Armor holds firm on merger hopes; Chemed higher, Sciele quiet in gray; Chesapeake, Alesco launch deals

By Kenneth Lim

Boston, May 8 - Armor Holdings Inc. remained active on Tuesday and held firm dollar-neutral as confidence remained high that the company's acquirer will likely have to pay convertible holders a make-whole premium.

Chemed Corp. attracted strong bids in the gray market with its deal described as very attractive and likely to arrive near the rich end of talk.

Sciele Pharma Inc. was quiet in the gray market on mixed reaction to its planned offering. Analysts and investors said its deal appeared fair to slightly cheap, but a sharp decline in the stock on Tuesday after a month-long rally created an air of uncertainty.

Meanwhile, Chesapeake Energy Corp. announced a $1 billion offering expected to price Thursday before the market opens, the biggest deal so far for the month. Alesco Financial Inc. also launched a $75 million deal that is slated to price Wednesday after the close.

Armor holds firm

Armor Holdings' 2% convertible due 2024 slipped slightly outright with its stock but held firm on a dollar-neutral basis as investors remained optimistic that they will receive a make-whole premium if BAE Systems Inc. buys the company.

The convertible traded at 176 against a stock price of $86, lower by ½ point outright. Armor stock (NYSE: AH) closed at $86.02, down by 0.67% or 58 cents.

"It's not as active as yesterday, but we're still getting calls on it," a sellside convertible trader said. "The feeling is that BAE won't be considered a public acquirer so the make-whole will be paid out."

Armor, a Jacksonville, Fla.-based maker of armored vehicles for the military, said Monday that BAE is offering to buy it for $88 per share. Including an additional $388 million in debt, the total deal is valued at $4.5 billion. The deal needs approval from Armor shareholders and must comply with national security law regarding foreign investment and with antitrust law. The deal is expected to close in the third quarter.

Under the indenture terms, a make-whole premium will be added to the convertible in a cash takeover unless the acquirer is a publicly listed company. One analyst estimated that the make-whole will cost BAE about $70 million. Debate on Monday centered over whether BAE, which has American depository receipts but is not listed in the United States, could be considered a public acquirer.

A Lehman Brothers report by convertible analyst Venu Krishna on Tuesday said "convertible-based trades are clearly expected to outperform plain stock-based trades."

A long convertible, short stock trade could yield an annualized unlevered return of 11.8%, Krishna wrote. A long convertible trade will yield just 11.2%, while a long stock trade will return only 4.57%, the analyst added.

Krishna also noted that Lehman Brothers' risk-arbitrage analysts do not perceive any regulatory obstacles to the deal. The risk arb strategists "initially expect no major impediments in the regulatory approval process based on currently available information," Krishna wrote.

But a buyside convertible analyst said there remains concern of a competing bid by a public acquirer.

"People are thinking that if someone else comes in with a public bid," the analyst said. "Right now BAE Systems is not technically public, so they can't elect that public acquirer language. But if someone else comes in and makes a competing offer and tops that offer and they fit under the definition of a public acquirer, then they may elect the public acquirer waiver."

Chemed bid higher in gray

Chemed's planned $160 million of seven-year convertible senior notes were bid at 101.5 to 101.75 in the gray market on Tuesday with the deal expected to price after the market closed.

The deal was talked at a coupon of 1.875% to 2.375% and an initial conversion premium of 17.5% to 22.5%. The convertible was offered at par. Chemed stock (NYSE: CHE) rose 4.85% or $3.05 to close at $65.90.

There is an over-allotment option for a further $24 million.

Citigroup and JP Morgan were the bookrunners of the Rule 144A offering.

"It's kind of a funky business because they already own Roto-Rooter, the plumbing company, and also the hospice company, which are very different businesses," a buyside convertible analyst said. "But pricing certainly looks interesting."

Chemed, a Cincinnati-based provider of hospice care services, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions. It will also buy back about $100 million of its common stock and to repay its revolving debt.

General consensus on the Street was that the deal modeled cheap. One sellside analyst said the deal modeled more than 2% cheap.

"It sets up well for the hedgers," the analyst said. "And it's coming as a happy meal [with the stock buyback]. It's a really nice setup for hedgers and there's great upside-downside participation."

Another sellside analyst had the deal just as cheap using a credit spread of around 300 bps over Libor and a volatility in the low 30% range.

"I wouldn't be surprised if it came at the rich end," the second analyst said.

A buysider said the deal appeared to be very popular.

"That one is incredibly cheap," the buysider said. "Probably everybody will get 250 bonds. It's really cheap. It's got a low premium and it's a pretty good company. Great cash flow, good credit. You can set this up and forget about it and make money."

"It actually reminds me of what convertible arbitrage is supposed to be," the buysider said.

Sciele quiet in gray

Sciele's planned $250 million of 20-year convertible senior notes was quiet in the gray market on Tuesday with mixed views about the deal.

The deal was talked at a coupon of 2.375% to 2.875% and an initial conversion premium of 45% to 50%. The convertibles were offered at par. Sciele stock (Nasdaq: SCRX) closed at $23.73, lower by 7.63% or $1.96 after the deal was announced in the morning.

UBS Investment Bank and Thomas Weisel Partners were the bookrunners of the registered offering.

Sciele, an Atlanta-based pharmaceutical company, said it will use the proceeds to redeem its $150 million outstanding 1.75% convertible senior subordinated notes due 2024 and for future acquisitions, capital expenditures and other general purposes.

"It's pretty boring," a buysider said. "If you have a definite view on it you can set it up. We didn't have a definite view on it so we're staying out."

A sellside convertible analyst said the deal modeled around fair value to 100.5 at the midpoint of talk using a high 100 bps over Libor credit spread and a volatility in the mid 30% range.

"I think this is a pretty high premium," the analyst said. "It is a risky name. But it's a pharma company, so that's I think why they can sell that kind of premium."

The analyst noted that the stock "took a huge hit" on Tuesday, which could help the convertible on Wednesday.

"You might get a little bounce back tomorrow," the analyst said.

Another analyst said the deal modeled almost 3% cheap using a credit spread assumption slightly tighter than 300 basis points over Treasuries and a volatility slightly higher than the mid-20% range.

The second analyst said that although the offering modeled cheap, "there doesn't seem to be a lot of great upside potential on the stock."

"Guys might just flip it tomorrow," the analyst said.

The second analyst said the convertible will participate in about half of the stock's upside, but it will participate in more than half of the downside.

"I don't like the upside-downside tradeoff," the second analyst said. "If you think the stock is undervalued you should just buy the stock."

Chesapeake, Alesco launch deals

Chesapeake launched a $1 billion offering of 30-year convertible senior notes that will be the biggest deal so far for the month.

The offering is expected to price Thursday before the market opens and is talked at a coupon of 2.125%-2.625% and an initial conversion premium of 47.5% to 52.5%.

The convertibles will be offered at par.

There is an over-allotment option for a further $150 million.

Credit Suisse and UBS Investment Bank are the bookrunners of the registered offering.

Chesapeake, an Oklahoma City-based oil and gas exploration and production company, said it will use the proceeds of the deal to repay outstanding revolving debt that bears interest at an average of 6.7%.

Alesco's $75 million offering of 20-year convertible senior notes is expected to price Wednesday after the market closes. Its deal is talked at a coupon of 7.375% to 7.875% and an initial conversion premium of 20% to 25%.

The convertibles will be offered at par.

There is an over-allotment option for a further $11.25 million.

RBC Capital Markets is the bookrunner of the Rule 144A offering.

Alesco, a Philadelphia-based real estate investment trust, said it will use $25 million of the proceeds to concurrently buy back its common stock. It will also partly repay its outstanding debt and fund additional investments.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.