Nextel strong on wireless consolidation buzz; Jefferson Smurfit to price $700 million offering

By Paul Deckelman and Paul A. Harris

New York, Sept. 6 - Nextel Communications Inc. bonds were up smartly in otherwise generally quiet activity Friday, given a boost, along with the company's shares, on renewed investor speculation about coming consolidation within the wireless telecommunications industry. Fleming Cos. debt, which along with the stock had been solidly smacked around over the previous few sessions on the wholesale and retail grocery giant's mounting troubles, appeared to have stabilized.

In primary market activity, Jefferson Smurfit Corp. (U.S.) announced plans for a $700 million bond offering, expected to price Wednesday after a quick marketing campaign. And new-deal players - and secondary denizens as well - noted with approval a second consecutive week of inflows for high yield mutual funds, seen as a key barometer of overall junk market liquidity trends.

Sources told Prospect News that AMG Data Services reported an inflow of $284 million to high-yield mutual funds for the week ending Sept. 4.

The $284 million inflow follows the previous week's record-breaking $1.556 billion inflow.

One sell-side source told Prospect News that the two inflows, coming at a time when money continues to flow out of equities, may represent a risk-return middle ground for some investors.

"In a soft economy peoples' first impulse is to buy Treasuries," the source said. "But with Treasuries under 4% right now, who's going to buy them?

"So then everyone moves to corporates and those spreads start narrowing with those low Treasury rates. Pretty soon people start saying 'You know what? I think high yield's worth the stretch.'

"If you believe that things have stabilized and a recovery is coming, and default rates are going to slow down, then high yield is the place to be."

This source said that if an investor believed in an improving economic picture, at first glance equities would seem like the place to be as they would probably generate a healthier return than bonds over, say, a five-year period - "provided," the source specified, "that the company doesn't go bankrupt.

"The bonds give you downside protection," the sell-side official said.

"You have your cash yield and right now they are pretty juicy on a spread basis. And then you have price appreciation. And in an economic recovery mode you're going to have significant price appreciation the bonds.

"People are making a bet that they're hedged on the downside, with some of the asset value in some of these companies. And they believe that things are stabilizing, defaults are going down."

Still, this source stated, trying to make heavy weather out of two successive weeks of inflows is perhaps somewhat akin to reading the tea leaves.

Meanwhile, investment banks continue to build the forward calendar step by step; Friday it took on $700 million from the second of two unrelated deals from companies whose titles share the name Jefferson Smurfit.

Jefferson Smurfit Corp. (U.S.), in an offering not to be confused with that from Jefferson Smurfit Group plc, expects to price $700 million of senior notes due 2012 (existing ratings B2/B) on Wednesday, according to a syndicate source who added that the deal will be marketed to investors beginning Monday.

Morgan Stanley is the bookrunner. Proceeds will be used to fund the tender offer for its $500 million of 9¾% senior notes due 2003, and partially fund the Stevenson acquisition.

"The deal bears no relationship to the offering from Jefferson Smurfit Group Plc, which will also begin its US roadshow on Monday," the syndicate source specified.

"The only relationship they did have was that Jefferson Smurfit Group had a 29% stake in Smurfit-Stone," the source said. "But because of the LBO they've relinquished that stake. So the only thing they have in common is the name. Operations and management are completely different."

Finally on Friday market sources said St. Louis scaffolding services firm Brand Services, Inc. will bring $165 million of new Rule 144A 10-year senior subordinated notes (B3) via Credit Suisse First Boston and JP Morgan sometime in September. Neither syndicate sources nor the company would comment on the information.

Back in the secondary, the name everyone wanted to connect with Friday was Nextel; the Reston Va.-based wireless operator's shares jumped 99 cents (14.16%) to end at $7.98; volume on its Nasdaq-traded shares was 39 million, well up from the average 24-million share turnover.

Nextel was seen as having benefited from renewed speculation that Deutsche Telekom's VoiceStream Wireless Corp. unit might merge with one of the other large U.S. wireless carriers; The Financial Times reported Friday that VoiceStream and Cingular Wireless were getting closer to a possible merger. Bellevue, Wash.-based VoiceStream was acquired by the European phone giant only last year, but Telekom is said to be looking for ways to shed debt, with a sale or merger of VoiceStream and some other entity said to be one of the possibilities. The British business newspaper reported that the two firms have agreed how much they would each hold in any merged entity, quoting people familiar with the talks.

The paper further reported that while some issues in the talks with Cingular were still unresolved at this time, such as management control and the regulation of any capital increases by the merged group, those details could be finalized by late October.

The Financial Times further noted that the situation could be complicated should Deutsche Telekom decide to change its mind about giving up the fast-growing VoiceStream.

During the session, news reports quoted other parties familiar with the discussions as saying that any talks with Cingular were only in the preliminary stages, and that Deutsche Telekom has been talking to several parties about a possible VoiceStream combination.

The VoiceStream speculation does not directly affect Nextel, but raises the possibility that another large player in the wireless world, such as AT&T Wireless or Sprint, might look to counter an alliance between VoiceStream and Cingular (a joint venture of BellSouth Corp. and SBC Communications Inc.) by forming their own combination, with Nextel as a possible partner and/or acquisition target.

On the debt side, the rise was equally pronounced; a trader called the company's bonds "up a lot," quoting its benchmark 9 3/8% notes due 2009 as having pushed up to late bid levels around 78-79 after having been "languishing" around the 73.5-74.5 area for most of the week. "They rallied strong to finish at 78-9. The VoiceStream thing would be good."

Another trader saw the Nextel 9 3/8s as having opened at 73 bid and having pushed up to about the 77.5-78 area. "They were all over the place but up from the open," he said. "There was a lot of activity in them in that [73-77.5] range."

Yet another trader opined that the Nextel gains came within the context of the junk market "snapping back, reversing a little bit of the weakness over the past day-and-a-half." He said the bounce was "entirely because of the employment number;" the Labor Department reported Friday that the August jobless rate was 5.7% - the lowest it's been since March - as 39,000 new jobs were created. Economists were looking for the jobless rate, which had been 5.9% in July, to have pushed up to 6% in August. When that didn't happen, it touched off a stock market surge Friday, with the Dow Jones Industrial Average rallying 143.50 (1.7%) to 8427.20. The Standard & Poor's 500 Index was up 14.77 (1.7%), to 893.92, while the Nasdaq Composite Index jumped 44.30 (3.5%) to its highest level since mid-August, 1295.30.

The trader said that while Nextel had been helped by the VoiceStream/Cingular speculation, "it was mainly a snapback in the overall market."

Elsewhere, traders saw little additional erosion in Fleming Cos., whose shares and bonds had been soundly pummeled over the previous several sessions amid bad news about investor lawsuits against the company, projected lower earnings for the remainder of the year and reported friction between the company and its vendors.

Fleming's 10 1/8% notes were seen hanging in around the 88 bid area, up slightly from the 87 bid/88 offered where they had finished up on Thursday (but still well below the near-par levels they had previously held), while its subordinated 10 5/8% notes were seen at 71 bid/73 offered, up from Thursday's 69 bid/71 offered.

Fleming shares, which had been suffering double-digit percentage losses over the previous several sessions, ended trading Friday down two cents (0.29%), at $6.90.

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