Armor climbs on BAE buyout; Yahoo! fades with merger hopes; Gold Reserve, Chemed launch deals

By Kenneth Lim

Boston, May 7 - Armor Holdings Inc. shot up on Monday after it agreed to a buyout by BAE Systems Inc., confirming recent rumors of a takeover.

Yahoo! Inc. fell back down after rumors of a merger with Microsoft Corp. proved to be unfounded just before the weekend began.

Meanwhile, Gold Reserve Inc. and Chemed Corp. announced new deals that will add another $235 million of new convertibles to the market.

Overall activity was subdued on Monday amid a dearth of major news items. Trading was light and scattered among a broad range of names with no dominant theme, market sources said.

"We saw some buy interest in Wyeth, looks like outright interest, otherwise it's pretty quiet, honestly," a sellsider said. "We're seeing some lightening up outright on Allergan, better sellers of Bunge. But it's pretty quiet. Most people are focused on Armor Holdings."

Wyeth's six-month Libor minus 50 basis points convertible due 2024 was unchanged on Monday, trading at 112.125 against a stock price of $57.40. Shares of Madison, N.J.-based Wyeth (NYSE: WYE), a drug maker, rose by 0.39% or 22 cents to close at $57.31.

Allergan Inc.'s 1.5% convertible due 2026 gained about ½ point outright to change hands at 109.25 versus a $121.10 stock price. Allergan stock (NYSE: AGN) closed at $121.21, down by 0.08% or 10 cents. Allergan is an Irvine, Calif.-based maker of specialty pharmaceutical and medical device products.

White Plains, N.Y.-based Bunge Ltd., an agricultural services and processing company, saw its 4.875% perpetual convertible preferred slip 2.72 or 2.41% to close at 110.28 against the closing common stock price of $75.60. Bunge common stock (NYSE: BG) finished 1% or 76 cents lower.

Armor strengthens on buyout

Armor Holdings' 2% convertible due 2024 jumped about 10 points on Monday after the company agreed to a $4.1 billion cash buyout by BAE Systems Inc., the U.S. unit of U.K. defense company BAE Systems plc.

The Armor convertible traded at 176.75 against a stock price of $86.55. Armor stock (NYSE: AH) closed at $86.60, higher by 5.42% or $4.45.

"There was a lot of Armor Holdings trading today," a sellside convertible trader said. "It's a home run for everyone, even the hedge guys."

Jacksonville, Fla.-based Armor Holdings said BAE is offering $88 per share for the company. Including an additional $388 million in debt, the total deal is valued at $4.5 billion. Armor makes armored vehicles for the military. The deal needs approval from Armor shareholders and must comply with national security law regarding foreign investment and antitrust law. The deal is expected to close in the third quarter.

The offer price represents a 7% premium to the company's closing stock price on Friday.

Rumors emerged at the end of the previous week that Armor could be the target of a takeover. Lockheed Martin Corp., which does business with Armor and had previously been rumored to be a potential acquirer, was mentioned again on Friday as a possible buyer. Neither Armor nor Lockheed commented, and BAE turned out to be the bidder Monday.

Convertible holders had chased the convertible higher on Friday, but an air of cautiousness remained over uncertainty about whether there was any deal to begin with as well as whether a buyer would be able to claim the public acquirer waiver, which would deny convertible holders the make-whole premium.

Debate continued on Monday over whether BAE, which has American depository receipts but is not listed in the United States, could be considered a public acquirer.

"There's some debate over whether the company can say they're a public acquirer," a convertible strategist said. "They have an ADR that trades here over the counter, but not necessarily on the Nasdaq or any major exchange. And I'm not even sure if the company wants to pursue that. They [the convertibles] are better, but I think they would be trading even better if there was clarity on this."

Some observers also wondered whether the deal will pass regulatory scrutiny, the strategist said.

"There are a couple of issues to be resolved," the strategist said. "I think you'll hear different things from different risk arb desks. Armor Holdings bought Stewart and Stevenson about a year ago and that's a competitor to BAE in one of their segments. That could be an issue, although I heard some people say it won't be."

The strategist said the deal has a decent chance of approval.

"It seems like they paid a pretty fair price," the strategist said. "It doesn't appear that there's anyone imminently that will jump in the fray, but in this private equity market, maybe you'll see something...but right now because of where they're trading all the upside of receiving a make-whole table is already in there."

A sellside convertible analyst said Lockheed could be a potential rival, although the company has not given any indication of its interest.

"I do know that they were a fit for Lockheed," the analyst said. "They're already working on one contract for one light armored truck, and there's some things that they work together on...There was some speculation that Lockheed was going to acquire them going even back to last fall."

Although BAE does not appear to have a case as a public acquirer, it may try to figure out a way to avoid paying the make-whole premium, the analyst said.

"It's about $70 million, 20 points of premium on a $350 million issue, so it's not chump change," the analyst said.

"The one thing that gives me just a bit of caution is BAE said they'll finance part of the transaction with sales of common," the analyst said. "In doing that it made me wonder whether they could issue ADRs or more ordinary shares and whether they could just take the existing ADRs and list them on the NYSE or something...I'm not sure if that will work, but if they could spend a few million bucks and list the ADRs, if they could use that to avoid paying the make-whole, I don't see why they wouldn't do that."

Yahoo! falls after rumors fade

Yahoo!'s zero-coupon convertible due 2008 slid back by about 5 points in line with its stock Monday after rumored merger talks with Microsoft were reported to be dead.

The convertible traded at 150 against a stock price of $30.45 on Monday. Yahoo! stock (Nasdaq: YHOO) closed at $30.38, down by 1.94% or 60 cents.

"It doesn't really matter for the converts," a sellside trader said. "Of course the outright guys won't be too happy, but there's no real loss here. It's just back to where it was before all these happened."

Yahoo! was reported to be discussing a merger with Microsoft early Friday, sending the stock and convertible higher. But a report just minutes before the market closed on Friday said the merger talks were not active. The company's securities retreated and continued to fall Monday.

Yahoo! is a Sunnyvale, Calif.-based online services provider.

Chemed, Gold Reserve launch deals

Chemed said Monday that it plans to price $160 million of seven-year convertible unsubordinated unsecured notes on Tuesday after the market closes. Price talk was not disclosed.

There is an over-allotment option for a further $24 million.

Citigroup and JP Morgan are the bookrunners of the Rule 144A deal, the company said.

Chemed, a Cincinnati-based provider of hospice care services, said it will use the proceeds of the deal to fund convertible note hedge and warrant transactions. It will also buy back about $100 million of its common stock and to repay its revolving debt.

Meanwhile, Gold Reserve's planned $75 million of 15-year convertible senior subordinated notes was talked at a coupon of 5% to 5.5% and an initial conversion premium of 30% to 35%.

The convertibles were offered at par and are expected to price Monday.

There is an over-allotment option for a further $11.25 million.

JP Morgan and RBC Capital Markets are the bookrunners of the registered offering.

There is a concurrent offering of 16 million shares of Gold Reserve common stock, with an over-allotment option for an additional 2.4 million shares.

Gold Reserve, a Spokane, Wash.-based gold and copper mining company, said it will use the proceeds of the deals to fund construction activities, equipment purchases and the development of its Venezuela-based Brisas project.

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