Komag delayed a day on Maxtor earnings, still bid up 2.5 points; Kodak's paper snapped up on new plan

By Ronda Fears

Nashville, Jan. 22 - Convertibles trading saw heavy volume Thursday amid a flurry of news and nearly $2 billion of new paper in circulation. New issues were on a more upbeat track while the overall secondary market tended to be flat to lower in tandem with stocks.

Among the bright spots in stock trading were the airlines, which resumed flight on better-than-expected results from American Airlines parent AMR Corp.

Eastman Kodak Co. also was an exception to the downdraft, shooting upward on a new plan to cut costs up to $1 billion by 2007 by means of a 20% cut in its workforce, among other measures, all the while aiming to further reduce debt.

New convertible issues took a positive turn, for the most part, despite aggressive terms.

Teva Pharmaceutical Industries Ltd. priced its two-parter at the cheap end of guidance and was said to be fully subscribed, so it did better out of the gate than in the gray market beforehand. The issue drew no bids and the offer was 0.5 point over par in the gray market; in the immediate aftermarket, however, the $400 million 0.5%, up 29% tranche was better by 0.785 point, and the $600 million 0.25%, up 20% tranche gained 1.25 points.

The News Corp.-linked exchangeable, however, ended the day more than 0.625 point below issue price, even after it priced cheaply outside guidance to yield the three-month Libor plus 5 basis points, up 53.5%. The issue also failed to capture any of the positive momentum in News Corp. stock from Liberty Media Corp.'s $700 million investment in the Australian news giant, gaining a top voting seat.

Comtech Telecommunications Corp. upsized its deal and it got printed with a 2% handle, up 35% - at the aggressive end of price talk - but also continued north after pricing. The issue added 4.25 points from par and 3 points from gray market levels.

Komag Inc., however, delayed final pricing of its deal by a day. It wasn't put off because it was having trouble getting placed, a market source said, but in order for investors to digest the earnings of Maxtor Corp., Komag's largest customer for its disks.

Komag deal unfazed by delay

Potential buyers for Komag's $70 million deal didn't flinch, cringe or wince on word that the pricing was put off for a full day. The issue continued heading north, ending Thursday at 2.5 points over issue price on the bid side with an offer at 3 points over. That was a 0.5-point gain from where it ended in the gray market Wednesday.

Komag shares took another sharp decline, however, as hedge funds position to play the convertible. The stock lost $1.10 on Thursday, or 4.98%, to $20.99.

The convertible offering was not fazed by the guidance getting tightened Wednesday either.

Komag's deal was originally talked to yield 2.5% to 3.0% with a 28% to 32% initial conversion premium. Guidance was amended Wednesday to cut the coupon to 2.0% to 2.5%.

At the middle of original price talk, sellside analysts put the Komag deal 3% to 4% cheap.

A source said the delay was due to Maxtor announcing earnings.

Komag's sales to Maxtor accounted for 39% of total revenue in fourth quarter. Komag is the world's largest independent supplier of thin-film disks, the primary high-capacity storage medium for digital data. Maxtor provides hard disk drives for a variety of applications, including desktop computers, Intel-based servers, near-line storage systems and consumer electronics.

After the market close Wednesday, Maxtor reported fourth-quarter revenue of $1.17 billion, up from $1.04 billion a year before; GAAP net income was $38.8 million or 15 cents per diluted share, up from $3.58 million or 1 cent per diluted share. For 2003, revenue was $4 billion, up from $3.78 billion in 2002; GAAP net income was $102.3 million or 41 cents per diluted share, up from a net loss of $334 million or $1.40 per diluted share.

"Looking ahead, we believe that 2004 will be a year of significant opportunity for the hard drive industry and for Maxtor," said Maxtor Chief Executive Paul Tufano, in the company's earnings release.

"Demand in our core desktop and server markets remains strong. There is growing momentum for the use of hard drives in emerging applications where Maxtor has a leadership position. We are committed to improving our operating leverage throughout the year, by enhancing manufacturing efficiencies, driving economies through the supply chain and maintaining a strong focus on expense control."

Komag said on Tuesday that based on current customer demand, it expects total revenue for first quarter to be similar to fourth quarter when its revenues rose 8% to $118.2 million. Komag posted net earnings of $16.4 million or 65 cents per share on a fully diluted basis.

Terms curb passion for News

Citigroup Global Markets Holdings Inc. sold $750 million of five-year mandatory exchangeable notes that convert into News Corp. shares at par of 37.83575 to yield the three-month Libor plus 5 basis points. The notes have a 53.5% initial conversion premium.

It sold cheaply outside of price talk that put the yield at the three-month Libor minus 50 basis points to the three-month Libor flat, up 153.5%. Sellside analysts had put the deal around 1.5% rich, at the midpoint of price talk.

"There could've been some gusto for this name," said a buyside trader in New York. "But the terms just killed the enthusiasm as far as we were concerned."

Sole manager Citigroup Global Markets Inc. took the new deal out at 37.2, off more than 0.625 point from issue price.

News Corp. shares, however, gained 46 cents on the day, or 1.21%, to $38.46 as Liberty Media cast a resounding vote of confidence in the company.

Liberty Media reported on Wednesday that by a transaction on Tuesday it had acquired a 9.15% voting interest in News Corp. After giving effect to the deal, Liberty Media now owns 48 million News Corp. ordinary American Depository Shares and 210.8 million preferred limited voting shares, for a total equity interest of some 17%.

The deal makes Liberty Media the largest shareholder in News Corp. with the second-largest voting stake behind the Rupert Murdoch family.

In a filing with the Securities and Exchange Commission, Liberty Media reported that during the past year, it has increased its ownership in News Corp. by 26.8 million shares. The company exchanged nonvoting shares and $693 million in cash to gain the position.

"We have capitalized on an opportunity to exchange nonvoting shares for voting shares at attractive prices to become the second-largest voting block in one of the world's premier media companies," said Robert Bennett, chief executive of Liberty Media.

"News Corp. is one of the few truly global media companies and we are very pleased we were able to leverage our substantial equity interest in News Corp. into a larger equity and voting stake."

The Murdoch family owns about 30% of the voting shares.

There was no ill effect on Liberty Media from the substantial cash outlay. Liberty Media shares gained 9 cents, or 0.74%, to $12.32.

Standard & Poor's credit analyst Heather Goodchild said: "Liberty Media Corp.'s (BBB-/stable) announcement that it has increased its investment in News Corp. Ltd. by about $700 million does not affect its rating or outlook. However, coming on the heels of Liberty's indication that it expects to participate pro rata in UnitedGlobalCom Inc.'s $1 billion rights offering, translating into a further $550 million cash use, the investment reduces its flexibility within the rating for share repurchases."

She went on to say these actions follow the company's announcement on Nov. 20 that it will reduce its debt by $4.5 billion by the end of 2005, $2.5 billion of which was achieved by the end of 2003. Despite the size of these two cash uses, S&P believes Liberty's liquidity will be appropriate for the rating following the two transactions, as Liberty has relatively few sizeable further capital commitments.

Teva, Comtech please buyers

Convertible buyers eked out some space with regard to the Teva Pharmaceutical Industries Ltd. issue, as it priced at the cheapest end of price talk, a buyside trader in New Jersey said.

"It [Teva] still was pretty aggressive, but if you like the name, and a lot of people do, then you just had to play this one," the trader said.

Teva sold $1 billion of 20-year senior convertible notes in two parts via sole bookrunner Lehman Brothers, at the cheap end of guidance on the overnight transaction.

Tranche A, for $400 million, sold at par to yield 0.5% with a 29% initial conversion premium. It had been talked at 0.25% to 0.5%, up 29% to 35%.

Tranche B, for $600 million, sold at par to yield 0.25% with a 20% initial conversion premium. It had been talked at 0.0% to 0.25%, up 20% to 26%.

Sole bookrunner Lehman Brothers took Tranche A home at 100.875 and Tranche B at 101.25.

Teva shares climbed $2.24, or 3.81%, to $61.

The Jerusalem-based generic drugmaker also on Thursday consummated its $3.4 billion acquisition of Irvine, Calif.-based generic drugmaker Sicor Inc.

Comtech didn't have to work hard to find buyers, though.

In fact, Comtech upsized its deal to $90 million from $75 million and priced it aggressively. The deal was printed with a 2.0% coupon, up 35% versus yield talk for a 2.5% to 3.0% coupon and premium guidance of 33% to 37%. At the midpoint of indicative terms, sellside analysts not associated with the deal had put it 4% to 5.35% cheap.

Bookrunner Bear Stearns & Co. closed the new Comtech convertible at 104.25 bid, 104.75 offered. The stock closed down $1.19, or 3.4%, to $33.81 The convertible ended in the when-issued market Wednesday with a bid of 3 points over issue price and an offer at 4.5 points over.

Telecom, tech investors waffle

Although Lucent Technologies Inc. was a fall guy of sorts in the technology and telecoms slide Thursday, a sellside convertible dealer said it was more of a reverberating thud in reaction to mixed signals about whether corporate spending levels have indeed rebounded.

On the heels of such an explosion in the space - Lucent shares alone have skyrocketed more than 50% since the first of the New Year - a good deal of the pullback, or implosion, was from profit taking, the trader said.

"Lucent got slammed pretty hard; there was a Smith Barney downgrade," the trader said.

"An entire quadrant of the market - the opticals, networkers, you have it - were caught up in this wave. There is some anxiety about whether spending levels really are on the mend. So, if you're really nervous, you might want to take your profits and give it some time to either pan out, or not.

"It is a bad case of nerves, commingled with a big dose of greed."

Lucent's 2.75% convertibles both lost about 10 to 12 points on a dollar neutral basis, the trader said. The stock fell 37 cents, or 8.37%, to $4.05.

Nortel Networks Corp. was another high-flyer that took a dive.

On Thursday Nortel said it is in talks to sell its manufacturing assets to Flextronics International Ltd. for more than $500 million.

From Nortel's point of view, the company said it would cut costs and free up more money to develop new products.

From Flextronics' vantage point the deal, which hasn't been finalized, would be worth $2 billion in annual revenue for Flextronics.

"This proposed transaction would solidify Flextronics as the leader in the infrastructure market," said Michael E. Marks, chief executive of Flextronics, in a company release.

Robert Dykes, chief financial officer of Flextronics, said the financial impact would be accretive to Flextronics in the first year.

"The company [Flextronics] has adequate liquidity through its existing cash reserves and available revolving credit facility to meet the cash requirement, which would be spread over a nine-month period. Further quantification of the transaction will be provided upon consummation of the proposed transaction," Dykes said.

Flextronics senior management previously had scheduled a conference call for Jan. 27 to discuss its third-quarter earnings results and outlook. The company said the Nortel transaction would also be discussed in that call.

Nortel said its intention is to focus its supply chain resources and investments on areas that can provide true competitive differentiation and offer the most value, such as new products, and the deployment, integration and support of complex, multi-technology network solutions.

Flextronics gained some ground while Nortel slid alongside its peers, but a dealer said neither of the two companies' convertibles moved more than a point. He said it appears investors are waiting to see if the sale goes through.

Kodak developments pleasing

Kodak's picture looks better, judging by the market's reaction to its earnings and new plan to become a digital photography giant. Part of the $1.7 billion plan was a 20% job cut.

The Kodak 3.375% convertible due 2033 was better by about 1.25 points on swap, and on a dollar neutral basis it showed a gain of 8.5 points.

Kodak shares shot up $3.49, or 12.71%, to $30.95.

"It was amazing, really," said a sellside convertible dealer.

A buyside trader added, "Kodak delivered a boatload of news to the market, and it was a nice development."

Kodak, which announced in September a strategy to accelerate earnings growth based on a strong move in the digital photography market, said it has achieved a series of milestones in pursuit of that goal: Strong revenue growth across a number of digital markets, several acquisitions and an investment in Lucky Film Co. Ltd. that will strengthen its position in the emerging markets of Asia.

The buyside trader said a key point in Kodak's presentation was that it emphasized that the company expects to generate enough cash flow in 2004 to pay down debt while maintaining a level of investment necessary to pursue its objectives.

In a news release, Kodak said its new digital businesses are already doing well and offer significant growth opportunities, while portions of the company's traditional business are in decline. Thus, the company plans to devote additional resources to digital growth opportunities and maximize the traditional businesses, including through selective investments.

"New, competitive Kodak"

"We are at the dawning of a new, more competitive Kodak, one that is growing profitably, that has a more balanced earnings stream, and that will have a dramatically lower cost structure," said Daniel A. Carp, chief executive of Kodak.

Kodak is preparing plans aiming for full-year continuing savings of $800 million to $1 billion by 2007 through consolidating operations, asset disposals and the reduction in workforce, among other things. This will likely result in charges of an estimated $1.3 billion to $1.7 billion during the next three years, the company said. That would be in addition to some $1.3 billion in charges announced over the past three years.

Also Thursday, Kodak reported fourth-quarter sales of $3.778 billion, an increase of 10% from a year ago, and net income of $19 million or 7 cents per share, compared with net income of $113 million or 39 cents per share, in fourth-quarter 2002. For 2003, sales were $13.317 billion, up 4% from 2002, and net income totaled $265 million or 92 cents a share, compared with $770 million or $2.64 per share, the year before.

For 2004, Kodak expects operational per-share earnings to range between $2.25 and $2.55 and GAAP earnings to range between 80 cents and $1.30. The company also expects operating cash flow, excluding acquisitions, of $485 million to $615 million based on sales of $13.8 billion to $14.2 billion.

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