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business newsHutchinson: How Not to Play
Its two convertibles may be a better bet than its stock.
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The right way to play this name, if you're interested, is not the stock. It's through the 2 convertible bonds Hutchinson has outstanding.
The "safe" approach -- and I use the term advisedly -- is the 2.25% convertibles that mature in March 2010. These were trading in the mid-80s yesterday.
The aggressive approach involves the 3.25% convertibles, which don't mature until January 2013. Strictly speaking, they don't mature until 2026, but investors have the right to put the bonds to the company at par in 2013. This issue was quoted in the mid-20s yesterday.
The ugly news may drive Hutchinson into the arms of a suitor. Consolidation in the drive industry is an ongoing theme. Back in the 1990s, Seagate (STX) bought Conner Peripherals. More recently, Western Digital (WDC) bought Komag.
I wouldn't want to bet on a big premium -- or perhaps any premium -- for Hutchinson stock. But the rule with cash takeovers is that you have to be able to put your convertibles back at 100. So a bond trading in the 20s is very interesting.
Should Hutchinson go the way of a stock acquisition, the "poison put" I just described wouldn't apply, and the bonds would become a function of the acquirer's credit. Still, you'd expect the bonds would at least double from here.
Of course, this is all predicated on Hutchinson having to take aggressive action now and finding a willing buyer. In the past, many speculated this would happen. But that's exactly what it is - speculation.
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