Deals for $1.43 billion emerge; El Paso lifts power group; merger buzz stirs players

By Ronda Fears

Nashville, Jan. 20 - Three new convertible deals emerged Tuesday, including the early stages of a $600 million mandatory born out of General Electric Co.'s spin-off of its insurance unit, giving market participants a reason to trudge on.

There also was a $750 million floating-rate mandatory put on the board. Citigroup Global Markets Holdings Inc. is making the offering, which converts into News Corp. shares. And, Comtech Telecommunications Corp. launched a small $75 million deal. Both of those are pricing alongside Komag Inc.'s small $70 million deal after the close Wednesday.

"This should make a dent, but we're still way off," in terms of supply meeting demand, one dealer said.

"We are needing some big issues for the market to get involved with, big enough that they can trade around for several days or become a liquid part of the market. I'm not so sure about the News deal, because of the structure, but it's a name that will generate interest and it's a good size."

Traders have been talking about the scarcity of offers in the market for some time, and now they are seeing what few offers there had been withdraw as bids pop up.

The vast majority of trading is limited to the very liquid issues, such as Lucent Technologies Inc. and Tyco International Ltd. Otherwise, traders said the market keeps fetching bids, "to the moon," as one put it, while offers are few and far between.

"If there were offers, they were lifted and went away after a bid came in," said one dealer.

The offers to sell are not serious, another trader said, because most managers will need to put that money elsewhere, or do so very soon, and they are not sure about what to do with it, especially if an offer is for a good-sized chunk of an issue.

Moreover, the trader said a lot of the bids that are out there right now are sector driven, especially in the power, technology and telecom groups.

Name-dropping on issuers

There has been lots of name-dropping of sorts and speculating as to who may bringing a convertible to the market, which is raging with demand.

Talk of the News Corp. deal was circulating Tuesday, and it came to pass with a different spin on the structure. GE's name has been tossed out there, as well, in recent sessions.

Citigroup launched right after the closing bell the $750 million five-year floating-rate mandatory exchangeable that converts into News Corp. stock. The issue is talked to yield three-month Libor minus 50 basis points to three-month Libor flat, with an initial conversion premium of 153.5%.

It issue will be sold at par with a floor price of 85% of par; thus, investors are protected on the downside beyond 15%.

The GE-related buzz turned out to be a $600 million mandatory convertible as part of the spin-off of its insurance unit, Genworth Financial Inc. Morgan Stanley and Goldman Sachs & Co. are lead managers of the offerings, which are expected to be completed by the end of June.

Comtech's deal is expected to price to yield 2.5% to 3.0% with a 33% to 37% initial conversion premium. It will be sold at par and pay cash interest for seven years, then become a 0% accreting bond.

The Citigroup/News Corp. and the Comtech deals join Komag to price after Wednesday's close.

Komag Inc.'s $70 million of 20-year convertible notes is talked to yield 2.5% to 3.0% with a 28% to 32% initial conversion premium.

At the middle of price talk, Lehman Brothers analysts put the Komag deal 4% cheap, using a credit spread of 600 basis points over Treasuries and a 55% stock volatility.

Deutsche Bank Securities analysts put the Komag deal 3.12% cheap, at the middle of guidance, using a credit spread of 500 basis points over Libor and a 50% stock volatility.

Yet to come to pass is anything linked to a severely distressed company or one just exiting bankruptcy, which has been among the buzz for several weeks now. Names mentioned in that vein include HealthSouth Corp., Adelphia Communications Corp. and Mirant Inc.

El Paso lifts power issues

El Paso Corp. got a nice shot in the arm Tuesday on the back of a pitch from a portfolio manager in a Barron's article, traders said.

Archie MacAllaster, a principal in the investment firm MacAllaster Pitfield MacKay, hyped El Paso in the article, citing the company's debt reduction strategy and earnings forecast.

El Paso's 9% mandatory convertible due 2005 soared 3.125 points to 34.25 bid, 34.75 offered while the stock gained $1.27, or 15.12%, to $9.67.

Also supporting the group, another trader said, was Moody's affirming the ratings of Duke Energy Corp. in response to the company's accelerated debt reduction program for 2004.

Duke's 8% mandatory convertible due 2004 added 0.18 point on the New York Stock Exchange to 14.95, and the 8.25% mandatory due 2004 rose 0.27 point to 14.48. The common stock closed up 30 cents, or 1.43%, to $21.26.

"All the energy-related stuff, the IPPs [independent power producers] have made big, big runs," one sellside convertible trader said, adding that a good portion of the gains are related to a positive spin on the sector rather than company-specific news or events.

"At the same time, with fuel prices going up, you see the airlines going down."

Calpine Corp., Dynegy Inc. and Reliant Resources Inc. were among the biggest gainers in the power group.

M&A buzz spurs activity

AT&T Wireless Services Inc. getting a cash bid from Cingular Wireless sparked huge gains among several telecom equipment names like Lucent, Nortel Networks Corp., Corning Inc. and Sprint PCS. All those were heading north, but competitors in the wireless services area like Western Wireless Corp. were losing ground.

New buzz that JDS Uniphase Corp. was a takeover target by French communications equipment maker Alcatel also helped the telecom and telecom equipment groups. Both companies were mum on the speculation, but the market's reaction was unmistakable.

JDS Uniphase's 0% convertible due 2010 shot up 10 points to 138 bid, 138.5 offered, while the stock rose 56 cents, or 10.83%, to $5.73.

Alcatel's 4.75% euro convertible due 2011 saw good two-way action, a dealer in London said, with the issue closing off about 0.25 point at 20.25 bid, 20.375 offered. Nothing happened with regard to the Alcatel 0% mandatory convertible due 2005, he said, which closed at 13.355 bid, 13.385 offered. Alcatel shares ended in the United States off 18 cents, or 1%, at $17.13.

There were some nice gains beyond the specific merger news, too.

Both Lucent 2.75% convertibles were about 3.75 points better, and Nortel's convertible bond added 1 to 2 points.

Juniper Networks also extended gains from last week, as well.

E*Trade was not overly active insofar as the convertible market was concerned, but traders said news the company abandoned talks to merge with Toronto Dominion's TD Waterhouse online trading unit gave its two bonds a lift.

"We did not see a lot of the E*Trade converts trade, but they were better by 2-3 points on the news," said a dealer.

The E*Trade 6% convertible due 2007 was quoted at 102.25 bid, 102.75 offered, and the 6.75% convertible due 2008 was quoted at 142.5 bid, 143.5 offered.

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