Lehman: TXU tender offers create value, in order, for 8.125% mandatory, floater, 8.75% mandatory

By Ronda Fears

Nashville, Oct. 1 - TXU Corp.'s tender offers for its convertibles create some extra value, said Lehman Brothers analysts in a report Friday, with the most available on the 8.125% mandatory, then the convertible floater and then the 8.75% mandatory.

On Sept. 15, TXU announced the cash tender for substantially all of its 8.75% due November 2005 and 8.125% due May 2005 mandatory issues and its convertible floaters due 2033, together totaling about $1.5 billion.

Holders have until Oct. 13 to tender their securities.

But the exact values of the offers will be based on the 15-trading-day volume weighted average price for TXU stock from Sept. 20 through Oct. 8. TXU will announce the figure to be used in the final offer calculation by 9 a.m. ET on Oct. 12, giving holders two full trading days to make their decision.

"Based on our analysis, we believe that the exchange offer currently creates incremental value relative to theoretical value for all three issues," said Venu Krishna, head of U.S. convertible research at Lehman.

Maximum value is created in the case of the 8.125% mandatory - 7.34% or $3.58 per issue - followed by the TXU floaters - 2.74% or 4.25 points per bond - and then the 8.75% mandatory - 1% or $0.52 per issue, he said in the report.

Lehman analysts suggest holders of the 8.75% mandatory tender if the TXU shares close Oct. 13 equal to or less than $48.56, holders of the 8.125% mandatory tender if the stock is equal to or less than $53.60 and holders of the floaters tender if the stock is equal to or less than $49.82.

Resist temptation to hold out

Investors bullish on TXU common beyond Lehman's threshold levels may be tempted to decline participation in the tender, or to participate and then buy any of the small amounts of the issues that remain outstanding afterward, but Krishna warned of potential pitfalls in those strategies.

"Fundamental investors who are bullish on TXU might contemplate abstaining from participating [in the tender offer], especially if they believe that the stock could exceed the above mentioned threshold levels," Krishna said.

"In an ideal scenario, one might consider participating in the exchange realizing the incremental value in the offer in cash and then re-establishing the position in the security after the expiration of the offer.

"However, since TXU is seeking to exchange practically all the outstanding amounts of the three convertibles, re-establishing a position might not be a viable option," he said, because of potential that liquidity in the issues will be severely compromised after the tender.

Similarly, he said, liquidity could be a major problem with not participating in the tender because one is bullish on the TXU story. That said, he noted that both the mandatories present less risk since they have relatively short maturities - in 2005.

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