Yahoo, Sina gain as buzz of deal resurfaces; i2 Tech finds interest; Beazer off on data

By Ronda Fears

Nashville, Aug. 25 - There were some buyers in the convertible market, albeit amid light summer flow, traders said. Technology issues were catching strong bids, traders said, with Yahoo Inc. and Sina Corp. up sharply as buzz about a possible merger or partnership popped up again. I2 Technology Inc. also received inquiries on gaining optimism since a big capital infusion earlier this summer.

Convertible players took comfort as Treasury yields eased off the sharp back-up seen earlier this week amid modest flight-to-safety buying as durable orders and new home sales were not as positive as the market was expecting.

Beazer Homes USA Inc., however, was softer with the convertible off by a half-point on the 6.4% drop in July new home sales. Still, traders noted that the bond held up well against the sharp pullback in the stock.

Biotech issues were another focal point of buying, sellside traders said, as the summer retreat in those issues provided some opportunity in the space. One trader pointed out Wednesday, though, that the big push in those issues has been some anticipation of credit spreads widening in that sector.

Gap Inc. and Saks Inc. dropped on lackluster expectations for back-to-school clothing sales, what with the Wal-Mart Stores Inc. warning earlier this week and a downgrade to the Gap stock by Merrill Lynch on Wednesday, traders said. Gap's 5.75% convertible lost about 2 points, and Saks' 2% issue was off by a half-point.

Players were looking worldwide for opportunities to set up convertible positions ahead of whatever post-Labor Day rush may occur, although it was quiet outside the United States as well.

"It is deathly quiet over here," said a sellside market source in London. "No new issuance activity to speak of; everyone is still on holiday. There's almost no reason to be in the office, although the secondary markets have bounced back to life a little as vols [volatility] have risen recently and spreads have widened a little."

Similar to market chatter in the United States, he added, "Rumors are that several funds of funds are pulling out of the convertible arbitrage market so should see some money leave the European convertible market, which is probably a good thing as there was too much money chasing too little paper. I think September should be busier as people return from holidays."

Beazer shaken by home sales

Beazer's 4.625% convertible dropped 0.5 point to 103.5 bid, 104 offered on the drop in July new home sales. Traders said concern over the data was amplified by the revision to June home sales and a sharp decline in mortgage applications.

"Risk appetite is not very strong right now. With the fears about a housing bubble, anemic job growth and, so far, the Fed's bias to raising interest rates, homebuilding is just not a popular space right now," a buyside trader said.

"The [Beazer] issue is a little pricey, and the theme this week is about looking for whatever bargain may be out there after the summer slump."

The U.S. Commerce Department reported sales of new homes declined a whopping 6.4% in July from the previous month, which was more than analysts expected and the worst month for new home sales since December. In addition, revised figures for June showed a 5.6% drop - even weaker than previously reported.

On top of the new home sales data, mortgage applications dropped 6.3% last week.

Yet, a sellside trader said a dip in mortgage rates recently is apt to stimulate sales before the summer is over. Thus, he said, there was some marginal buying on the weakness.

"The markets are worried about high oil prices causing a slowing in economic growth and jobs not being there," the trader said, "but all that does is surely mean the Fed will leave rates alone. If that is the case, then homes sales should be okay, because it's still a lot cheaper to finance a new home than re-mortgage the one you're in."

i2 Tech turnaround noticed

i2 Tech's turnaround situation has not entirely played out, maybe not even whole-heartedly begun, convertible market sources say. The Dallas-based firm, which designs software for enterprise supply chain management, only has one bond issue - $350 million of 5.25% convertibles due 2006, which until recent months was trading in deeply distressed territory.

On Wednesday, the i2 Tech convertible was quoted at 93.75 bid, 94.75 offered and traders on the Street said there had been recent inquiries into the issue.

"We upgraded the [convertible] bonds to buy from hold" about a month ago, said David Marsh, bond analyst at Friedman Billings Ramsey, on Wednesday. "I hated this bond for a long time, but I've come full circle with it."

A $100 million capital injection into i2 Tech by Q Investments, a Fort Worth, Texas, investment fund, in April is the linchpin for the rational behind his change of heart, he said. When the Q Investments infusion took place, the i2 Tech converts spiked up about 10 points. i2 Tech issued $100 million of 10-year 2.5% mandatory convertibles to Q Investments in a privately negotiated transaction, boosting Q Investments' stake in i2 Tech to 26% on a converted basis. The mandatory issue converts at 92.6 cents versus $37.99 for the convertible bond.

i2 Tech shares on Wednesday added a penny to close at 75 cents.

Of particular interest to i2 Tech convertible holders, Marsh said, is that the new mandatory takes a subordinate position to those bonds.

In addition, the analyst said he could foresee i2 Tech making a reverse stock split, say at around 10-for-1, and then seeking to regain a Nasdaq listing.

i2Tech cash position stronger

Other recent events that contributed to the improved view of i2 Tech, Marsh added, are the resolution of the Securities and Exchange Commission investigation, settling a stockholder lawsuit and a reduction in the company's cash burn rate.

The SEC case resulted in a $10 million penalty to i2 Tech, but the analyst noted that it could have been much more. The stockholder suit was settled for $42 million, but he pointed out that i2Tech founder and chief executive Sanjiv Sidhu ponied up half of that, or $21 million.

As for cash burn, Marsh said the capital infusion in April is a big factor but added that i2 Tech has finally cut its cash expenses to a level where it's reasonable to see where they could get to breakeven on a cash flow basis, or perhaps even become cash flow positive.

The mandatory proceeds brought i2 Tech's cash position to $390 million, and the analyst noted that trailing 12-month revenues for the company are about $410 million.

"I don't think they are going to knock the cover off the ball in the next 18 months," which he noted is critical since the convertible bonds mature Dec.15, 2006. "But I don't think they will continue to hemorrhage. Fundamentally, they are heading in the right direction."

But Marsh said he doesn't necessarily see i2 Tech as a strong takeover candidate. Manugistics Group Inc. would probably be a better target for the big software suite players like Oracle Corp., but there doesn't really seem to be a catalyst for a merger among those names.

Yahoo, Sina deal abuzz again

Rumors about a merger or partnership between Yahoo and China-based Sina were circulating again Wednesday, and it prompted buying in the zero-coupon converts of both companies. Sina's issue shot up almost 10 points to the 120 area, a sellside trader said, while Yahoo's issue added about 4 points.

"This has floated around before and nothing has come of it, but it was giving us something to do today," the trader said.

Translated news reports in China were the origin of the buzz Wednesday, he said. Briefing.com cited one translation, he added, but also pointed out that many of the publications commenting on the deal are little more than Chinese bulletin board postings and a daily newspaper described as being located "way out in the boondocks."

"The big difference in today's rumor is that now Yahoo has a bunch of new cash from selling some of its stake in Google when it IPO'd," the trader said. "The China market is huge, and probably Yahoo is only able to penetrate it by making an acquisition. They have been trying to break into the China market for a couple of years without a lot of success on their own. So, the fundamental thinking behind the speculation makes sense."

Google Inc.'s initial public offering last week at $85 a share was panned by Wall Street analysts but the stock has risen to a close Wednesday of $106, a gain of $1.13, or 1.08%, on the day.

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