Level 3 gains on $1.2 billion acquisition; Teva gets court boost; Human Genome tightens on drug trials

By Kenneth Lim

Boston, May 1 - The convertible bond market was quiet on Monday, with Level 3 Communications Inc.'s $1.2 billion acquisition generating most of the noise and sending its convertibles higher on a dollar-neutral basis.

In the midst of earnings season, non-earnings related news attracted the most attention on Monday. Biotech companies Teva Pharmaceutical Industries Ltd. and Human Genome Sciences Inc. were active as drug-related developments drove investors.

Otherwise the market generally lacked compelling headlines with no major events and no new issues to spark activity, said a buy-side trader.

"Vol ticked up earlier today, but the market sold off later in the day," the trader said.

Gilead Sciences Inc.'s new convertible notes were up in line with a slight rise in the stock. The 0.625% convertible due 2013 was traded at 93.125 versus a stock price of $58, while the 0.5% convertible due 2011 changed hands at 94.125 against the same stock price. Gilead stock (Nasdaq: GILD) closed at $57.89, up 0.68% or 39 cents.

"I supposed some people think it may look more interesting now" after it was seen as too rich at its launch just over a week ago, said a sell-side analyst.

Gilead is a Foster City, Calif.-based biopharmaceutical company.

Par Pharmaceutical Cos. Inc. "traded up initially, but came in a little" after the Woodcliff Lake, N.J.-based generic drug maker reported a quadrupling of profits but lower margins in its first quarter, said a sell-side convertible analyst. Par Pharmaceutical's 2.875% convertible due 2010 was marked at 82.13 against the closing stock price of $24.41 on Monday. Par Pharmaceutical stock (NYSE: PRX) closed lower by 5.2% or $1.34.

Par Pharmaceutical said Monday that it earned $8.4 million, or 24 cents per share, in the first quarter, from $2 million, or 6 cents per share, in the year-ago period. But gross margin fell to 32% from 41% due to profit sharing agreements on products such as the generic Flonase nasal spray.

Lucent Technologies Inc. swung about before ending flat on signs of Congressional resistance to its planned merger with France's Alcatel. Lucent's 2.75% convertible due 2025 changed hands at 105.5 versus a stock price of $2.80, while its 8% convertible due 2031 traded at 100.5 against the same stock level. Lucent stock (NYSE: LU) closed unchanged at $2.79 after spending most of the session lower.

Reports emerged over the weekend that U.S. House Armed Services Committee chairman Duncan Hunter expressed "grave concerns" in a letter to the president over Lucent's planned merger with France's Alcatel. Hunter said he did not think the U.S. government panel that assesses foreign takeovers for national security issues - no House members sit on the panel - could provide the clearance for the deal.

Lucent and Alcatel carry out sensitive defense work for their respective countries. Alcatel has sold its satellite and security operations to French-owned electronics company Thales, while Lucent plans to create a separate subsidiary run by Americans to handle sensitive work.

Lucent is a Murray Hill, N.J.-based communications equipment maker.

Level 3's $1.2 billion purchase well received

Level 3 Communications saw its convertibles improve slightly on a dollar-neutral basis on Monday after the company announced a $1.2 billion acquisition.

Level 3's 2.875% convertible due 2010, which was marked at 92.25 in the pre-market, was marked at 95.375 bid, 95.875 offered against the closing stock price of $5.72 on Monday. The 5.25% convertible due 2011 was 146.25 before the market opened, and ended Monday marked at about 152.875 versus the last stock price. Level 3 stock (Nasdaq: LVLT) closed up 5.93% or 32 cents.

"The borrow is getting better," said a buy-side trader.

Level 3, a Broomfield, Colo.-based communications network provider, said on Monday that it would buy privately held TelCove Inc. for $445 million in cash and $637 million in stock, as well as assume $155.5 million of TelCove debt.

A New York-based convertible analyst said that because Level 3 was the acquirer, "there's probably going to be a slight credit drop, but the valuation [of the convertibles] might not change much."

"Nothing's going to change dramatically, let's put it that way," the New York-based analyst said.

But another analyst said the credit improved because people saw the acquisition as a boost for Level 3's cash flow. Level 3 said it expects Canonsburg, Pa.-based TelCove to earn $125 million to $135 million in operating income before depreciation and amortization in 2006.

"A lot of times it is [credit negative], but in this case, it's accretive quickly on the top and bottom lines, and it will probably help the company get to free-cashflow positive sooner rather than later," the analyst said. "That's the way many people in the market are looking at it."

The analyst noted that Level 3 has been on the acquisition path and its recent purchases were well-received by investors. Level 3 said in April that it would buy ICG Communications for $163 million. In January, Level 3 announced that it was buying Progress Telecom for $137 million. Last year, Level 3 unveiled an $825 million cash-and-stock acquisition of WilTel Communications Group.

"I think most people have a positive view on the acquisition, especially in the light of the previous two acquisitions," the analyst said.

Teva gains outright on court win

Teva Pharmaceutical was higher by about 2 to 2½ points on an outright basis in line with the stock Monday after the generic drug maker said a federal court ruled that regulators unfairly denied its bid to exclusively market a cholesterol drug.

Teva Pharmaceutical's 1.75% convertible due 2026 was seen at 100.3 versus a stock price of $42.50, while its 0.25% convertible also due 2026 was 101.25 against a stock price of $40.50.

Israel-based Teva Pharmaceutical said Monday the U.S. District Court for the District of Columbia ruled that the Food and Drug Administration had wrongly denied Teva Pharmaceutical's petition for marketing exclusivity on its generic version of cholesterol drug Zocor.

Teva Pharmaceutical's application for exclusivity will go back before the FDA, and traders stressed that it is unclear how the FDA will rule.

A sell-side convertible analyst said the convertibles moved in line with the stock because the court ruling was "not really a credit story...The equity analysts would probably have modeled this to hell."

Teva Pharmaceutical stock (Nasdaq: TEVA) closed at $42.11, higher by 3.98% or $1.61.

The analyst did not think the news had any significant impact on Teva Pharmaceutical's credit health.

"The credit is already so tight, I don't know if it can tighten any more," the analyst said. "You'd have to go with U.S. Treasuries to get a better interest rate."

Human Genome

Human Genome Sciences' credit "tightened a little" on Monday as the stock opened higher but slid later in the day despite the biotech company reporting positive drug trial results, a sellsider said.

Human Genome's 2.25% convertible due 2012 was down by half a point on Monday on an outright basis and was marked at 86.85 bid, 87.35 offered versus the closing stock price of $10.99. Human Genome stock (Nasdaq: HGSI) gained as much as 7.36% in early trading, but ended lower by 3.68% or 42 cents.

"Those [convertibles] were a little better to buy today on news over the weekend, when they presented some data, and the stock was up earlier in the day," the sellsider said.

Rockville, Md.-based Human Genome said Monday that its hepatitis C drug Albuferon was successful in lowering the amount of the virus in the blood of patients during phase 2 drug trials when used with the drug ribavirin.

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