Microsoft flat to lower after stock downgrade; Endo Pharmaceuticals edges up; TRW slips

By Rebecca Melvin

New York, Oct. 4 - Microsoft Corp. convertibles held mostly steady on Monday but slipped a little toward the end of the session after a downgrade on its underlying shares to "neutral" from "buy" by Goldman Sachs.

Endo Pharmaceuticals Holdings Inc., with a convertible that hasn't often been heard in trade, continued to creep higher after the Chadds Ford, Pa.-based specialty drug maker made headlines recently with two acquisitions in as many months aimed at diversifying and building out its position in the generics and pain drug businesses.

Livonia, Mich.-based automotive supplier TRW Automotive Holdings Corp. appeared to slip a notch with its shares lower. The in-the-money convertible has been pulled higher by the prospect that the company could opt to pay down the convertibles after shares climbed subsequent to the new issue.

SBA Communications Inc.'s 1.875% convertibles traded flat with shares little changed.

It's "as quiet as I can remember," a New York-based sellside trader said of Monday's session in which secondary market action was muted and the primary was quiet. The major stock indices slipped, too, amid thin trading volumes.

It may have been the calm before the storm given that a deluge of economic data is slated for this week, and earnings season is set to begin when Alcoa Inc. reports quarterly results on Thursday.

On Tuesday, September ISM services data is expected, and Wednesday will bring the September. ADP Employment change report.

Monday brought news that factory orders fell slightly more than expected in August and August pending new home sales were higher compared to the previous month, but still far below last year's level.

"While earnings season does generate volatility, especially in the kind of market we are in, today's quiet has more to do with a break from an active September and end-of-month work on Friday," a New York-based sellside analyst said.

But the analyst saw earning and economic data as only a small part of the equation. He said meetings of the European Central Bank and Bank of England coming on Thursday as well as an IMF/World Bank meeting in Washington on Friday extending through Sunday were potential catalysts for the markets.

In addition, the analyst noted that federal court decisions could also affect markets. "News that federal courts upheld anti-dumping complains from the likes of Nucor Corp. against China illustrates more protectionist behavior," the analyst said.

Microsoft stands pat

Microsoft's 0% convertibles due 2013, which is not among the most liquid convertible names in the secondary market despite the size of the issue, traded but didn't appear to move, having changed hands Monday at 102.5 versus a share price of $24.35, compared 102.5 versus a share price of $24.50 on Friday.

A second pricing source said the Microsoft 0% convertibles settled lower by about 0.4 point to 102.1 on the day.

Goldman Sachs analyst Sarah Friar cut her rating on Microsoft and lowered her price target on its shares to $28 from $32. In a research note, the analyst said investors aren't likely to take more of a positive view of the company until it establishes a stronger position in the market for mobile devices.

"At a minimum, tablets will likely prolong the refresh cycle for notebooks," Friar said. "We do not believe a Windows 7 tablet built on an Intel processor is currently able to compete."

Endo Pharma creeps higher

Endo Pharmaceuticals' 1.75% convertibles due 2015 traded at 126.75 versus a share price of $32.90 early in the session and was seen settling near that level at the end of the day at 126.8 compared to a previous level of 126.1.

Shares of the Chadds Ford, Pa.-based company edged up some more to $33.14, which was up 26 cents, or 0.8%, on the day. The shares have been about 10% higher since the company announced its Qualitest Pharmaceuticals acquisition last week.

The company is diversifying its business and building out its positions in the generic and pain drug businesses. It is acquiring privately held Qualitest, a generic pain medications giant, for about $1.2 billion from Apax Partners, a private equity investment group.

Qualitest is the sixth largest U.S. generics company as measured by prescriptions filled, Endo said in its release. Controlled substances like pain reliever oxycodone make up 40% of Qualitest's product portfolio.

Combining the companies' generics portfolios will "significantly boost Endo's revenue and earnings growth," Endo said.

On a pro forma basis for fiscal 2010, the combined company would have had revenues of about $2 billion and more than 3,000 employees.

Endo's board of directors has approved the deal, which is expected to close by the end of the year or early 2011. Endo plans to use its cash balance to finance the deal to the extent of $500 million, $300 million will be financed through its credit facility and the funding for the balance has been arranged.

In August, Endo agreed to acquire Penwest Pharmaceuticals for $144 million. Through the deal, Endo gains access to Opana ER, a painkiller which was being co-developed by the two companies.

Endo reaffirmed its 2010 projection for revenues and adjusted earnings. The company expects revenue of between $1.63 billion to $1.68 billion and adjusted earnings per share are expected in the range of $3.30 to $3.35.

TRW slips

TRW's 3.5% exchangeable senior notes due 2015, which priced a year ago in November, traded at 156 versus a share price of $40.90 on Monday but then were seen settling a leg lower at 153.2 on Monday compared to 156.3 on Friday.

That compares to a trade at 145 versus a share price of $37.60 in August after Deutsche Bank downgraded the auto-parts supplier's shares to "hold" from "buy," citing the potential end of a considerable run up in the stock.

Shares of the auto-parts supplier fell 77 cents, or 1.9%, to $40.15 on Monday. The non-callable convertible's initial conversion price is $29.55.

This is a higher-priced, in the money convertible name that has seen its shares move up a lot since issue and hence is a candidate for being paid down by the issuer, or flushed out.

Mentioned in this article:

Endo Pharmaceuticals Holdings Inc. Nasdaq: ENDP

Microsoft Corp. Nasdaq: MSFT

SBA Communications Inc. Nasdaq: SBAC

TRW Automotive Holdings Corp. NYSE: TRW

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