CKE bids beefed up to 107; Flextronics expected to lose "big points" on jury award

By Ronda Fears

Nashville, Sept. 23 - With the new issue market coming to life, highlighted by a $1 billion floater launched by big pharma Bristol-Myers Squibb Co., convertible players are more lively, too.

Traders said activity picked up sharply Wednesday as a spattering of tiny new deals were put into play, but more so because chatter spread throughout the market that there was a jumbo deal ready to be unleashed at the close.

"It [the Bristol-Myers price talk] was sort of anticlimactic, because it was part of the rumor mill all day," said a convert trader at a huge hedge fund in New York.

"We've not worked up the particulars on this one but it looks like it might be a bit difficult to swallow."

After six weeks of nothing but a few scattered tiny deals, bankers expect the market to be a bit more eager to snap up new paper.

CKE Restaurants Inc. just priced an upsized $90 million at the tight end of guidance, and the new 4%, up 27% issue soared to 107 bid, 108 offered, by bookrunner Citigroup's account. That was up from bids of 4.5 points over par in the gray market at Tuesday's close.

"We've been seeing terms get more aggressive, so it makes sense that if you have something sitting on a shadow calendar that now would be a good time to bring that out," said one capital markets source, who is not involved in the Bristol-Myers deal.

"At least we're not expecting deals to have to be backed up or scrapped because the market's tolerance has been stretched. It's a lot more friendlier climate for issuers than, say, a month ago."

But, buyside sources noted that CKE terms and other new deals in circulation are running about 5% cheap, versus recent market statistics that put new issues over the past month pricing around 4% cheap.

"I think it [Bristol-Myers] will probably trade well just on name recognition, being Big Pharma, but we'd want it to model out pretty cheap - at least in the ballpark of the rest of the market - to participate," said an outright convertible trader in Connecticut.

The Bristol-Myers deal is scheduled to price after the close Thursday.

Before the open Wednesday, two other small deals were launched, by Exult Inc. and Pharmaceutical Resources Inc., and both were estimated to be in the 5% cheap neighborhood. Both also were pricing after the close.

Exult's $100 million of seven-year convertible notes were talked to yield of 2.5% to 3.0% with a 35% to 40% initial conversion premium. Exult shares closed down $1.10, or 11.58%, to $8.40.

Merrill Lynch put the Exult deal 5.2% cheap at the middle of guidance, using a credit spread of 460 basis points over Treasuries and a 40% stock volatility.

Tatyana Hube, a convertible analyst at Merrill Lynch & Co., said that although the Exult deal appears quite cheap given the recent cheapening trend of the convertible primary market, it is actually fairly priced based on the very tough borrow.

Merrill stock analysts Jennifer Dugan and Michael Maestas on Thursday renewed a buy recommendation on Exult shares, noting the "fairly opportunistic" convertible was launched on the heels of an upbeat analyst day. The analysts said that in their view Exult is the best positioned player in the rapidly growing human resource business process outsourcing arena.

"Our industry contacts suggest a deal with a national retailer looks increasingly likely before year end, a potential share price catalyst," the stock analysts said in a report.

Lehman Brothers analysts put the Exult deal 4.31% cheap, in line with recent cheapness of new deals. The midrange valuation was based on a credit spread of 600 bps over Treasuries and a 45% stock volatility. The spread was based on benchmark indexes and took into consideration Exult's strong financials, debt-free balance sheet and senior ranking of the convert, the analysts added.

Pharma Resources' $150 million of seven-year convertible notes were talked to yield 2.75% to 3.25% with a 33% to 37% initial conversion premium. Pharma Resource shares closed down $3.24, or 4.7%, to $65.75.

Merrill analysts put the Pharma Resources deal 5.7% cheap, at the midpoint of price talk, using a credit spread of 290 bps over Treasuries and a 30% stock volatility. Hube said the deal appears quite cheap versus recent pricing trends, so it's likely to price at the rich end of guidance, or terms might be tightened.

Lehman analysts put the Pharma Resources deal 5.21% cheap, at the middle of indicative terms, using a credit spread of 450 bps over Treasuries and a 38% stock volatility.

The credit assumption was based on the Lehman high-yield pharmaceuticals index and the Watson Pharmaceuticals Inc. 1.75% convertible due 2023. It was discounted versus Watson's spread due to subordination, a smaller market cap and non-investment grade rating, but tighter than the Lehman Pharma Index given Pharma Resources' solid financial metrics.

Outside of the new issue furor, convert players were watching the stock market take a dive that dealers said appeared to be in reaction to a combination of factors, including a weak dollar and Viacom Inc.'s lowered guidance.

Flextronics International Ltd. was the source of a good deal of afternoon hysterics when trading in the stock (and converts) halted at about 1.30 p.m. ET at $15 on news pending, which turned out to be a nearly $1 billion jury award against the Singapore circuit board maker.

A California jury on Wednesday awarded some $934 million, mostly in punitive damages, to medical device maker Beckman Coulter Inc. in a breach-of-contract lawsuit against Flextronics. The suit stemmed from circuit boards that Flextronics had agreed to supply to Beckman Coulter, as Flextronics ended the five-year contract prematurely in 2000 amid a dispute.

Trading in the converts also was halted - with the 1% issue off 2.875 points to 120 bid, 120.5 offered - and never restarted. Trading in the stock also did not resume by the market close.

"There was some selling [of the Flextronics converts] on valuation early, just in sympathy with the tech group, and they lost a couple of points," said a dealer at one of the underwriters for the $500 million convertible that was sold in late July.

"They will probably lose big points tomorrow because this jury award would nearly wipe out their cash coffers."

The trader said Flextronics had about $860 million in cash before the $500 million convert issue. Although Flextronics is sure to appeal the ruling, he said the magnitude of it will weigh on the convertibles.

Flextronics had already scheduled an analyst and investor day for Thursday with management presentations beginning at noon ET, and its chief executive, Michael Marks, was to join Nasdaq host Bob Greifeld to preside over the market open Thursday.

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