By Ronda Fears
Nashville, Dec. 12 - Bear Stearns & Co. is recommending Omnicare Inc.'s convertible on the prospect that its proposed acquisition of NCS HealthCare Inc. could materialize.
"We are recommending the Omnicare 5% convertible subordinated debentures due 2007 for outright as well as hedge investors on a market hedge of 40%," the analysts said in a report Thursday.
"Yesterday, the Delaware Supreme Court reversed two earlier decisions reopening the potential for Omnicare to acquire NCS HealthCare. If the deal is completed, we feel that it could be 10% accretive."
The Delaware Supreme Court made a ruling to block the proposed acquisition of NCS Healthcare by Genesis Health Ventures Inc., according to a statement by Genesis.
Shareholders of NCS had sued to delay the acquisition by Genesis, which had made an all-stock offer valued at about $38 million in July, as NCS also received an unsolicited $71.1 million all-cash offer from Omnicare later the same month. The value of the deals was based on stock prices in July.
"We like the 5.00% convertible notes for their current yield of 5.35%, a good carry, and a premium that has come in considerably in the last few weeks. The Omnicare converts offer an attractive 5.21% current yield, 5.94% yield to maturity with a relatively attractive 58.4% conversion premium," the Bear Stearns analysts said.
"The debentures are trading at a 58.4% premium, yield 5.94% to maturity. While the notes are currently callable, we do not see that as an issue given the current parity of 60% and our common price target of $31."
Using a spread assumption of 600 basis points and a volatility of 35%, the analysts said the debentures are fairly valued.
However, the analysts noted that 100-day historical volatility is 43.5% and listed OTM calls of June 2003 are offered at 44% volatility.
"Although we used a 600 bps spread to be conservative, we feel that a 400-500 bps spread is more appropriate given the convertibles shorter maturity (high yield matures in 2011 and is trading at 350 bps spread)," the analysts said.
"In this scenario, the debentures model 4% cheap using a 35% volatility assumption. While not highly undervalued, which is a requirement for most of our recommendations, we feel the notes offer an excellent way to gain exposure to a stable cash flow business on attractive yield and premium terms.
"For the swap investor, we recommend less than a 40% market hedge to establish a positive bias to the stock."
With cash balance of $169 million, a trailing 12-month operating cash flow of $193 million and a strong growth outlook, the analysts said they do not see any issues with the credit.
Bear Stearns healthcare analyst Ray Falci believes Omnicare shares have been pressured recently by Medicare reimbursement issues and the NCS acquisition, which he sees as highly accretive. Falci expects the NCS issue to be resolved in the next month or two.
Falci has a price target of $31 on Omnicare, based on 15 times 12 months-out EPS of $2.05. Currently trading at 12.4 times Bear Stearns' fiscal 2003 and an EV/EBITDA multiple of 7x, he sees Omnicare offering a very attractive combination of free cash flows at a near value-investor multiple.
Omnicare 5% convertible due 2007
| Price: | 96
|
| Common: | $24
|
| Conversion premium: | 58.40%
|
| Conversion price: | $39.6
|
| Current yield: | 5.21%
|
| Delta: | 35%
|
| Yield to maturity: | 5.94%
|
| 100-day volatility: | 49%
|
| Call/put price: | 102.5
|
| Spread: | 450 basis points
|
| Credit Ratings: | BB+/Ba3
|
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