Merger news spurs trades in Placer Dome, Chiron, Leucadia and Level 3

By Rebecca Melvin

Princeton, N.J., Oct. 31 - Merger news drove much of the activity in the convertibles market on Monday, with month end chores also requiring the energies of most players, sources said.

Among merger news was the unsolicited bid by Canada's Barrick Gold Corp. to take over compatriot rival Placer Dome Inc.

Placer Dome convertibles gained 4 to 6 points outright but were lower on a hedged basis; and both hedge players and outright holders of the 2.75% convertibles were seen losing value on the $9.2 billion takeover bid because the bonds have no takeover protection. Both Placer Dome and Barrick are issuers of convertible paper.

Chiron Corp. bonds were trading a little higher after long-awaited word that Swiss pharmaceutical giant Novartis AG lifted its offer to buy the remaining 58% of Chiron that it didn't already own.

In a third deal, Level 3 Communications Inc. said it signed a definitive agreement with Leucadia National Corp. to acquire WilTel Communications Group, LLC. Both Leucadia and Level 3 are issuers of convertible paper.

Level 3 will pay 115 million shares of Level 3 common stock and $370 million cash. But the agreement provides that Level 3 will not acquire certain assets and liabilities of WilTel. The deal was seen credit positive for Leucadia, which were up about 2 points on the news, traders said.

Airlines convertibles were also trading with AMR Corp.'s convertibles off just slightly after rising last week amid lower oil and fuel prices.

But overall convertibles trading was "pretty much a nonevent," said a New Jersey-based buysider. "They dollar neutral-ed up from Friday's close, although the bond market did rally up a little bit."

In the new deal arena, news hit the tape that Credit Suisse First Boston Capital LLC will price $165 million of mandatory convertibles exchangeable into Equinix Inc. on Nov. 9, according to a syndicate source.

Price talk for the exchangeables is for a coupon of 5.25% to 5.75%, with an initial conversion premium of 18% to 22%. The mandatory convertibles will mature in 2008 and are non-callable for life.

The exchangeable offering is being made through an underwriting syndicate led by Credit Suisse First Boston LLC as bookrunner, with Citigroup Global Markets Inc. and Goldman, Sachs & Co. acting as co-managers.

Equinix' largest shareholder, STT Communications, will enter a pre-paid forward contract with Credit Suisse to sell the mandatory convertibles, which will be offered concurrently with a public offering of 5.15 million Equinix common shares.

Equinix is a provider of internet exchange services based in Foster City, Calif.

Given the last day of the month, players looked back on October, which Citigroup called "weak" for convertible issuance, with only four new deals that raised just $1.11 billion.

Total issuance for October, including investment bank exchangeables, was $1.32 billion in 25 deals.

But even including the exchangeables, issuance was at its lowest level since May, when volume was $1.12 billion, or $0.95 billion without the exchangeables.

Year to date, volume totaled $28.23 billion, 65% of the amount at the same point last year.

The Prospect News figures cover dollar-denominated deals offered in the United States as registered transactions or under Rule 144A. They include deals issued by investment banks linked to a single stock, unless otherwise noted.

Placer Dome adds 4 to 6 points outright

The 2.75% convertibles of Placer Dome were up by about 4 to 6 points, but lower on a hedged basis, as its underlying shares climbed 20.84%. Parity on the bonds was 95.6.

"We're not really sure what's going to happen," said an outright buyside analyst, who was reading the indenture and searching for particulars.

He said there are tax implications for U.S. holders because Placer Dome is a Canadian company as is Barrick Gold. He also said that Placer Dome's board is still considering the bid.

It would seem it was a good deal given the reaction by shareholders, he said. "But who knows, maybe it went up in anticipation of an even better bid."

Placer Dome has entertained previous bids from Barrick and opted to continue to go it alone.

In this proposed deal, Barrick said it will pay $9.2 billion, with up to $1.2 billion in cash and issue up to 303 million in shares, for Placer Dome, although the deal could be all cash.

Vancouver, B.C.-based Placer Dome's shareholders would get $20.50 in cash, or a combination of 0.7518 of a Barrick common share plus 5 cents in cash, for each Placer Dome share, at the maximum share, minimum cash end of the proposed deal range.

The offer represents a 24% premium over Placer Dome's closing price Friday and a 27% premium over its average closing price over the last 10 days.

Also on Monday, Placer Dome was upgraded to "in line" from "underperform" by Goldman Sachs.

Placer Dome's 2.75s traded between 109.50 and almost 112, up 4 to 6 points, compared to the 105.50 bid, 106 offered level on Friday. Shares of Placer Dome surged $3.44, or 20.84%, to $19.95.

Barrick Gold's 3% convertibles were also heard in trade, at about 83 versus a share price of $27.25.

Barrick Gold shares closed lower, down $1.75, or 7.16%, to $25.25.

Chiron adds 1.5 points

The convertibles of Chiron gained about 1.5 points, in line with its underlying shares, after news that Novartis raises its bid to a deal worth $5.1 billion, or $45 a share, following its $40-a-share bid, worth $4.1 billion, that Chiron directors rejected in September.

The merged companies aim to be a powerhouse vaccine producer through investments in R&D and manufacturing to increase quality and capacity.

According to Citigroup analyst Elise Wang, who tracks Chiron, the $45-a-share price represents a 23% premium over the last price the stock traded at before Novartis made its original offer. It's also a 4% premium over Friday's close.

Chiron is best known for its seasonal flu vaccine, Fluvirin. But the Emeryville, Calif.-based company has been beset with manufacturing problems. Last October, British authorities revoked Chiron's license to make Fluvirin at its Liverpool, England, plant, citing contamination concerns. The move effectively barred almost 48 million doses from reaching the U.S. market, roughly half the nation's flu-shot supply, resulting in a national shortage.

Chiron has subsequently been cleared to resume production of its Fluvirin at its Liverpool facility. But in July, Chiron said that it also had quality control problems with another flu vaccine, Begrivac, at its facility in Marburg, Germany.

On Oct. 17, Chiron said that due to lingering production problems it was lowering its estimated 2005 production targets for Fluvirin from as high as 30 million doses to below 18 million.

The deal with Swiss drugmaker Novartis is expected to close in the first half of 2006, pending shareholder and regulatory approvals.

Chiron's 2.75% convertibles traded at 99.25, and its 1.625% convertible notes changed hands at 98.75. Its shares closed up 74 cents, or 1.71%, at $44.14.

Leucadia gains on divestiture

The 3.75% convertibles of Leucadia traded about 2 points higher after news that it agreed to sell its internet access and services company, WilTel Communications Group LLC, to Level 3 Communications Inc. for about $680 million.

Level 3, which operates IP-based fiber optic networks, said it will pay $370 million in cash and issue 115 million shares for the deal.

Tulsa, Okla.-based WilTel delivers voice, data, video and IP services over a next-generation fiber-optic network. The acquisition includes all of WilTel's communications business, including a multi-year contract with SBC Communications Inc. and WilTel's Vyvx video transmission business.

The Leucadia 3.75s traded up about 2 points to 107.75 bid, 108.00 offered. Shares of Leucadia closed higher by $1.37, or 3.29%, to $42.96.

Level 3 convertibles were seen little changed to slightly higher, with the 2.875% convertibles due 2010 little changed at 57, and its 5.25% due 2011 trading at 79.50, up about a point. Its 6% convertibles due 2009 traded at 52, and its 6% convertibles due 2010 traded at 55.

The company's shares ended up 18 cents, or 6.67%, at $2.88.

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