EMS sector attracts investors on trend of repurchasing convertibles

By Sara Rosenberg

New York, Oct. 30 - The electronic manufacturing services sector has seen increased interest by investors with the relatively recent trend of companies in this category repurchasing their convertible bonds, according to market sources. Most recently Sanmina-SCI Corp. said late Tuesday it had bought back various convertibles. However, Celstica Inc. and Solectron Corp. fall into this category as well.

Overall, trading flow was categorized as fairly active in a basically flat toned market on Wednesday, according to an analyst.

"It looks like there's been some interest in some EMS companies," an analyst told Prospect News, explaining that there has been an ongoing of trend of companies in the sector buying back their bonds, which has boosted investor confidence in owning these names. "[These companies have] cash balances and generate cash," he added.

In Sanmina-SCI's earnings report Tuesday, the company announced that during the third quarter it repurchased at a discount $209 million of its 4¼% convertible notes and zero-coupon convertible subordinated notes. Taking into account interest accruals on the 0% notes, the reduction in convertible debt maturing in 2004 and payable in 2005 on exercise of redemption rights on the zeroes is actually $228 million, the company said in a news release. Furthermore, as of Oct. 28, the company reduced the debt further by an additional $50 million for a total reduction of $278 million on a due-at-maturity basis.

About an hour before the close, Sanmina's 4¼% convertible was quoted at 87 bid, 88 offer, almost two points higher than Tuesday's level of 85¼ bid, 86¼ offer. The 0% convertible was quoted at 32¼ bid, 33¼ offer, also nearly two points above Tuesday's level of 30½ bid, 31½ offer. And the 3% convertible was quoted at 56¼ bid, 57¼ offer, about a point higher than Tuesday's level, according to a trader. The 41/4s closed at 87.625 and the 0% closed at 321/2, according to a second trader. The stock closed at $2.91, up 93 cents or 46.97%.

Sanmina is a San Jose, Calif. provider of electronic manufacturing services.

On Oct. 16, Celestica Inc. said it bought back $110.4 million principal amount of its 0% Liquid Yield Option Notes during the third quarter, spending $48.3 million on the purchases. The Toronto, Ont. provider of electronics manufacturing services also said that its board of directors has authorized it to buy back up to $100 million more of the convertibles, subject to market conditions.

Celestica's 0% convertible is currently being quoted around 43¾ bid, 44¼ offer, according to a trader, although he said he hadn't seen any trades in the name on Wednesday. The stock closed at $14, up 24c or 1.74%.

And yet another example is Solectron Corp., made a modified dutch auction tender offer to buy back up to $1.5 billion of its Liquid Yield Option Notes due 2020. The offer was oversubscribed at the top end of the offer range, with $1.94 billion principal amount of the securities validly tendered. As a result, the Milpitas, Calif. electronics manufacturer accepted 77.4% of the convertibles tendered. The purchase was funded by cash on hand and following the transaction, debt on the balance sheet was reduced by about $919 million.

The company's stock closed Tuesday at $2.40, up 35c or 17.07%.

Meanwhile Avaya Inc.'s 0% convertible traded up about two points Wednesday to 29 bid while the stock closed at $1.79, down 1c or 0.56% following the company's investment community conference call. During the meeting the company announced that is targeting break-even results in the third quarter of 2003 with revenue of about $1.075 billion. Furthermore, the company anticipates having $600 million in cash at the end of the first quarter of 2003 and a minimum of $500 million in cash at the end of Sept. 30, 2003.

The company's debt has been tracking up since it had a major fall-out in July following the release of the June quarter numbers, according to Wachovia Securities, Inc. analyst Brian Park.

Around July, the 0% convertible was being quoted in the mid-30s. However, in the June quarter earnings release, the company announced restructuring charges and various other payments, which caused investors to worry over possibly liquidity issues, bringing the convertible down into the high teens, Park explained.

The company managed to bring its cash balance up pretty significantly (with $597 million in cash at Sept. 30) and reported uplifting expectations for 2003, resulting in improved investor confidence, which caused the convertible to trade up from the low 20s to the high 20s.

Avaya is a Basking Ridge, N.J. provider of communications systems and software for enterprises.

Despite Omnicom Group Inc.'s reporting third quarter earnings results of 68 cents per share on Tuesday, which was in line with the consensus, one analyst expressed surprise that the company's stock hadn't gone down by early afternoon on Wednesday.

"They're not addressing the put situation at all," the analyst said, adding that he found both the earnings and the conference call to be uninspiring.

On Tuesday, Venu Krishna, head of convertible research at Lehman Brothers, had addressed this very issue, telling Prospect News that Omnicom is currently viewed as a company that has a "reasonably high likelihood" of giving incentives to avoid the put.

Omnicom's 0% convertible due 2031 has an $850 million put in February 2003. According to Krishna, the company hinted in its conference call that it would benefit from keeping the convertibles outstanding.

"Assuming that the stock remains around current levels, [which is] roughly in the $60 range, then the company may have to create almost four to 4½ points in incremental value to prevent a put from being exercised," Krishna added.

Upon telling the analyst the view that the New York communications company may sweeten its bonds in order to avoid the put, he responded, "that won't help them in a year from now" when there's another put.

About an hour before the close, Omnicom's 0% convertible due 2032 was quoted at 96 1/8 bid, 96 3/8 offered, up ¼ point from Tuesday's level of 95 7/8 bid, 96 1/8 offered. The 0% convertible due 2031 was quoted at 98 15/16 bid, 99 1/16 offered, up marginally from 98 7/8 bid, 99¼ offered on Tuesday, according to a trader. The 0% due 2032 closed at 95 7/8 and the 0% due 2031 closed at 983/4, according to a second trader. The stock closed at $59.19, down 36c or 0.60%.

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