Telecom names take the spotlight as their stocks, convertibles rise

By Sara Rosenberg

New York, Oct. 24 - The star attraction of the convertibles market Thursday was telecommunications names, according to market sources. These speculative, low stock-price companies, such as Nextel Communications Inc., Lucent Technologies Inc. and Corning Inc., have seen a tightening in their credit spreads as equity prices have improved.

Nextel Communications Inc.'s convertibles gained about two to three points by mid-day following "blow-out numbers" for the third quarter, Rao Aisola, head of convertibles research at Bear Stearns & Co. told Prospect News. The securities, however, came back down slightly to end the day about a point higher, according to a trader.

Income for the third quarter was $526 million or 58c per share including gains of 44c per share due to retirement of debt and preferred stock. Net of these gains, Nextel still blew away analyst expectations with third quarter earnings per share of 14c, compared to estimates of 4c per share.

"Last quarter people thought it may be an aberration," Aisola said. "But they did it again. Nobody can keep a pace like this indefinitely but this is operating on all cylinders. They're meeting all their targets."

In the second quarter, Nextel reported positive net income for the first time. Income during the quarter was 39c per share, compared with a net loss of $426 million, or 56c a share, in second quarter 2001 and the First Call analyst consensus of a loss of 24c a share.

Another positive factor influencing Nextel's performance is the improvement of its leverage situation through the reduction of debt. During this quarter alone, the company retired $1.5 billion in debt and preferred stock in exchange for 83 million shares of Class A common stock and $394 million in cash. So far, debt reduction for the year, including third quarter numbers, is $2.6 billion.

"These transactions allow Nextel to avoid payments of approximately $4.4 billion in principal, interest and dividends over the life of these securities, or approximately $235 million in interest and dividend savings annually," said Paul Saleh, Nextel's executive vice president and chief financial officer, in a news release.

The Reston, Va. wireless company's convertibles have seen a marked improvement over the last month and a half to two months, according to Aisola.

At mid-day on Thursday, Nextel's 6% convertibles due 2011 were offered at 83, yielding about 8.87%. As of 12.04 p.m. ET, the stock was trading at $10.878, up about 68c or 6.65%. At close, the 6% convertibles were quoted around 80/81, up from quotes around 79/80 at the previous day's close, a trader said. The equity closed at $10.06, down 14c or 1.37%.

Also among telecom and telecom-related issuers, Lucent's 8% convertibles due 2031 were up about 9½ points to close the day at 33 and the 7¾% convertibles due 2017 were up about 5¾ points to close at 28.9, according to a trader. The company's stock ended the day at 98c, up 22c or 28.95%.

On Wednesday, Lucent reported fourth-quarter results, posting a loss of 64c versus the consensus of a loss of 65c per share.

Corning's 7% convertibles due 2005 were up about 15 points to close at 1211/2, the 3½% convertibles due 2008 were up about 2½ points to close at 53 and the 0% convertibles due 2015 were up about two points to close at 441/2, a trader said. The company's stock closed the day at $2.00, up 29c or 16.96%.

In other news, Valassis Communications Inc. "sold off tentatively" by mid-day on Thursday as the company brought earnings guidance down, according to Aisola. For the full year 2003, the company expects earnings-per-share to be down 8% to 18% versus 2002, due primarily to a market share issue in co-op free-standing inserts (FSI's), a news release said. Total company revenues are expected to be down by a percentage in the mid-single digits.

"Although an FSI market share issue will cause us to report a down year for 2003, we remain confident of our ability to generate over $100 million in cash flow, and to once again leverage our cash for the benefit of our shareholders," said Alan F. Schultz, chairman, president and chief executive officer, in the release. "We continue to believe that the fundamentals of our business are solid, and we are committed to improving our FSI market share to approximately 50%, which is near traditional levels."

"It's not an industry-wide issue. [It's a] company-specific issue," Aisola said. "The credit rating is quite good so the bonds held."

The Livonia, Mich. media company's 0% convertible due 2021 and putable in June 2004 was offered at 55 around mid-day, compared to a trading price of approximately 58 on Wednesday. The company's equity closed the day at $26.01, down $8.95 or 25.6%.

Third quarter earnings per share were 61c, basically in line with analyst estimates of 60c. During the quarter, Valassis repurchased 493,200 shares of its stock. The number of diluted shares at the end of the quarter was 53.4 million, down 2.3% from the year ago. The company ended the quarter with debt, net of cash, of $189.6 million.

Meanwhile, with the dearth of new issuance, companies are taking advantage of investors with aggressively priced deals, according to a market professional.

For example, the professional brought up Wednesday's General Mills Inc. deal, saying that he "did not even touch" the new offering because it was "horribly priced."

"Because people are desperate to find anything to invest in, companies can get away with almost anything," he said. "[General Mills was a] very aggressively priced new instrument that sold due to a lack of new issuance."

General Mills sold $1.35 billion in proceeds of 20-year convertible senior unsecured debentures at 67.165 for a yield to maturity of 2.0% and with a 25% initial conversion premium, at the cheap end of guidance.

The new debentures were trading at 67 1/8 on Thursday, according to a trader.

Joint bookrunning lead managers for the Rule 144A offering were Banc of America Securities and Morgan Stanley.

Minneapolis-based General Mills plans to use proceeds to partially repay the $4 billion of commercial paper taken on to help fund the $10.4 billion purchase of Pillsbury from Diageo plc last year.

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