Western Wireless comes in on Alltel deal buzz; Citizens gains; Leucadia off; AtheroGenics up

By Ronda Fears

Nashville, Jan. 6 - Speculation about an estimated $4 billion buyout of Western Wireless Corp. by Alltel Corp. sent convertible and risk arbitrageurs scrambling for positions, pressuring the convertibles of both names lower and renewing merger speculation about rural phone carriers and the wireless sector.

Citizens Communications Co., the Stamford, Conn.-based rural phone company that was on the auction block nearly a year ago and then taken off the market last summer after apparently dismal bids, was an obvious focal point, traders remarked. CenturyTel Inc., a Monroe, La.-based rural and suburban phone carrier, was another. Both gained in the convertible market, and the stocks were higher on heavy volume.

Pure wireless names were less noteworthy in the convertible universe, traders said, particularly with Nextel Communications Inc.'s takeover by Sprint Corp. still playing out. That said, Nextel Partners Inc., which markets Nextel cell phones and is still seen as a possible inclusion in the Sprint merger, saw its converts gain some ground. Telecom equipment makers like Juniper Networks Inc. declined.

In the same vein - consolidation prospects in the telecom group, that is - Leucadia National Corp. was getting attention as a likely suitor for potential takeover candidates, based on its history, but was lower on the day. Traders also pointed out that Leucadia's history on telecom purchases, specifically its unsuccessful bid for MCI Inc., was cause for trepidation about deals not yet firmed up.

Airline paper continued in a downward spiral Thursday as AMR Corp.'s American Airlines Inc. matched Delta Air Lines Inc.'s reduced fare strategy and Continental Airlines Corp. reminded the markets of its needing some $500 million in labor concessions by the end of February, which compounded the negative impact of its report of lower revenues earlier this week.

However, traders said there was again little traffic in those converts. One dealer said most of the airline converts were lower by about 1 to 2 points.

New issues were a bright spot for convertible players, though, with the pending AtheroGenics Inc. deal at bat after the closing bell. It was lifted to 2.75 points over issue price in the gray market during the session, though seen worth a little less by convertible analysts.

Celanese Corp.'s $200 million perpetual convertible preferred, talked with a 4.0% to 4.5% dividend and 18% to 22% initial conversion premium, was already getting positive interest, too. But buyside traders said it was too early for the issue to trade when-issued, as it doesn't price until Jan. 20, which will be alongside the German chemical concern's initial public offering.

Western Wireless off 12 points

The Western Wireless converts come in about 12 points on the day as the Alltel news spread, with the 4.875% issue trading roughly 8 points over parity on a 90% hedge. Risk arbs were heavily involved, pushing the underlying stock up $4.70, or some 15%, to close at $35.70. Traders remarked, though, that Western Wireless shares eased back in after-hours trading.

"These [Western Wireless converts] were pretty rich going into it and really when you punch in all the numbers on this, the converts are worth probably just 3 or 4 points in premium," said a buyside trader involved in both convert arb and risk arb strategies.

Some players were boosting positions, others trying to establish a position, he said, because they like the 40%-plus volatility in Western Wireless stock.

In junkland, traders told Prospect News that the Western Wireless 9.25% bonds due 2013 shot up over 5 points on the news to the area of 114 bid, 115 offered.

Alltel mandatory off 0.75 point

An acquisition by Alltel worth $4 billion, including the assumption of some $2 billion in Western Wireless' debt, put considerable pressure on the buyer's converts as well. For one thing, one dealer commented, this merger does not entirely remove Alltel as a takeover target itself.

Alltel's 7.75% mandatory, a $1.4 billion issue that settles in May 2005, dropped 0.75 point on the news to 51.625. Alltel shares also were sold off, ending lower by $2, or 3.45%, at $56.

The New York Times reported that the two companies could reach a deal within the week, but analysts and convert players were not sure the deal was "a cinch," or that it would entirely remove takeover risk for Alltel. In fact, a sellside convertible analyst cited a separate report on Thursday that Verizon Communications Inc., the largest U.S. telephone company, is considering an acquisition of Alltel, but has not yet decided to make a bid.

Analysts said the impact on Alltel of acquiring Western Wireless would depend on the deal's structure, or how much stock, if any, would be used for the roughly $2 billion cash portion of the total price tag. Another key would be any asset divestitures, as some analysts expect rural operator Alltel would dispose of Western Wireless' assets in Europe.

"At [an estimated bid of] $40 a share, Alltel would be paying a 29% premium [for Western Wireless]. That seems like too much. Sprint is only paying a 14% premium for Nextel," based on deal terms putting the value of Nextel shares at $32.63, said a convert trader at a huge hedge fund in New York. "You could look at it as maybe a deterrent for any rival bids, but it still looks too high, so the deal is at risk."

Western Wireless call a factor

If a buyout by Alltel transpires, convertible traders said there could be some call risk attached to the Western Wireless converts but that would likely be mitigated by a make-whole provision on the bonds. There are several other moving parts players were having to juggle, like dividends and related conversion ratio adjustments.

"At first there were some guys figuring that the Western Wireless converts, which by the way are deep in the money, would be taken out next June [2006] at the call," one buyside trader said. "I thought that, too, at first, but there's a make-whole provision."

A buyside analyst added that it doesn't make sense to attach any call risk to the Western Wireless convert because the "make-whole is only a company-initiated call," and besides, "wouldn't the company want to make the coupon payments over time rather than having to pay them all out at once?"

There also was the possibility that the takeover would be accomplished through an all-stock deal, which would not trigger a call.

"The bonds have rotten dividend protection, i.e. AT [Alltel] could double their dividend to 5% before the conversion ratio adjustment kicks in," the analyst added. "Unfortunately, the WWCA bonds' conversion ratio would not be adjusted until the dividend doubles - this hurts!"

Citizens, CenturyTel eyed

Contraction in the wireless sector aside, the potential Alltel-Western Wireless deal caused as much attention to return to the rural or regional phone sector with onlookers expecting a new phase of consolidation in that group.

"There is not a whole lot more to do in the wireless sector," after Sprint announced plans to buy Nextel for $35.5 billion in December, following Cingular Wireless' purchase of AT&T Wireless for $41 billion in November, one sellside dealer said.

"The spotlight, really, is the rural ILECs [incumbent local exchange carriers], and the small ways they could move into wireless, like with WWCA," the trader said.

Citizens Communications was the most obvious, he said, since it has already attempted a merger.

Last summer, Citizens - the Stamford, Conn.-based rural ILEC - abandoned bid solicitations that had been sought since February 2004, saying it had decided to remain an independent company after an apparent fruitless exercise that lasted about four months. Then in July, the company paid a special dividend, which sparked rating agencies to cut the credit to junk.

The Citizens 5% convertible preferred added 0.75 point on Thursday, with the stock gaining $22 cents on the day, or 1.64%, to $13.64.

CenturyTel was another name moving up in that group, with its 6.875% mandatory up 0.25 point to 26 and 4.75% convertible bond also up 0.25 point at 110. CenturyTel shares closed up 45 cents, or 1.34%, at $34.10.

Leucadia, MCI event recalled

Leucadia was seen as a potential suitor for mergers in the telecom group, particularly the rural carrier, the sellside trader said. But, he added, that Leucadia's failed play for MCI last fall had left a "sour taste" among convert players.

The Leucadia 3.75% convert due 2014 was quoted off by 1 point to 116.25 bid, 117.25 offered. The underlying stock lost 50 cents on the day, or 1.16%, ending at $42.59.

In July, Leucadia aired a desire to buy a controlling stake in MCI, with the news seen as a particularly wily move on the heels of acquiring control of Wiltel Communications Group in the fall of 2003. Instead, however, the New York-based conglomerate - involved in telecom, banking, manufacturing, real estate, wine making, copper mining and reinsurance - sold its MCI stock over the following months, raking in a reported $20 million profit.

AtheroGenics up 2.75 points

AtheroGenics's new convert, at bat after the close on guidance for a 1.5% to 2.0% coupon and 30% to 35% initial conversion premium, traded at least 2.75 points over issue price in the gray market Thursday, buyside traders said, as buyers saw it as a hot volatility play despite a virtually non-existent borrow on the stock.

The Atlanta firm, which concentrates on chronic inflammatory diseases such as clogged arteries, also has a 4.5% convertible due 2008.

Sellside analysts were not quite as enthusiastic about the value of the new AtheroGenics convert, putting it around 1% to 1.5% cheap at the middle of indicative terms.

Merrill Lynch analysts put it 1.1% cheap at the middle of price talk, using a 55% stock volatility and credit spread of 750 basis points over Treasuries. At the widest end of terms, it would be 3.4% cheap; at the tightest, 1.3% rich.

Another sellside analyst put it 1.5% cheap at the middle of guidance, using a 50% volatility and credit spread of 700 bps over Treasuries.

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