Sovereign slides, Schlumberger, Sepracor lift; Essex reoffered at 98; Flextronics drops after close

By Rebecca Melvin

Princeton, N.J., Oct. 25 - Convertibles players were busy Tuesday with earnings-specific news that prompted sundry trades, and some energy-related names were active amid rebalancing in that space in which equities were recently oversold, trading sources said.

But a lack of conviction overall in the markets precluded many themes from developing and meant that players were doing more than the usual amount of checking and querying, but not necessarily trading, sources said.

Sovereign Bancorp Inc. was an obvious exception. Those convertibles traded "in" actively as a series of downgrades followed hard on the heels of Monday's news that the third largest U.S. savings and loan is set to acquire Brooklyn-based Independence Community Bank Corp. for $3.6 billion and that Spain's Banco Santander Central Hispano SA agreed to pay $2.4 billion for a stake in the U.S. bank.

Sovereign followed up on Tuesday by saying that its sale of a 20% stake to Spain's largest bank is structured to restrict Santander from making an offer for the rest of Sovereign in a hostile takeover, according to The Associated Press.

Another financial name mentioned in trade Tuesday was Bankunited Financial Corp., a small issue, which traded up after the company reported earnings that beat earning per share estimates and net interest margin.

"Net interest margin is something that's closely watched for small bank companies and I think people were pleasantly surprised after a couple of tough quarters," a New York-based sellside trader said.

Schlumberger Ltd.'s convertibles lifted as its stock jumped 4.30% as energy prices reinitiated a climb higher. But the oil services company's move came as rival Halliburton Holdings Co. retraced just over one-half of gains notched Monday ahead of its earnings report. Schlumberger already reported earnings on Friday.

Amerada Hess Corp. is expected to report earnings Wednesday, and its 7% convertible due 2006 were seen better than a point higher at 103.68 bid, 103.88 offered.

In health care, Teva Pharmaceutical Industries Ltd. and Invitrogen Corp. had both buyers and sellers, and the convertibles of Sepracor Inc. jumped more than 1.5 point as its shares moved higher after the Marlborough, Mass.-based drug company reported healthy third-quarter earnings.

In the primary market, Essex Portfolio LP priced $190 million of 20-year exchangeable senior notes at par to yield 3.625% with an initial conversion premium of 18.15%. The notes were reoffered at 98, traded at 99 and closed at 98.875, according to a syndicate source.

Essex Portfolio is the operating partnership of Essex Property Trust Inc., a real estate investment trust, based in Palo Alto, Calif., which focuses on multifamily apartment communities.

The notes via joint bookrunners UBS Investment Bank and Bear Stearns & Co. priced at the cheap end of the coupon talk, which was 3.375% to 3.625%. The conversion price was fixed at 103.25.

The new paper apparently failed to inspire many players, as traders said little was seen traded. One buyside source said that of late there has been little in the new issuance department to attract a lot of interest.

But a syndicate source said that after placing nearly $700 million in new paper in the last week, more new deals can be expected soon.

"In the next couple of weeks we should see more deals. We've got the third quarter coming to an end and we should have more people looking for finance for 2006," he said.

The deal referenced in addition to Essex was Interpublic Group of Cos. Inc., which priced a week ago an upsized $525 million of perpetual convertible preferreds to yield 5.25% with a 30% initial conversion premium.

Sovereign drops

The 4.375% convertibles of Sovereign Bancorp were down about 2 points after three downgrades hit the Philadelphia-based bank on Tuesday. The company was downgraded by Ryan, Beck & Co., Friedman Billings and Keefe Bruyette, and all three moved the company's shares to "market perform" from "outperform."

The downgrades followed news on Monday that Banco Santander will pay $2.4 billion for a 20% stake in Sovereign.

Sovereign plans to use the proceeds to expand in New York City, and also on Monday it said it reached an agreement to acquire Brooklyn-based Independence Community Bank.

Santander will appoint two new members to Sovereign's board of directors, and Sovereign head Jay Sidhu will serve on the Spanish bank's board.

The equity stake comes as Sovereign faces a challenge from its largest investor, San Diego-based Relational Investors LLC, an asset management firm, which owns 7.3% of Sovereign's outstanding common stock. Relational Investors wants to nominate two of its principals to the bank's board of directors. It has criticized Sovereign for what it considers to be a lagging share price and excessive loans and other perks to directors.

Relational founder and principal Ralph Whitworth, in a report by the AP, called the deal "a transferring of shareholder wealth so they can consolidate control over the company." Whitworth said Santander's stake is low enough to avoid the need for shareholder approval, and that his own firm's investment in Sovereign will drop to below 5% because of the additional shares issued.

The Spanish bank offered $27 per share for the Sovereign stake.

Sovereign Bancorp now has assets of $63 billion, more than 650 branches from New Hampshire to Maryland and about 10,000 employees.

Independence Community Bank, which is being offered $42 per share in cash, has $18.5 billion of assets and a market value of $2.71 billion. The bank has about 120 branches in New York and New Jersey and operates SI Bank & Trust after last year's acquisition of Staten Island Bancorp.

The Sovereign convertibles were seen at 43.7 bid, 44.2 offered, down about 2 points compared to 45.5 bid, 46 offered on Monday, according to a New York-based sellside shop. Shares of Sovereign fell $1.99, or 8.52%, to $21.44.

Sepracor convertibles gain

Sepracor's 0% convertibles due 2024 gained more than 1.5 points after the company reported that its revenue more than doubled from the year-ago period helped in no small part by sales of its new sleeping pill.

The company reported $205.7 million in revenue for the quarter ended Sept. 30, versus $80.1 million in revenue during the same period a year ago. Sepracor said the number included $100.9 million in sales of Lunesta, its anti-insomnia drug approved for sale late last year. Asthma inhaler drug Xopenex generated more than $92.5 million in sales during the same period, up from $60 million.

Sepracor's 0% convertibles due 2024 traded at 99.4, compared to 97.75 on Monday. Its 5% convertibles due in 2007 also traded on Tuesday, but little changed from recent levels at 97.50.

Flextronics drops in after-hours

Flextronics International Inc. saw its shares drop more than 13% in after-hours trading after the contract electronics manufacturer posted a fiscal second-quarter loss and revised guidance downward for its third quarter.

The company's 1% convertibles due 2010, which were expected to be the focus of trade on Wednesday, traded Tuesday at 97.45, according to NASD Trace.

Also eyed for trade on Wednesday were other convertible names reporting earnings on Wednesday including Komag Inc., L-3 Communications Holdings Inc., Lucent Technologies Inc., and Amkor Technology Inc., traders said.

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