Cephalon, Tekelec bid up as players position for upsurge; airlines higher in 9/11 trading

By Ronda Fears

Nashville, Sept. 11 - Activity was muted during the memorial 9/11 session, but traders noted that all the airline paper moved higher with stocks in a show of support on the second anniversary of the terrorist attacks on the World Trade Center in New York and U.S. Pentagon.

"All the airlines firmed 2 to 3 points and that seemed to be something directly related to the memory of 9/11," said the head convertible trader at one of the bulge bracket firms that was located near the World Trade Center two years ago.

"As for trading today, it was relatively quiet. There were random names moving, bits and pieces. It's difficult to get a grasp on the market today because there really was not much of a market today."

Not until this year was there any airline paper to speak of, but a wave surfaced in the convertible market during the strong capital-raising efforts of 2003.

Continental Airlines Inc., Delta Air Lines Inc., Northwest Airlines Corp., AirTran Holdings Inc., JetBlue Holdings Inc. and ExpressJet Holdings Inc. were all higher in tandem with their stocks.

Several telecom and telecom equipment names were higher, too, along with a few biotech issues. There also were a few biotechs still pulling back from the recent surge in the group, however.

"There's a general feeling that telecoms, especially in the wireless space, will be rallying and a great way to play that is with the converts," said a dealer.

Lucent Technologies Inc. and Nortel Networks Corp. both spiked higher, by 3-4 points, the trader said.

Tekelec, which makes call network and routing equipment, has seen bidders all week, he said. The new 2.25% convert due 2008 was bid up 1.5 points to 119 bid, 119.75 offered, he said, with the stock up 23c, or 1.36%, to $17.12.

TriQuint Semiconductor Inc. stock surged on its improved guidance but convert traders said there was not much going on in the converts, which remain in busted territory. The company, which makes components for wireless phones and optical networks, upped its outlook for third quarter sales to $75 million to $77 million from $70 million to $74 million and now sees a loss of 6-8 cents per share rather than 8-11c.

Motorola Inc., one of TriQuint's biggest customers, got a lift, too, traders said.

Cephalon Inc. continued to gather bids, with the both tranches of its new 0% converts up 2 to 2.5 points. The stock gained 71c, or 1.49%, to $48.32.

Cephalon is not backing down from its pursuit of Cima Labs Inc., which earlier this month spurned a $384 million takeover offer. Cima said Thursday it had received a letter from Cephalon again offering to buy the small drugmaker. Cima said its board of directors would meet to consider the new bid, after earlier planning to merge with aaiPharma Inc. in a stock deal.

American International Group Inc. was "fractionally weaker" on a settlement with the Securities and Exchange Commission, but traders said there wasn't a great deal of selling.

AIG agreed to pay $10 million to settle fraud charges stemming from its role in alleged accounting violations at Brightpoint Inc.

The SEC said the charges against AIG stemmed from its role in what the agency referred to as an insurance product that helped Brightpoint overstate earnings by 61% in 1998. Brightpoint agreed to pay a $450,000 civil penalty.

In a company statement, AIG said the settlement did not admit or deny the SEC allegations.

"AIG acknowledges that mistakes were made in the underwriting of this policy," the company said in the statement. "Consistent with its longstanding commitment to ensure that it has sound and effective internal controls, AIG has taken steps to correct those mistakes."

AIG said its profit from this policy was less than $100,000 and added that the settlement is not expected to have any material impact on current or future operating results.

AIG's 0% convertibles due 2031 were quoted at 64.75 bid, 65 offered and the 0.5% due 2007 was quoted at 91.25 bid, 92.25 offered. AIG shares ended off 43c, or 0.71%, to $60.15.

"AIG had been pressured already due to dividend risk, this wasn't a huge event," one trader said.

Brightpoint also has a minute amount of converts and those 0% due 2018 were quoted up 0.25 point to 59.125 bid, 60.125 offered with the cell phone distributor's stock surging $1.58, or 6.11%, to $27.45 along with the bulk of that sector.

Guitar Center Inc. was another small convert name mentioned during the session. The company sold a $100 million issue in June.

"We have been looking at this issue since right after it was sold," said a convertible fund manager on the West Coast.

"We weren't interested in it when it priced at 4%, up 40%. But now the premium is down to about 20% or a little more than that and the stock has really taken off.

"It's really sort of an interesting story. They have these guitar shops, specialty stores, which I find fascinating. It's a small cap growth story, right up our alley."

A dealer at one of the shops among the underwriters of the Guitar Centers issue said it has traded this week, and gained about 1 point Thursday to 117.5 bid, 118.5 offered. The stock was up $1.25, or 3.91%, to $33.25.

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