Wednesday, March 18, 2009

A Proposal For Understanding, and Tracking the Value, of the Merck Price Offered for Schering-Plough. . . .

I have just seen several peoples' commonly-voiced lament -- that Schering-Plough common stock doesn't rise as much as Merck's does, of late -- and seems to fall a little more than Merck's. This, they say, is evidence of a widening arbitrage spread. I am unconvinced, and here's why [this is what I wrote over there, at Yahoo!, below, in blue]:

. . . .I think what you are missing, with all due respect, is that about $10.50 of the value to be paid is now like an unsecured, non-interest-bearing debt obligation (owed to Schering-Plough holders of common -- as of the merger record date). That is, it is (1) taxable (a chunk goes away, there), (2) should fairly be discounted to the present value -- of the $10.50 to be paid at the end of 2009 (three-quarters of a year away, minimum) -- albeit at a smallish discount-rate, (3) some small uncertainty about the deal getting done (at all) -- and then, most-importantly, here: (4) the $10.50 (unless re-invested) will not particate in any of Merck's future growth opportunities -- it is essentially "dead money" after Merger Date (for valuation purposes).

So -- about half of Schering-Plough common is trading like commercial paper (i.e., debt -- not equity), at the moment, paper issued by Merck's operations (but not its legal entity, because of the would-be J&J avoidance "cuteness").

The other .5767 of a common Schering-Plough share should move closely to Merck's equity -- except for the J&J uncertainty (~$4 billion), and the uncertainty about whether any of the value of the Animal Health businesses (~$3 billion), upon divestiture (spin, split or whatever-may-come) ever reaches the pockets of the .5767 holders.

Note that the percentage move today, looks to fairly approximate .5767 of Merck's percentage (less, of course, $7 billion [$3B plus $4B, from above], spread over 1.653 billion outstanding "old" Schering-Plough common shares).

I think that's a sensible way to value the deal, and the relative trading spreads. . . .

Anyone out there see it differently? Have I (once again) missed something obvious?

Something obvious -- like the possibility that the $10.50 per share in cash is a settlement payment, to all the purchasers of common stock in the August 2007 Organon-financing offering -- underwritten at $27.50. Yeh -- something like that. Heh.

1 comment:

robin allin said...

From my perspective SGP was not month all gloom and doom.If you look at as a day trader,sure it looks bad($27.73 down to $13.62,in several months time).If treat it as an investment,as I did,itturned out great! Purchased SGP at $17.51,in Mar.,2008.1500shs.($26,300).Still hold the investment.Net gain would be $18,515.Investment!!!,not short term pop.