Maxtor gains on Seagate takeover; some tech names better; Calpine bankruptcy spurs trading

By Rebecca Melvin

Princeton, N.J., Dec. 21 - The convertibles market was surprisingly busy for the Wednesday before Christmas, with event-driven trading in Maxtor Corp., Calpine Corp. and General Motors Corp., traders and market sources said. But Maxtor was the centerpiece of the day's session.

News that hard disk drive maker Maxtor had agreed to be acquired by Seagate Technology, another disk drive maker, sparked a run in Maxtor shares, but its 2.375% convertible bonds gained 4 or 5 points on a dollar neutral basis due to the fact that the credit of Seagate is perceived to be better than that of Maxtor, and under the stock merger, Maxtor convertibles will be convertible into shares of Seagate.

Volume was heavy in Calpine Corp. convertibles after the debt-laden power company announced late Tuesday that it had filed for Chapter 11 bankruptcy protection.

The three $25 convertible bond issues of GM extended losses on Wednesday and its shares skidded another 4% as news of GM stock sales by billionaire investor Kirk Kekorian continued to reverberate in the market.

Technology names were most often mentioned in the sundry lists of trades ticked off by players on Wednesday. Among them was Hutchinson Technology Inc., another disk drive maker, based in Hutchinson, Minn., which was better by about 0.25 point.

But semiconductor chip maker Advanced Micro Devices Inc.'s 4.75% convertibles traded a little lower. Chip giant Intel Corp., which priced its 2.95% convertibles a week ago, was flat at 100.20, versus a share price of $25.75.

And the convertibles of Boise, Idaho-based Micron Technology Inc., which has a new flash memory joint venture with Intel, were quiet ahead of its fiscal first-quarter earnings posted after the bell.

Credence Systems Corp., which has been active in the past few days, was better bid, according to a West Coast-based sellside trader.

New issues traded, including Entergy Corp.'s mandatories, which were at 50 versus a stock price of $70.25 during the session. Their underlying shares closed a bit lower at $69.18. Also EDO Corp.'s 4% convertibles, which priced in November, were at 100, versus a price of $26.00. When the bonds priced Nov. 14, they were reoffered at 99.

Convertible players gain on Maxtor

"Maxtor was definitely the name of the day," a New York-based sellside trader said.

The Maxtor 2.375% convertibles gained 32 points outright and were up 5 or 6 points on a hedged basis depending on the delta. "Everybody made money on this deal," a buysider said.

The Maxtor 6.8% convertibles, which are less actively traded and considered a yield play, traded higher by about 5 points to 101 bid, 102 offered, traders said.

"There was a gap in the stock, but the delta was more," the sellsider said, regarding the more than 50% run up in Maxtor shares. "It was more a question of the Seagate credit, which is about 350 basis points tighter than Maxtor's."

The bulk of the richening was due to the acquirer's credit, the sellside trader said, as Seagate's volatility is lower.

But there were both buyers and sellers of Maxtor on Wednesday as some players took profits on the Maxtor moves, inspired by takeover news.

Seagate said it will acquire Maxtor for $1.9 billion in stock, bringing together two of the largest makers of hard disk drives.

Bill Watkins, Seagate chief executive, said that the deal was about gaining scale and leverage in a competitive market.

Under the terms of the agreement, which has been unanimously approved by the directors of both companies, Maxtor shareholders will receive 0.37 shares of Seagate common stock for each Maxtor share they own.

The deal leverages the "strength of Seagate's significant operating scale to drive product innovation, maximize operational efficiencies, and realize significant cost synergies," the companies said in a release.

The combined company will be better positioned to navigate some of the challenges ahead for the industry in which prices keep dropping and margins are shrinking. There is also competition from flash memory, a competing storage medium.

The transaction is expected to be at least 10% to 20% accretive to Seagate on a cash earnings per share basis after the first full year of combined operations. In addition, the combined company expects to achieve about $300 million of annual operating expense savings after the first full year of integration.

The combined company will retain the Seagate name and executive offices will be located in Scotts Valley, Calif., Seagate's headquarters. Closing of the transaction is expected to be completed in the second half of 2006, subject to shareholder approvals and regulatory approvals.

Maxtor's 2.375% convertibles closed at 121, up from 89 on Tuesday. Maxtor shares closed up $2.41, or 53.3%, at $6.93. Seagate shares gained 63 cents, or 3.2%, to $20.23.

Calpine bankruptcy spurs trades

Calpine convertibles rose several points on Wednesday but were trading flat, without accrued interest, on the heels of the company's announcement that it filed for Chapter 11 bankruptcy protection.

They were up a couple of points due to among other things settling credit default swaps. "They'll probably drift back down," a Connecticut-based sellside trader said.

The Calpine 4.75% convertibles traded at about 24.5, and the 6% convertibles traded at 17 and 19. Shares of Calpine, which trade in pink sheets, closed down another 14% at $0.198.

Calpine said that the filing is intended to allow operations to continue at its power plants and facilities in the United States, Canada and Mexico, and to strengthen its balance sheet and protect its assets, and to enhance the value of its business.

The company and many of its subsidiaries, including Calpine Generating Co. LLC, filed voluntary petitions to restructure under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York.

The company also announced that certain of its direct and indirect subsidiaries and affiliates in Canada intend to file for creditor protection under the Companies' Creditors Arrangement Act.

In conjunction with the filing, Calpine said it has commitments for up to $2 billion of secured debtor-in-possession financing from Deutsche Bank and Credit Suisse First Boston, joint lead arrangers and joint bookrunners.

The financing includes a $1 billion revolving credit facility and a $1 billion term loan.

Robert P. May, Calpine's chief executive, said, "We intend to move through this restructuring process as quickly as possible to regain our financial health and to take the necessary steps to become a stronger and more competitive energy provider. With our new financing we will have additional financial flexibility and sufficient liquidity to meet our obligations going forward."

"We believe that Calpine needs to change its business model in light of the ongoing evolution of competitive power markets and our current financial condition," May said. "Although the company has taken numerous steps to reduce its debt and strengthen its balance sheet through asset sales and other means, these actions were not sufficient to offset the cost of Calpine's substantial debt obligations."

Calpine has petitioned the court to reject certain of its contracts, including power sales agreements in which the price paid to Calpine for electricity is significantly below its cost or market prices. The company expects its power plants will continue to be available to meet the needs of electricity consumers in all of its service areas.

In addition, the Chapter 11 filing does not affect a tender offer to purchase up to $400 million of the outstanding 9.625% first priority senior secured notes due in 2014 that started on Dec. 1.

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