Morning Commentary: Planned Tesaro looks rich on the mids; Salix active amid more M&A chatter

By Rebecca Melvin

New York, Sept. 23 – Tesaro Inc.’s planned $165 million offering of seven-year convertible senior notes was getting a once over from market players early Tuesday, and the deal was looking rich based on valuations at the midpoint of talk.

The Tesaro deal, which was seen pricing after the close Tuesday, was seen at about 97, according to one trader, using a credit spread of 750 basis points over Libor and a 35% vol. at the midpoint of talk for a 2.5% to 3% coupon and 35% to 40% initial conversion premium.

“Valuation looks stretched to me. [I] think this has to come on the cheap end,” the trader said.

A second source agreed that the new deal “doesn’t look that exciting.”

Using a slightly higher vol. of 38% to 40%, but well below the underwriters’ 45% vol., the source got the deal worth 98.5 to 99.5 at the same credit spread of 750 bps over Libor.

Elsewhere, the market was quiet so far, sources said. But Salix Pharmaceuticals Ltd. was active following more takeover news from Allergan Inc.

The Salix 1.5% convertibles were quoted at 260.0625 bid, 260.5625 offered versus an underlying share price of $169.00. Salix shares were most recently $167.45, up $7.62, or nearly 5%.

In the news were reports that Allergan rejected a recent bid from Actavis plc. The Irvine, Calif.-based maker of Botox has also been trying to fend off a hostile takeover by Valeant International Inc. and is instead in hot pursuit of a Salix tie up.

Meanwhile Raleigh, N.C.-based Salix has agreed to merge with a unit of Italy’s Cosmo Pharmaceuticals SpA, which hasn’t closed yet and would involve moving the company’s domicile abroad.

WellPoint Inc.’s convertibles were also active and trading in line with underlying shares of the company that were down about 0.7%, a New York-based trading source said.

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