Lehman recommends holders accept Omnicom sweetener to avert put

By Ronda Fears

Nashville, July 30 - Lehman Brothers convertible analysts recommend holders of the Omnicom Inc. 0% convertible due 2032 accept the company's incentive offer aimed at avoiding the $900 million put on the issue Thursday, provided the stock stays above $67.25.

While Omnicom shares took a hit Wednesday, the stock was well above that threshold.

"In light of the benefits that accrue to Omnicom due to the contingent features of the convertible as well as the 0% financing cost against the backdrop of rising rates, it is clearly economical for the company to pay the incentive rather than allow the put to be exercised," said Venu Krishna, head of U.S. convertible research at Lehman in a report.

"Therefore, this appears to be a smart financing decision by the company."

On Wednesday, Omnicom offered two more years of call protection, through July 31, 2009, plus a one-time 0.75% payment to holders who choose not to exercise their put. Holders have until the close of business on Thursday to exercise their put, or accept the sweetener.

Lehman analysts recommend holders accept the incentive, provided Omnicom stock trades at $67.25 or higher, as they expect the convert will trade down to the 99.875 level after the incentive offer expires.

The analysts estimate the call extension is worth 0.19 points and together with the 0.75 points cash incentive, the incremental value created relative to the put price of 100 is 0.60 points. With the convert trading at 100.125-100.375 versus Omnicom stock at $73.10, the incremental value created via the incentives is 0.35 points at the midpoint.

After factoring in the incentives, the analysts estimate the put exercise threshold level on Omnicom stock, or the breakeven price, to be $67.25. So, at stock levels below $67.25, holders would find exercising the put more economical versus accepting the incentive package.

The assumptions are based on a credit spread of 50 basis points over Libor and a 26% volatility. It also was noted in the report that investors should note that Omnicom realized volatility has been trending down recently.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.