M&A boosts Houston Exploration; Intelsat deal set to price Tuesday

By Paul Deckelman, Paul A. Harris and Ronda Fears

New York, Jan. 8 - News that Forest Oil Corp. plans to buy The Houston Exploration Corp. in a $1.5 billion cash and stock deal that includes debt assumption helped the latter's bonds firm smartly in Monday's dealings, traders said.

Elsewhere on the merger and acquisition front, the announcement that United Surgical Partners International Inc. has agreed to be acquired by Welsh, Carson, Anderson & Stowe in a $1.8 billion deal proved to be pretty much a non-story for the junk market, where what's left of United Surgical's bonds are rarely seen - and Monday was no different. Split-rated crossover credit The Gap Inc.'s bonds, as well as its shares, were better on news reports that the San Francisco-based apparel retailer had retained Goldman Sachs & Co. to help it evaluate strategic alternatives - market-speak for the possibility that the company could be sold.

In the distressed-debt markets, M&A buzz was giving a boost to Rotech Healthcare Inc.'s bonds and shares. However, the news that US Airways Inc. has added Morgan Stanley & Co. to its underwriting team as it attempts a hostile takeover of Delta Air Lines Inc. had Delta's bonds bouncing around in brisk trading, at mostly lower levels.

A senior high yield syndicate official said that flows were relatively two sided on Monday, as there was a slight amount of profit taking.

On the day the market was unchanged to an eighth of a point higher, the official added.

In the new-deal arena, price talk emerged on Intelsat Corp.'s planned $600 million offering of eight-year notes, which is expected to come to market as soon as Tuesday morning. And Stallion Oilfield Services Ltd. will be hitting the road on Tuesday to pitch its $300 million bond deal to prospective investors.

Forest deal helps Houston

The news that Denver-based independent oil and gas exploration and production operator Forest Oil has agreed to buy Houston Exploration gave the latter's 7% notes due 2013 a boost to levels around 101.25 bid from the levels around 98 at which those bonds had been trading last week.

A trader said the bonds were now hovering right around the 101 level at which investors would expect the company to make an offer for them in the event of a change of control of the company.

The Houston-based energy operator's New York Stock Exchange-traded shares were up $2 (4.11%) to $50.69 in Monday's dealings. Volume of 2.6 million shares was about eight times the usual turnover.

The trader meantime saw Forest Oil's 8% notes due 2008 pretty much unchanged on the session at 102 bid, 103 offered.

"I think people were initially concerned [about the leverage implications of the deal] and they dropped to 101.5 bid, but then they bounced up and finished unchanged on the day."

He added that "that paper is so short that I wouldn't expect anybody to be freaked out by [the deal].

He estimated that while the company's shorter-dated paper was about unchanged, its longer-dated issues were down "½ point to a point."

At another desk, a trader saw the Forest 8s of '08 perhaps 1/8 point better at 102.125, and saw its 8% notes due 2011 up ¾ point at 103.75 bid. However, the Forest 7¾% notes due 2014 were "down a little" at 100.75.

Under terms of the offer announced by the two companies on Monday, Forest Oil will give Houston Exploration shareholders 23.6 million of its shares and $740 million in cash. Houston Exploration shareholders will receive 0.84 of a Forest share and $26.25 in cash for each share of Houston Exploration, which values those shares at about $52.47 per share. Forest Oil will also assume some $100 million in Houston Exploration debt.

Forest plans to enter into a new $1.4 billion revolving credit facility to finance the acquisition.

No impact seen from United Surgical deal

The other major M&A deal involving a junk operator Monday, the planned buyout of United Surgical Partners by the private equity firm Welsh, Carson, Anderson & Stowe, was seen having little impact on the junk market.

Although United Surgical Partners, a Dallas-based surgery-center operator, had some 10% notes due 2011 out, most were taken out over the summer via a tender and market participants said they hardly ever see what's left of them, and none were trading around on Monday.

Gap up on Goldman news

Crossover players were watching the behavior of Gap Inc.'s 6.90% notes due 2007 which rose to 101 bid on Monday from Friday's close around 100.25, likely in reaction to a CNBC report and other subsequent news stories indicating that the owner of the eponymous Gap clothing stores, plus the Old Navy and Banana Republic chains, had hired Goldman Sachs - spurring Wall Street speculation that the retailer might be shopping itself around to would-be buyers.

That buyout buzz pushed its NYSE-traded shares up $1.37 (7.25%), to close at $20.26. Volume of 29 million shares was about four times the norm.

Industry-watchers say that the shares are trading at about half the level they were at five years ago, making the company attractively priced should an investor wish to take it private. Its well-known clothing store brands - even though sales have recently been lagging at The Gap and Old Navy - have inherent value that could be unlocked by a strategic transaction. Apart from the sale of the whole company, the idea of spinning off one or more of the chains from the parent company has been floated around in the media.

Gap said Monday that company policy is not to comment on financial market rumors or speculation. The company said it has had an ongoing relationship with Goldman Sachs for a dozen years.

Delta drops as US Air gains underwriter

A trader in the distressed-debt market saw Delta Air Lines' widely quoted 8.30% notes due 2029 first climb skyward, but then give back their early gains to actually finish lower. He pegged the bonds at 63 bid, 64 offered going home - down about 2 points from their opening levels at 65 bid, 66 offered, and well down from the peak level around 66-67 which the bonds hit during the session.

Another source saw the bonds get as good as 66.25 bid before retreating from that peak to close at 63 bid, 63.5 offered.

However, yet another trader estimated that the paper was essentially unchanged on the day, or maybe just a touch easier, with the 8.30% bonds pegged at 64.5 bid, 64.75 offered at the close versus 65 on Friday.

The trader dismissed the news that US Airways Group had added Morgan Stanley as a lead underwriter, along with Citigroup, for the financing for its proposed takeover of the bankrupt Atlanta-based Number-Three U.S. airline operator.

Morgan Stanley and Citigroup lead a syndicate of underwriters committed to providing $7.2 billion in debt financing for the hostile takeover try.

"It hasn't changed the bid as we read the news," the trader said.

The new financing commitment has been revised to provide improved terms, US Airways said. Tempe, Ariz.-based US Airways made the unsolicited bid, which includes $4 billion in cash plus 78.5 million shares of its own stock, on Nov. 15. At the current US Airways stock price, its bid would be roughly $8.55 billion.

Delta has filed a reorganization plan that calls for it to emerge from bankruptcy as a stand-alone company by the middle of this year. Financial adviser The Blackstone Group estimates a $9.4 billion to $12 billion consolidated equity value for the company, which US Airways has asserted is unreasonable.

However, not all of Delta's creditors are thrilled with the company's intentions. Some have formed an unofficial creditors' committee - quite apart from the official creditors' panel - in order to try to persuade Delta's management to seriously consider the US Air offer.

Rotech rises on renewed rumors

Also in the distressed sector, Rotech's 9½% notes were seen having moved up to 98.5 bid, 99.5 offered from prior levels at 97 bid, 99 offered. Bond traders saw no fresh news out on the Orlando, Fla.-based medical products distributor, whose Nasdaq-traded shares were up 19 cents (8.051%) to end at $2.55.

However, in the equity market, traders attributed the rise in the company's securities to renewed M&A rumors, coupled with better Medicaid reimbursement projections.

Rotech has been the subject of speculation about a possible combination with American Homepatient Inc. for several weeks.

One trader said Highland Capital Management LP is a big player in both companies, and there has been talk that the company might propose a merger between the two home health care providers. Highland Capital did not return calls about the speculation.

"This has been circulating for a good while now and nothing has come of it, except for a nice appreciation in both stock prices," an equity trader said, noting that Rotech shares were trading at about $1.60 about six weeks ago.

"It could be that Highland just cashes out now that the stocks have risen so much."

Rotech, which provides home medical equipment and related products and services, such as respiratory therapy and durable home medical equipment and related services, is heavily dependent on government Medicaid reimbursement, and a trader cited a long-awaited Medicaid report that pushes tax breaks for long-term care as another possible catalyst for improvement in Rotech shares.

Tembec, Sea Containers better

Other distressed names seen doing well Monday included Tembec Inc., whose bonds were seen up a point across the board, with its 8 5/8% notes at 71 bid, 73 offered, its 8½% notes due 2011 at 63 bid, 65 offered, and its 7¾% notes due 2012 at 61 bid, 63 offered. No positive news that might explain the rise was seen out about the Montreal-based forest products company.

And after a short bout of weakness, Sea Containers Ltd. bonds got lifted on an offer at 75, versus 72 for the paper last Friday, a distressed trader reported.

At another desk, a trader saw the Bermuda-based maritime and railroad transportation company's bonds up "across the board," with its 10¾% notes up 3 points at 77 bid, 78 offered, its 7 5/8% notes up 4 points at 75 bid, 76 offered, and its 10½% notes up 3 points at 76 bid, 78 offered.

The company filed for bankruptcy in mid-October and had been steadily climbing until recently, but now seems to have bounced back.

Most of the Sea Containers issues are locked up in restricted hands and nearly any offer put on the table are getting hit, a buyside trader said.

AES unmoved on Chavez remarks

Traders saw little or no movement in the bonds of AES Corp., despite Monday's announcement by Venezuelan president Hugo Chavez that he wants to nationalize the South American country's electric power and telecommunications networks - presumably including AES' sizable holdings.

"All of those sectors that in an area so important and strategic for all of us as is electricity-all of that which was privatized, let it be nationalized," Chavez declared in a televised speech after swearing in a new Cabinet.

Chavez's intentions of nationalizing the electricity system will likely have a considerable affect on Electricidad de Caracas, owned by AES. However, junk traders said they saw little movement Monday in the bonds of the Arlington, Va.-based global power producer. AES' 9 3/8% notes due 2010 were actually ¼ point higher at 109.25, in thin trade, while its 9½% notes due 2009 were down perhaps ¼ to ½ point to 106.5, also on thin dealings. AES' 7¾% notes due 2014 were about ½ point firmer at 106.5, again on light trading.

In his bombastic speech following the swearing-in of his cabinet, the controversial Venezuelan leader - clearly buoyed by his recent definitive re-election victory - also said that he would he would soon ask the country's parliament, the National Assembly, which is solidly controlled by Chavez' political allies, to approve a special law giving him powers to approve major economic changes by decree and without requiring further approval.

"We're moving toward a socialist republic of Venezuela, and that requires adeep reform of our national constitution," he proclaimed.

Intelsat brings $600 million

In the primary market no issues were priced on Monday, as the 2007 deal drought continued: no new issues have priced thus far in the new year.

However that situation promises to change on Tuesday.

Fixed satellite services provider Intelsat (Bermuda), Ltd. unveiled a $600 million floater.

The company talked its notes (Caa1/B) at Libor plus 350 to 375 basis points, and plans to price the deal on Tuesday morning.

Deutsche Bank Securities, Lehman Brothers, Citigroup and Credit Suisse are joint bookrunners for the debt refinancing deal which is poised to be the first issue priced in the 2007 junk market.

An investor who was looking at it said that the Intelsat deal is rumored to be four-times oversubscribed, and should go well.

Stallion starts roadshow

Also stepping forward on Monday was Stallion Oilfield Services.

The Houston company will begin a roadshow on Tuesday for its $300 million offering of eight-year senior unsecured notes, a deal led by UBS Investment Bank.

Proceeds will be used to repay bank debt and for general corporate purposes.

Roadshow starts

Although at the Monday close the Intelsat deal was the only offering scheduled to price during the present week, roadshows got underway for three bond offerings, including 2007's first megadeal.

Aramark Corp. started roadshowing its $2.270 billion three-part offering of notes.

The Philadelphia-based professional food, hospitality and facility management services company plans to sell plans to sell $1.70 billion of eight-year senior fixed-rate and floating-rate notes in two tranches, and $570 million of 10-year senior subordinated notes.

JP Morgan and Goldman Sachs & Co. are joint bookrunners for the LBO deal, which is expected to price on Jan. 17.

Also kicking off the roadshow for an LBO deal on Monday was Connecticut-based provider of technology solutions to the financial industry, Open Solutions Inc.

The company is offering $325 million of eight-year senior subordinated notes (Caa1/CCC+) via Wachovia Securities, JP Morgan and Merrill Lynch & Co.

Finally, Tube City IMS Corp., a Glassport, Pa., provider of outsourced services to steel mills, started its roadshow on Monday for a $250 million offering of eight-year senior subordinated notes (B3/B-).

The acquisition deal is being led by Credit Suisse.

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