Bausch & Lomb gains on buyout; CV Therapeutics keeps rising; Countrywide, Micron launch giant deals

By Kenneth Lim

Boston, May 16 - Bausch & Lomb Inc. surged outright but slipped on a dollar-neutral basis Wednesday amid initial confusion about the extent of its convertible's takeover protection following a buyout bid by private equity firm Warburg Pincus.

Meanwhile, CV Therapeutics Inc. continued to climb after the company reached a milestone on a developmental drug.

Thursday is set to be one of the busiest days for the primary market so far this year, with Countrywide Financial Corp. and Micron Technology Inc. launching $5.1 billion worth of convertibles that will price over the day. Countrywide's two-tranche $4 billion offering of 30-year debentures is the biggest deal so far this year and will price before the market opens. Terms on Micron's $1.1 billion deal are expected to be set after the market closes.

Bausch & Lomb gains on buyout

Bausch & Lomb improved outright but declined on a hedged basis after the company agreed to a $3.67 billion buyout offer by Warburg Pincus.

The Bausch & Lomb floating-rate six-month Libor plus 50 basis points convertible due 2023 traded at 125.75 against a stock price of $67.50, a four-point outright gain. Bausch & Lomb stock (NYSE: BOL) rose 9.76% or $6 to close at $67.50.

"We were very active in those," a sellsider said. "With the news the bonds were obviously up outright but sort of came in dollar-neutral as the takeover protection doesn't fully protect you."

Warburg Pincus is offering Bausch & Lomb stockholders $65 per share, a 26% premium over the common stock's 30-day average. The private equity firm will also take on about $830 million of debt. Rochester, N.Y.-based Bausch & Lomb is a maker of eye health products that has seen its stock struggle since a worldwide recall of a key contact lens solution product in 2006. Bausch & Lomb will seek superior bids for the next 50 days.

"This was a 21%-22% volatility name, now it's closer to 27% to 28%," said the sellsider, who explained that the convertibles were trading at a premium to the volatility assumption that went into formulating the make-whole table for the convertibles.

"The takeover table at this point doesn't fully protect you," the sellsider said. "You can compare it to what happened in Armor Holdings, where the make-whole over-compensated you, compared to the current matrix, which under-compensates you."

The sellsider said Johnson & Johnson and Novartis AG were two names that could potentially offer competing bids. Competing bids and a longer review of the transaction will be positive for convertible holders, the sellsider said.

"In this case the longer it takes to close the more value there is in the converts," the sellsider said. "If there's a takeover at a later date, it works in your favor...because of the carry."

Convertible holders were initially confused about whether the make-whole will be triggered, said Michael Knox, managing partner of Xtract Research, a research firm that provides access to bond and convertible indenture documents.

Knox said the main confusion was whether exceptions to the indenture's definition of a change of control would negate the make-whole premium.

The convertible's indenture states that no change of control occurred if the takeout is essentially an all-stock deal or if the stock price is at least 110% of the conversion price, "which is very common language," Knox said. With Bausch & Lomb's common stock trading around $67.50 apiece, the common stock is just under 110% of the conversion price of $61.44.

"The make-whole is paid if a cash takeover transaction occurs," Knox said. "A cash takeover transaction is defined as a change of control described in the second point under the change of control description and is at least 10% in cash. The reason there is confusion is that at the end of the change of control definition there are two exceptions in which case a change of control will be deemed not to occur. One of these is triggered, so a change of control has not occurred. Therefore, some people are saying that a cash takeover transaction does not occur. We do not agree with this interpretation.

The make-whole is dependent only on a cash takeover transaction taking place, and not whether the cash takeover transaction is also a change of control, Knox explained. Those exceptions, which apply to the change of control definition, are therefore not relevant to the make-whole. Other aspects of the make-whole language also support his view, Knox said.

"The make-whole matrix deals with stock prices up to $250, so this would not make sense under the interpretation that some others are using," Knox said.

Lehman Brothers convertible analysts Venu Krishna and Manoj Shivdasani wrote in a report that the common stock offers higher upside compared to the convertible under the current deal, although the convertible appears more attractive if a public acquirer takes over or if the deal falls through.

The Lehman analysts compared stock and convertible returns assuming the make-whole was paid, and found that the stock will still outperform the convertible.

"For instance if the final cash take out were at $70 the stock would return 3.7% while we estimate the convert to return 3.43% over the period...Only in the case when the deal potentially breaks do we think the convert looks more attractive since it would likely hold better than the stock," Krishna and Shivdasani wrote.

An investment-grade public acquirer such as Johnson & Johnson with a strong credit will also benefit convertible holders if the public acquirer waiver is exercised and the make-whole is not triggered, the analysts wrote. In such a scenario, the convertibles will return more than the common stock.

"Investors who have high conviction on the deal closing should own the common," Krishna and Shivdasani wrote. "Those who desire a more defensive strategy would be better off owning the convert."

CV Therapeutics gains on milestone

CV Therapeutics' 2.75% convertible due 2012 gained about 4 points outright as investors continued to push up the stock following its new drug application for heart stress treatment Regadenoson.

The CV Therapeutics convertible traded at 88.5 against a stock price of $10.15. CV Therapeutics stock (Nasdaq: CVTX) closed at $10.62, higher by 11.67% or $1.11.

"CVTX was up today," a sellside convertible trader said. "It's been climbing ever since they filed the new drug application. It's great right now, but there's still a long way to go before they get something on the market and with biotechs anything could happen until it's on the shelves. Actually, anything can still happen even after it's on the shelves."

CV Therapeutics, a Palo Alto, Calif.-based biopharmaceutical company, on Monday filed a new drug application for Regadenoson, a heart stress treatment. The milestone triggered a $7 million payment from drug partner Astellas Pharma U.S. Inc., and will yield even more if the drug progresses to the market.

"Well, they're getting a huge payment for this milestone, so that's good," a convertible analyst said. "But it's still early to know whether this will eventually succeed. It's probably going to be another year or so before we get to approval."

Countrywide launches $4 billion deal

Countrywide plans to price an overnight $4 billion two-tranche offering of 30-year floating-rate convertible senior debentures on Thursday before the market opens.

The $2 billion series A convertibles are talked at a reoffered range of 98.75 to 99 with coupon of three-month Libor minus 350 basis points and an initial conversion premium of 30%.

The $2 billion series B convertibles are talked at a reoffered range of 98.75 to 99 with a coupon of three-month Libor minus 225 basis points and an initial conversion premium of 45%.

Countrywide stock (NYSE: CFC) slipped 0.45% or 18 cents in after-hours trading to $40.15.

Each series has an over-allotment option for a further $300 million.

Citigroup and Lehman Brothers are the bookrunners of the Rule 144A offering.

Countrywide, Calabasas, Calif.-based financial services provider, said it will use the proceeds of the deal to buy back up to 23 million shares of its common stock and to fund general corporate purposes.

The combined $4 billion offering will be the biggest so far this year. But a sellside convertible trader said the terms on both tranches did not appear attractive.

"Why buy this?" the trader asked. "Financial engineering - but the bridge is to nowhere...If any outright accounts buy these they are smoking crack."

Micron plans $1.1 billion deal

Micron also announced $1.1 billion of seven-year convertible senior notes talked at a coupon of 1.625% to 2.125% and an initial conversion premium of 22.5% to 27.5%.

The convertibles will be offered at par and are expected to price Thursday after the market closes.

There is an over-allotment option for a further $165 million.

Morgan Stanley is the bookrunner of the registered offering.

Micron, a Boise, Idaho-based maker of semiconductor devices, said it will use $132 million of the proceeds to fund capped call transactions with the remainder earmarked for general corporate purposes.

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