Chiron trades mixed, but Curagen gains; Dobson Communications to price $150 million issue

By Rebecca Melvin

Princeton, N.J., Sept. 6 - The convertibles of Chiron Corp. were mixed in active trade Tuesday after the company rejected the $40-a-share buyout bid by Swiss pharmaceutical giant Novartis AG.

Other biotechnology names were also active in the convertibles market including Curagen Corp., which saw its 4% convertible gain about 2 points. Cephalon Inc. also traded as did Human Genome Sciences Inc., although their moves weren't large, traders said.

Northwest Airlines Corp. saw its 7.625% convertible move lower again, extending a slide from last week. Tuesday's renewed move was spurred by Standard & Poor's action to cut its rating further into junk territory and on reports that its more than two-week-old mechanics strike may be starting to cause maintenance problems. Many airline stocks began to bounce back on Tuesday, however.

Overall convertibles trading activity on Tuesday was seen as "gearing up" after a three-day weekend and the unofficial end of summer. "It was busier than Friday, but still pretty quiet," a sellside trader said.

In addition, convertibles players watched news after the close regarding a new $150 million convertible issue from Dobson Communications Corp. that is expected to price after markets close on Wednesday.

The 20-year convertible debentures will be priced concurrently with senior floating-rate notes due 2012 from Dobson Communications.

The Rule 144A convertibles, to be sold via bookrunner Lehman Brothers and joint leads Bear Stearns and Morgan Stanley, were talked to price with a coupon of 1.0% to 1.5% and an initial conversion premium of 22.5% to 27.5%.

There is a $30 million greenshoe.

Oklahoma City-based Dobson Communications is a wireless communications services company, and the company said it plans to use proceeds, along with cash on hand, to redeem $299 million outstanding principal amount of its 10.875% senior notes due 2010, plus accrued interest and the redemption premium.

Chiron convertible slips

The 1.625% convertibles of Chiron slipped in trade Tuesday after the company announced late Monday that its independent board directors rejected Novartis's $4.5 billion buyout offer to acquire the 58% of Chiron shares it doesn't already own for $40 a share. Novartis currently owns about 42% of Chiron.

In its release Monday, when markets were closed for the Labor Day holiday, Chiron termed the offer "inadequate."

That response, which wasn't surprising given the zoom up in Chiron shares above $40 when the all-cash offer was made last week, caused the 1.625% convertible due 2033 to retract about 0.375 point to 98.25 in "pretty active" trade, a trader said.

The 4.75% convertible due 2034 traded up slightly however to 99.125.

Traders disagreed on the reason for the moves. One sellsider said that he expected both issues to move pretty much the same because they don't have a lot of delta sensitivity and the potential for a par put means neither is expected to be converted.

However another sellside trader said that the 1.625% is less attractive without takeover protection, while the premium make-whole provision for the 2.75s becomes more of a viable event with the stock run-up close to the a pre-set threshold on the takeover protection.

The initial stock move Thursday suggested that many anticipated a rival bid for the Emeryville, Calif.-based biotech company. On Friday, Chiron stock slipped 14 cents but was still well over $40 at $42.79.

For its part, Novartis said it made the bid in part because it believes Chiron would better be able to cope with its regulatory and production problems as a subsidiary rather than as an independent company.

Chiron suffered after U.K. regulators last autumn pulled Chiron's license for its flu-vaccine manufacturing plant in Liverpool due to contamination concerns. Subsequently, Chiron wasn't able to ship nearly 48 million doses to the U.S., which contributed to a vaccine shortage in the states last winter.

In July, Chiron reported it had quality-control problems with another flu vaccine plant in Marburg, Germany. The company also has two other manufacturing facilities in Italy.

On Tuesday, the stock closed higher by 72 cents, 1.68%, at $43.51.

Curagen 4s add

The 4% convertibles of Curagen Corp. picked up Tuesday amid a jump in its stock price and recent activity in biotechs that has prompted two-way interest in the convertibles of several issues, traders said.

The 4s were quoted at 76.25 late in the day, up from about 74.25 last week.

The New Haven, Conn.-based company's 6% convertible was seen "wrapped around 99." The 6% convertible is considered a "busted convert," which doesn't trade actively.

Shares of Curagen closed up 38 cents, or 8.62%, at $4.79.

Northwest convertibles extend losses

The convertibles of Northwest continued to lose ground on Tuesday after S&P cut the Eagan, Minn.-based airline's long-term credit rating to CCC- from CCC+. The rating agency cited rising fuel costs and delays in winning labor concessions.

In addition, the Wall Street Journal reported Tuesday that federal regulators are investigating possible maintenance lapses at Northwest since mechanics went on strike on Aug. 20.

Northwest's 7.625% convertible fell 3.75 points to trade at 33, compared to 36.75 on Friday. Its 6.625% convertible traded down 1.25 points to 34.75, compared to 35 on Friday. Shares of the company fell four cents, or 1%, to $3.59.

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