Kyphon says conversion rate for 1%, 1.25% convertibles may increase

By Jennifer Chiou

New York, Oct. 23 - Kyphon Inc. said the conversion rates of its $200 million of 1% convertible senior notes due 2012 and $200 million of 1.25% convertible senior notes due 2014 may change because of the anticipated fundamental change that would occur upon the completion of its upcoming merger, according to an 8-K filing with the Securities and Exchange Commission.

On Oct. 16, Kyphon stockholders voted to adopt the July 26 merger agreement with Medtronic, Inc. at a special meeting.

As already reported, Medtronic agreed to acquire all of the outstanding shares of Kyphon common stock for $71 per share in cash. The transaction, valued at some $3.9 billion, is slated to close following clearance from antitrust authorities in Portugal and Turkey, sometime after Nov. 1.

Holders may surrender their notes for conversion until 35 calendar days after the actual effective date of the merger.

Notes that are surrendered for conversion will be converted into the right to receive cash, less any withholding taxes, and, if applicable, shares of common stock of Kyphon.

The conversion rate is 17.1951 shares per $1,000 principal amount of notes, and holders who convert their notes during the convertibility period may, in some circumstances, be entitled to an increased rate.

If the merger were consummated on Nov. 1, the increase in the conversion rate to notes surrendered during the convertibility period would be 1.4237 shares per $1,000 principal amount of 1% notes, to yield a conversion rate equal to 18.6188, and 1.5551 shares per $1,000 principal amount of 1.25% notes, for a conversion rate equal to 18.7502.

If the merger were consummated on Nov. 15, the increase in the conversion rate for notes surrendered during the convertibility period would be 1.4206 shares per $1,000 principal amount of 1% notes, to yield a conversion rate equal to 18.6157, and 1.5540 shares per $1,000 principal amount of 1.25% notes, for a conversion rate equal to 18.7491.

If the merger were consummated on Dec. 1, the increase in the conversion rate applicable to notes surrendered during the convertibility period would be 1.4171 shares per $1,000 principal amount of 1% notes, for a conversion rate equal to 18.6122, and 1.5527 shares per $1,000 principal amount of 1.25% notes, to yield a conversion rate equal to 18.7478.

If the merger were consummated on Dec. 15, the increase in the conversion rate applicable to notes surrendered during the convertibility period would be 1.4140 shares per $1,000 principal amount of 1% notes, for a conversion rate equal to 18.6091, and 1.5516 shares per $1,000 principal amount of 1.25% notes, to yield a conversion rate equal to 18.7467.

Holders will be entitled to the increase in conversion rate only if the merger is actually completed.

The company will also offer to purchase any notes outstanding after the merger.

In connection with the sale of the notes, Kyphon entered into convertible note hedge transactions with respect to its common stock with J.P. Morgan Securities Inc., Goldman, Sachs & Co. and Banc of America Securities LLC, providing for a call option requiring the hedge participants, upon exercise of the call option, to deliver to Kyphon cash and/or stock in the event of conversion of the notes by holders thereof.

Medtronic's spinal surgery focus has been on younger patients suffering from scoliosis and degenerative disc disease in the cervical and lumbar spine. The company is based in Minneapolis.

Kyphon, a Sunnyvale, Calif., medical device company, specializes in the treatment of older patients suffering from vertebral compression fractures and spinal stenosis.

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