Lucent leaps on Alcatel merger talks; Sea Containers down on ferry exit; Compton sells add-on

By Paul Deckelman and Paul A. Harris

New York, March 24 - Lucent Technologies Inc.'s bonds - particularly its longer-dated issues - shot skyward on Friday on the news that Lucent and French telecom equipment maker Alcatel SA were in talks that could result in the acquisition of the U.S. equipment maker by its larger European rival.

However, the major ratings agencies reacted warily to the prospect, Lucent shareholders were expected to be less-than-thrilled with the structure of the planned get-together, and Alcatel's French heritage was seen creating possible political problems.

On the downside, the bonds of Sea Containers Ltd. fell after the Bermuda-based marine transportation company revealed that it was in talks with its lenders on covenant relief and was getting out of the ferry business altogether, taking earnings charges in connection with that move.

In the primary market, two deals priced.

Compton Petroleum Corp. priced an upsized $150 million add-on to its 7 5/8% senior notes due Dec. 1, 2013 (B2/B) at 100.25 resulting in a 7.566% yield to worst and a 7.578% yield to maturity.

Credit Suisse and Morgan Stanley were joint bookrunners for the debt refinancing, which was upsized from $100 million.

The original $300 million issue priced at 99.26 on Nov. 15, 2005 to yield 7¾%. Hence the Calgary, Alta.-based oil and gas exploration and production company realized a substantial interest savings with Friday's tap.

Not quite a $2 billion week

Counting Friday's Compton transaction, the primary market saw $1.9 billion price in eight dollar-denominated tranches during the week of March 20, well above the previous week's $1.3 billion in three tranches.

The week closed with $27.65 billion of business having priced in 72 dollar-denominated tranches year-to-date, as 2006 issuance continues to lag that of 2005 in terms of both dollar-amount and deal volume.

By the March 24, 2005 close, the primary market had seen approximately $31.24 billion price in 119 tranches.

M-Real at a discount

Also pricing on Friday was Finnish paper products company M-Real Corp.'s €500 million issue of 7 ¼% seven-year senior notes (Ba3/BB-).

The notes sold at a discount, 98.655, to yield 7.35%, toward the wide end of the 7¼% area price talk.

Deutsche Bank Securities and Barclays Capital ran the books for the debt refinancing deal.

Hanover sans roadshow

The investment banks took the wraps off of one deal on Friday that is scheduled to be completed by Monday's close, by which time Hanover Compressor Co. is expected to price a $150 million public offering of seven-year senior notes (existing B3/confirmed B).

JP Morgan and Credit Suisse are joint bookrunners for the Houston-based natural gas compression company's debt refinancing deal.

The week ahead

Heading into the final week of March 2006, the forward calendar contains less than half a billion of expected issuance in three dollar-denominated offerings.

Festival Fun Park is on the road with a $150 million offering of eight-year senior notes (B2/B) via JP Morgan.

French Lick Resorts and Casinos LLC is roadshowing $270 million of first mortgage notes in two parts (B3/B-) - seven-year floating-rate notes and eight-year fixed-rate notes - in a deal led by Merrill Lynch.

And Wood Resources LLC is marketing a $75 million offering of seven-year senior secured floating-rate notes (B3/B-) underwritten by Jefferies & Co.

In addition to those dollar-denominated deals, Saskatchewan Wheat Pool Inc. is marketing a C$100 million offering of seven-year senior secured notes via TD Securities.

During the March 20 week Pool downsized the debt refinancing bond offering from C$150 million, shifting C$50 million proceeds to a common share bought deal.

New deals little seen in trading

Traders did not see Compton Petroleum's add-on 7 5/8% notes due 2013 trading in the aftermarket, and most likewise did not see Hard Rock Park's three tranches of new bonds, which had come on Thursday, either.

One, however, did hear a quote around 100.5 bid, 101 offered for Hard Rock's 12½% junior secured notes due 2013, which had priced at par on Thursday. He also said that both tranches of the new MGM Mirage bonds - the 6¾% senior notes due 2013 and 6 7/8% senior notes due 2016, which had priced at par on Wednesday, "were dead around issue [price]."

A trader at another desk, while seeing nothing doing in either the Compton notes or in Hard Rock Park, did see Mobile Satellite Ventures' new 14% payment-in-kind senior secured discount notes due 2013 at 60 bid, 61 offered, up from their issue price late Thursday at 58.156.

A market source saw little movement in Hanover Compressor's existing bonds - even the zero-coupon senior subordinated notes due 2007 which will be taken out using the proceeds of the upcoming note offering and borrowings under the company's bank facility. He saw those zeroes at 92.5 bid. Hanover's 8 5/8% notes due 2010 were at 105 and its 9% notes due 2014 at 107.5, all unchanged on the session.

Lucent long debt soars

Back among established issues without new-deal influences, traders saw Lucent's long bonds zoom in response to the Alcatel news.

"The longer paper was the biggest mover," one said, estimating that Lucent's 6.45% notes due 2029 and 6½% notes due 2028 "were up as much as 10 points, and then they backed up to end up eight points." He quoted the 6.45s as having finished the day at 91 bid, 92 offered, up eight points.

"There just wasn't as much activity in the short stuff," he said, since those bonds are already trading at pretty tight levels. He saw the Lucent 5½% notes due 2008 "up maybe a half [point]" to 99 bid, par offered. "Clearly, the long end is the big mover."

He did see Nortel Networks Corp.'s 6 7/8% notes due 2023 three points better on the day in apparent sector sympathy at 94 bid, 95 offered. The Brampton, Ont.-based telecom equipment maker, though a Lucent rival, frequently moves up and down in tandem with Lucent's bonds, since it is affected by the same industry dynamics.

A market source at another desk said the longer Lucent bonds were "up big," with the 6.45s at 91.75 bid and the 61/2s at 90, up 8½ points and eight points, respectively. He saw the 51/2s a point better at 99.25.

However, he saw "nothing" going on in Nortel, saying its longer-dated bonds were already trading in the mid-90s to begin with, with the 7 7/8% notes due 2026 at 95.

Lucent's New York Stock Exchange-traded shares boomed 24 cents (8.51%) to $3.06 on incredible volume of 531.6 million shares - more than 10 times the usual turnover. Lucent is one of the most widely-held U.S. stocks today, and the shares are among the most heavily traded on any given day.

Lucent and Alcatel late Thursday confirmed market rumors that they were discussing a possible merger - revisiting territory they covered five years ago, when the two companies seemed headed for a $23 billion combination, until those talks fell apart.

Since the end of that initial courtship in early 2001, the market value of both companies has increased solidly, with observers now estimating a Lucent-Alcatel merger as a $34 billion combination.

Murray Hill, N.J.-based Lucent and Alcatel issued a statement Thursday night, saying that the two companies "are engaged in discussions about a potential merger of equals that is intended to be priced at market." They warned that such a union was by no means a done deal yet, and said that they would have "no further comment until an agreement is reached or the discussions are terminated."

Although a combination is being pitched to the investment world as a "merger of equals," analysts and other observers said that Alcatel, with about a 40% larger market capitalization than Lucent - about $22 billion to $12.6 billion - and stronger debt ratings, is likely to emerge as the senior partner in the relationship.

News reports late Friday said that the new company would likely be incorporated in France and headquartered in Paris - although there was talk that Lucent's chief executive officer, Patricia Russo, would likely be tapped to be the combined company's CEO, since Alcatel's 68-year-old chief, Serge Tchuruk, is months away from his previously announced retirement. The companies would have equal board representation, the reports said.

A combination of Lucent with Alcatel would create one of the largest telecommunications equipment manufacturers in the world - and probably the largest single maker of networking equipment, surpassing current market leader Cisco Systems. Such a merger could kick off a wave of consolidation among the companies that help power telephone and internet networks.

Such a consolidation trend would parallel the urge to merge that has led to a number of the customer telecom companies getting together, including last year's unions of Sprint Corp. and Nextel Communications Inc., and Verizon Communications Inc. and MCI Inc., paralleling SBC Communications Corp.'s acquisition of the venerable AT&T Corp. The resulting combined company recently announced an agreement to absorb BellSouth Corp.

A merger with Lucent would allow Paris-based Alcatel to expand its presence in the U.S. telecom market, where Lucent has lucrative contracts with such key players as Verizon.

Lucent also has a number of defense contracts - but this could in theory prove to be a problem in getting U.S. government clearance for the deal, should a perception arise that a non-U.S. entity - particularly a French company - ought not to be in so sensitive a capacity. Factors that could create a political snag on this side of the Atlantic could include election-year opposition from politicians not wanting to be accused by their opponents of endorsing a transfer of American economic assets to non-U.S. control - especially during wartime and in the wake of the recent Dubai Ports fiasco - as well as some lingering popular Francophobia generated by Washington's differences with Paris during the run up to the Iraq war.

The deal, should it emerge as advertised, may also provoke some grumbling from Lucent shareholders dismayed that the combination "is intended to be priced at market" - in other words, with no premium to be paid for their shares. That may bitterly disappoint Lucent holders who remember when the shares traded as high as $65 back during the telecom boom of the late 1990s, and who want to be rewarded for sticking with a stock that now trades at just one-eighth of that price.

On the credit front, Standard & Poor's put Lucent's B long-term corporate credit rating on CreditWatch with positive implications on the news - but cautioned that a deal might be disruptive to Lucent's business over the intermediate term.

However, the ratings agency warned that the deal could cause Alcatel's ratings to tumble, citing both the likely disruption to its business, as well as "the potentially weaker financial profile of a combined business." It put the French company's BB long-term corporate credit rating on CreditWatch with negative implications.

Moody's Investors Service changed its outlook on Lucent's B1 corporate family and senior unsecured ratings and its B3 subordinated and trust preferred ratings to developing from positive; the ratings agency said that "the developing outlook reflects the possibility that Lucent's credit profile would benefit from a merger with Alcatel, but that absent a merger, Lucent would continue to face challenges to improve recent soft operating performance."

Fitch Ratings also looked warily on the prospective deal, saying that it assumes that the merger "would be completed through an all-share exchange in order to maintain some degree of financial flexibility.

"Nevertheless, the financial profile of the new group would still deteriorate on completion of the transaction," Fitch said.

Some investors with long memories could be forgiven if they viewed the current talks as something of a case of "deja vu all over again." In the spring of 2001, the two equipment makers were on the verge of a $23 billion merger - but those talks fell apart in a disagreement over how much control Alcatel would have.

The news that Lucent and Alcatel could be nearing a combination comes just a day after Lucent got the green light from the U.S. Bankruptcy Court in Wilmington, Del. to purchase the assets of Riverstone Networks - a bankrupt maker of carrier-grade ethernet routers for the telecommunications industry - in a $207 million transaction. The acquisition still needs certain regulatory approvals in Germany, which Lucent anticipates could happen early in April.

Lucent said in a statement that the integration of Riverstone's assets into Lucent "will create an industry leader in the delivery of end-to-end carrier-grade ethernet and converged optical/ethernet solutions." It said that analysts have estimated that the carrier-grade Ethernet market will grow from just over $4 billion in 2005 to more than $7 billion by 2008.

Sea Containers sinks

Apart from the Lucent news, traders said, Sea Containers bonds and shares were listing badly after the company announced plans to get out of the ferry business, take a big charge against earnings and delay filing its 2005 financial report as it negotiates with its lenders to avoid a default.

"The stock was down more than 35%," a trader said, and the bonds were off more than a couple of points," with its 7 7/8% notes due 2008 seen having fallen seven points on the day to 91 bid, 93 offered.

He said that the bonds "moved down five points" in the early goings on the company's announcement - and then lost another two points later on after S&P downgraded the ratings.

Sea Container's NYSE-traded shares meantime sank $4.61 (38.23%), ending at $7.45 on volume of 988,000 shares, about 12 times the usual turnover.

Sea Containers - which runs ferry and railroad services in many countries as well as a maritime cargo container leasing business, from whence it derives its name - had said in November that it would seek to restructure its under-performing ferry operations and would seek buyers for the business. However, this past week, it said it would exit the business completely, and take about a $500 million charge against its fiscal fourth-quarter earnings related to its departure from the ferry field and to an impairment of its container business.

That charge - which is much higher than the $138 million impairment which had been previously expected from the ferry operations' restructuring - will in turn reduce the company's net worth by $475 million, putting it in violation of net-worth requirements under its credit facility covenants.

Sea Containers said that it will delay filing its 2005 financial reports while it seeks covenant amendments or waivers from its bankers. It also needs the extra time to restate its results for the first three quarters of last year to correct its accounting for the sale of shares in its former Orient-Express Hotels investment, reducing the sale gain it recorded.

S&P on Friday lowered all of its ratings on Sea Containers, including the corporate credit rating, which was cut to CCC+ from B+ previously. The bonds were cut to CCC- .

"The downgrade is based on heightened uncertainty regarding continued debt service after management stated that it was evaluating 'all options' for Sea Containers' financial structure," S&P analyst Betsy Snyder wrote in her downgrade message.

"Although Sea Containers currently has $250 million to $300 million of cash, and expects proceeds from sales of the ferry operations sufficient to pay off associated debt, cash flow from the company's continuing operations [GNER, its U.K. railroad franchise, and its marine cargo container leasing business] could prove insufficient to service remaining debt," the analyst continued. If the company were to default on debt payments or to undertake an exchange of existing debt that Standard & Poor's considered to be a distressed exchange, "ratings would be lowered to D or SD (selective default)."

Snyder said that Sea Containers' ratings "reflect a relatively weak financial profile, even after the planned divestiture of Sea Containers' unprofitable ferry operations, expected to occur in 2006."

Junk mostly quiet

Elsewhere, traders saw not much activity going on. Level 3 Communications Inc.'s bonds were down perhaps half a point after posting big gains Thursday after Bear Stearns upped its rating on the company's stock; its 10¾% notes due 2011 ended at 98.5 bid, 99 offered.

Little was going on among the automotive names, which fell quiet after a volatile week characterized by much news out of General Motors Corp.; GM's benchmark 8 3/8% notes due 2033 were steady at 73.25 bid, 74 offered.

One other name going places, though, a trader said, was Dole Food Co. Inc., whose 8 5/8% notes due 2009 fell 2½ points to end at par bid, 101 offered. He cited recent "really bad numbers" and a ratings downgrade Friday by S&P.

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