Medtronic gains dollar-neutral on debut; Bausch and Lomb rebounds before product pulled

By Kenneth Lim

Boston, April 13 - Medtronic Inc.'s new five- and seven-year convertible bonds were better on a hedged basis off the blocks Thursday, but the rest of the market was slow as investors wound down for the long weekend.

"There's nothing to do," said a trader around 3 p.m. ET. "I've been sitting here all morning."

Bausch and Lomb Inc. continued to see some action, but stayed at around the same levels as its stock made a slight recovery from safety concerns about the company's contact lens solution products. Bausch and Lomb said Thursday after the market closed that it is asking retailers to pull its ReNu MoistureLoc solution from the shelves and will run ads in the next few days asking customers not to use the product.

In other markets, Canada's Westfield Real Estate Investment Trust has priced C$30 million of convertible debentures at a coupon of 6.25% and an initial conversion premium of 13.5% to fund future acquisitions.

General Motors Corp.'s convertible bonds were mixed Thursday after the company said it expects to save about $13 billion over six years from its health-care deal with the United Auto Workers. The company's longest-dated convertible, the 6.25% due 2033 (NYSE: GPM), closed higher by 0.15 point at 17.15 against the closing stock price of $20.40. The 5.25% convertible due 2032 (NYSE: GBM) also ended higher at 15.87, up by 0.06 or 0.38%. But the shortest-dated General Motors convertible, the 4.5% due 2032 (NYSE: GXM), closed lower by 0.02 point at 23.05 versus the closing stock price of $20.40. General Motors stock (NYSE: GM) gained 37 cents or 1.85%.

The Detroit auto maker also said it will take a charge of at least $1 billion in the first quarter of 2006 as part of its contribution to the Defined Contribution Voluntary Employees' Beneficiary Association under the union deal. General Motors has to make a total payment of $3 billion over three years to the association, and is currently discussing with the Securities and Exchange Commission how to account for the charges.

Jakks Pacific Inc. was also seen trading in line amid a sharp dip in the stock early in the day, but market sources said there was no news to drive the activity.

"I'm not sure why those are active, but those were active in the morning," said a sell-sider, while a buy-side trader remarked that there were trades in the name but it was not significant volume.

The Jakks 4.625% convertible due 2023 was seen at 148.5 bid, 149 offered against a stock price of $27.14. The Jakks stock (Nasdaq: JAKK) closed at $27.21, up 7 cents or 0.26%. Jakks is a Malibu, Calif.-based maker of toys such as action figures.

Medtronic better dollar-neutral on debut

Medtronic's new five- and seven-year convertible bonds were better on a hedged basis on their secondary market debut on Thursday, but were about a point below par outright as the stock fell on the release of proposed Medicare changes seen as negative for the company.

The new Medtronic 1.5% convertible due 2011 and the 1.625% convertible due 2013 were seen trading at about 99 against a stock price of $50. The convertibles were priced at the mid-to-cheap range of talk. The company had guided for a coupon of between 0.75% to 1.5% on the five-year tranche, while the seven-year securities were talked at a coupon of 1% to 1.75%. Both tranches had talk of an initial conversion premium of 10%, in line with where they priced.

The Medtronic convertibles were the biggest names on Thursday, said a buy-side trader who noted that "the market seemed to close down about 11 [a.m. ET] this morning."

The trader described the deal as "grossly fairly priced."

"It probably traded up an eighth, and if you wanted to flip out of it, it would have cost you on the commission," the trader said. "So it's nothing that flew out the door by any stretch, although with a name like Medtronic the risk-reward profile for it is pretty favorable."

But a sell-side trader said that while the convertibles did not perform well on an outright basis, they ended better on a hedged basis.

"That means it was properly priced as a hedge vehicle," the trader said.

The trader noted that the stock had taken a hit on reports that newly released proposals to change Medicare were likely to hit major heart device makers like Medtronic. The draft changes, which were released late Wednesday, will change the way Medicare reimburses hospitals. Bank of America equity analyst Glenn Novarro said in a note that reimbursements for implantable cardioverter defibrillators, which Medtronic makes, could fall by more than 20% after the changes take effect next year.

A sell-side analyst said the convertibles may also have received "a fair amount of outright interest."

"You're buying 16% vol on Medtronic, which is probably fair to cheap," the analyst said. "It's not the sexiest bond, but it's fair and a low premium, so if you have any type of positive yield on the equity those could be interesting."

Minneapolis-based Medtronic is using proceeds from the convertible deals - worth $2 billion per tranche with greenshoe options of $200 million per tranche - to buy back about $2.5 billion of its own stock. The repurchase amounts exceed the outstanding 36 million shares in its current stock buyback program. Part of the proceeds will also be used to fund convertible note hedge transactions. Any remaining proceeds will be used for general corporate purposes.

Bausch and Lomb steady on stock rebound

Bausch and Lomb was seen trading better by about a point outright on Thursday but in line with a slight recovery in the stock after two straight days of losses for the shares.

The company's floating-rate convertible due 2023, which currently has a coupon of 5.311%, was marked at 113.25 bid, 114.25 offered against a stock price of $46.45. Bausch and Lomb stock (NYSE: BOL) closed at $46.17, up 56 cents or 1.23%.

A sell-side convertible trader said before the market closed that Bausch and Lomb stock could see further slides, citing the stock woes that biotech company Chiron Corp. faced two years ago when there were concerns about the safety of its flu vaccine.

"Chiron, when they had the manufacturing problems two years ago, it went down a ton over the plant shutdown in England, I would not be surprised to see that at some point for Bausch and Lomb," the trader said.

Rochester, N.Y.-based Bausch and Lomb announced Thursday after the market closed that it had asked retailers to stop selling its ReNu MoistureLoc contact lens solution, which the company stopped shipping earlier in the week after the Food and Drug Administration found several cases of a rare fungal eye infection in patients who had used the product.

The maker of eye health products will also run ads over the next few days asking customers to use other contact lens solutions while investigations continue.

"We've done a series of exhaustive tests on the product, and a thorough inspection of the plant, and nothing has yet been found to show that ReNu with MoistureLoc contributed to these infections in any way," Bausch and Lomb chairman and chief executive Ron Zarrella said in a statement. "However, in the cases of infections reviewed to date, the majority of patients reported using ReNu with MoistureLoc manufactured at our U.S. factory."

Bausch and Lomb's announcement came after Sears Holdings said it would pull the product from its Kmart and Sears stores, joining Wal-Mart Stores and Walgreen Co. as major retailers who had stopped selling the product.

Westfield prices C$30 million deal

Canada's Westfield Real Estate Investment Trust on Thursday priced C$30 million of seven-year convertible unsecured subordinated debentures at a coupon of 6.25% and an initial conversion premium of 13.5%.

The convertibles, which were offered at par, have an initial conversion price of C$17.25. Westfield units (TSX: WFD.UN) closed at C$15.20 on the Toronto Stock Exchange on Wednesday, the latest closing price for the common stock before the convertibles priced.

Canaccord Capital, CIBC World Markets, National Bank Financial, Scotia Capital, Bieber Securities and Westwind Partners managed the deal with Canaccord as lead.

Westfield is a closed-end real estate investment trust with assets in Western Canada. It currently trades on the TSX Venture Exchange, but shifts to the main exchange on Monday, April 17. The REIT said it will use proceeds from the offering to fund acquisitions and for general working capital.

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