Harrah's rises on new buyout talk; Peabody retreats on gas prices; Entertainment Properties launches deal

By Kenneth Lim

Boston, Dec. 18 - Harrah's Entertainment Inc. sprang to life on Monday on news regarding a two-month old buyout offer, while the rest of a quiet convertible bond market took it slow coming off the weekend.

Harrah's was up slightly, in line with its stock, following reports that the company could accept a private-equity buyout proposed in October.

Meanwhile, Peabody Energy Corp.'s new deal slipped outright with the equity amid a sector-wide stock decline prompted by softer natural gas prices.

From the primary market, Entertainment Properties Trust launched a $125 million offering of perpetual convertible preferred stock, which is expected to price Tuesday after the market closes.

The rest of convertibles was mostly quiet, as the market enters the final fortnight of the year.

"You're going to ask me if there's anything going on and I'm not going to have anything for you at all," a sellside convertible bond trader said when contacted by Prospect News.

Even recently issued paper saw activity slow down on Monday.

Tech Data Corp.'s new 2.75% convertible senior debenture due 2026 changed hands at 98.25 against a stock price of $38.25, unchanged from Friday. Tech Data stock (Nasdaq: TECD) closed at $38.03, down by 0.65% or 25 cents.

Tech Data, a Clearwater, Fla.-based distributor of information technology products and logistics management services, priced the convertible early Friday with an initial conversion premium of 35%, and reoffered at 98.25.

International Game Technology Inc.'s 2.6% convertible senior debenture due 2036, which also made its debut on Friday, did not trade, although it was bid a point lower on Monday, at 98.75 against a stock price of $45.02. International Game stock (NYSE: IGT) rose 0.69% or 31 cents to end at $45.33.

International Game is a Reno, Nev.-based maker of gaming machines and systems. Its $825 million deal priced with an initial conversion premium of 35%, and was reoffered at 98.625.

"It's extremely, extremely silent," the sellside trader said.

Harrah's up on buyout talk

Harrah's floating-rate three-month Libor convertible due 2024 improved by about 2 points outright on Monday, in line with its stock amid expectations that the company will accept a $16.7 billion buyout offer from two private-equity parties.

Harrah's convertible, which currently pays a coupon of 5.374%, traded at 129 versus a stock price of $80. Harrah's stock (NYSE: HET) climbed 3.37% or $2.68 to close at $82.18.

"They were up slightly with the stock, unchanged dollar-neutral," a buyside convertible bond trader said. "I don't think they're trading with very much of a premium now, so it's just a matter of where the stock is at this point."

Reports on Monday said Harrah's is very close to a final agreement with private equity firms Apollo Management Group and Texas Pacific Group on their offer to buy the company for about $90 per share and take on $10.7 billion in debt. Apollo and Texas announced their bid for the Las Vegas-based casino owner in October, prompting a 14% surge in Harrah's stock. The convertible also climbed outright at that time, but fell on a dollar-neutral basis.

"They're already affected," a sellside convertible bond analyst said. "I think most of any impact happened when they first made the offer a couple of months ago."

The analyst explained that because the convertible does not have takeover protection, convertible holders who were hedged would have taken a loss back in October. But the analyst noted that an acceptance of the deal by Harrah's will put the spotlight on other gaming and hotel convertibles.

"This is an interesting situation," the analyst said. "You still need gaming [regulators'] approval, but now it puts other gaming convertibles into play. You can start thinking about the smaller gaming companies. You can start thinking about the hotels, like maybe Hilton. They could become more active, because some of them also don't have takeover protection."

"If a company as big as Harrah's can be taken out, it makes it more likely that you'd see a cash takeover of another company in the sector," the analyst added. "Those convertibles that don't have takeover protection and at a premium over par, those could be negatively affected."

Peabody slides with stock

Peabody's new 4.75% convertible junior subordinated debenture due 2066 retreated slightly on Monday, dragged by weakness in the stock.

The convertible was 97.5 bid, 97.875 offered against a stock price of $42.40 on Monday. Peabody stock (NYSE: BTU) fell 3.81% or $1.67 and closed at $42.17.

"It's moving down with the stock," a sellside convertible bond trader said.

Peabody, a St. Louis, Mo.-based coal company, saw its stock slide on Monday along with other coal miners, as falling natural gas prices fueled concern that demand for coal among energy producers will soften.

"The theory goes that if natural gas is cheaper, power plants will use more natural gas instead of coal," a buyside analyst said. "But what you're seeing today is more of a short-term reaction. Over the longer term Peabody's stock is still attractive."

The sellside convertible trader said the stock retreat on Monday did not generate such big gains for hedged investors as it would have if the Peabody convertible's terms were better. The convertible - which has no puts and may be called in five years - had been criticized for a structure and terms that appeared highly favorable to the issuer.

"You're not picking up a lot because of the structure of this thing and the long horizon," the trader said. "It's not a thrill, and this bond will continue to not be a thrill."

Entertainment Properties plans deal

Entertainment Properties Trust said Monday it plans to price $125 million of perpetual convertible preferred stock, talked at a dividend of 5.5% to 5.75% and an initial conversion premium of 20% to 24%.

The preferred shares will be offered at par of $25 apiece.

There is an over-allotment option for a further $18.75 million.

Bear Stearns is the bookrunner of the registered off-the-shelf offering.

The deal will price after the close Tuesday.

Entertainment Properties, real estate investment trust that owns entertainment retail centers, cinemas and other entertainment-related properties, said it will use the proceeds of the deal to fund general corporate purposes, including acquisitions, and to reduce debt under a KeyBank facility.

Entertainment Properties stock (NYSE: EPR) slipped 0.91% or 57 cents before the deal was announced, closing at $61.74.

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