Serena bonds lower in active trade on takeover news; Prudential, Maverick mostly flat

By Rebecca Melvin

Princeton, N.J., Nov. 11 - Convertibles players jumped in early Friday in reaction to news that Serena Software Inc. agreed to be taken over for $1.2 billion by private equity firm Silver Lake Partners.

The 1.5% Serena convertibles, which don't have the now-standard feature of takeover protection, dropped about 5 points on a hedged basis; and although the bonds were discounted to account for the lack of protection, the takeout number of $24 a share turned out to be lower then many had hoped for and expected, sources said.

Aside from the flurry of activity surrounding the Serena paper, many sellside shops said the convertibles market was quiet, with the typically slower Friday subdued even more because bond markets were closed in observance of the Veterans Day holiday.

One sellsider said, however, that the session was notable in that there were some "bids out there in a week that saw everything for sale." He said buyers materialized for some technology and semiconductor names and a few biotechs, like Advanced Medical Optics Inc.

New issues were also mentioned in trade including the exchangeables into shares of Equinix Inc. and this week's mega $2 billion offering from Prudential Financial Inc., as well as the recent exchangeables into Genworth Financial Inc.

A third new issue, the Maverick Tube Corp.'s 1.875% convertibles, traded early in line with its shares, after closing Thursday at 99.375. Maverick shares moved up smartly in the afternoon, closing up $1.03, or 3.1%, to $34.66. Its convertibles weren't heard in trade late.

The new floating-rate Prudential convertibles were flat to lower with an early trade quoted at 98.625, versus a share price of $73.60. Its shares also climbed through the session to notch a $1.12, or 1.5%, gain to $74.62, while the new paper closed at 98.85, according to a syndicate source.

Speculation swirled around the Newark, N.J.-based financial services company on Thursday after a Citigroup analyst had suggested Prudential Financial may be about to buy Lincoln National Corp.

On Friday, the convertibles of another software company, BEA Systems Inc., remained under pressure amid the softer market that has seen yields returning to those levels of the trough of April and May, traders said.

San Jose, Calif.-based BEA's 4% convertibles traded - although not as actively as on Thursday - at 97.5 bid, 98.5 offered.

A check on troubled General Motors Corp. revealed that its convertible bonds were turning around, but barely traded, as their underlying shares recovered more than 4%. GM stocks and bonds slid Thursday in the wake of a disclosure that the automaker will have to restate its 2001 earnings. On Friday, GM's 6.25% convertible bonds added 0.56 point, or 3.33%, to 17.38. GM shares closed up 97 cents to $24.48.

Takeout news lowers Serena

The $220 million of existing convertibles of Serena Software came in about 3.5 points on an outright basis, and on a hedged basis they were in about 5 points, after the San Mateo, Calif.-based company announced that it had agreed to be acquired by private equity firm Silver Lake Partners.

The bonds didn't have takeover protection, and had been modeling out cheap for just that reason prior to the announcement.

The $1.2 billion deal works out to $24.00 a share, representing about a 1.5% premium over Serena's closing price of $23.65 on Thursday.

But many had been hoping for more. "There's been a concern of takeout risk in that name for quite some time," a New York-based sellside convertibles player said. "If the price had been $27 a share, holders would have broken even."

"Most on the call didn't like the takeout price, especially with the current quarter coming in so strong," he said referring to the company's conference call early Friday.

Serena provides management software to such companies as General Electric Co., American Express Co. and International Business Machines Corp. Immediately after the takeover was announced its stock popped up, but it traded back down again, and ended the day lower.

Most likely bond holders will convert out of the bonds before the deal closes, which is expected early in the first quarter of 2006, subject to shareholder and regulatory approvals.

The 1.5% convertibles traded at 107.125 bid, 108.125 offered on Friday, down compared to about 111 on Thursday. Serena shares closed down 15 cents, or 0.63%, at $23.50.

Douglas Troxel, founder of Serena and currently its chairman and largest shareholder, will receive $24.00 per share in cash in exchange for one-third of his shares and will exchange the balance of his equity interest in Serena for shares in the resulting privately held company, making him the largest minority investor.

Serena president and chief executive Mark Woodward and chief financial officer Robert Pender will remain at their posts in the privately held company and will also exchange a portion of their Serena equity for equity interests in the private company.

The company also announced preliminary results for its fiscal quarter ended Oct. 31, reporting revenue of $64 million to $65 million, compared to prior guidance of $60 million and $61 million. License revenues were seen to be in the range of $21.5 million to $22.5 million, company officials said during the conference call. Final quarterly results will be announced Nov. 17.

Upon closing, the transaction is expected to be financed through a combination of equity contributed by Silver Lake and debt financing provided by Merrill Lynch & Co., Lehman Brothers and UBS. Merrill Lynch & Co. and Lehman Brothers acted as financial advisers to Silver Lake in connection with the transaction.

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