "My guess is something that small probably won't see a whole lot of interest. Mostly outrights."

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