Omnicare edges higher; Intel, Ceradyne on deck; price talk emerges on Entergy mandatories

By Rebecca Melvin

Princeton, N.J., Dec. 13 - Convertibles players during Tuesday's trading session were mostly occupied with new deals, including an upsized $850 million of convertibles that Omnicare Inc. priced late Monday and a $1.4 billion deal from Intel Corp. slated to price after the close, sources said.

A second deal for $100 million of convertibles from Costa Mesa, Calif.-based Ceradyne Inc. was also set to price after the close.

Also after the close, price talk and timing emerged on the $500 million of mandatory convertibles previously expected from Entergy Corp. And United Dominion Realty Trust Inc. said it plans to price $200 million of 30-year convertible senior notes.

In the secondary market, the convertibles of Best Buy Co. Inc. dropped about 8 points outright as its shares fell after the consumer-electronics retailer reported third-quarter profits, which were dragged down by spending on solutions and services areas. It also trimmed its full-year forecast.

The convertibles of CuraGen Corp. were also lower, with the 4% convertibles due 2011 down 5 points, while the 6%, with little delta, remained little changed to down 0.50 point, after the Branford, Conn.-based genomics-based drug development company said it missed its goal in a velafermin phase 2 study but said it plans to continue studies.

Also lower on Tuesday were the 1.5% convertibles of Fair Isaac Corp. which were down about 3 or 4 points after the developer of credit scoring systems had its shares downgraded by JPM Securities to "market underperform" from "market perform."

On the upside, Calpine Corp. convertibles gained about 2.5 points as its shares, which were delisted from the New York Stock Exchange and trade over the counter, climbed on news that the troubled power producer had tapped turnaround specialist Robert Kay as its new chief executive.

CKE Restaurants Inc. saw its convertibles up about 13 points after the Carpinteria, Calif.-based restaurant operator reported third-quarter earnings that beat expectations, according to a market source.

Intel is subject of chatter

Intel was expected to price $1.4 billion of 30-year convertibles, which were talked to yield 2.875% to 3.125% with an initial conversion premium of 18% to 20%.

"There was a lot of chatter about the Intel deal, pricing it and looking at it," said a New York-based sellside trader focused on technology issues.

"It's a really, really good credit; nothing in convertibles comes close. The closest comparable is IBM," the trader said.

He said that the pricing looked "reasonable," or a little cheap, and guessed that it would probably price at the rich end of talk.

At the midpoint of talk, the convertibles looked 1.5% cheap, using a volatility of 20% and a credit spread of 45 basis points over Libor, he said.

A New York-based sellside analyst put the deal 2.7% cheap at the midpoint of talk, using 20% volatility, a credit spread of Treasuries plus 100 basis points and 1.21% stock yield.

The oversubscribed book was seen generating a lot of outright interest - possibly up to 70% - given the paper's credit rating, low premium, long maturity and junior subordinated ranking, which made it look similar to a preferred security.

"The way the deal is structured it's good for outrights with its great credit and low premium," the sellsider said.

But the "problem for hedging is that the duration is very long, so the downside protection is ill-defined," a convertibles fund manager, based in New York, said.

The 30-year debentures are non-callable for seven years and are provisionally callable after that at a trigger of 130%. There are no puts.

"It's a weird structure with 30 years and no puts," the sellsider said.

The Rule 144A deal, being sold via bookrunner JP Morgan, has a greenshoe of $200 million.

Intel said it intends to use the proceeds for general corporate purposes, including using a portion to buy back shares. Nevertheless, market sources continued to mull Intel's purpose in doing such a deal.

"I'm still not sure," a sellsider said when asked why Intel, with $10 billion in free cash flow, would do a convertible offering of $1.4 billion.

"It's cheap money for them and the contingent payment acts like a tax credit. The coupon payment will be financed by the tax credit," he surmised. "They also said they might buy back up to $1 billion of stock through the underwriter, so there may be some options derivative transaction."

Stacking Intel against IBM Corp., they have similar cash flows, but IBM has less debt than Intel and a bigger market capitalization, the sellside trader said.

Santa Clara, Calif.-based Intel is a semiconductor chip maker.

Entergy to price late Wednesday

Entergy plans to offer $500 million of mandatory convertibles after the close Wednesday. The equity units were talked to yield 7.375% to 7.875% with an initial conversion premium of 20% to 24%, according to a syndicate source.

The registered deal, being sold via joint bookrunners Morgan Stanley, Citigroup Global Markets and J.P. Morgan Securities, are three-year mandatories, which will be issued at a price of $50.

They are non-callable, and there is no greenshoe.

Temporarily based in Clinton, Miss., Entergy is an electric power plant owner and operator.

Omnicare closes at 100.375 bid, 100.50 offered

Despite a 1.22% drop in its share price, the new 3.25% Omnicare convertibles closed above par at 100.375 bid, 100.50 offered, according to a syndicate source.

After the upsized $850 million of 30-year convertibles was released to the secondary market, it traded actively and did "pretty well," having the support of a lot of outright buyers, a syndicate trading source said.

The convertibles priced toward the cheap end of talk, which was 3.125% to 3.625% for the coupon and 32.5% to 37.5% for the initial conversion premium.

According to talk, the deal was expected to be $750 million when it priced Monday after the close of markets.

JP Morgan, Lehman Brothers and CIBC World Markets were joint bookrunners, and SunTrust Robinson Humphrey, Wachovia Securities and Merrill Lynch were co-managers.

The convertible senior debentures are non-callable for 10 years and have a put in year 10.

Concurrently with the convertibles offering, Omnicare priced 12.825 million shares at $59.72 each, $225 million of eight-year senior subordinated notes to yield 6.75% and $525 million of 10-year senior subordinated notes to yield 6.875%.

Covington, Ky.-based Omnicare is a pharmaceutical-care provider for the elderly.

CuraGen 4s down 5 points outright

The CuraGen 4% convertibles traded down about 5 points to about 63 bid, 64 offered as its shares crashed 24% on news that its experimental drug to prevent a complication from high-dose chemotherapy had failed to meet the main goal of a phase 2 clinical trial.

The 4% convertibles are more liquid than the 6s, which mature in 2007 and have little delta. The 6s were seen at 98.5, essentially unchanged to down 0.50 point from the level at which they have been seen in recent weeks.

The stock dropped throughout the session, ending off 98 cents, or 23.56%, at $3.18.

The drug, velafermin, was developed to prevent oral mucositis, an inflammation of the mouth and throat, in patients taking high-dose chemotherapy ahead of bone marrow transplants.

The phase 2 study evaluated 212 patients who were divided into four treatment segments with various dosages and one placebo. CuraGen said that while velafermin failed to show a statistically significant overall benefit, it did show some effectiveness in one of three groups.

It said it would conduct additional phase 2 trials, which a sellside market source said was a decision the market clearly disagreed with.

"It was a failed study," the sellsider said around noon. "Looks like it may go to $3. It probably won't go lower, but even at that price there are not enough institutional buyers. There's no one to buy even at reduced prices. I don't think $3 is a good buying opportunity.

"They have cash but, they have huge debt too," the sellsider continued. "It's all a story of the burn rate now."

In August CuraGen priced a secondary offering of 4 million shares at $5.50 each, discounted from the previous day's close of $6.06, for proceeds of $21 million. Proceeds were partly earmarked to repurchase from time to time its 6% convertibles.

Calpine adds on new CEO

The 4.75% and 6% convertibles of Calpine were higher by about 2.5 points after the San Jose, Calif.-based company said that its board named Robert May as Calpine's new chief executive and member of its board.

May, 56, succeeds acting chief executive Kenneth T. Derr, who will continue serving as Calpine's chairman.

In enumerating what May brings to Calpine, Derr said he successfully demonstrated his operational and financial turnaround capabilities at HealthSouth, Charter Communications, FedEx and Cablevision.

The Calpine 4.75% convertibles traded early at 19 versus a share price of $0.28. Later they were seen closing at 19.5 bid, 20 offered. On Monday, the 4.75s were quoted at about 17, according to a Connecticut-based sellside trader.

The 6% convertibles traded at about 14.5 compared with trades on Monday at 12.

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