SanDisk mostly better as market weighs deal; Priceline lower outright; FOMC statement eyed

By Rebecca Melvin

New York, Jan. 27 – SanDisk Corp.’s convertibles were active and traded mostly better on Wednesday as market players continued to weigh the odds that the tie up with Western Digital Corp. will occur as planned.

The Western Digital-SanDisk deal was unveiled in October for $19 billion in cash and stock, or $86.50 per share, which represented a premium of about 15% over SanDisk’s share price at the time. On Wednesday, SanDisk shares closed at $64.21.

Also on Wednesday, Citigroup Global Markets Inc. initiated coverage with a “buy” rating on the Milpitas, Calif.-based flash memory chip maker’s shares, and after the market close, SanDisk reported fourth-quarter earnings that were better than expected.

The SanDisk 1.5% convertibles “have been one of the best performing bonds this year as both outrights and hedgies play the deal/deal break,” a New York-based trader said.

Elsewhere, Priceline Group Inc.’s convertibles were trading lower in active trade after a stock downgrade by Goldman Sachs & Co.

Overall, U.S. convertibles were trading lightly in early trade as market players eyed various earnings reports due out as well as movements in oil prices and word from the Federal Open Market Committee expected at the conclusion of its two-day meeting Wednesday afternoon.

The Fed didn’t make any changes in rates at this meeting, as expected, and pointed to renewed turbulence in global financial markets as something that it is watching carefully, but it didn’t indicate that an interest-rate rise was not on the table for March.

In December, the Fed raised its Fed Funds target rate by 0.25% and off of near zero and at that time said it expected to continue to normalize rates at a gradual pace.

In its statement on Wednesday, the FOMC said that since the December meeting, information received suggests that labor market conditions improved further even as economic growth slowed.

Equity markets, which were positive before the FOMC statement, turned lower afterwards. Shortly before the market close, one convertibles source said that “the market is melting.”

The Nasdaq stock market fell 99.51 points, or 2.2%, to 4,468.17; the Dow Jones industrial average fell 222.77 points, or 1.4%, to 15,944.46; and the S&P 500 index lost 20.68 points, or 1.1%, to 1,882.95.

Crude oil prices were higher again, ending up 2.3% to $32.16 per barrel for West Texas intermediate crude for March delivery.

SanDisk trades actively

SanDisk’s 1.5% convertibles due 2017 traded late in the session at 141.25. That trade was an outright buyer, a New York-based trader said. The bond had been higher earlier in the session but was still up more than 2 points on the day.

SanDisk’s 0.5% convertibles traded at par early in the session and slipped below par later. They were quoted at 99 bid, 99.7 offered at the end of the day. That was still slightly positive on the day on an outright basis.

SanDisk shares had been up as much as 3.6% intraday but ended higher by only 12 cents at $64.21. Shares gained more than 1% in after-hours trade.

After the bell, the Milpitas, Calif.-based storage chip maker reported fourth-quarter results that beat expectations even though profit slipped from the year-earlier period. The company booked charges ahead of its planned acquisition by Western Digital.

SanDisk reported earnings of $135.5 million, or 65 cents a share, down from $201.9 million, or 86 cents per share, in the year-earlier period. Excluding restructuring and other items, earnings fell to $1.26 from $1.30. Revenue fell 11% to $1.54 billion.

Analysts expected earnings of 89 cents per share on revenue of $1.44 billion.

As for how the bonds performed on swap during the session, traders agreed that the 1.5% bond did better. But they were divided on how the 0.5% convertibles performed.

One trader said that the 0.5% issue came in by as much as a point on swap. But a second trader said the issue expanded by 0.5 point.

“A lot of SanDisk 1.5s were trading. It looks like Western Digital may release an update on the deal. Earlier in the week the deal wasn’t seen as a sure thing,” a New York-based trader said.

SanDisk shares moved around during the session, gaining more than 3% by early afternoon, before trading off just before and after the FOMC policy statement released at 2 p.m. ET. The broader markets also traded down after the FOMC statement, which wasn’t deemed dovish enough to alleviate worries about more rate hikes this year.

Priceline lower outright

Priceline’s three convertible bonds were trading mostly lower early Wednesday.

The moves came after Goldman Sachs downgraded the shares to “neutral” from “buy,” citing the stronger dollar and competition weighing on the Norwalk, Conn.-based online travel company’s performance as well as its focus on markets and customer acquisition techniques as potentially squeezing margin expansion.

Priceline’s 0.35% convertibles due 2020 traded down 1.3 points to 110.976, according to Trace data. Priceline shares were down about 3% at $1,077.37 in the early going.

Trace data also showed Priceline’s 0.9% convertibles due 2021 were at 96.875, which was down only about 0.1 point, and Priceline’s 1% convertibles due 2018 trading down 2.4 points to 127.3.

Near the end of the session the Priceline 0.35% convertibles, which were the most actively traded of Priceline’s convertibles during the day, traded on swap at 110.005 versus a share price of $1,063.79, a trader said.

But selling of Priceline shares accelerated into the market close, and the stock ended down $67.84, or 6%, at $1,043.70.

Mentioned in this article:

Priceline Group Inc. Nasdaq: PCLN

SanDisk Corp. Nasdaq: SNDK

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