Blockbuster off on Circuit City quest; Tyson, Aleris move lower; Berry Plastics launches seven-year deal

By Paul Deckelman and Paul A. Harris

New York, April 14 -Blockbuster Inc.'s bonds followed its shares down Monday as investors reacted warily to the Dallas-based Number-One video-rental chain operator's offer to buy struggling electronics retailer Circuit City Inc. for somewhere north of $1 billion - even though major Blockbuster shareholder Carl Icahn was said to have offered to backstop Blockbuster's financing effort.

The news of what could turnout to be a "blockbuster" deal was the only significant feature in an otherwise fairly quiet junk market with a somewhat easier tone to it.

Among the larger losers were Tyson Foods Inc. and Aleris International Inc., although there seemed to be no fresh negative news out on either company that might explain such a retreat.

Dillard's Inc. and Trump Entertainment Resorts Inc. were each seen lower following downgrades by Moody's Investors Service. Dillard's was also later cut by Standard & Poor's.

In the primary sphere, Berry Plastics Corp. was heard to have launched a $530 million seven-year secured note offer.

Market indicators mixed

A trader saw the widely followed CDX index of junk bond market performance up 5/16 point Monday to 94 bid, 94 5/16 offered. The KDP High Yield Daily Index was meantime off 5 basis points to 74.23, while its yield widened 2 bps to 9.62%.

In the broader market, advancing issues trailed decliners by around a nine-to-seven margin, while activity, as measured by dollar volumes, was about 22% higher than Friday's sleepy levels.

Despite the apparently busier trading, some market participants were unimpressed. One called the session "a snoozer," while another characterized it as "a little boring." There was "not a lot doing," yet another said. "It was an extremely quiet day, a carryover from Friday."

Bloockbuster stumbles

The traders agreed that Blockbuster "was really the only active thing today," as one put it. He pegged the company's 9% notes due 2012 at 81.5 bid, 82.5 offered, down about a point. That was the level at which several traders who were queried saw the bonds ending up, although one figured the loss at 1½%.

Blockbuster's New York Stock Exchange-traded shares, meantime, nosedived 32 cents, or 10.22%, to end at $2.81 on volume of 32 million, over seven times the usual turnover.

Blockbuster investors were reacting with dismay to the company's announcement making public its desire to buy Richmond, Va.-based consumer electronics retailer Circuit City for a price of between $6 and $8 per share, cash or $1 billion to $1.35 billion total. Blockbuster has been quietly wooing Circuit City since February, but said that the latter company has so far failed to allow the video-rental company to do due diligence. The revelations are seen as an effort by Blockbuster to pressure Circuit City by appealing to its shareholders - who reacted to the news by taking the retailer's shares up smartly.

The key question appears to be: where is the money-losing Blockbuster going to get the $1 billion or more it needs to swing this deal, the presumed cause of the wariness of Circuit City's board about entering into advanced talks with Blockbuster. As of the last quarter, Blockbuster only had about $185 million in cash on its balance sheet. In answer to that question, Blockbuster chief executive officer James Keyes, in his Feb. 17 letter to his opposite number at Circuit City, Philip J. Schoonover, the contents of which were publicly released Monday, said that "[g]iven current debt market conditions, we believe most of the cash necessary would be generated through the issuance of additional Blockbuster equity, most probably in a rights offering to our existing shareholders. We believe they, and the market, will recognize the merits of this transaction and we are confident that we can raise the required equity. The borrowing capacity of the combined business would provide the remaining cash proceeds."

Keyes said on a conference call Monday that the move has the support of Blockbuster's largest shareholder, the billionaire Icahn. There was no direct comment Monday from Icahn himself - but a major Circuit City shareholder, Mark Wattles, said in a media interview that he had spoken with Icahn, and that the financier was "enthusiastic about the transaction and said he was willing to backstop the finance," by buying any shares from the rights offering that other stockholders choose not to buy.

Even if the financing should fall into place, there was much negative media and analyst commentary Monday to the effect that Blockbuster - which has plenty of its own problems trying to hang onto its eroding share of the home-video market, challenged by upstart rivals like Netflix Inc. and the growth of video-on-demand offerings from satellite and cable operators - may be biting off more than it can chew in trying to find profit by combining with Circuit City.

Blockbuster's announcement said such a combination of Circuit City's 680 stores with Blockbuster's own over 5,000 domestic locations "would result in an $18 billion global retail enterprise uniquely positioned to capitalize on the growing convergence of media content and electronic devices. The transaction would allow both companies to benefit from the revenue growth generated by their complementary products, while the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value."

But the skeptics note that Circuit City - once the largest consumer electronics chain in the United States - is, like Blockbuster, also losing money as it tries to compete with upstart rivals like the larger home electronics retailer Best Buy Inc., which now holds Circuit City's old top spot, as well as retailing giant Wal-Mart Stores Inc., whose bargain-priced TVs, DVD players and audio equipment are eating into the lower end of Circuit City's market. Retailers in general are meanwhile having difficulty selling big-ticket electronic goods in a soft economy populated by fearful consumers. Current management is under assault by investors including Wattles, who is waging a proxy campaign to oust Schoonover and his team.

With all of that going on, a bond trader said, "I would have expected Blockbuster's bonds to get hit even more," and said that he had read a piece in which the writer compared the Blockbuster-Circuit City situation to the conditions which prevailed several years ago when financier Eddie Lampert bought and combined the Sears and Kmart retail chains under one corporate roof, "for the real estate" profits that might be realized by closing some stores and selling the underlying real estate.

"If you just look at the real estate values of these Circuit City properties," he said, "the thinking or the rationale may be that it covers [Icahn's] investment. I thought that was an interesting take on it - because that's the only angle that I could see [that might explain] why Icahn would be willing to risk that substantial of an investment," especially with two companies that right now "are both unsuccessful. He must see value" in potential real estate dealings, he reiterated.

Tyson, Aleris lower, but on no news

Elsewhere, news features were hard to come by in the market. For instance, a market source had the bonds of Beachwood, Ohio-based aluminum producer Aleris International lower, with its 10% notes due 2015 down 3 points to the 59 level and its 9% notes due 2014 hovering around 69, down more than 5 points on the session, in busy dealings.

But there was no fresh news out on the company, which is trying to tighten its belt. Last week Aleris announced plans to close an alloy facility in Shelbyville, Tenn., eliminating about 70 jobs.

Another big loser was Arkansas-based chicken processor Tyson, whose split-rated 8¼% notes due 2011 - considered junk by Moody's and by Standard & Poor's but investment grade by Fitch Ratings - were seen off some 4 points around the 105 level.

Trump, Dillard's off after ratings moves

A trader saw Trump Entertainment Resorts' 8½% notes due 2015 down a point at 63 bid, 65 offered.

Earlier in the day, Moody's cut the Atlantic City, N.J.-based gaming operator's probability of default rating one notch to Caa1 from the previous B3, citing increased competition from racetrack gaming operations in nearby Pennsylvania.

The agency meantime maintained its B3 corporate family rating and its Caa1 rating on the senior secured 2015 second-lien notes, both with a negative outlook.

Moody's separately dropped Little Rock, Ark.-based retailer Dillard's corporate family rating to B1 - a four notch cut from Ba3 previously, citing its weak operating margins. S&P later weighed in with a one-notch corporate credit downgrade to BB- from BB.

A trader saw the company's 6 5/8% notes coming due later this year ½ point lower at 99 bid, 101 offered, while its 6 5/8s due 2018 were down a point at 76 bid, 78.5 offered.

Other retailers steady to firmer

Among other retailing names, Pantry Inc.'s 7¾% notes due 2014 were seen up nearly 3 points on the session to about the 78 level, bouncing back from the beating they took on Friday, when they were pegged about 4 points lower. That followed some gyrations last week in the Sanford, N.C.-based convenience store operator's shares, after the company warned that it expects to report a loss in its fiscal second quarter, citing lower gas and merchandise sales due to soft consumer spending and high gas prices. It also cited the impact of a one-time charge related to mark-to-market losses on hedging positions, as well as a rise in credit-card processing fees.

Linens 'n Things Inc.'s floating-rate notes due 2014 were seen up a point at 39 bid, 42 offered after last week's see-sawing levels amid speculation that the New Jersey-based housewares retailer might file for protection from its creditors, possibly as early as Tuesday, when a coupon interest payment is due on those bonds.

No activity from airline merger

Monday night's announcement that Delta Air Lines Inc and Northwest Airlines Corp. had agreed to merge in a $17 billion-plus deal, though rumored for some days beforehand, came way too late to affect trading in the remaining paper of the two carriers.

A trader said that most activity in those names comes in "stubs" from their old bonds which had traded around before the two airlines separately but pretty much simultaneously reorganized through the bankruptcy courts, emerging last year. The old bonds were paid at a fraction of their value as part of the companies' emergence from their respective Chapter 11 processes, with the stubs given to the bond holders entitle the holders to possible future additional payments beyond what they were paid for their bonds in the restructuring. Delta's stubs were quoted last week as having fallen to around the 2 bid, 3 offered area.

Berry to price Tuesday

Meanwhile the primary market turned up a bit of news as underwriters announced that Berry Plastics Corp.'s $530.6 million issue of first priority floating-rate senior secured notes due 2015 (expected ratings B1/BB-) is expected to be priced on Tuesday.

An investor call is 11:30 a.m. ET on Tuesday morning.

Banc of America Securities LLC, Goldman Sachs & Co. and Lehman Brothers are joint bookrunners for the bridge refinancing.

Two bridges

Shortly after the news on Berry Plastics was circulated, one investment banker observed that presently there are two deals in the market: Berry and CCS Inc., which is on the road with a $312 million offering of senior unsecured notes due Nov. 15, 2015.

The roadshow for CCS' bridge-refinancing deal, being led by Goldman Sachs and Deutsche Bank Securities, is expected to wrap up early next week.

The banker, who is not in either deal, commented that, given the recent volatility in the capital markets and the anemic new issuance of the first quarter of 2008, the fact that both of the deals now in the market are bridge refinancings is either a sign that health is returning to the high yield, or that the dealers are becoming aggressive.

Another sell-sider source, also not involved in either Berry or CCS, said that junk prices have cheapened up to the point where, for the right risk story, high yield is a compelling investment.

"People seem willing to buy paper right now where they are being adequately compensated," the official said.

"The inventory sales that are taking place are going to sophisticated investors, many of them from the distressed sector.

"And apart from Nielsen most of the new paper has tended to be double-B stuff, at what should be attractive spreads."

A week ago Nielsen Finance LLC and Nielsen Finance Co. priced a $220 million add-on to their 10% senior notes due Aug. 1, 2014 (Caa1/B-) at 99.50.

Avoiding seller's remorse

As with sources who spoke to Prospect News late last week, this sell-sider had been expecting news before last Friday's close on the LBO backlog, particularly the hung bonds of Alltel Communications Inc. and First Data Corp.

However the sell-sider had encountered no conclusive evidence that the hung Alltel or First Data paper had been placed.

Consistent with color heard late last week, this source also believes that with high yield stabilizing and prices improving, the dealers may be raising their sights somewhat.

"You don't want to have seller's remorse any more than you want to have buyer's remorse," the sell-sider reasoned.

Still, the source added, getting the backlog sold and in a final resting place is a big part of stabilizing the market.

"Some of the banks are taking the position that at some point you have to rip the Band-Aid off," the sell-sider remarked.

High yield has been improving, the source reiterated, because of where paper - both new issues and the backlog - has been pricing and trading.

"The downside has become less ominous than it was," the sell-sider said.

"We hear they're buying Harrah's at 14%.

"That seems pretty cheap."

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