Inverness Medical convertible preferred stock offers value relative to common: Lehman analysts

By Rebecca Melvin

New York, May 9 - Investors seeking exposure to Inverness Medical Innovations Inc. should consider owning the 3% convertible preferred stock instead of the common due to attractive yield, as well as because it is higher up in the capital structure with good risk-reward and dividend and takeover protection, Lehman Brothers' convertibles research team wrote in a report Friday.

Inverness priced about $720 million of cumulative convertible perpetual preferred shares in connection with its acquisition of Matria Healthcare Inc, and trading was expected to begin Friday.

The preferreds have a high delta of 83.1% and offer an attractive risk-reward profile of 87% upside, 52% downside, the research team wrote.

Given an issuer rating of B2/B+, "our base credit assumption of Libor plus 800 basis points is 370 bps wider than the OAS on the eight-year 3% Inverness senior subordinated convert, the LEH HY Healthcare Index (B2/B3) and the LEH Cap Securities Index (Baa Capital Credit)," the report stated. Volume is assumed at 35%, which was called conservative relative to listed implieds that are in the mid-50s.

Matria shareholders voted to approve the merger on Thursday and they will receive $6.50 in cash and 0.08125 shares of Inverness convertible stock, with a $400 face value.

Although the preferred stock face value is $400, the assumed fair value, given the assumptions, is more like $250, with a current yield of 4.57%, the Lehman report said.

Waltham, Massachusetts-based Inverness develops, makes and markets consumer and professional medical diagnostics, and a range of vitamins and nutritional supplements.

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