King Pharma soars on merger; Boise Cascade higher on split; Marshall & Ilsley deal emerges

By Ronda Fears

Nashville, July 26 - King Pharmaceuticals Inc.'s convertibles skyrocketed Monday on a $4 billion all-stock offer from Mylan Laboratories to buy out the company at a huge premium. The converts also rose on the possibility the notes will get taken out at par due to the takeover or that Mylan would want to keep its debt slate clean and redeem the issue as soon as possible.

Otherwise, however, most of the remaining field of biotechs got slaughtered in a bloodbath ahead of earnings, including Elan Corp. plc, Biogen Idec and Sepracor Inc., to name those most often mentioned on Monday. Sepracor reports earnings Tuesday, Biogen Idec on Wednesday and Elan on Thursday.

Similar to the reaction to King Pharma's sale, Boise Cascade Corp.'s mandatory convertible was higher on the split of the timber company assets and OfficeMax Inc., which was acquired late in 2003, with Chicago-based buyout firm Madison Dearborn Partners LLC buying the traditional paper products company for $3.7 billion.

Biotech issues were not the only soft spot in the market, by any means, however.

"There is too much uncertainty about where we go from here, will the Nasdaq keep falling or claw back over 2000 by the end of year? It seems that the market has no direction yet," the trader said. Earnings misses and/or warnings continue to spook investors, he said, adding, "Lots of paper is for sale."

Andrew Corp., which makes coaxial cable and wireless networking products, warned about fiscal fourth quarter expectations after posting solid fiscal third quarter results, and that pressured its convertibles along with many other telecom equipment names. Andrew's convertible dropped sharply on the stock plunge by more than 22% to $11.39, with the 3.25% issue pegged at around 116.125 bid, 116.625 offered.

Marshall & Ilsley deal afloat

Marshall & Ilsley Corp. was in the convertible market Monday with $365 million of three-year non-callable mandatories talked with a 6.0% to 6.5% dividend and 23% to 27% initial conversion premium.

Goldman Sachs & Co. and JPMorgan Securities are joint bookrunners of the deal, which is set to price after the close Monday alongside $600 million of straight senior notes.

The $600 million note offering, jointly led by Credit Suisse First Boston and Lehman Brothers, was priced at 99.946 to yield 4.387% or a spread of 67 basis points over the five-year Treasury, according to a sellside convertible market source.

The convertible will have dividend protection by way of a settlement rate adjustment for cash dividends on the common stock above the current common dividend yield level of roughly 2.18%.

The Milwaukee-based regional bank said proceeds from the offerings would be used to provide long-term financing for two recently completed acquisitions by subsidiary Metavante Corp. and to fund its pending acquisition of NYCE Corp.

Marshall & Ilsley shares on Monday lost $1.19, or 3%, to $37.32.

PNM deal surfaces amid lull

There actually was news of a couple of new issues Monday, though nothing too exciting as market pros say the debate over accounting for contingent convertible structures continues to give issuers pause.

In addition to the Marshall & Ilsley deal, PNM Resources Inc. - the Albuquerque, N.M., electric utility parent to Public Service Co. of New Mexico - said that $200 million of equity-linked securities will be part of its financing package for the $1.024 billion acquisition of TNP Enterprises Inc. Timing of the deal, however, will coincide with the acquisition closing sometime in the next nine to 12 months.

So, the CoCo flap may not even be part of the consideration for the PNM deal.

Meanwhile, many banker types are preoccupied with trying to prepare responses to the proposed rules that might sway the Financial Accounting Standard Board, which is not due to decide the matter until Sept. 30.

"We are trying to respond during this comment period," said a top underwriting official at one of the international banks involved in convertibles. Meanwhile, he added, issuance disruption is coming from several external forces.

"Interest rates are rising, earnings comps are difficult and the market is down for the year, not to mention the [U.S. presidential] election and overall concern about terrorism," he continued. "I'm not planning on spending big on Christmas this year."

Boise trades as high as 51.125

The long-awaited and much-anticipated sale of Boise Cascade, which has circulated for several months, finally came to pass Monday but in a little different form than some had expected. Boise Cascade is selling its traditional paper assets for $3.7 billion to Boise Cascade LLC., a company formed by Madison Dearborn, leaving the retail office products company, OfficeMax Inc.

The transaction is expected to be completed by mid-November, and Boise Cascade LLC will be privately held.

"There's been a lot of speculation in the market for months," said a buyside trader. "I just find it kind of funny that Boise went through all of the effort to buy OfficeMax only to split the company apart and, in essence, re-establish OfficeMax as an independent entity."

Boise Cascade's 7.5% mandatory, which matures Dec. 16, 2004, shot up on the news, trading as high as 51.125 on heavy buying, a dealer said. Another closed the issue up just 0.25 point at 48.5 bid, 48.785 offered. On the New York Stock Exchange, the issue ended off 0.18 to 48.84 in heavy volume. Par on the issue is 50; it converts at a lower threshold of $31.87 with a conversion ratio of 1.286 or at a higher threshold of $33.88 with a conversion ratio of 1.5689.

Boise Cascade shares closed off 6 cents, or 0.18%, to $32.99.

Boise Cascade's junk bonds were quoted up 5 to 6 points on the news, with the 6.5s at 108.5 bid, 109.5 offered and the 7s at 110.5 bid, 111.5 offered.

Standard & Poor's, which lowered Boise Cascade's credit ratings to junk on the OfficeMax acquisition for $1.3 billion in December, said the split would have no impact on the BB rating or negative outlook, as current ratings had already incorporated the sale of these assets and use of proceeds toward debt reduction. S&P said it anticipates Boise will use $2.2 billion to $2.3 billion to reduce debt and return the other $800 million or so to shareholders.

Boise Cascade executives expect $1.8 billion to $1.9 billion in debt retirement with asset sale proceeds, repaying bank debt and some term debt probably by going to the market to tender for bonds. The new Boise Cascade LLC is getting a new loan via JP Morgan and Lehman and also is likely to sell some bonds as well.

King approaches par on merger

Initially on the Mylan merger offer for King Pharma, the convertibles traded near par, a sellside trader said, but then backed off to close at 98.375 bid, 98.875 offered, still a gain of 4.875 points on the day.

"The first line of thought was that Mylan, which has plenty of cash, would want to take out this issue. The takeover language in the prospectus may activate a par put, even," the trader said. "Then, there was a question about whether Mylan stockholders would approve this at such a big premium so they backed off the highs."

Standard & Poor's put King Pharma's ratings on positive watch, while Moody's put the credit on review, direction uncertain. Previously, Moody's was considering a downgrade for King.

Moody's said its review of King's ratings will consider the nature of the put feature in the convertible on a change of control and the position of King's debt in the new capital structure, among other factors.

S&P analysts suggested in their rating action that Mylan, which had $800 million in cash and short-term investments at June 30, would likely redeem the convertible as a result of the merger.

King price tag big question

The big wildcard in King's buyout, however, is whether the deal will be approved by Mylan shareholders and, if so, at what ultimate price.

Under terms of the agreement, King stockholders would get 0.9 shares of Mylan stock for each King share, which values King shares at $16.66 based on Friday's closing price for Mylan shares, or a 60% premium on King's closing price Friday.

On the news, King shares gained $2.52, or 24.3%., to $12.89 and Mylan shares plummeted $3, or 16.21%, to $15.51.

"I just can't see Mylan shareholders approving a 60% premium, no way," said a buyside convertible trader. "Mylan shareholders are bailing. The only way this deal may go through is at much less favorable terms for King holders."

On the positive side, a King holder who has weathered the downfall of the drugmaker's trouble so far through a Securities and Exchange Commission probe and encroaching generic drugmakers, said ownership in the new company formed with Mylan would be a profitable proposition.

"The synergy will bring in sharply increased revenue, far better profit margin and growth in the future," he said. "If this [price tag] comes down, the deal just gets better and better. I'm a buyer for King right now. Buying King is really buying Mylan at a huge discount. Long term, this is a huge goldmine for anyone holding King.

"We used to think that generic [drugmakers] would be the demise of King, bring it down. Now generics [Mylan Labs] are going to bring it back up. Fancy that."

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