Archstone trims hedges; Advanced Medical, Bausch & Lomb fall on recall; NII, Luminent plans deals

By Kenneth Lim

Boston, May 29 - Tuesday's market movers led to different outcomes for outright and hedge investors, with Archstone-Smith Trust rising outright following a buyout offer but dropping on a hedged basis because of an insufficient make-whole payout.

Advanced Medical Optics Inc. fell outright but rose on a hedged basis after the company's stock crashed following a product recall. The recall also sent into doubt whether Advanced Medical will make a competing bid for rival Bausch & Lomb Inc.

Meanwhile, the primary market pipeline continued to flow with NII Holdings Inc. and Luminent Mortgage Capital Inc. announcing deals worth $1.085 billion that are expected to price Wednesday after the market closes.

Archstone-Smith may hurt hedges

Archstone-Smith's 4% convertible due 2036 rose outright but slipped a little on a hedge basis following a $15.5 billion buyout offer because the convertible's make-whole takeover protection did not appear to be sufficient to cover hedge positions.

"It looks like they're trading now on par with what you get, but if you look yesterday they were a couple of points wider," a sellside convertible analyst said. "It looks like a little money was given up."

Archstone-Smith's 4% convertible due 2036 rose about 3 points outright to trade at 106.5 against a stock price of $61. Archstone-Smith stock (NYSE: ASN) climbed 8.91% or $4.92 to close at $60.15 on Tuesday. Archstone-Smith will pay a common dividend of 45.25 cents per share on May 31, but the common stock is already trading on an ex-dividend basis.

Archstone-Smith took off on Tuesday after the company agreed to a $15.5 billion offer by a Tishman Speyer-Lehman Brothers consortium, although the common stock surpassed the $60.75 per share offer on hopes of a better bid. The deal is expected to close in the third quarter.

Tishman Speyer and Lehman Brothers will also assume an additional $6.9 billion in debt, bringing the deal's worth to $22.2 billion. It represents a 22.7% premium over Archstone-Smith's Thursday closing stock price, before reports surfaced on Friday about a possible deal.

Archstone-Smith is an Englewood, Colo.-based apartment real estate investment trust.

"It looks like if you have it set up on hedge that you might get hurt a little bit on the takeout protection because the make-whole looks like it may short-change holders by a couple of points," the analyst said.

An equity trader said the deal had a good chance of success despite the stock's trading above the offer price.

"I think part of why it's gone up so much is investors thinking that with all the private equity money floating around you would think there's a good chance that someone else will make a better bid or some of the major shareholders will fight for a better bid," the trader said.

"But looking at where the shares are trading now it looks like investors are hopeful but not too hopeful, and I'm inclined to agree with that. It's just under three times net assets, which isn't that high, about 23% premium over the stock price, which is decent, so you could make a case for a better price.

"But even though there's a lot of money right now looking for a takeover opportunity there isn't a clear candidate right now to start a bidding war."

REITs get boost

The Archstone-Smith deal sent other real estate investment trusts higher on hopes of consolidation and buyouts in the rest of the sector.

San Francisco-based BRE Properties Inc. saw its 4.125% convertible due 2026 improve by 1.5 points outright to trade at 105.875 against a stock price of $64.15. BRE stock (NYSE: BRE) jumped 6.28% or $3.74 to finish at $63.33.

"Everything moved up," a sellside convertible analyst said.

"Every time one of these deals is announced they all move up. It went pretty much across the board in terms of sector...The initial interest was in the office sector now we're seeing some in other areas like apartments, and the other day we had Crescent [Real Estate Equities Co.], which was more in retail.

"Every time you get these deals you get a sort of a knee-jerk reaction. I'm not sure if it's all justified, but a good number of them, at least those with converts, were up three, four, five points today. Some of the other ones that had already been bid up for other reasons, perhaps less a little bit, but this was just a knee-jerk."

Advanced Medical hurts outrights

Advanced Medical's convertibles all fell outright but improved slightly on a hedged basis after the company recalled a contact lens solution line following concerns that it could be linked to cases of eye infection.

The 2.5% convertible due 2024 fell about 5 points outright following the recall to trade at 97.375 against a stock price of $35, while the 3.25% convertible due 2026 was 6 points lower outright at 91 versus the same stock price. Advanced Medical stock (NYSE: EYE) tumbled 13.71% or $5.51 to close at $34.69.

"They opened up a little bit," said a buysider who was involved in the 2.5% convertible. "It's a shorter piece of paper, so the credit held well on those...We made a little money on the bonds. I think hedge guys would have done fine on this. On a market hedge they would have been fine on the 2.5s."

The U.S. Centers for Disease Control and Prevention on Friday warned that the AMO Complete Moisture Plus Multi-Purpose Solution was linked to cases of acanthamoeba keratitis and urged consumers to throw away the contact lens solution. The CDC said it is still investigating why the link exists.

Santa Ana, Calif.-based Advanced Medical recalled the product in response to the warning, but said the problem was not a manufacturing or contamination issue. Advanced Medical makes eye health care products and equipment.

"It's like Bausch & Lomb all over again," an equity trader said. "The concern is over the source and the extent of the problem. The worst case is if it turns out there's a real problem and that the company was aware of a problem, then you'll be looking not only a lost sales but also a bunch of lawsuits."

Bausch & Lomb dragged lower

Bausch & Lomb's floating-rate convertible did not trade, but was expected to fall with the stock as investors lost hope that Advanced Medical will still be interested in making a takeover bid.

Bausch & Lomb, which is seeking superior offers to a $65 per share bid by private equity firm Warburg Pincus, saw its stock fall 3.67% or $2.59 to close at $67.90. Its six-month Libor plus 50 basis points convertible due 2023 was quiet.

"EYE was the top candidate for making a better bid, but with this new problem it's highly unlikely a better bid is going to come from them, and that's what the BOL stock price is reflecting," a sellside equity trader said.

Advanced Medical said a week ago that it was looking into the possibility of making a bid for Rochester, N.Y.-based Basuch & Lomb, also a maker of eye health products. But the product recall significantly lowered hopes that a bid will be forthcoming, observers said.

"I don't think that they're going to make a bid for BOL," a buyside convertible trader said. "I think it's very unlikely. It's not as valuable as it was last week, so I just don't think they're going to make a bid for BOL. It's probably better for the [Advanced Medical] bonds because the issue here is they're a highly levered company. Although you could argue that if they did this with stock that it would actually have been better for the convertibles."

A sellside convertible analyst said Advanced Medical suggested that it was still interested in making an offer, although the obstacles were tougher.

"During a conference call management was like, 'This recall was our first priority and everything is on the backburner,'" the analyst said.

"One of the analysts who was pretty astute said, 'Are you not going to do your due diligence now?' but they said they're still looking into it, which suggests that it's not completely off the charts yet. But the stock price has just taken such a big whack, it's going to take a lot more stock if they're doing a cash-and-equity deal and it's going to be a lot more dilutive, so it certainly makes it less likely."

More deals planned

NII Holdings on Tuesday announced $1 billion of five-year convertible senior unsecured notes that will price Wednesday after the market closes. The deal is talked at a coupon of 2.625% to 3.125% and an initial conversion premium of 45% to 50%.

The convertibles will be offered at par.

There is an over-allotment option for an additional $200 million.

Deutsche Bank is the bookrunner of the Rule 144A offering.

NII, a Reston, Va.-based provider of digital wireless communication services, said it will use the proceeds to buy back up to 4 million shares of its common stock and to fund general corporate purposes.

Luminent also plans to price $85 million of 20-year convertible senior unsecured notes on Wednesday after the market closes, talked at a coupon of 7.875% to 8.375% and an initial conversion premium of 20% to 25%.

The convertibles will be offered at par. They will be guaranteed by Luminent subsidiaries Maia Mortgage Finance Statutory Trust, Mercury Mortgage Finance Statutory Trust and Saturn Portfolio Management Inc.

There is an over-allotment option for a further $15 million.

Bear Stearns is the bookrunner of the Rule 144A offering.

Luminent, a San Francisco-based real estate investment trust that invests in mortgage-backed securities and loans, said it will use the proceeds of the deal to concurrently buy back up to $25 million of its common stock and fund general purposes.

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