Manor Care moves sideways; Aussies, Indians price new bonds; traders go quiet

By Evan Weinberger

New York, July 2 - Manor Care Inc. convertibles were active Monday on takeover news, but the nursing home-operator's bonds were the exception as new-month bookkeeping and a week broken up by a holiday conspired to make the first trading day of July a languid one.

With only two new issues coming from overseas and little action in the secondary market, traders spent the day scouring their computer screens searching for deals.

"I've been checking to see if anything's trading," one trader said.

"The tape was, like, minimal all day long. I really don't see anything."

Meanwhile, Lehman Brothers advised investors to be aware that only small returns are likely on Komag Inc. convertibles despite its recent takeover agreement with Western Digital Corp.

The day's only new deals came from overseas. The two international issues that provided some spice to the session came from India and Australia.

Gemini Communication Ltd., a computer networking company based in Chennai, India, priced €15 million in foreign currency convertible bonds due 2012 with a 6% coupon to yield 6.99%. The bonds have a conversion price of Rs. 513.08 and will be listed on the Luxemburg Stock Exchange. Merrill Lynch is the bookrunner and Edelweiss Capital Ltd served as the placement agent and the company's adviser.

While Macquarie Communications Infrastructure Management Ltd didn't price the largest convertible bonds ever offered up, it did make the deal interesting.

The Sydney-based broadcast transmissions provider priced $200 million in exchangeable senior unsecured bonds. The bonds have an initial exchange premium of 30% and will yield 6%. Once exchanged, the bonds will yield shares in the triple-stapled securities of Macquarie Communications Infrastructure Ltd., Macquarie MCG International Ltd. and the Macquarie Communications Infrastructure Trust.

Macquarie Equity Capital Markets Ltd., ABN AMRO Rothschild and UBS AG, Australia Branch are joint bookrunners and lead managers.

There were no new American issues with July 4th holiday fast approaching.

In contrast to the sluggish performance of the convertibles market, the stock markets moved up sharply Monday. The Dow Jones Industrial Average jumped 126.81 points, or 0.95%, to 13,535.41. The Nasdaq moved forward 29.07 points, or 1.12%, to 2,632.30.

Analysts who could be tracked down on this holiday week were not expecting much action, as many traders and investors have built vacations around Wednesday's holiday.

"I'd be hard pressed to imagine anything else happening for the rest of the week," one analyst said.

Manor Care upwardly mobile

Investors looking to cash in on the Carlyle Group's agreement to take over Manor Care Inc. looked to the Toledo-based nursing home manager's 2% convertible senior notes due 2036 and 2.125% convertible senior notes due 2035.

One analyst called the action on Manor Care convertibles "the highlight of the day."

The 2.125% convertibles were by far the more active of the two issues. They closed lower Monday at 147.357 versus $64.10 after a Friday finish at 149.477 versus $65.29. The stock (NYSE: HCR) close down $1.19, or 1.82%, at $64.10 Monday.

Although the 2% convertibles were less active, they did finish Monday up a bit. The 2% convertibles closed at 131.886307 versus $64.10. The bonds closed Friday at 130 versus $65.29.

Analysts say investors saw an opportunity to cash in on the buyout deal reached Monday, but it's not without risk.

"It's pretty indefinite at this point, except that the company says it wants to get this done in the fourth quarter," one analyst said, adding that there is a chance for a rival bidder to swoop in.

The Carlyle Group agreed to purchase Manor Care at $67 per share, or a total of around $6.3 billion. Toledo-based Manor Care operates around 500 nursing homes around the country.

Lehman cautions on Komag

The recent agreement for Western Digital to take over Komag may not provide anything beyond a small payoff for investors in Komag's 2% convertible subordinated notes due Feb. 1, 2024, according to a Monday report by Lehman Brothers convertibles analysts.

On Friday, data storage firm Komag agreed to a $1 billion buyout, or $32.25-per-share - a 9% premium to the previous day's close, from hard disk drive maker Western Digital, one of its largest customers.

The Lehman analysts advised outright convertibles investors that the Komag convertibles would yield "decent but unspectacular returns" and told risk-arb investors to stick with Komag stock.

"We believe the benefits of enhanced upside in the case of stock outweighs the better downside characteristics of the convert which is also subject to horizon extension risk," the analysts wrote.

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