Rovi gains dollar neutral as dour outlook torpedoes stock; Salix adds outright; GM lower

By Rebecca Melvin

New York, Nov. 9 - Rovi Corp.'s convertibles improved on a hedged basis Wednesday but fell outright after the Santa Clara, Calif.-based digital entertainment company reported third-quarter earnings that included a much lower revenue outlook for 2012 than analysts had been expecting.

"Rovi was a big winner for the hedged guys," a New York-based trader said.

"Rovi seems to be the name of the day," a second trader said. Around midday, Rovi convertibles were atop the volume chart, according to Trace data.

Salix Pharmaceuticals Ltd., gained outright after the Morrisville, N.C.-based maker of drugs to treat gastrointestinal disorders reported stronger earnings for its third quarter and said that it expects to complete its acquisition of Oceana Therapeutics in December.

MGM Resorts International was also mentioned as a good trader, with its convertibles changing hands in the mid to upper 90s after an upgrade by Standard & Poor's.

But those positive stories were against a backdrop of very shaky markets, and convertibles in general were seen weaker in line with a sell-off in investment-grade and high-yield bonds and equities on concerns over spiking Italian sovereign debt yields.

Like Greece, Italy's yields spiked up to levels that forced margin calls on debt holders and raised the specter of a potential liquidity crisis for that nation's debt. But unlike Greece, Italy's massive debt burden is seen as being too large to bail out, and thus markets were understandably nervous and volatility spiked.

After the market close, many convertible players were in risk meetings.

General Motors Co. was one name that suffered along with the broader markets, after the Detroit-based auto maker warned that the situation in European was likely to dampen demand for its cars. The General Motors mandatory convertible preferred was down 7% on the day, versus General Motors' stock, which was down 11%.

"The overwhelming and unprecedented characteristic of the market is its responsiveness to political developments - especially in places like Greece and Italy. Essentially, no one who manages money has any particular ability to forecast such developments, but professional money managers feel a compulsion to do something...so they're selling on bad news and buying on good news...every other month, every other week, every other day, every other hour," a New York-based convertibles portfolio manager said.

"We have a smorgasbord of cheap convertibles, rich convertibles and everything in between. Recent setbacks in the stock market and credit markets have provided us with more discount bonds, like just barely ROVI today," the manager said.

Rovi gains dollar neutral

Rovi's 2.625% convertibles due 2040 gained 3.2 points on a dollar-neutral basis versus the $28.23 closing share price. On an absolute basis, the bonds fell to a closing level of 99 bid, 99.25 offered, versus the $28.23 share price, compared to 110.5 bid, 111 offered versus a share price of $46.02 on Tuesday, according to one New York-based sellsider.

A second sellsider said that Tuesday's level of the Rovi bonds was 120.5 bid, 121 offered versus the $46 stock price.

The delta on the bonds moved from the high 50% at the beginning of the day, to the low 50% by the end of the day, the first sellsider said. If traders moved on that delta, they would have made the 3.2 points.

During the session, the bonds, which originally priced March 2010 and have a conversion price of $47.36, traded frequently at 100 to 101.

Rovi, a digital home-entertainment products company, saw its shares drop more than 30% on Wednesday after it lowered guidance.

The company expects full-year 2011 to come in near the low end of its August forecast and sees 2012 revenue growth in the low mid to high single digits, which is well below analysts' expectations of a 15.5% increase.

Collins Steward, Brean Murray and Credit Agricole Securities downgraded their recommendations on the stock following the quarterly results.

But its third-quarter revenue rose 42% to $196.5 million, within shouting distance of the $197.2 million expected by analysts.

And the bottom line was better than expected. Net income fell to $1.8 million, or 2 cents a share, for the three months ended Sept. 30 compared with net income of $36.4 million, or 33 cents a share, a year ago. Excluding special items, Rovi's earnings amounted to 63 cents a share.

On that basis, earnings beat the average analysts' forecast of 61 cents a shares. Expenses climbed to $174 million in the last quarter, up from $106.1 million.

MGM trades at 96.5

MGM's 4.25% convertibles due 2015 traded at 96.5 versus an underlying share price of $10.40. In early October the 4.25% bonds changed hands at 82.5 versus an underlying share price of $8.25.

Shares of MGM closed down 79 cents, or 7.3%, at $10.03.

A sellsider said the convertibles were trading on S&P's upgrade. S&P said it raised the corporate credit rating on MGM to B- from CCC+, along with the rating on its senior secured notes to B+ from B with a recovery rating of 1, indicating 90% to 100% expected recovery in a default.

The agency also said it raised the rating on MGM's senior unsecured notes to B- from CCC+ with a 4 recovery rating, indicating 30% to 50% expected recovery in a default.

The agency also said it removed all of the ratings from CreditWatch, where they were placed with positive implications in August.

The outlook is stable. The upgrade reflects MGM's solid performance thus far in 2001, S&P said, and an expectation that MGM will continue benefiting from improving performance trends on the Las Vegas Strip, particularly on the lodging side of the business.

Salix adds outright

Salix's 2.75% convertibles due 2015 traded at 108 versus an underlying share price of $35.00. That level was up about 3 points compared to the previous level.

Salix shares added $2.07 to close at $36.72.

The company reported a profit of $34.3 million, or 55 cents per share, compared to a loss of $2.7 million, or 5 cents per share, for the same period of 2010. Excluding one-time items, Salix' profit totaled 77 cents per share. Analysts had expected a profit of 63 cents a share.

Revenue climbed 81% to $146.2 million from $80.6 million. Analysts had expected revenue of $140.6 million. The company cited rising sales of its Xifaxan drug for the gains.

Mentioned in this article:

General Motors Co. NYSE: GM

MGM Resorts International NYSE: MGM

Rovi Corp. Nasdaq: ROVI

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

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