Transocean gains modestly on acquisition bid as deals dominate action; Microsoft, Newmont gain

By Kenneth Lim

Boston, Aug. 15 - Transocean Ltd.'s convertibles were mixed on Monday after the company announced a $1.43 billion acquisition, as corporate deals helped to lift underlying stocks across the market.

Transocean said it would buy Norwegian drilling contractor Aker Drilling ASA for cash, marking the rig builder's largest acquisition bid in about four years.

Microsoft Corp. was also in play after rival Google Inc. announced a $12.5 billion bid for Motorola Mobility Holdings Inc., although market sources downplayed the immediate impact of the deal.

Newmont Mining Corp. gained on reports that the company could be looking to sell some assets in Australia.

The market in general had a healthier tone on Monday, a sellside desk analyst said.

"It's busier than Friday, but not crazy like the beginning of last week," the analyst said, referring to the selloff in equities and convertibles a week ago following Standard & Poor's downgrade of U.S. government debt.

One convertible trader said that Monday's wave of merger and acquisition deals gave the markets a strong boost.

"It means some people are seeing value at these prices, and some companies are still optimistic," the trader said.

"It's been a good day for convertibles just because the underlying equities are doing well. There's more of a willingness to make a trade today."

Transocean up on deal

Transocean's Series A 1.5% convertible due 2037 slipped modestly, by about a quarter-point, to 99.5 versus a common stock price of $57.55 on Monday, while its series C 1.5% convertible due 2037 was flat at 97.375 at the same stock price.

The common stock rose 2.97% or $1.65 to close at $57.26 per share.

Transocean, a Switzerland-based offshore drilling contractor, said on Monday that it was offering to pay 26.50 kroner per share for Aker, a premium of about 98% over Aker's stock price before the deal. Transocean will also assume about $800 million of debt.

Holders of about 67% of Aker's shares have already agreed to the deal, Transocean said in a press release.

Aker will add about $1.05 billion of contracts to Transocean and should immediately add to the combined company's earnings, the press release stated.

"It's not a bad deal for Transocean," one sellside analyst said. "They're paying a pretty big premium, but Aker has a pretty substantial order book and acquisitions are probably the easiest way for them to grow now because of the problems they're having in the U.S. after the [Deepwater Horizon explosion in the Gulf of Mexico]."

The analyst said the convertibles will probably not move much in response to the deal because of their impending calls in December 2011.

"They're going to take these out by then," the trader said. "At this time, they're basically trading to call, so they're going to stay pretty close to par."

Transocean has enough cash on its books to pay for the deal, but it could come back to the market given that it will eventually have to fork over more than $2 billion for the shares and debt, the analyst said.

"It's a good environment to be raising debt," the analyst said.

"I wouldn't be surprised if they sell more debt, although I'm not sure if they'll do another convert because yields on straight debt are quite favorable now."

Microsoft sees action

Microsoft's zero-coupon convertible due 2013 traded at 101.75 against a common stock price of $25.40, up by about a quarter point Monday after Google made its $12.5 billion offer for Motorola Mobility.

Shares of the Redmond, Wash.-based software company closed at $25.51, up by 1.63% or $0.41 each.

Microsoft convertibles have been one of the more reliably consistent names amid the past week's wild price movements, a sellside trader said.

"It's a very stable, strong credit and a fairly liquid name, and it's where people like to go when they need somewhere safe," the trader said.

Google's offer for Motorola Mobility would mark the internet search giant's biggest foray into the hardware business, seen as a move to help shore up its Android mobile operating system. It could also make Google a more formidable rival for Apple Inc. and Microsoft. But convertible investors are not reacting strongly at the moment, the trader said.

"We're still at very early stages of this acquisition," the trader said.

"First, they have to get past the antitrust regulators, and then they still have to prove that they can actually do something with it. There are still a lot of very big question marks about this deal, so I don't think there's enough there to really move prices one way or the other."

The trader added that even if the deal works out well for Google, Microsoft is unlikely to be adversely affected in the short term.

"Microsoft is a very resilient name," the trader said. "I don't think the credit's going to be in jeopardy because of this. It's not like they're run by politicians, right?"

Newmont up on report

Newmont's 1.625% convertible due 2017 was seen a quarter-point higher at 140 against a common stock price of $57.85 apiece on Monday after overnight reports that the company could be looking to sell some Australian assets surfaced.

The common stock added 2.75% or $1.58 on Monday before ending at $59.02 per share.

A representative for the Greenwood Village, Colo.-based gold miner told media overnight that the company was in discussions to sell its coal assets in Queensland, although no deadline has been set to secure a sale.

A sale may be a good way for the company to divest a non-core asset, one analyst said.

"Obviously this is all just speculation at this time, but selling its coal assets in Australia sounds reasonable because they're primarily a gold and copper mining outfit," the analyst said.

"It's going to depend on what kind of price they can get for it. But on the face of it, it's probably going to be cash positive and that's going to be good for both the stock and the convert."

Mentioned in this article

Transocean Ltd. NYSE: RIG

Microsoft Corp. Nasdaq: MSFT

Newmont Mining Corp. NYSE: NEM

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