GenCorp, Hollywood buy offers, Delta vote may impact Friday trade; funds see $601.5 million inflow

By Paul Deckelman and Paul A. Harris

New York, Nov. 11 - The high yield market was described by participants as virtually dead Thursday, with the bond markets officially closed in celebration of the Veterans' Day holiday. The few stalwart individuals who were manning the desks at those shops that were even open saw just an odd-lot trade here and there but opined that there might be some activity Friday in response to two pieces of merger and acquisition news - and another company's significant piece of news that surfaced Thursday.

On the M&A front, there was Blockbuster Inc.'s $700 million offer to buy underperforming rival Hollywood Entertainment Corp. and Gencorp Inc. shareholder Steel Partners II's $17 per share offer to buy all of the shares of Gencorp that it does not yet own. And on top of that, late in the day there came another news item sure to affect Friday trading across the screens in the by-now-deserted trading rooms - Delta Air Lines Inc. said that its pilots had overwhelmingly approved the $1 billion pay cut package that the carrier said it needed if it was to have any chance at all of avoiding bankruptcy.

Long after even that news broke, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. said that in the week ended Wednesday, $601.5 million more came into the funds than left them, which followed a $361 million inflow in the week ended Nov. 3. The fund flow numbers are seen as a reliable barometer of overall junk market liquidity trends, even though the funds make up only a relatively small percentage of the money available in the greater high yield universe.

Inflows have now been seen in 12 weeks out of the last 13 - with the one outflow in that time a barely discernable $900,000 for the week ended Oct. 21. Inflows have also now been seen in 24 of the 45 weeks since the beginning of the year, although the funds still show a net outflow over that time of $2.597 billion, according to a Prospect News analysis of the AMG figures.

However, after a strong start to the year, and then a rocky patch over a number of months in which outflows from the funds mounted up, the trend over the past three months has been solidly positive, according to the analysis of the figures.

The AMG statistics include only those funds that report on a weekly basis and they exclude distributions.

Hollywood Entertainment seen rising

A market source said that Blockbuster's offer to buy out its rival had little or no impact on Hollywood's bonds Thursday, with virtually nobody around to trade them. He saw the Portland, Ore.-based video rental chain's 9 5/8% notes due 2011 unchanged at 114, but said that the bonds could firm further - although they are already in nosebleed territory - when trading gets back to normal on Friday.

Hollywood's Nasdaq-traded shares meantime were up $1.13 (11.53%) to $10.93 on volume of 22.9 million, nearly 21 times the usual turnover.

Dallas-based Blockbuster said it offered $11.50 per share, a 17% premium over Hollywood's closing price Wednesday of $9.80 per share, and said it would assume about $350 million in Hollywood Entertainment debt.

That offer, if accepted, would trump the pending bid of $10.25 per share for Hollywood Entertainment by Leonard Green Partners, a Los Angeles buyout firm, which is working with the company's senior management to take Hollywood private. The Green agreement, however, allowed Hollywood to solicit other bids, and chief executive officer Mark J. Wattles, looking to buy out the company with Green's help, said that he welcomed Blockbuster's offer.

Whether federal anti-trust regulators would welcome such a deal is another matter. Blockbuster, which was recently spun off by media giant Viacom Inc., is the nation's largest video rental operator, with some 9,000 outlets worldwide. Hollywood is a distant number two, with more than 1,920 Hollywood Video stores and 600 Game Crazy video-game rental stores, most of them combined with the video locations. Combined, the two companies might account for up to half of the U.S. rental business, although they would hold only about 20% of the video retailing market.

The ratings agencies may also be wary about the deal; on Thursday, Standard & Poor's said that it might cut Blockbuster's BB corporate credit rating deeper into junk, although S&P also said that it might either raise, affirm or lower Hollywood's B+ rating, depending on how the deal shakes out.

GenCorp gains

Also on the M&A front, Steel Partners II's offer to "immediately" enter into negotiations with GenCorp to acquire it for $17 a share, subject to certain conditions, shot the Rancho Cordova, Calif.-based technology company's New York Stock Exchange-traded shares up $3.25 (23.67%) to $17.50 on volume of 10.5 million shares - about 30 times the usual daily handle. The company's 9½% notes due 2013 were being quoted higher at 109.5 bid, up from prior levels at 107, although there was a holiday-inspired dearth of actual trading.

Steel Partners describes itself as "a long-term and patient shareholder of GenCorp.," and said in a statement announcing its bid offer that it has "given the [GenCorp] board the benefit of the doubt despite the many mistakes it has made in allocating the company's capital and the poor job it has done managing the day-to-day operations of the company's various businesses, including but not limited to, the GDX Automotive business."

Steel Partners also doesn't think very much of GenCorp's recent announcement that it will privately offer up to $75 million of its convertible debt and publicly offer 8.6 million shares of common stock, calling the financing plan "unnecessary, dilutive and not in the best interest of the company's shareholders." It added that the financing was "yet another example of the incorrect and misguided business decisions the board has and continues to make."

Steel Partners has engaged Imperial Capital, LLC as its financial advisor.

Barney's seen poised to rise

A market source also saw another piece of M&A news that could conceivably be reflected in Friday's trading - the announcement that Jones Apparel Group Inc. will buy upscale clothing retailer Barney's New York for $294.3 million in cash, and will absorb $106 million of Barney's debt, including its 6% notes due 2008.

The source saw those notes at 104.5 bid, unchanged from Wednesday's levels, but ventured that "they should be higher on this news, based on the yield," and based on the fact that the bonds would likely be lifted by the ratings agencies to Jones' BBB level.

Delta gets pilot vote

Apart from the latest round of mergermania, the most significant news to hit the market - long after what little activity taking place had closed for the day - was the announcement by Atlanta-based air carrier Delta that its pilots had okayed the $1 billion paycut that troubled Delta had been seeking.

Delta's bonds have firmed remarkably over the past two to three weeks on expectations that the pilots would cave and the airline would get the concessions it wanted. They were last seen Wednesday with the company's benchmark 7.70% notes due 2005 holding at 83 bid, its 7.90% notes due 2009 at 50 and its 8.30% notes due 2029 at 39.75.

A trader said Thursday that there had been no movement in the bonds during the holiday session.

There was likewise no movement Thursday in Rayovac Corp.'s 8½% notes due 2013, seen steady at Wednesday's closing level of 109.5 bid. The Atlanta-based maker of flashlight batteries and electric shavers reported what it boasted as "record" earnings in the fiscal fourth quarter and fiscal 2004 ended Sept. 30. largely on the healthy sales of its Remington shaver division. Rayovac also noted that its strong cash flow had permitted it to cut its debt sharply from year-earlier levels (see related story elsewhere in this issue).

Mixed forecasts for Friday

Sources on skeletally staffed syndicate desks reported no news in the primary market on Thursday, as the bond market was officially closed for Veterans Day.

With the Nov. 7 week's issuance ending Thursday at a hefty $4.7 billion in 15 tranches, sell-side sources were predicting another snoozer on Friday as a follow-up to the quiet Veterans Day session.

The reason: some senior players in fixed income will be ducking in and out of their offices on Friday, while others will simply call it a four-day weekend.

However one investment banker claimed to have information to the contrary, hinting that Friday could easily hold at least one noteworthy surprise in the high-yield market.

Prospect News could not pry any names out of the banker. However the names that have been in play over the past few sessions include Intelsat and Lyondell Chemical, both of which are expected to turn up in the near term with sizable issuance, according to one market source.

Affinia in the wings

Barring surprises, the new issue market expects terms to emerge Friday from only one issuer.

Affinia Group Inc., the Toledo, Ohio designer and manufacturer of value-added products and systems for automotive, commercial and off-highway vehicles, has $300 million of 10-year senior subordinated notes (Caa1/B) on the block, via Credit Suisse First Boston, Deutsche Bank Securities, Goldman Sachs & Co. and JP Morgan.

Price talk is for a yield in the 9¼% area.

If completed, Affinia's $300 million would turn the four sessions of the Nov. 8-12 period into a $5 billion week.

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