Gateway climbs on offer; Developers REIT deal falls flat; Cell leaps on trial data; Ford picks up speed

By Kenneth Lim

Boston, Aug. 23 - The convertible bond market had another sluggish session on Wednesday, with Gateway Inc. trading higher after the company received a $450 million bid for its retail operations.

Developers Diversified Realty Corp. struggled on its secondary market debut even after the deal was reoffered below the original price talk.

Cell Therapeutics Inc. improved on an outright basis, in line with sharp gains in the stock after the drug maker reported positive trial results for a cancer treatment.

Outside of a handful of names, the overall convertible market saw little action on Wednesday.

"There's nothing going on," a sellside convertible bond trader said.

Ford Motor Co.'s 6.5% convertible preferred gained about 4% with the stock on reports that the company had approached Nissan-Renault to discuss a possible alliance. The convertible closed at 32.06, up 3.39% or 1.05 points, versus the closing stock price of $7.76. Ford stock (NYSE: F) rose 4.58% or 34 cents.

A report in the Wall Street Journal on Wednesday said Bill Ford, chief executive of Dearborn, Mich.-based Ford, called Nissan-Renault chief executive Carlos Ghosn about a possible alliance between the auto makers. Ford rival General Motors Corp. is currently in talks with Nissan-Renault about forming an alliance. If those talks fail, Bill Ford has asked Ghosn to consider discussions with his company, the newspaper said.

Ford did not comment on the report, while Nissan has said it is not aware of talks between the two companies.

"I think it's just speculation at this point," a buyside convertible bond trader said.

Also trading was Tanger Factory Outlet Centers Inc.'s newest 3.75% exchangeable due 2026. The exchangeable continued to hold above par on Wednesday, two weeks after the paper was priced, changing hands at 106.5 versus a stock price of $34.50. Tanger stock (NYSE: SKT) closed at $34.75, up by 0.32% or 11 cents. Tanger is a Greensboro, N.C.-based real estate investment trust that develops and operates factory outlet shopping centers.

Gateway rises on bid

Gateway leaped several points outright on Wednesday after the company received a $450 million bid for its retail operations, raising hopes that a deal will improve the company's credit quality.

The company's 1.5% convertible due 2009 changed hands at 84 against a stock price of $2, up by about 6 points outright from week-ago levels. The 2% convertible due 2011 traded at 80 versus a $1.98 stock price, an 8 point improvement on an outright basis. Gateway stock (NYSE: GTW) jumped 13.37% or 23 cents and finished at $1.95.

"The Gateways traded up on the news, they traded a lot," a sellside convertible bond trader said.

Irvine, Calif.-based Gateway on Wednesday received a $450 million cash offer from eMachines Inc. founder Lap Shun Hui for the personal computer seller's retail operations. In a letter to the company, Hui said Gateway must separate its retail operations from its other businesses to stay competitive, and must quickly name a replacement chief executive for Wayne Inouye, who left in February.

Hui's bid fueled speculation that Gateway would be bought out. Hedge fund Harbert Management Corp. on Monday said it had acquired 10.2% of Gateway stock and suggested that it would take an active role in helping the company turnaround its operations.

The convertible trader acknowledged that whether Hui's bid would succeed remains to be seen, but said that investors were hopeful that it would lead to tighter spreads for the notes.

"This is more an expression of hopes of a more solid company with an additional $450 million on its balance sheets," the trader said.

Developers REIT deal falls flat

Developers Diversified's newly priced 3.5% convertible senior note due 2011 fell below its reoffered price on Wednesday, even though the deal was cheaper than talked.

The convertible was bid at 97.625 against its previous closing stock price of $53.15 early Wednesday, an eighth-point below its reoffered price of 97.75. Developers Diversified stock (NYSE: DDR) eased 0.09% or 5 cents to close at $53.10.

"I don't see anyone really getting their hands on this," a sellsider said.

Developers Diversified on Tuesday reoffered $250 million of five-year convertible senior notes below price talk, at 97.75 apiece and a coupon of 3.5% with an initial conversion premium of 22.5%.

The convertibles were initially reoffered at 98.5 during price talk, which also guided for a coupon of 3% to 3.5% and an initial conversion premium of 22.5%.

The original over-allotment option for a further $37.5 million has been removed.

JP Morgan and Banc of America were the bookrunners of the Rule 144A deal.

Developers Diversified, a Beachwood, Ohio-based real estate investment trust that develops and manages shopping centers in the United States, said it will use part of the proceeds for convertible note hedge transaction and about $48.3 million to repurchase shares. The rest of the proceeds will be used to repay outstanding debt under the company's senior unsecured credit facility and for general purposes.

A convertible bond analyst said the deal was too aggressively priced right from the start.

"I knew yesterday [Tuesday] it would have to be reoffered below 98.5," the analyst said. "It just didn't make sense at that price."

But even at the new reoffer price the deal seemed slightly too rich, the analyst said

"It looked to be half a point rich based on where it was finally priced," the analyst noted.

Also hurting the deal was the low coupon on the convertible, the analyst added.

"The yield on the common dividend is about 4.4%, this coupon is 3.5%," the analyst said. "So investors aren't going to be too thrilled."

Cell Therapeutics higher on data

Cell Therapeutics' convertibles burst into life on Wednesday after the drug maker reported positive results from early trials of its cancer treatment Xyotax.

The company's convertibles rarely see action, but the 7.5% convertible due 2011 on Wednesday changed hands at 80 versus a stock price of $1.60. That was about 7.5 points higher on an outright basis from the last time it traded, which was in June. The 4% convertible due 2010 traded at 48 against the same stock price, about six points higher outright than its previous trade, which was also in June.

"They came out with something good today," a convertible bond trader said.

Seattle-based Cell Therapeutics on Wednesday said an early-stage Phase 1 study showed that 11 of 12 patients with cancer in a local region saw their tumors disappear or shrink by more than 50% when treated with Xyotax. Xyotax is a radiation sensitizer that is used with radiation therapy.

"I'll just point out that this is Phase 1 data, which is 11 of 12 patients or something like that," the trader said. "That being the case, if this was a Phase 3 trial or a Phase 2, which is a larger trial, if you get that kind of response, then you'd see people really running for these things [Cell Therapeutics stock]."

The trader said that while the news was positive, it is still in the early stages of development and has a ways to go before reaching the market.

"The bonds should go up, but should they trade a lot and a lot of people running out to buy these things?" the trader said. "The answer is no."

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