Take-Two's planned $200 million deal in focus ahead of pricing; Regeneron trades at 92.75

By Rebecca Melvin

New York, Nov. 10 -Take-Two Interactive Software Inc.'s planned $200 million of five-year convertibles was in focus Thursday after the New York-based video game publisher launched the deal ahead of the market open for pricing after the close.

Reaction to Take-Two's price talk ranged from "not so good" to "about fair value." Several sources said they thought it would come at the wide end of talk, for which the coupon was 1.25% to 1.75% and the initial conversion premium was 30% to 35%.

Take-Two's existing 4.375% convertibles due 2014, which are in-the-money, traded down in tandem with the underlying equity to about 147 to 148 from 150.

Regeneron Pharmaceuticals Inc., which priced $400 million of 1.875% five-year convertibles at a discount of 98 on Oct. 18, slipped lower again Thursday, changing hands at 92.75 versus an underlying share price of $54.05. One source said they've slid steadily since pricing.

Back in established issues, trading was quieting down ahead of the bond markets remaining closed Friday in observance of Veterans Day. The equity markets were set to open and convertibles players were expected to be working.

Trading for the week brought heightened volatility when Italian bond yields gapped up to alarming levels. In the convertibles market, pressure remained on high-yield credits, but things were more or less a wash, a sellsider said, with some things higher and some things lower.

AMR Corp. traded Thursday at 49 versus an underlying share price of $2.15, compared to 50 versus an underlying share price of $2.35 on Wednesday.

But Mylan Inc.'s higher-grade 1.25% convertibles were active at about par. The Mylan convertibles mature in March and players can move in and out of them, often making a small profit, or hold them outright. The bonds traded more actively than usual on Thursday.

"People are buying them and hoping that something really good happens to the stock between now and March," a trader said, when pressed for color on Mylan's trading action.

Rovi Corp.'s convertibles, which improved on a hedged basis Wednesday after a disappointing outlook, were in trade again and a little lower outright, trading at 98.17 versus an underlying share price of $27.76.

In the broader markets, there was a bit of a bounce from Wednesday's drubbing. Italy was able to pull off a treasury auction smoothly, and its yields pulled back to 6.9%, from the frightening 7% plus levels.

Take-Two on tap

Take-two, a New York City-based interactive-entertainment software company, said it planned to price $200 million of five-year convertible bonds to yield 1.25% to 1.75% with an initial conversion premium of 30% to 35%.

The deal didn't "look that good," said one trader. Others suggested that pricing would probably need to come at the wide end of the talked price, at least, or at a 1.75% coupon with a premium of 30%.

"The convert market has corrected and valuation has evolved because of all the macro stuff that has gone on and the fact that the credit market has widened out," a New York-based sellside analyst said.

Because of that, "opportunities are out there and I think there are bonds out there trading at substantial discounts to fair value. My hunch is that it needs to be a little bit better," he said of the Take-Two pricing.

Given Take-Two's market capitalization, lack of comparable companies to measure it against, and because of where the market has been recently, it wasn't easy choosing assumptions by which to value Take-Two.

One New York-based sellsider used a credit spread of 600 basis points over Libor and a 40% volatility rate, to get the bond valued at 103 at the midpoint of talk. That calculation assumed a $14.00 stock price and conversion price of $18.55.

A second sellsider used a credit spread of 600 bps and a 35% vol. to get the deal modeling 99.25 at the midpoint of talk.

While a third said he would conservatively use a credit spread of 700 bps over Libor.

"It was hard to get a pairing that makes a lot of sense," one sellsider said of the credit spread and volatility assumptions.

He mentioned possible comparables as THQ Inc. and Electronic Arts Inc., but complained that the market cap of one was too large and that of the other was too small.

The new Take-Two paper was offered at 101 in the Street, but there wasn't much of a gray market, sources said.

The Rule 144A deal has a $30 million greenshoe and was being sold via J.P. Morgan Securities LLC and Barclays Capital Inc.

The notes have contingent conversion and are non-callable, with no puts except a change-of-control put.

Proceeds will be used for general corporate purposes, which may include acquisitions and other strategic investments.

Mentioned in this article:

AMR Corp. NYSE: AMR

Mylan Inc. NYSE: MY

Regeneron Pharmaceuticals Inc. Nasdaq: REGN

Rovi Corp. Nasdaq: ROVI

Take-Two Interactive Software Inc. Nasdaq: TTWO

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