Liberty exchangeables seen fully valued on Google bid; Microsoft steady; ArcelorMittal falls

By Kenneth Lim

Boston, Aug. 16 - Liberty Media Corp.'s notes exchangeable into post-split Motorola shares remained active on Tuesday following an acquisition bid, but the rest of the market was quiet as underlying equities fell again.

Some of the usual suspects that traded were Microsoft Corp.'s zero-coupon convertibles, which remain liquid as trades focus on the safer credit names.

ArcelorMittal fell with the broader equity markets as renewed economic concerns took down bellwether stocks.

The market in general saw languid flows, with the resurgence in volatility pushing money back to the sidelines. Most people on Tuesday appeared to just be adjusting hedges, a trader said.

"I think the volatility is hurting us," the trader said. "These guys are just delta trading. It makes it very difficult to do anything."

Beyond the higher volatility, the market was also quiet because of the summer holidays.

"It's a typical summer and August," the trader said. "People are sitting on their hands and hoping that when September comes around they'll be able to find better value."

Liberty Media slips modestly

Liberty Media's 3.5% exchangeable due 2031 eased by about half a point outright to trade at 56.5 on Tuesday as its underlying stocks slipped slightly.

Each note is exchangeable into 5.2598 shares of Motorola Solutions, Inc. and 4.6024 shares of Motorola Mobility Holdings at maturity, a result of Motorola Inc.'s split into the two companies earlier in the year.

On Monday, Google Inc. offered to buy Motorola Mobility in an all-cash deal worth $12.5 billion, a premium of about 63% over the takeover target's share price before the deal. The move pushed the exchangeable's price up by about 4 points outright on Monday.

"The Liberty Motorolas continue to be active," a sellside trader said. "The takeover is obviously positive for the convertibles because they're paying in cash and it's a pretty good premium. The main risk is that the deal doesn't go through because of antitrust concerns or maybe another bid."

If the Google acquisition is completed, convertible holders will receive about $18.40 in cash, wrote Barclays Capital convertible analysts Kannan Venkateshwar and Venu Krishna in a note.

"The theoretical price of this bond (assuming the deal closes in January) using a credit spread of 600 bps and implied volatility of 28% (based on longer term listed options of MSI) is ~$40.70," the analysts wrote. "This is close to the implied price of $40.60 based on the present bond price. Therefore, at present levels, the bond seems to be fairly priced after factoring in the deal."

If the deal closes, the exchangeable will be exposed to just the volatility of Motorola Solutions stock while the credit exposure to Liberty Media will remain the same, the analysts wrote.

The post-deal convertible will also be less sensitive to the underlying stock price, with a delta of about 33%, compared with the existing delta of about 61%.

"Post the deal close, the bond will be convertible to a relatively low volatility stock, which is cash rich and has a steady stream of cash flows," the analysts wrote.

If Motorola Solutions also becomes the target of a cash takeover, convertible holders will also be able to receive cash upfront, the analysts added.

Microsoft steady

Microsoft's zero-coupon convertible due 2013 held firm at 101.5 against a common stock price of $25.25 on Tuesday, clawing back early losses as equity markets took a hit.

Microsoft common stock closed at $25.35 on Tuesday, unchanged from the previous session.

"The Microsoft zeros belong in that class of converts where they have enough paper outstanding to still have some liquidity even when the rest of the market is kind of quiet," the trader said. "It's like the Amgens and Gileads and Intels that you always see on the boards."

The company's strong credit quality also makes the name easy to trade.

"Investment grades are always in some sort of demand," the trader said.

Microsoft is a Redmond, Wash.-based software company.

ArcelorMittal slips with stock

ArcelorMittal's 5% convertible due 2014 fell 2 points outright on Tuesday, changing hands at 113.875 against a common stock price of $22.58.

"I think it was just the rest of the market pulling down on the stock," a sellsider said. "MT is a proxy play on the global economy. So if stocks are not doing well because people don't have confidence in the economy, it's going to get hit as well."

ArcelorMittal is a Luxembourg-based steel producer.

Mentioned in this article

Liberty Media Corp. Nasdaq: LINTA

Motorola Mobility Holdings Inc. NYSE: MMI

Motorola Solutions Inc. NYSE: MSI

Microsoft Corp. Nasdaq: MSFT

ArcelorMittal NYSE: MT

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