Eric Green, a portfolio manager at Penn Capital Management, has recently been adding to his position in Pegasus Communications on the view that Pegasus is an excellent yield play and a likely takeover candidate. Green has been buying the zero coupon notes of '07 (Caa1/CCC+) because they offer considerably more yield than comparable cash pay paper, and he believes the principal will be paid off when the bonds mature. Last week, the zeros traded at 58, giving it a current yield of 18.14%, while 9.625% senior notes of '05 (B3/CCC+) traded at 92, giving them a yield-to-worst of 12.14%.
Green, like many others, believes either Echostar Communications or News Corporation will probably buy Pegasus once one of those companies wins the competition for DirecTV. Pegasus is the largest independent distributor of DirecTV, a satellite television service provider. Green points out that Pegasus would be a logical acquisition because it is better at marketing satellite television services to rural areas than either DirecTV or Echostar.
Andy Van Houten, co-head of high-yield research at Deutsche Banc Securities, has a buy recommendation on Pegasus bonds, and believes the cash pay notes would trade above par in a takeover scenario. He says News Corp has a better chance of winning the bid, since an Echostar win would raise antitrust considerations. If News Corp does buy DirecTV, Van Houten says Pegasus' bonds would trade up only slightly on expectations of an eventual acquisition of Pegasus. However, if Echostar acquires DirecTV, he says Pegasus notes would come under slight pressure, since an Echostar takeover of Pegasus might be stopped by regulators because of antitrust issues.