An Interesting Coincidence: Of $10.50 per Share -- in Cash Payments. . . .

Last night, a commenter asked about the stability of the Schering-Plough pension plans. Other than following Cain v. Hassan, et al., I haven't really written much about them, yet. As is often the case, one finds interesting coincidences, on the way to looking for something else, entirely.

What I found, upon a cursory glance, is that the pension plans are immensely underfunded -- their expected liabilities exceeded their projected assets by about $1.2 billion, at year end 2008. And I think that gap has likely widened, with the global downturn, and increased lay-offs/early retirements. However -- a potential silver lining, here -- I did notice that, if the reverse merger is completed, Schering/Merck would have some instant liquidity.

More specifically, in the event that the Sch-Merck transaction is consummated, next year, at least some of the underfunded plans will get liquidity, to the extent that these plans hold Schering-Plough stock, at closing. That is, any of the plans then holding old Schering-Plough common will receive $10.50 in cash for each share -- thus increasing the liquidity of those plans' assets. As luck would have it, at least at year-end 2007, the single largest asset-class held by the Schering-Plough pension plans is -- you guessed it! -- Schering-Plough common stock.

The Details, Then (Where the Devil Resides)

As I said at the top, though, as of year-end 2008, the pension plans were underfunded by $1.2 billion -- per the financial footnotes, Note 9, in Form 10-K:

. . . .At December 31, 2008 . . . the accumulated benefit obligations (ABO) for the retirement plans were $3.7 billion. . . . The aggregated accumulated benefit obligations and fair values of plan assets for retirement plans with accumulated benefit obligations in excess of plan assets were $3.4 billion and $2.2 billion, respectively, at December 31, 2008. . . .

That leaves about $1.2 billion unfunded, and it will likely be worse this year, due to the overall equity market downturns.

Then I began to look deeper: the 2008 year end asset-by-asset holdings of the pension funds won't be filed with the SEC until late-June 2009 -- so I used 2007 figures (from the June 2008 Schering Form 11-K filing, at Page 13):

. . . .7. INVESTMENTS

The following investments represented 5 percent or more of the Plan’s net assets available for benefits. . . .

Schering-Plough Stock Fund, 882,935 . . . units, and $422,749,000, respectively. . . in 2007. . . .

This means that the plans held, at year-end 2007, about 16,153,955 shares of Schering-Plough -- then, the single largest holding of these plans.

If there are still that many, or more, shares held by the plans today, $169,616,528 in cash will be paid to the plans in the merger, sometime in 2010.

And that will generate decent liquidity, for the $1.2 billion of underfunding, should there be a spike in early pay-outs/borrowings against pensions (say via early retirements/layoffs).

However, at year-end 2007, the common stock was trading at about $26.90 per share -- so the losses the plans show on these shares, at year-end 2008, when the stock was trading at about $16.90 -- are also about $10 per share.

Now that's a pretty interesting coincidence, no?

The Sch-Merck transaction will return almost all the losses since 2007 year-end to the plans -- in cash -- plus $0.50 per share in attorneys' fees (or about $8 million).

Thus, as I have argued before, this reverse merger deal looks a little like a non-litigated, extra-judicial, preemptive settlement of ENHANCE securities law liabilities.