SPSS surges on debut; Gateway gains on takeover rumors; Stanley Works gains fans despite unusual deal

By Kenneth Lim

Boston, March 14 - SPSS Inc. took off on its debut on Wednesday after its new convertibles arrived near the cheap end of price talk.

Gateway Inc. gained with its stock amid ongoing speculation about the company's potential as a takeover target.

Meanwhile, The Stanley Works' planned $300 million convertible offering got investors scratching their heads trying to model the paper, although the deal was reportedly several times subscribed.

BankUnited Financial Corp.'s 3.125% convertible due 2034 slipped about a point outright on continuing concerns about its exposure to the subprime lending market. The convertible traded at 90.75 against a stock price of $21.14, while BankUnited stock (Nasdaq: BKUNA) gained 4.35% or 89 cents to close at $21.35.

BankUnited is a Coral Gables, Fla.-based bank that focuses on the Florida market.

"We saw a fair amount of BankUnited, pretty good size," a sellsider said. "The stock's been hit the past couple of days, and there were a lot of equity calls today that the stock's overdone, that its subprime exposure is exaggerated. We saw some buyers step in on the bonds this afternoon."

SPSS shoots higher

SPSS's new 2.5% convertible subordinated note due 2012 climbed more than two points outright on Tuesday as investors said they liked the volatile stock and the company's relatively tight credit.

The convertible traded at 102.5 against a stock price of $33.30. The convertible was offered at par. SPSS stock (Nasdaq: SPSS) rose 1.12% or 37 cents to close at $33.30.

"We traded some of the SPSS right off the bat, but it quieted down in the afternoon," a sellsider said.

SPSS priced its $125 million offering on Tuesday after the market closed, with an initial conversion premium of 42.5%. The notes were talked at a coupon of 2% to 2.5% and an initial conversion premium of 40% to 45%.

There is an over-allotment option for a further $25 million.

Merrill Lynch was the bookrunner of the Rule 144A offering.

SPSS, a Chicago-based developer of research analytics software, plans to use the proceeds to buy back $50 million of its common stock and to fund general purposes, which may include acquisitions.

"It was up about 2 points on a dollar-neutral basis," a buyside convertible trader said. "They did really well."

The buysider said there was some concern about high conversion premium.

"I thought that the premium was kind of high," the buysider said. "At 42% the premium was high. However this is a volatile stock, and that's what people were paying for. It's also a good credit, and it's prone to some pretty big gaps."

Gateway gains on rumors

Gateway's two convertibles rose about ½ point outright on Tuesday amid renewed speculation that the company could be the target of acquisition hunters.

The Gateway 1.5% convertible due 2009 traded at 87.5 versus a stock price of $2.20, while the Gateway 2% changed hands at 82.5 against the same stock price. Gateway stock (NYSE: GTW) closed at $2.27, higher by 6.57% or 14 cents.

"The Gateways were improving on speculation about a possible takeover," a sellsider said. "It's nothing new, but we saw a firmer stock on talk of a possible acquisition by Acer. That's the name right now. Those rumors have been around for a while. Who knows? Maybe this time there may be something to it."

Taiwan-based Acer said in interviews earlier in the week that it could be interested in buying another company. In a subsequent article, Taiwan-based IT-focused publication Digitimes raised the possibility that Acer could be eyeing Irvine, Calif.-based Gateway. Acer and Gateway are computer manufacturers.

Gateway and Acer did not comment on the speculation.

A buysider said speculation about Gateway being taken over by other companies have been making rounds in the Street for some time.

"That's been around for a while," the buysider said. "I can't say if it's right or wrong, but I've heard it."

Stanley Works piques interest

Stanley Works' planned $300 million offering of equity units that comprise 5.2-year convertible senior notes and 3.2-year mandatory purchase contracts received strong interest on Wednesday even as investors struggled to understand the deal's unique structure.

"It's an interesting type of structure, a structure we really haven't seen before," a buyside convertible trader said. "But I think it will do well...there's pretty heavy demand for it."

The deal was expected to price after the market closed. The convertible portion of the equity unit was talked at a coupon of three-month Libor minus 350 basis points to three-month Libor minus 300 basis points, and an initial conversion premium of 15% to 19%. The purchase contract is expected to bear an adjustment coupon of 5.125% per year.

Citigroup, Morgan Stanley and Banc of America are the bookrunners of the registered offering. Citigroup and Morgan Stanley are the structuring agents.

There is a concurrent $200 million offering of three-year unsecured notes.

The purchase contract requires the holder to buy a number of Stanley Works common shares equal to the settlement amount, for $1,000 in cash. The number of shares will be based on the current market value of the shares, but holders will never receive more value than $1,000 upon settlement.

Stanley Works, a New Britain, Conn.-based maker of tools and security products, plans to use the proceeds of the deal to repay its commercial debt, to repay a $130 million loan and to pay convertible note hedge and warrant transactions.

Investors and analysts said they had a tough time trying to fit the deal into their models. A sellside convertible strategist said the structure was a modified mandatory similar to hybrid capital units offered by Scottish Re Group Ltd. a few years ago. But the convertible and purchase contract structures were still new.

"I think as far as modeling it, people will model it similar to a mandatory," the strategist said. "I modeled it out at about fair value, so it'll probably do fine."

Another convertible analyst was not as confident. The analyst said "there's no easy way for me to model it."

"You have to look a the sum of the parts and assess whether they net out to something cheap," the analyst said. "They probably do, but it's complex so I hesitate to be too bullish about it."

The analyst said Stanley Works' credit was fine, so there was no concern there. But the analyst was puzzled about who would benefit from the structure. Because the purchase contract only allows holders to participate in any downward movement in the common stock, it has to pay a higher-than-usual interest rate. For the issuer, the result could be higher interest payments that issuing a more conventional security.

That lack of upside participation could also limit the attractiveness to outright investors, the analyst said.

"You're have to be an outright guy who thinks the stock is going to go nowhere for the next three years, and you're willing to forgo the upside for a fat coupon," the analyst said. Most equity analysts expect the stock to move up in the next few years, the analyst added.

The analyst acknowledged that holders can substitute a "treasury unit" for the embedded convertible that is pledged against the purchase contract, which "takes the sting out" for holders, but noted that the purchase contract is still an issue to grapple with.

For arbitrage investors, hedging might have to be done with options, which would be difficult and costly, the analyst said.

But the buyside trader felt that the deal was still attractive for arb investors.

"You do have some downside exposure, but it's hedgeable," the buysider said. "But it's tough to model fair value on it at the moment. We have a our models, but because it's two separate securities, I'm still not completely confident that it's modeled correctly. But looking at it intuitively, I'm confident that it will do well."

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