Freeport adds on more takeout speculation, Grey Wolf contracts on merger news; Alpha Natural pressured

By Rebecca Melvin

New York, June 10 - Renewed speculation that Freeport-McMoRan Copper & Gold Inc. might be taken over boosted the Phoenix, Ariz.-based mining company's convertible preferreds on Tuesday, with rumors spurred by Compania Vale do Rio Doce SA's disclosure that its management approved a $15 billion offering of shares.

Freeport was one of three companies mentioned in association with a potential acquisition by CVRD of Brazil. Freeport mandatory preferreds added about 4 points, expanding compared to the gain in its shares, while the CVRD mandatory exchangeables slipped about 1.5 to 2 points, mostly in line with its shares.

The convert universe was activated by a double dose of merger-related news Tuesday. A second situation was the unsolicited offer for Houston-based oil services company Grey Wolf Inc. by Canada's Precision Drilling Trust. Precision is offering to pay $9.00 a share for Grey Wolf.

"There have been a couple of deals recently in terms of the convert space," a New York-based sellside analyst said, referring to merger and acquisition activity, and mentioning a currently pending bid for DRS Technologies Inc. also.

"The [Freeport] convertibles have takeout protection. The bonds are trading close to wherever your breakeven on the takeout is. The question is, does the competing bid actually win or not," the analyst said.

Alpha Natural Resources Inc.'s convertibles were under pressure after the coal company was downgraded by Davenport research to "neutral" from "buy." But Goldman Sachs raised its price target on Alpha Natural shares to $115 from $75 and maintained a buy rating on the name, according to the sellsider. Last week, FBR Capital Markets boosted its price target on Alpha Natural to $168 from $67.

The Alpha Natural 2.375% convertibles due 2015 were seen closing at 179, versus a share price of $87.49 on Tuesday, compared with a close of 181.25 versus a share price of $89.24 on Monday.

Shares of Abingdon, Va.-based Alpha Natural (NYSE: ANR) shed $1.75, or 2%.

Meanwhile United Rentals Inc. said its board approved a tender offer for the company to purchase up to 31% of its outstanding common stock and also announced the repurchase of some preferred stock for $679 million. The news pulled the Greenwich, Conn.-based company's 1.875% convertible bonds up about 5 points to the 109 level, but the climb didn't keep pace with a 13.3% jump in its underlying shares.

Independent research firm Gimme Credit believes the potential for shareholder-friendly moves will weigh on the bonds, causing them to underperform, according to analyst Shelly Lombard.

In new issue action, a small $65 million deal emerged from Bedford, Mass.-based medical device maker Insulet Corp., which was seen pricing after the market close Tuesday.

Two other deals are on the calendar for this week, including Bristow Group Inc.'s $100 million of 30-year convertible bonds seen pricing Wednesday and Sotheby's $150 million of five-year senior unsecured convertible notes seen pricing Thursday.

Freeport expands amid speculation

Freeport-McMoRan's 6.75% mandatory convertible preferred due May 2010 traded as high as $175.25 versus a stock price of $123 early Tuesday, and the paper ended closer to $121 versus a close of $119.41, compared to 167.5 previously, versus a stock price of $118.26..

Freeport-McMoRan's 5.5% perpetual convertible preferred was seen at 2,576.82 compared with 2,520.82. Very little of the company's 7% convertible senior notes due 2011 remain outstanding, and therefore pricing information wasn't available.

"The convertibles...all three...are far in the money, with little or no conversion premium, so it seems like it's all good news from a short-term trading perspective if the company is taken out, even for cash. The bad news is that we would lose a really good company that has a long history of issuing convertibles," a New York-based outright buysider said.

The buysider has liked Freeport for a long time, and had perhaps hoped that it would make an acquisition for itself. "It has powerful fundamentals and years of rising cash flow. There is social/political stability in Indonesia, where its major mine is located. The acquisition of Phelps Dodge gave the company some assets in Canada. If copper and gold continue to rise, the company will do better and better," the buysider said.

"If commodities tank, the company will remain rock solid. It could be a takeover target. But it could also make some good acquisitions itself," he said prior to Tuesday's latest wrinkle.

As the takeout situation stands right now, hedged investors would make about a point, compared to about 3 points on a cash takeout back in March, assuming a takeout of $120, a sellside analyst said. "The rumor has been around for a while and the bonds have moved accordingly."

The sellsider cited a recent Wall Street Journal report that talked about smaller mining companies running into issues due to drought conditions existing in South America. "And these guys rely on hydraulic power to do things," he said.

Freeport has a market capitalization of about $44 billion to $46 billion, while the market capitalization of CVRD is more like $163 billion.

Shares of Freeport (NYSE: FCX) closed up $1.15, or about 1%, at $119.41.

Rio de Janeiro-based CVRD's stock (NYSE: RIO) fell $1.57, or 4.26%, on the day.

Grey Wolf seen coming in

The Grey Wolf Libor minus 5 basis points convertible floating-rate senior unsecured notes due April 2024 were seen closing at about 142 versus a closing stock price of $9.02, compared to about 132 versus a closing stock price of $8.28 on Monday.

The Grey Wolf 3.75% contingent convertible senior notes due 2023 were seen closing at about the same levels.

They have about 3.75 points of premium and 1.5 points of premium, respectively.

"Given its premium and assuming a stock move up to $9, it looks like a loser in that situation," a sellsider said, regarding the $9 unsolicited bid.

"They should come in a little," he said.

Grey Wolf shares (NYSE: GW) shares closed up 74 cents, or 9%.

Precision confirmed that it has formally proposed a business combination between Grey Wolf and Precision. The proposal provides for Precision to acquire all of the common shares of Grey Wolf for $9 per share in cash and Precision trust units, at the election of Grey Wolf shareholders, subject to proration such that the cash portion does not exceed 33.33% of the purchase price.

The $9 per share amount represents a 21% premium over the average closing price of Grey Wolf stock over the 30-day period preceding the proposed deal. Precision said it believes its proposal is superior to Grey Wolf's planned combination with Basic Energy Services, Inc.

Insulet, Sotheby's and Bristow to price this week

Medical device maker Insulet planned to price $65 million of five-year convertible senior notes late Tuesday, which were talked at a coupon of 5.125% to 5.625%, with an initial conversion premium of 30% to 35%, according to a market source.

"It has some hair. It's going to take some work," a Connecticut-based sellside trader said, citing reduced borrow, the small deal size, small market cap and some questionable fundamentals as the hurdles facing the issue.

"They are burning cash and have negative gross margin, and they really need to grow to perform. They have a factory in Massachusetts that isn't fully automated; and they are opening a plant in China, and it will be cheap, and they will continue to ramp up sales; but right now they're losing money on every product that they sell. So all those things add up, especially in a tough market like this," the analyst said.

Meanwhile, price talk on the Sotheby's proposed deal didn't materialize, but a pricing date did: it's set for pricing Thursday after the close. One sellsider wondered why the New York-based art auction company couldn't bring a deal overnight.

The Bristow deal was on deck and sources said it modeled "super cheap."

"Even if you took down the vol, which I did, it still comes really cheap," a Connecticut based sellside analyst said.

"We think the vol should be 33, but even if you lower it to 30, it's cheap; and at fair value the vol is 22," the analyst said.

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