Network Associates taken for ride on Microsoft merger buzz; Per-Se emerges; Priceline, LabOne gain

By Ronda Fears

Nashville, June 22 - Chatter that Networks Associates Inc. was the target of a cash takeover by Microsoft Corp. caused the biggest stir in the convertible market Tuesday. Convertible players took a positive spin on the buzz - although Network Associates backed off the day's high after the company chief executive denied the rumor - but were insisting on getting paid for the risk.

"After Mandalay and Kroll, and a couple of other cash takeovers where the [convertible] market got burned, you were going to have to pony up if you wanted to get involved with NET [Network Associates] today," said a sellside trader.

"There were lots of people wanting to get involved, too, because it would link you up to Microsoft -a huge cash cow."

After ticking up more than 2.5 points, the Network Associates convertible gave back about half of that.

Elsewhere, convertibles firmed a bit, as well, but flow was still lolling along at a leisurely summer pace, traders said. In fact, one buyside source said it was "deadly quiet," except for new issues that were small but active.

Lots of hedge fund players were busy in bond futures, although Treasury yields were flattish ahead of next week's Federal Reserve meeting.

Hedge funds wince at vol

Some of the pain among hedge fund players has eased, sources in that community said, but volatility is still a huge concern looking into the coming summer months.

Merrill Lynch reported that its convertible hedge index last week edged up 0.13% net of a 2% annual management and a 20% performance fee - taking the year-to-date net return to a drop of 0.47% before hedging out interest rates. It was the first uptick, albeit slight, in about four weeks, though.

Now, volatility is a major sore spot and it is heading lower, as expected, for the summer. The Nasdaq volatility index on Tuesday lost more than 2% to 19.29, and the old VIX was down more than 6% to 14.31.

"Vol is clearly underperforming expectations and putting pressure on valuations," said a hedge fund manager based in Bermuda.

Another manager in New York, who runs a multi-strategy hedge fund, said, "Vol looks like it is going lower. I think people are worried in ConvertLand."

Valero eyed after shelf filing

U.S. refining concern Valero Energy Corp. got a very warm reception to a meeting with Wall Street types Tuesday morning, on the heels of filing a $3.5 billion shelf registration Monday. An issue from the San Antonio company would likely be as hot as the gasoline it makes right now, one buyside source remarked.

The July gasoline futures contract jumped as high as $1.2070 a gallon on Tuesday before settling at $1.1989 a gallon, up 3.74 cents, as crude oil remains above the $38-a-barrel level.

A sellside market source echoed positive sentiments on Valero, as well.

"I've been looking at Valero. The management meeting here in New York this morning was very bullish and there were about twice as many people there than in years past," he said.

The Valero 2% mandatory trades fairly regularly, he said. And the issue has made a run alongside gasoline prices. Valero's 2% mandatory convertible due 2006 gained about 0.5 point on the day, a buyside source said, to 34.5 bid, 34.75 offered.

Valero shares on Tuesday gained $1.24, or 1.77%, to $71.43.

The $211.5 million mandatory was issued at 22 last October. It had originally issued to Orion Refining Corp. in July as part payment for Valero's acquisition of a refinery from the bankrupt company. The issue is non-callable but does not have any dividend protection features.

Network Associates ends up

The "for sale" sign headlines on the tape regarding a rumored cash takeover bid for Network Associates by Microsoft quickly got lots of players trying to get involved, but they were going to have to pony up because of recent scares in the convertible market regarding takeover risk.

Although the rumor seemed to have been quickly dispelled, interest in the situation didn't altogether die out.

Early, the Network Associates 5.25% convertible due 2006 shot up about 2.5 points to the 106.375 area but by day's end had backed down to 105.25 bid, 105.75 offered - still a 1.25-point gain from Monday. The stock reacted similarly, ending up 59 cents, or 3.56%, to $17.16 on extremely heavy volume, with 8.7 million shares changing hangs versus the three-month running average of 2.5 million shares.

According to a news report citing Wall Street sources and channel partners, the maker of McAfee antivirus and security products would be making a public announcement concerning either the pending or closed sale of the company to a buyer. The announcement could come as early as July 1 when Network Associates also plans to announce layoffs.

Microsoft was cited as the logical buyer, as the software giant has been making moves to boost its presence in the security market and already has a partnership with Network Associates.

Speaking at a Wachovia Securities investment conference webcast, Network Associates chief executive George Samenuk denied the rumors, and that cooled the situation but didn't entirely squelch interest.

"We get rumors like that all the time in risk arb," said one buyside trader. "But we've all seen situations where the company denies it right and left, and then the very next day announce a deal."

"The [Network Associates] bonds look a little rich and did heat up - rich, as needed, to pay for the 'gap up' risk, I suppose," said an outright convertible fund manager. Take the company denying the chatter "for whatever it's worth," adding, "I'm trying to get involved. They [the converts] are looking rich but, like I said, you have gap risk. With the M&A cash takeover frenzy, I can understand this fear."

Per-Se launches for Thursday

Per-Se Technologies Inc. launched after the closing bell Tuesday $100 million of 20-year convertible notes talked to yield 3.0% to 3.5% with a 38% to 43% initial conversion premium, with $25 million of proceeds earmarked to buy back stock sold short by note buyers.

Remaining proceeds, with cash on hand plus funds available on its bank revolver, will go retire a $118.8 million term loan B.

On June 8, Per-Se announced that the Nasdaq listing qualifications panel acknowledged the company was in compliance with its periodic reporting filing obligations and would continue to be listed, following its May 21 notice for possible delisting because the company delayed filing its first quarter 2004 results at the SEC.

Priceline, LabOne higher

Priceline.com Inc. sold an upsized $90 million of 20.5-year convertible notes at the middle of price talk with a 2.25% coupon and 37.5% initial conversion premium. Guidance on the deal, boosted from $75 million, put the yield between 2.0% and 2.5% and the premium at 34% to 41%.

Buyside sources said the issue was oversubscribed "significantly" and the issue was getting bid up in the gray market. Most of the popularity, sources said, was just as a pure stock play.

One buyer pointed out that Standard & Poor's equity analyst Scott Kessler upped his recommendation on the stock Tuesday to accumulate following the company's boosted earnings guidance.

LabOne Inc. also was doing very well in the immediate aftermarket, opening Tuesday at least 1 point higher. The 3.5%, up 35% convertible - issued at the middle of yield talk for a 3.25% to 3.75% coupon and at the cheap end of premium guidance for 35% to 40% - traded at least as high as 2.25 points over par, a buyside trader said.

LabOne shares closed up $1.76, or 6.05%, to $30.87.

Postbank four times booked

The Postbank AG convertible was at least four times oversubscribed, a market source in London said, even though the European market has cooled off recently.

Deutsche Post World Net AG sold the €1 billion of three-year exchangeable bonds, which convert into Postbank AG shares, to yield 2.65% with a 38% initial conversion premium. The notes priced at the tighter end of yield talk for a 2.5% to 3.0% coupon but at the cheapest end of the premium guidance of 38% to 42%.

It was part of Deutsche Post's spinoff of Postbank and references the initial public offering price of €28.50, which was at the lower end of the revised range for the stock of €28 to €29. The range was cheapened from a range of €28 to €29 on Monday, which was cut from the original range of €31.50 to €36.50.

Postbank AG amended its plans to break away from Deutsche Post World Net AG by lowering its IPO range and adding a €1 billion exchangeable, amid a softer market tone in Europe, as well.

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