J.C. Penney gains on the back of Duane Reade buyout; American Tower pat on unit's bankruptcy

By Ronda Fears

Nashville, Dec. 23 - Duane Reade Inc.'s buyout gave its convertibles a big shot in the arm Tuesday, but the news also lifted J.C. Penney Co. Inc. on speculation that the latter could now get more for its Eckerd drugstore chain.

Rite Aid Corp., however, did not participate much in the lift to drugstore convertibles. One trader attributed the lack of movement to Ride Aid's having too much risk associated with its own story, namely the financial reporting misconduct that led to criminal convictions.

American Greetings Inc., another retail name, plunged sharply after the greeting card company missed on its third-quarter earnings and lowered guidance for the year.

Traders said there was heavy activity in Duane Reade and, to a lesser extent, J.C. Penney. Rite Aid and American Greetings, however, saw little trading, at least in the convertibles.

From the quiet primary market, the week's lone Christmas deal from Roper Industries Inc. was upsized and gained a little ground after being delayed from last week.

Roper sold an upsized $200 million in proceeds of 30-year discount cash-to-zero convertible notes at 39.5 for a yield to maturity of 3.75% and 32.5% initial conversion premium. The notes were sold aggressively outside yield talk of 4.0% to 4.5% and at the rich end of premium guidance of 27.5% to 32.5%. It pays a cash coupon of 1.481% for five years.

The Duluth, Ga.-based company, which designs, manufactures and distributes specialty industrial controls, fluid handling and analytical instrumentation products, also sold 4.2 million shares of common stock, up from 3.955 million shares, at $48 a share for $201.6 million and is negotiating a new $650 million senior secured bank facility.

Roper's new convertible was seen closing up 0.25 point from issue price, at 39.75 bid, 40 offered. The underlying stock closed down 24 cents, or 0.49%, to $48.32.

New York-area drugstore chain Duane Reade was the big news of the day in convertibles, although many players were also watching for Micron Technology Inc. earnings after the closing bell.

Duane Reade agreed to be acquired by private equity group Oak Hill Capital Partners LP and company management for about $415 million, or $700 million including debt repayments. Duane Reade stockholders would get $17 per share in cash, a premium of nearly 23% over the closing price on Monday.

"The buzz began soon after the news hit the tape about J.C. Penney, since it's been common knowledge that they will shed the Eckerd chain. The line of thinking is that it was a nice premium, the price tag for Duane Reade, so it stands to reason that J.C. Penney could realize a lot more for Eckerd," said one buyside trader.

"Eckerd has a lot more going for it, too, probably than Duane Reade. It's a national chain, whereas Duane Reade is regional, probably even more localized than that, so it has growth limitations.

"But there were people also who were buying Duane Reade, speculating that the Oak Hill group will be looking at selling that out to a bigger outfit," said the trader at a huge hedge fund in New York. "The convert will automatically be putable, but maybe some people hold those to see what's going to develop."

Duane Reade's 2.1478% discount cash-to-zero convertible due 2022 shot up 4 points to 56.625 bid, 57.625 offered, while the underlying stock added $1.79, or 11.76%, to $17.01.

J.C. Penney's 5% convertible due 2008 rose 1.625 points to 109 bid, 109.5 offered. The stock closed up $1.46, or 5.9%, to $26.22.

Rite Aid also is a national drugstore chain, but as the trader put it, "the story still has quite a bit of hair on it," referring to the October conviction of the company's top lawyer, Frank Brown, of taking part in a conspiracy to falsely inflate earnings and mislead federal investigators.

Rite Aid's 4.75% convertible due 2006 was slightly higher at 120 bid, 121 offered. The stock added 14 cents, or 0.16%, to $6.12.

American Greetings dropped significantly on its earnings miss and pared down outlook.

The Cleveland-based retailer reported Tuesday that third-quarter profits were down, mainly due to the cost of repurchasing debt, and cut its full-year estimate because of weak early holiday sales. The company posted profit of $46.4 million, or 60 cents a share, compared with $47 million, or 62 cents a share, a year before. Sales were up 4.6% to $616 million.

American Greetings posted costs of $13.8 million during the quarter for the repurchase of $63.6 million of its 11.75% subordinated notes.

The company now expects profit of $1.48 to $1.53 a share for the year, versus its forecast in May of $1.60 to $1.65 a share.

American Tower saw little repercussion from the bankruptcy of one of its units, Verestar Inc., which provides satellite and fiber network access for governmental and corporate customers. Traders said that was because the company designated the unit as a "discontinued operation" in December 2002.

American Tower said it does not expect any adverse affect on its business due to Verestar's bankruptcy but did acknowledge that it could be liable on a primary or secondary basis for no more than an estimated $10 million of Verestar contracts.

Smith Barney had initiated coverage of tower stocks Tuesday with a buy rating for American Tower and Crown Castle International Corp. and a hold on SpectraSite Inc., and traders said that helped stabilize American Tower as well.

American Tower's 3.25% convertible due 2010 added 0.5 point to 117.25 bid, 117.5 offered, as the stock edged up 2 cents, or 0.19%, to $10.70.

An agreement to sell a controlling interest in Verestar by the end of 2003 was terminated on Monday, American Tower said, but added that it "expects Verestar will continue to negotiate with this buyer and seek to maximize the value of its assets for the benefit of its creditors through a bankruptcy court approved sale."

Mesa Air Group Inc. also on Tuesday said it will scrap its unsolicited takeover bid for Atlantic Coast Airlines after United Airlines abandoned its service agreement for the two regional carriers.

On Monday, United parent UAL Corp. walked away from its deal with Mesa to provide service out of Washington Dulles International Airport. Under the deal, Mesa would have taken over certain United Express routes out of Dulles, located in Northern Virginia that are now operated by Atlantic Coast.

The market cheered the news insofar as Mesa was concerned.

Mesa's 2.483% convertible cash-to-zero convertible due 2008 gained 2.5 points on the day to 65.5 bid, 66.5 offered. The stock rose 89 cents, or 6.87%, to $13.85.

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