Conexant slips after loss; Weingarten flat on debut; Inco gains on failed bid; results dampen second half

By Kenneth Lim

Boston, July 28 - The convertible bond market took a breather on Friday as the summer weekend beckoned, but Conexant Systems Inc. came to life only to stumble outright after the company reported a wider third-quarter loss.

The new Weingarten Realty Investors convertibles were seen trading at around their reoffered price amid limited investor interest for the real estate investment trust.

Overall activity was languid on Friday, market sources said.

"There's nothing much going on," a buyside convertible bond trader said. "It's a really slow day."

Inco Ltd.'s 1% convertible due 2023 gained about 5 points outright in light trading in line with the stock after the Toronto-based mining company said it was no longer bidding for rival Falconbridge Ltd.

The convertible was marked at 240 against a stock price of $75.95 on Friday. Inco stock (NYSE: N) gained 3.38%, or $2.50, to close at $76.40.

"It seems like people are lightening up on deltas with the stock down here," a sellside convertible bond trader said.

Inco said Friday that it did not receive enough share tenders for its $17.3 million offer for Falconbridge. Inco's withdrawal leaves the field open for Xstrata plc to proceed with its bid to take over Falconbridge.

Meanwhile, Phelps Dodge Corp. said it will proceed with its plans to acquire Inco for C$20.25 cash plus 0.672 Phelps Dodge share for every Inco share. Teck Cominco Ltd. has also offered a competing bid of C$28 cash plus 0.6293 class B shares for each Inco share.

"It [the Falconbridge deal] was a disappointment for them, because they really wanted Falconbridge," a buyside convertible analyst said of Inco. "But it's obviously good for the stock because it meant that they wouldn't have to raise their bid, which was what they'd have to do if they wanted to be successful."

The ongoing takeover battle for Inco is also propping the company's stock, the analyst said.

"Phelps Dodge is still committed to acquiring Inco, and there's a possibility that there's another bidder interested," the analyst said. "It's very good for the stock."

For Inco's credit, the latest developments could be slightly positive.

"It's going to be Phelps Dodge credit, it's one less acquisition," the analyst said. "Even though it's a stock and cash deal, there would have been some debt involved, so it's better on the margin for the credit."

In the chip sector, Intel Corp. eked out an outright gain as the stock continued to improve a day after the chip maker unveiled a new product aimed at taking back market share from its largest competitor. The Intel 2.85% convertible due 2035 rose by about a point to change hands at 83 versus a stock price of $18.125. Shares of Santa Clara, Calif.-based Intel (Nasdaq: INTC) closed at $18.18, up by 4.06% or 71 cents.

Conexant hit by loss

Conexant's 4% convertible due 2026 was about 2.5 points lower outright on Friday after the company lost more money in its third fiscal quarter and provided lackluster guidance.

The convertible traded at 82 against a stock price of $1.75. Conexant stock (Nasdaq: CNXT) fell 10.36%, or 20 cents, to close at $1.73.

Conexant said late Thursday that it lost $67.1 million, or 14 cents per share, in the three months ended June, down from a loss of $32.2 million, or 7 cents per share, in the same period a year ago. Excluding write-downs and $30 million in costs related to a patent dispute with Texas Instruments, the communications semiconductor chip maker would have reported a profit of $18.6 million, or 4 cents per share. Newport Beach, Calif.-based Conexant also said it expects revenue growth of 1% to 3% in the fourth fiscal quarter against the third quarter as a weak PC market and slower sales of legacy wireless products take their tolls.

"The quarterly earnings was actually decent," a buyside convertible analyst said. "They reached their 10% operating income [margin target] threshold before the market expected, but guidance was a little weak. Most analysts took their estimates down slightly, but not a lot because the margin was enough to offset the guidance."

Investors in Conexant's debt securities are more concerned about the company's need to raise about $100 million to $200 million in cash over the next year as about $456.5 million of the company's older series of 4% convertible debt comes due in February 2007, the analyst said.

"They said in the conference call that they hope to get to the bank or high-yield market so they wouldn't cause any more dilution," the analyst said. "Once they can get that done, then it's going to free the stock up and free the rest of the converts. That's the biggest concern right now."

Weingarten flat on debut

Weingarten Realty Investors' newly priced 3.95% convertible due 2026 traded around its reoffered price of 98.125 on Friday as investors reported limited interest in the name.

Weingarten stock (NYSE: WRI) closed at $40.01, up by 1.91% or 75 cents.

Weingarten priced the upsized $575 million offering at the cheap end of talk before the market opened on Friday, with a coupon of 3.95% and an initial conversion premium of 25%.

Price talk guided for a reoffer range between 98.125 and 98.375, a coupon of 3.875% to 3.95% and an initial conversion premium of 25%.

The size of the deal was originally $450 million, but it was increased to $500 million plus a $75 million over-allotment option, upsized from the initial $67.5 million, that was already exercised. Citigroup, JP Morgan and Morgan Stanley were the bookrunners of the Rule 144A offering.

Weingarten is a Houston-based real estate investment trust with a portfolio of shopping centers and industrial properties in the United States. It plans to use the proceeds of the deal to buy back about $167.6 million of its common shares, to reduce its debt from a revolving loan and for general purposes.

Investor interest in the deal appeared limited although the pricing seemed fair and the offering was upsized, onlookers said.

"The stock compared to other REITs, it's pretty cheap," said a buysider whose firm did not take part in the deal. "REITs in general are all trading at pretty expensive levels, but the shopping center REITs are kind of the cheapest. But the fundamentals aren't the strongest as well."

A sellside convertible bond trader said the deal was "nothing spectacular."

"The take on these REITs is that the stock is at an all-time high...these guys are basically selling their stock at a high and paying something like below the dividend yield."

Second half concerns

With the reporting of quarterly earnings starting to pick up, the numbers so far suggest that the second half of the year could be weaker than expected, market sources said.

"For the most part companies seem to be doing OK," a sellsider said. "It's the guidance for the second half that seems to be coming in a bit."

With the outlook appearing not so bright, another source of speculation is whether the U.S. Federal Reserve will raise interest rates again in August, the sellsider said. Higher interest rates generally bode well for new convertible issuance, but the impact on the broader market remains to be seen.

"It's hard to say in the summertime because activity in the bond and equity markets is light," the sellsider said. "The real test will be in the fall."

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