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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
HBO & Co. Merging with McKesson
Drug distributor McKesson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCK)") else Response.Write("(NYSE: MCK)") end if %> fell $9 13/16 to $78 7/8 this morning after announcing an agreement to merge with healthcare software and services company HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %>. In July, the two companies were set to get together but called off the deal as word leaked out and sent HBO's shares down 11%. Same story today -- HBO's shares were down $2 7/16 to $27 1/8, or 8.3%, at midday. Once again, the market is greeting the transaction frostily, which isn't terribly surprising given that the benefits of the deal to HBO shareholders are somewhat muddled by the prospect of their company's excellent economics being eroded by McKesson's less desirable economics.
Both companies are information-intensive and both are leaders in what they do. But the economics of being a drug distributor are, to understate things, somewhat less attractive than the economics of being the leading healthcare information technology provider in the country. For every dollar put into McKesson's business, the company generates less than $0.10 in cash-on-cash returns, while every dollar invested in HBO & Co. generates more than $0.30 in cash-on-cash returns.
Certainly, the combined company will occupy an excellent position to "improve productivity and clinical outcomes for the U.S. healthcare system," as the companies' executives explained in their press release today. There is more than enough fat in the U.S. healthcare system for a supply-chain management company to attack, too. Of the $1.2 trillion spent on healthcare last year, nearly 18% of that went into administrative overhead. Every percentage point taken out of that overhead is worth $2.1 billion, which explains the major motivation behind the merger.
What HBO's shareholders have to deal with today is the fact that they've sold their company for a 61% interest in a company with substantially different business dynamics. Lower margins and lower asset turnover ratios come along with the short-term EPS accretion that the companies are projecting. And even then, in the short-term, the EPS accretion to HBO & Co. is only a couple pennies per share in the year after closing the deal. Combined, the new McKesson-HBO can generate EPS growth on the order of 35%, but shareholders were already building in an assumption of 33% growth for HBO. McKesson's EPS growth rate, according to the mean estimate from Zacks, was only estimated as 22%. So this really comes on the back of HBO. Paying in the currency of McKesson with only an 11% premium to Friday's closing price for HBO, both sets of shareholders should have benefited from a rise in McKesson's stock. But that's not panning out this morning. Until investors can sort through the information and the guidance from the company, HBO's shareholders will have an interesting task in reconciling the sea change in what they are getting.
Bus company Greyhound Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BUS)") else Response.Write("(AMEX: BUS)") end if %> ran ahead $15/16 to $5 13/16 after announcing it has agreed to be acquired by ambulance, school bus, and municipal transit services company Laidlaw Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LDW)") else Response.Write("(NYSE: LDW)") end if %> for $6.50 per share, up to $4.00 of which can be paid for with Laidlaw shares. Laidlaw already owns Greyhound Lines of Canada, so the merger will create the largest inter-city passenger carrier in North America.
Several retailers were marked up this morning after Goldman Sachs raised them to "recommended list" from "market outperform." Costco Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> jumped $2 3/4 to $54 11/16, Wal-Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> gained $1 1/8 to $67 3/4, Target Stores parent Dayton Hudson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> added $1 1/8 to $44, and Kohl's Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSS)") else Response.Write("(NYSE: KSS)") end if %> picked up $7/8 to $45 7/8.
Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> added $7/8 to $105 1/8 as it won exclusive rights to develop and market Toyama Chemical Co.'s synthetic antibacterial agent, T-3811, a version of the antibacterial quinolone, outside of Japan, China, South Korea, and Taiwan. The companies will jointly develop the drug in Japan and China.
Telecommunications equipment maker Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> rang up another $2 13/16 to $47 3/4 after reporting its 29th consecutive quarter of year-over-year earnings growth. EPS was $0.49 before charges, beating the $0.46 estimate.
Generic drug maker Schein Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHP)") else Response.Write("(NYSE: SHP)") end if %> recovered $1 9/16 to $10 3/4 after Friday announcing it has reached a consent agreement with the Food and Drug Administration that will allow it to resume operations at its Phoenix-based Steris Laboratories subsidiary. Schein expects to take a one-time after-tax charge of about $135 million in 1998, the bulk of which is for the write-off of goodwill.
Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> regained $4 5/8 to $56 after calling rumors that the investment bank was in financial straits "absolutely false" and saying that the company was in "sound financial condition." The company's shares fell $6 to $51 3/8 Friday on the rumors.
Natural gas utility Colonial Gas Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLG)") else Response.Write("(NYSE: CLG)") end if %> was cooking this morning, rising $4 1/8 to $33 11/16 after announcing it will be acquired by Eastern Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EFU)") else Response.Write("(NYSE: EFU)") end if %> for $37.50 per share in stock and cash. That represents a 26.8% premium to Colonial Gas' closing price Friday of $29 9/16. Eastern slipped $5/8 to $42 3/4.
Pharmaceutical giant Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> advanced $7/16 to $73 13/16 after reporting third quarter earnings of $0.35 a share, up from $0.24 last year and a penny ahead of analysts' estimates. This marks the fifth straight quarter the company has reported an increase in EPS of at least 30%. The company added that it now expects to achieve 1998 EPS of $1.48, which would be 40% more than the year before, as well as another 30% increase in 1999.
Computer networking company Shiva Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHVA)") else Response.Write("(Nasdaq: SHVA)") end if %> surged $1 11/32 to $5 19/32 on news that chipmaker Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> will acquire the company for $6 a share, a 41% premium to Shiva's closing price Friday of $4 1/4. Shiva will become a subsidiary of Intel and operate as part of its network products division.
Internet browser and enterprise software company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> moved up $1 15/16 to $22 3/16 while Web streaming media technology company RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> jumped $2 11/16 to $37 9/16 after announcing an agreement to bundle RealNetworks RealPlayer 5.0 with Netscape Communicator 4.5 and on Netscape Netcenter starting this week.
Photoelectron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PECX)") else Response.Write("(Nasdaq: PECX)") end if %> surged $2 3/8, or 76%, to $5 1/2 after announcing it has received the first order for its Photon Radiosurgery System (PRS), a proprietary x-ray delivery system for tumor therapy, from New York Medical College's University Hospital in Bronx, New York.
Grocery store chain Kroger Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %> croaked $2 9/16 to $46 3/16 after agreeing to buy fellow grocer Fred Meyer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %> in a deal valued at $13 billion in stock and assumed debt. Fred Meyer shareholders will end up owning 38% of the new company, which will become the nation's largest grocery store chain with about 2,200 stores in 31 states. Fred Meyer sank $4 1/4 to $44 3/4.
Life sciences company Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> sank $1 7/8 to $37 5/8 on concern about the company's near-term prospects. In a statement, the firm said fiscal 1999 will be a "transition year," which will include higher development expenses and possible asset divestments. However, the company expects cost-cutting efforts and new product launches to increase its net income "substantially" in fiscal 2000 and beyond.
Automotive components supplier Lear Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEA)") else Response.Write("(NYSE: LEA)") end if %> stalled $8 1/2 to $32 1/8 after reporting fiscal Q3 EPS of $0.32 versus $0.52 a year ago, which was in line with the Street's mean estimate. The results include the negative effects of this summer's strike at client General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>, which knocked about $0.21 per share off of Lear's net income for the quarter. The company said it will take a $125 million charge in Q4 to consolidate and reconfigure its international operations.
Hotel operator and franchisor Prime Hospitality Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDQ)") else Response.Write("(NYSE: PDQ)") end if %> slid $3/4 to $5 1/2 after announcing that president and COO John Elwood resigned in order to allow newly appointed chairman and CEO A.F. Petrocelli "the greatest degree of flexibility in structuring his management team organization."
Medical research and diagnostic testing instruments provider Beckman Coulter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEC)") else Response.Write("(NYSE: BEC)") end if %> declined $2 1/8 to $51 5/8 after reporting fiscal Q3 EPS of $0.47 (including merger-related charges) versus $0.68 a year ago, which was in line with the Street's mean estimate. The company said it will cut an unspecified number of jobs at its manufacturing plants in Puerto Rico and San Diego as it completes last year's merger with Coulter Corp.
Oil and gas exploration products and services firm Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> was drilled $1 to $31 after reporting fiscal Q3 EPS of $0.50 compared with $0.67 a year ago, missing the Zacks mean estimate of $0.56. The company said it was hurt by a slowdown in U.S. drilling activity during the quarter due to several hurricanes and tropical storms along the Gulf Coast.
Membership club retailer BJ's Wholesale Club <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJ)") else Response.Write("(NYSE: BJ)") end if %> lost $1 to $33 1/4 after saying a new accounting method it is adopting will result in a $18.2 million charge and reduce its fiscal 1998 earnings by 3% to 4% while lowering its fiscal 1999 earnings by 2% to 3%. However, the company said changing its accounting to recognize annual membership fees on a "cash basis" instead of over the life of the membership will "not have a material effect" on its financial condition or future operating results.
Land and offshore oil and gas drilling rig operator Nabors Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NBR)") else Response.Write("(AMEX: NBR)") end if %> sank $11/16 to $16 15/16 after announcing its intention to buy Bayard Drilling Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BDI)") else Response.Write("(AMEX: BDI)") end if %> for approximately $220 million in stock, cash, and assumed debt. Bayard, which owns and operates 87 drilling rigs in the United States, was up $15/16 to $5 7/8.
Sunrise Assisted Living <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNRZ)") else Response.Write("(Nasdaq: SNRZ)") end if %>, which provides assisted living services for the elderly, fell $1 1/8 to $34 7/8 after saying it will buy competitor Karrington Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KARR)") else Response.Write("(Nasdaq: KARR)") end if %> for $191 million in stock and assumed debt. The purchase would boost Sunrise's resident capacity by 33% to 8,445. Karrington shareholders were happier with the deal, as their stock rose $1 11/16 to $10 3/4.
Voice, video and data systems provider ADC Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADCT)") else Response.Write("(Nasdaq: ADCT)") end if %> lost $7/8 to $21 1/2 after reporting plans to buy privately held Hadax Electronics, a maker of remote test and access systems, for $25 million. ADC said the purchase will result in an undetermined one-time charge.
Vitamin retailer Nature's Bounty <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBTY)") else Response.Write("(Nasdaq: NBTY)") end if %> swallowed a $3/8 loss to $6 5/8 after Raymond James downgraded the company to "accumulate" from "buy."
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |