Archstone, URS, Washington surge on buyouts; Advanced Medical, Bausch & Lomb suffer recall pains

By Kenneth Lim

Boston, May 29 - The market returned from the Memorial Day weekend on Tuesday to a flurry of takeover activity, with Archstone-Smith Trust surging on a $15.5 billion takeover bid.

URS Corp. and Washington Group International Inc. also improved following news of a merger deal.

Advanced Medical Optics Inc. crashed on a recall of a contact lens solution product following concerns of links with a rare eye infection. The recall also sent shares of Bausch & Lomb Inc. tumbling on doubts that Advanced Medical will make a takeover offer.

Archstone-Smith up on deal

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.

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.

The deal was announced on Tuesday and 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.

"Archstone-Smith was active because of the buyout," a sellside trader said. "People were expecting a deal after the reports from last week, but the offer that was announced today was significantly higher than what the market was initially expecting, so I think that gave some investors a sense of hope."

The 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."

Archstone-Smith's 4% convertible due 2036 rose outright but slipped a little on a hedge basis following the announcement 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."

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.

Chicago-based Equity Residential (NYSE: EQR) finished 6.73% or $3.20 higher to close at $50.75, while San Francisco-based BRE Properties Inc. (NYSE: BRE) jumped 6.28% or $3.74 to finish at $63.33.

"Everything moved up," the 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."

URS, Washington surprise with deal

URS and Washington rose on Tuesday following news of a merger that was seen as reasonably priced and strategically sound.

URS stock (NYSE: URS) closed at $49.27, up by 5.08% or $2.38 on Tuesday. Washington stock (NYSE: WNG) reached $85.04, up by 21.54% or $15.07.

"I don't think anyone was expecting a deal," a trader said. "It was kind of a sleeper that suddenly woke up today."

The deal will create an engineering and construction company with a strong specialty in nuclear power projects. San Francisco-based URS and Boise, Idaho-based Washington are engineering companies.

The deal will give Washington investors $43.80 in cash and 0.772 URS share for each Washington share. That represented a 14% premium to Washington's closing stock price on Friday, but was worth about $81.84 at the end of Monday, short of Washington's latest stock price. The deal is expected to close in the second half of the year.

"It looks like a good deal for URS," a sellside equity trader said. "If the deal is approved they'll be getting WNG at a very reasonable price and from an operations standpoint they'll be in a much better position. People like the fact that they'll have a better nuclear group, which will allow them to capture the expected growth in the nuclear power segment."

But Standard & Poor's on Tuesday put URS on CreditWatch with negative implications, citing the deals impact on URS's balance sheet. URS, which had about $168 million in debt as at end-March, expects to have $1.5 million of debt after the deal is completed, S&P said.

"The acquisition grants URS some improved business capabilities, such as additional scale, diversity, and nuclear power expertise," S&P said. "However, the increased leverage will weaken the company's financial risk profile."

Advanced Medical falls on recall

Advanced Medical took a big hit on Tuesday after the company recalled a complete lens solution line following concerns that it could be linked to cases of eye infection.

Advanced Medical stock (NYSE: EYE) tumbled 13.71% or $5.51 to close at $34.69.

"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."

The U.S. Centers for Disease Control and Prevention on Friday warned that Advanced Medical's 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.

Advanced Medical's convertibles all fell outright but improved slightly on a hedged basis. 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.

"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."

Bausch & Lomb dragged lower

Bausch & Lomb also fell 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.

"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."

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