Tyco moves lower on lower guidance, break-up plan; Lucent mixed; Wyeth up

By Rebecca Melvin

Princeton, N.J., Jan. 13 - The convertible market was fairly quiet on Friday ahead of a holiday weekend; but company news sparked some activity, notably in the convertibles of Tyco International Ltd., Lucent Technologies Inc. and Wyeth.

Tyco convertibles fell 13 points outright but just a point or two on a hedged basis, traders said, after the company lowered guidance and detailed some aspects of its expected break-up plan.

Lucent convertibles more or less treaded water, trading mixed, after the Murray Hill, N.J.-based telecommunications equipment maker lowered 2006 guidance. And the Wyeth convertible floaters gained about 1.5 points, in line with its underlying shares.

"It was kind of back and forth; nothing was moving too much," a New York-based sellside trader said of the overall convertibles market.

Some traders slipped away ahead of the bell to start their holiday weekends early.

U.S. markets will be closed on Monday in observance of the Martin Luther King Jr. holiday.

Friday's session was a contrast to earlier in the week in the secondary convertibles market, a Connecticut-based sellsider said. "Monday, Tuesday and Wednesday were very busy. You had the auto-related credit issues and saw them trend down, and Medtronic was one issue that traded a ton," the convertibles sellsider said.

He also said biotechnology names were active, and volatility in the energy sector spurred convertibles in that sector. But energy was secondary to the biotech space, he said.

In the primary arena, there was still no sign of new issuance as the market apparently catches up from a heavy volume of new issuance in December.

"Everybody wanted to squeeze in deals before the holidays. They didn't want to issue anything when investors weren't going to be around," a New York-based syndicate source said. "And bankers too have been known to take a vacation."

"Now everyone's just getting back and it takes a while to get things cooking," he said.

Tyco pressured

Tyco's 3.125% convertibles dropped about 13 points outright and contracted on a hedged basis after the Bermuda-based conglomerate cut fiscal first-quarter guidance, citing weakness in its fire and security and health care business and outlined a plan to break up the conglomerate.

The Tyco 2.75% convertibles slid all day in tandem with the 3.125s, but the 2.75s weren't as actively traded because they are callable. "Premium wise they expanded," a sellsider said of the 2.75s.

"A lot of guys were long Tyco. The stock had a good run, with a lot of hedge guys holding the stock," a New York-based sellside trader said.

Tyco's fiscal first-quarter earnings from continuing operations, excluding special items, are expected to be about 38 cents a share, down from Tyco's previous forecast of 40 to 42 cents a share.

For the full-year 2006, earnings from continuing operations, excluding special items, are expected to be in the range of $1.85 to $1.92 per share.

The guidance was attached to a company release detailing aspects of its break-up plan into three different publicly traded companies.

Following the company's news, Citigroup downgraded the shares to "hold" from "buy" even though Citigroup analyst Jeffrey Sprague called the break-up "logical," given Tyco's recent struggles. His price target for the shares was lowered to $31 a share from $35.

The break-up plan, while expected, poses a lot of uncertainty, a Connecticut-based sellsider said. "There're a lot of questions: three different companies means three different shorts to maintain. You can't model it out the same way."

Tyco, based in Pembroke, Bermuda, said its board approved a plan for the conglomerate to split into a health care company, an electronics company and a fire and security and engineered products and services company. Each will have its own board, and the transactions are expected to be completed in first quarter of 2007.

Tyco health care had revenue of nearly $10 billion in 2005. Its products include advanced surgical instruments and supplies, respiratory care products, contrast media and diagnostic imaging products, needles and syringes, vascular therapies, sutures and wound care products, and generic pharmaceuticals.

Tyco electronics makes components, including connectors, switches, relays, circuit protection devices, touch screens, magnetics, resistors, wire and cable, and fiber-optic and wireless components. It is a $12 billion business with 88,000 employees, or twice as many employees as health care.

The fire and security business plus engineered products and services is an $18 billion business with 118,000 employees.

Under the proposed transaction structure, each of the companies is expected to remain incorporated in Bermuda.

As for earnings, Tyco said that fire and security revenue and margins were adversely impacted by weakness in commercial security and its worldwide fire services businesses. But the weakness was partially offset by improved performance in residential security, it said.

In health care, strong growth in revenue and operating profit internationally was offset by revenue and profit shortfalls in the imaging and respiratory businesses, primarily due to product recalls and regulatory compliance issues, as well as capacity limits in its pharmaceuticals business.

The release said that the issues have been resolved and the company expects additional pharmaceutical capacity on-line in the second quarter.

Tyco shares (NYSE: TYC) closed down $3.19, or 10.5%, at $27.10.

Lucent treads water on lower guidance

The convertibles of Lucent traded actively, but mixed and little changed, after the telecom equipment maker lowered revenue guidance for its fiscal first-quarter and full-year 2006.

The Lucent 2.75% convertibles A tranche was at 100.50 bid, 101 offered, down about 1.25 points from Thursday; and the 2.75% B tranche traded at 102 bid, 103 offered, compared to about 102.25 on Thursday.

The Lucent 8% convertible traded at 101.25.

Lucent shares (NYSE: LU) closed down 6 cents, or 2.2%, at $2.65.

The company said lower sales in the United States and China were to blame for the reduction, which puts revenue expectations at flat to a low-single digit increase, from the mid-single digit increase forecasted before.

For the fiscal first quarter ended Dec. 31, Lucent expects revenue will be 15.6% lower at $2.05 billion, compared to the previous quarter ended Sept. 30, when revenue was $2.43 billion.

The company expects second-half revenue to be "significantly" higher than in the first half.

In a separate release, the company announced a change in top management with chief financial officer Frank D'Amelio named chief operating officer. D'Amelio will continue in his role as chief financial officer until a successor is named.

Wyeth adds on settlement

The floating-rate convertibles of Wyeth added 1.5 points to about 105.5 bid, 106.50 offered. Its active trading was said to be a continuation of a pick up in volume marked since the beginning of the year with a jump in its underlying shares since December.

Wyeth shares (NYSE: WYE) added 64 cents, or 1.3%, to $48.28 on Friday.

The Madison, N.J.-based company, which is conducting human trials of three treatments for Alzheimer's Disease, said it hopes to begin testing at least three more promising treatments this year for the degenerative brain disease.

Also on Friday it said that it had settled litigation with generic drugmaker Teva Pharmaceutical Industries Ltd. over its Effexor drug.

"They're working on new Alzheimer's drugs. There's been positive buzz coming out of the health care conferences," a sellsider said.

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