A look at Credit Suisse's "independence" re SGP

Another View, here.

3-Apr-08 11:22 am

Most of the people from the old CS First Boston (now known as "Credit Suisse") are generally honest and capable -- it is a very good firm. I do think the firm, though, has a little more "skin in this game" -- the SGP future common stock pricing game -- than a completely independent Wall Street analyst-firm might have (about $800 million worth!).

Credit Suisse, you see, was a second tier member of the lead underwriting-group of the August 2007 common and convert public offering by SGP -- that offering was priced at $27.50 per SGP common share (now around $15); $250 per SGP convert (the convert now trades around $158):

SGP common stock:

Credit Suisse Securities (USA) LLC 2,233,125 shares

LINK (On Page S-22):

http://www.sec.gov/Archives/edgar/data/3...

SGP 6% converts:

Credit Suisse Securities (USA) LLC 444,375 shares

LINK:

http://www.sec.gov/Archives/edgar/data/3...

Credit Suisse ALSO co-led the SGP 2 Billion euro debt offering in September 2007 (See page S-38):

Underwriter Name 2010 Notes 2014 Notes

Goldman Sachs € 100,000,000 € 300,000,000
BNP Paribas € 100,000,000 € 300,000,000
Credit Suisse € 100,000,000 € 300,000,000

LINK (At Page S-38):

http://www.sec.gov/Archives/edgar/data/3...

To recap -- common stock: $61.4 million sold; converts: $111.09 million, and € 400 million euros of SGP debt is about $626 million at today's spot rate -- All-in, just under $800 million of "skin in the game". How many clients of Credit Suisse are hopping mad at the firm, as I write this?

So -- the firm has egg all over its face (about $800 million worth). Could that explain the higher SGP price targets it espouses?

Next post, I'll offer some guesses at a SGP REALISTIC EPS for 2008. . . .

Cheers!

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Original comment:

Credit Suisse Upgrade - Target $32!!

3-Apr-08 08:58 am

Productivity Transformation Program (PTP) Augments Future

After having dealt with so much negative surprise over the last 2 days, it is good news to have some hard numbers on SGP’s future cost and integration savings. The $1.5Bn in PTP is 3x the $500MM in Organon savings by 2010 that is factored into Street estimates based upon prior SGP guidance.

The majority of the $1.5Bn in savings probably relates to Organon integration plans, which were intended to incorporate concurrent reductions in SGP base costs. The negative surprise from ACC and the market reaction that ensued no doubt motivated management to implement the most aggressive of these plans and to share the details earlier than planned.

Previous guidance for $500MM in 2010 Organon synergies seemed low to us as this implied only 4.7% of proforma expenses, while we would have expected 8% or more based upon benchmark deals. Before today we had assumed some upside to guidance at $650MM by 2010.

SGP was grossly undervalued before additional cost-savings were added. Our DCF analysis using a 9x EBITDA multiple suggested intrinsic value of $15 with ZERO cholesterol income, which we see as an unimaginable scenario.

With the new savings added to our model, new DCF analysis suggests $17 and $22 with cholesterol revenues at zero and 50% of 2007 revenue levels, respectively.

Our EPS estimate for ’08 remains at $1.66. Our EPS estimates for ’09 and ’10 change from $1.88 and $2.15 to $2.01 and $2.50, respectively. Our target price remains $32.

Posted by: kjragan