Convertible Week in Review – 20 May 1999
4
versus our estimate of $0.21. Q1 EBITDA was $124mm
versus our estimate of $122mm. Q1 pro forma sales and BCF rose 14% and 19%, respectively. By
segment, Q1 pro forma sales growth was 18% for radio and 6% for outdoor. Our 12 month price
objective is $62/sh, using 17x our 2000E EBITDA of $1.1
billion, up 13%. Our price objective is tempered by our
view of AMFM's private market value of $65-$70. (J.
Reif Cohen. 5/13/1999)
n Evergreen Media 6% Pfd.
We recommend the 6% convertible preferred as an equity
alternative. We choose the 6% over the 7% mainly due to
an extra six months of hard call protection and an extra 30
bps of income, however the 7% preferred is also a
compelling equity alternative. At 113.9 versus $56-15/16
for the common, the 6% convertible preferred trades at
parity, 2.5% below theoretical value, and offers 2.6%
current yield, compared to no dividend on the common.
The security is rated B2/B- by Moody's/S&P and hard call
protection extends until June 15 th , 2000, resulting in
breakeven during the hard-call protection period. Our one-year
horizon analysis indicates +24.5%/-23.2% convertible
total returns in response to +/-25% changes in the common
stock price. We assume annual equity volatility of 40%
and a five-year credit spread of 515 bps over treasuries in
our calculations. (5/13/1999)
n Chancellor Media 7% Pfd.
We believe the 7% convertible preferred is a compelling
equity alternative. At 157.32, the 7% convertible preferred
trades at parity, 1% below theoretical value, and offers
2.2% current yield. The security is rated B2/B- by
Moody's/S&P and hard call protection extends until
January 16 th , 2000, resulting in breakeven during hard-call
protection. Our one-year horizon analysis suggests
+25.9%/-23.5% convertible total returns in response to +/-25%
changes in the common stock price. (5/13/1999)
Amazon.com 4.75% 2/1/09 (144A*)
On May 17, Amazon.com (AMZN/$137-5/8; D-2-1-9)
announced that it will begin selling New York Times
bestsellers at a 50% discount, instead of its usual 20%-40%
off. We believe that this move has several
implications for the company, stock, and industry.
Namely, we believe the move is:
1. positive for the long-term value of Amazon.com-the-company
(we do not believe that the cut will have a
major effect on the growth of Amazon.com's gross
profit, especially over the long term),
2. possibly negative for the near-term performance of
AMZN-the-stock (the perception of a possible price
war is rarely positive for stock prices, especially in an
industry in which the fear is that margins will go to
zero), and,
3. negative for competitors, both on and offline
(Amazon.com now has the wealth, scale, and ambition
to seriously undermine the competition—and appears
willing to use it).
Aside from the typical end-of-quarter run and possible new
product or investment announcements, we don't know of
any catalysts likely to drive AMZN stock higher near-term.
We think it should still be a core holding in a long-term
internet portfolio, however. (H. Blodget 5/18/99).
The AMZN 4-3/4s were quoted at 103-5/8 vs. $132-1/8 for
the common this morning for a 22.3% conversion premium
and a 4.6% current yield. At this level, they are 1.1%
cheap to theoretical value based on our model assumptions
of 40% annualized stock volatility and a credit spread of
550 bps over the ten year Treasury. For AMZN, which has
often traded rich by our estimates, this is a relatively
attractive valuation. Our one year total return projections
are +17.5%/-11.6% in response to a price move by the
common of +/-25%. Provisional call protection extends to
2/02 (NC unless the common is at least $234.08) and the
bond is rated Caa3/CCC+ by Moody's/S&P. If called
within the provisional period, investors would also receive
a make-whole payment of $212.60 per $1,000 bond less
any interest payments made previously. We have included
the AMZN convert in out Convertible Model Portfolio as
an Equity alternative and we continue to recommend it in
view of a reasonable valuation, positive risk/reward and
strong call protection. (5/18/99).
[ICIX, HWP] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the last three years.
[USW, GBLX, TXI] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[ICIX, ICGX, GBLX, SEPR, AMZN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these
securities are exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
*144A. This security may only be offered or sold to persons in the U.S. who are Qualified Institutional Buyers ("QIB's") within the meaning of Rule 144A under the Securities Act of 1933, as amended.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
regulated by SFA, and has been considered and issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was
obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments").
MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side
of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from
time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific
person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that
statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced
by the currency of the underlying security, effectively assume currency risk.
Convertible bonds are traded over-the-counter. Retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. MLPF&S may make a
market in the convertible bonds of this company. To calculate theoretical values and return profiles, Merrill Lynch uses a proprietary arbitrage model to value the convertible as a combination of embedded options. The model is
sensitive to, amongst other factors, the following inputs: stock volatility dividend yield, interest rate levels, and credit spread, all of which we hold constant. Further, we assume a similar discount/premium persists over the entire
investment horizon. Our theoretical valuation in no way constitutes a fundamental opinion, nor does a theoretical discount necessarily constitute a recommendation.
To calculate theoretical values and return profiles, Merrill Lynch uses a proprietary arbitrage model to value the convertible as a combination of embedded options. The model is sensitive to, amongst other factors, the following
inputs: stock volatility, dividend yield, interest rate levels, and credit spread, all of which we hold constant. Further, we assume a similar discount/premium persists over the entire investment horizon. Our theoretical valuation in no
way constitutes a fundamental opinion, nor does a theoretical discount necessarily constitute a recommendation. |
