Tesaro looks rich at the mids; Salix up in line or better amid M&A talk; SolarCity on tap

By Rebecca Melvin

New York, Sept. 23 – Tesaro Inc.’s planned deal for $165 million of seven-year convertible senior notes was getting a look from market players on Tuesday, and they thought it looked rich based on valuation at the midpoint of talk. Shares of the Waltham, Mass.-based biopharmaceutical oncology company fell through the session and ended down 9%.

Salix Pharmaceuticals Ltd. was active following more takeover news from Allergan Inc. The Salix 1.5% convertibles were up on an outright basis, and depending on delta expanded a bit or were in line.

“That was the only bond that was up today,” a New York-based trader said of Salix. The rest of the universe felt weak, he said, continuing an ongoing trend.

Yahoo! Inc.’s 0% convertibles due 2018 were a feature of trade again, and those bonds recouped a point outright as shares of the Sunnyvale, Calif.-based internet search, content and communications company regained their footing and added 1%. The shares have fallen about 8% since the initial public offering of Alibaba Inc. last week.

ProLogis Inc.’s convertibles were trading more or less in line with the underlying shares of the real estate investment trust, which were down 0.6% at $37.96. This bond “has come in points over the last few months,” a trader said. He said in the last few days there was a big outright seller of the ProLogis convertibles and some hedge guys were covering shorts.

Meanwhile, Herbalife Ltd. shares jumped nearly 10% but the Herbalife 2% convertibles due 2018 were up just about 0.2 point, changing hands at 77.599 late in the session, according to Trace data.

Overall the convertibles market felt weak. For the first time in several years, market players were starting to hope for fewer new deals. “They say it’s good for the market, but it’s not good for pricing,” a trader said.

“If we can get to October and the earnings season, maybe we can put in a bit of a floor,” he said.

After the market close Tuesday, SolarCity Corp. launched an offering of $500 million of five-year convertible bonds under Rule 144A that were expected to price after the market close Wednesday.

The San Mateo, Calif.-based provider of clean distributed energy has an existing $230 million convertible bond with a 2.75% coupon due 2018 that was priced last October.

Planned Tesaro looks rich

The planned 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.

Tesaro plans to price $165 million of seven-year convertible senior notes after the market close on Tuesday.

Tesaro shares fell $2.59, or 9%, to $26.02 on Tuesday.

The registered deal has a $24.75 million greenshoe and was being sold via joint bookrunners Citigroup Global Markets Inc. and Deutsche Bank Securities Inc., with Leerink Partners, Baird and BMO Capital Markets Corp. acting as co-managers.

In connection with the pricing of the notes, Tesaro plans to enter into capped call transactions with one or more of the underwriters.

Proceeds will be used to fund the capped call transactions and to fund Tesaro product candidates, including rolapitant and niraparib, to carry out Tesaro’s immune-oncology platform strategy, and for working capital and general corporate purposes.

Salix up with M&A chatter

The Salix 1.5% convertibles were quoted last at 260.25 bid, 260.75 offered versus an underlying share price of $169.17.

Earlier in the day, they were seen at 260.0625 bid, 260.5625 offered versus an underlying share price of $169.00.

Salix shares ended up $9.34, or 5.8%, at $169.17 on Tuesday.

“We’ll see what happens there. The stock is off its highs but close to where it opened,” a trader said of the Salix shares.

As for the bonds they were said to have traded up in line on a delta hedge of 95%, according to one New York-based trader.

A second trader said that on a delta hedge of 93%, the bonds expanded 0.5 point to 0.75 point.

The bond rose about 7 points outright from about 253.25 late Monday.

Driving action on Tuesday 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.

SolarCity to price

SolarCity has launched a new deal that is twice the size of the convertible deal it priced last October. The $500 million offering of five-year convertible senior notes was talked at a coupon of 1.125% to 1.625% with an initial conversion premium of 32.5% to 37.5%.

The Rule 144A deal is coming together with a capped call overlay. There is a $75 million greenshoe for the offering being sold via joint bookrunners Goldman Sachs & Co., BofA Merrill Lynch and Credit Suisse Securities (USA) LLC, with co-managers Barclays and Deutsche Bank Securities.

The new notes are non-callable for life, with no puts. There is dividend and takeover protection, and the bonds will be physically settled.

A portion of the proceeds will be used to pay the cost of the capped call transactions, with remaining proceeds for general corporate purposes, which includes working capital, capital expenditures and potential acquisitions.

Mentioned in this article:

Herbalife Ltd. NYSE: HLF

ProLogis Inc. NYSE: PLD

Salix Pharmaceuticals Ltd. Nasdaq: SLXP

SolarCity Corp. Nasdaq: SCTY

Tesaro Inc. Nasdaq: TSRO

Yahoo! Inc. Nasdaq: YHOO

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