BlackRock lifted; Lions Gate rolls out; Sepracor arbs hurt; REITs hit; Royal Caribbean call risk allayed

By Ronda Fears

Nashville, Feb. 17 - Convertible players - arbitrageurs that is - were again ambushed by merger noise Thursday as Sepracor Inc. became the target of a rumored buyout. Real estate investment trusts also were hit on concern that M&A activity will heat up in that sector.

Another cause of angst in the market - call risk - eased for holders of Royal Caribbean Cruises Ltd.'s 0% convertible due February 2021 when the company signaled Thursday that it has no plans to call the issue.

Airline paper also continued to drift lower, with the new Pinnacle Airlines Corp. convert as a standout gainer.

Moreover, traders said flow was staying pretty decent. As one sellsider said: "We're providing liquidity to the market."

Meanwhile, new issues continued to trickle in, with Lions Gate Entertainment Corp. rolling out an overnighter while BlackRock Inc.'s deal sank coming out of the gate and then bounced back and Sybase, Inc.'s issue eased back a bit.

BlackRock sinks, climbs back

New York investment firm BlackRock sold its $250 million convertible notes at par to yield 2.625% with a 32.5% initial conversion premium - at the wide end of yield talk for a 2.125% to 2.625% coupon and at the middle of premium guidance for 30% to 35%.

After ending Wednesday in the gray market with an offer of 0.5 point over with no bid, the first look at the new issue Thursday morning showed a bid of 99.375 on swap with an offer at 99.875. But the stock took off and gave some lift to the bonds, one trader said, adding: "Folks are nuts."

Bookrunner Morgan Stanley & Co. closed the issue out at 101 bid, 101.5 offered. BlackRock shares ended Thursday up $2.67, or 3.44%, at $80.25, which one buyside trader said was probably due to some insider buying.

"It was a crazy pricing," said a sellside trader, away from Morgan Stanley. "A bond market play, in this environment? I don't think so."

Lion's Gate replay gets panned

Replaying a convertible offering for the third time, Santa Monica, Calif.-based motion picture company Lions Gate launched a $150 million convertible in the overnight Rule 144A market. Indicative terms put the coupon at 3.125% to 3.625% and initial conversion premium between 38% and 43%.

The filmmaker already has a 2.9375% convertible for $125 million and 4.875% convertible for $70 million in play.

Lions Gate said it would use proceeds to repay its bank revolver and for possible acquisitions, plus it left open the door to buy back shares from note buyers selling the stock short. The shares ended Thursday off 6 cents on the day, or 0.5%, at $10.35 and in after-hours trading lost another 36 cents, or 3.48%.

"They were way too aggressive on [the Lions Gate] pricing," said one buyside source, who was passing on the deal. "The stock is probably going down to about $9.50 tomorrow [Friday], so even at the cheap end, the bonds will be almost a 50% premium. I'm not paying anything like that, especially not for this company!"

Lion's Gate fans say it's a 'hit'

Lions Gate buffs, though, predict the deal will be hot.

"If you set this up right, it's a nice deal," said one player expecting to participate in the new deal. "Not only is Lions Gate in a growth mode, they are a prime [merger] target."

An article two weeks ago in the Hollywood Reporter, he said, pitted Lions Gate with the likes of Sony and Metro-Goldwyn-Mayer. "You could be buying into a much bigger entertainment company, in other words," he said. "Even without that, they are growing."

On Feb. 10, Lions Gate raised its fiscal 2005 outlook for adjusted net earnings to $35 million from $25 million. For fiscal fourth quarter, ending in March, the company reiterated a projection to end the year with free cash flow of more than $80 million and revenue of more than $750 million.

Lions Gate posted a fiscal third quarter profit of 3 cents a share on revenue of $190.4 million, reversing a net loss a year earlier.

Sepracor rumor squeezes arbs

Sepracor shares skyrocketed on a Bloomberg report that the company is the target of a takeover and has retained Morgan Stanley to explore its options. That sent holders of the four Sepracor convertibles on swap scrambling to cover short positions, and by day's end traders said the converts only sustained a slight injury.

On swap, one trader said the Sepracor converts ended "getting hit a little bit." On an outright basis, though, the issues added anywhere from 6 to 12 points. The new 0% due 2024 settled the day at 110 bid, 111 offered, he said.

Sepracor shares, meanwhile, actually eased back toward the end of the session after hitting an intraday high of $64.91 to settle at $63.60, up $4.95 on the day, or 8.44%.

Marlborough, Mass.-based Sepracor has approval pending for a sleeping pill that it says could bring in up to $1 billion sales. It already markets a treatment for asthma, plus earns royalties on sales of other drugs marketed by Aventis and Schering-Plough.

M&A eye turns toward REITs

In addition to M&A related anxiety "off the charts" regarding certain sectors like telecom and telecom equipment makers, a sellside trader said there is increasing worry about consolidation in the REIT group. A number of those converts were hit with selling Thursday, he said.

Specifically mentioned were Arlington, Va.-based The Mills Corp. and Indianapolis-based Simon Property Group, both mall operators, and Baltimore apartments owner Town & Country Trust along with New Plan Excel Realty Trust Inc., a New York Based strip shopping center operator.

"SPG has been making acquisitions, though not always successful, so it's still getting some risk attached to it," the trader said. "The others are not only at risk because of potential takeovers, but dividend erosion."

He said convertible investors are getting skittish about holding paper in the telecom sector because of merger risk and there has been considerable selling in Lucent Technologies Inc., Level 3 Communications Inc., Nextel Communications Inc. and Primus Telecommunications Group Inc. this week.

Royal Caribbean plans no call

There was one spot of relief, though, in regard to call risk as onlookers gathered from a presentation by Royal Caribbean Cruises that the company has no plans to redeem its 0% convertible due February 2021, which became callable this month.

Royal Caribbean presented at a Citigroup Global Markets Inc. conference on leisure companies in New York on Thursday.

"I was very happy to hear this," said a holder of the converts. "They were specifically asked about this and our view of their answer was that they have no plans to call this issue."

First of all, he said the company pointed out that the convert is already figured into earnings per share, and perhaps foremost, the company doesn't want to pay off the $1.31 billion face amount or have it converted.

Now, the bonds could get a lift from the skinny trading levels - just about 0.125 point over parity - that reflect what was previously thought to be call risk.

Royal Caribbean's 0% convertible due May 2021 doesn't become callable until May 2006.

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