Solectron shares slammed in advance of $1 billion convertible deal

By Ronda Fears

Nashville, Tenn., Dec. 20 - Solectron Corp.'s shares have been pounded this week in advance of its $1 billion mandatory convertible offering, which was scheduled to price after the close Thursday. The stock has fallen roughly one-third from $14.81 on Monday before the deal emerged Tuesday to end Thursday at $9.81. Convertible market watchers said the stock sank in part as the electronics manufacturing services industry became a selling target due to weak earnings in the sector but also because of the convertible offering and short selling by hedge funds.

"The hedge guys are slamming the stock," said one observer. "It's a game of chicken at this point. They have to go ahead with it because if they pulled it now, it would be at a huge cost to stockholders short term."

The deal is said to be over-subscribed by about 1.5 times, but buy-side sources said there are not a lot of dedicated convertible investors participating in it.

"Natural buyers are not exactly falling over themselves to buy it," said one convertible trader at a hedge fund in New York.

Solectron's deal is structured as a mandatory convertible, but the mandatory market is hot right now.

Another market observer suggested that it was the sector location that hurt Solectron, noting that Solectron reported weak earnings and was downgraded to junk by the rating agencies on the day the convertible was announced.

Solectron reported a net loss of $52.5 million, or 8c a share, on sales of $3.15 billion, versus net earnings of $190.6 million, or 29c a share, on sales of $5.70 billion a year before. The credit agencies cut Solectron's rating from investment-grade to junk territory on the news, saying the company was doing worse than some rivals and that the company still needs to cut jobs. But also on Tuesday, Solectron said it has received a commitment for $500 million of revolving credit facilities. At the same time, Solectron said it would use cash to meet any obligations in January to repurchase its zero-coupon senior convertible notes due 2019, of which there is about $530 million outstanding.

Solectron also has suffered in sympathy with most of the electronics manufacturing services sector, which was particularly hit Thursday as Jabil Circuits Inc. posted net income for fiscal first quarter of $8.4 million, or 4c per diluted share, compared with earnings of $47.7 million, or 24c per share, a year earlier. Jabil said it does not expect a resumption of sequential growth until the third or fourth quarter, and said it may cut more jobs. Also, Jabil warned its second quarter results aren't likely to meet analysts' expectations.

There was talk in the market that the Solectron deal was structured in a way to prohibit early conversion, but that could not be confirmed. One hedge fund trader noted that early conversion of a mandatory involves getting the minimum ratio, which investors would do only as a last resort. That, the trader said, would make such language moot.

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