Earlier this week, WellPoint Inc. (WLP) announced that it will offer 2.75% senior convertible debentures due 2042, worth $1.35 billion. The company will also confer the right to procure additional debentures worth $150 million to the initial buyers to adjust for any over-allotment.
The offer, which is expected to close on October 9, 2012, is open only to qualified institutional buyers, as defined by the amended Rule 144A of the Securities Act of 1933. The debentures carry a maturity date of October 15, 2042.
The 2.75% per annum interest on the debentures will be paid semi-annually. Additionally, debenture holders might get a contingent interest from October 15, 2022, in specific situations depending on the debentures’ trading price.
Moreover, in certain situations, the debentures will be converted into cash up to the principal amount, while the debenture holders will get either WellPoint’s shares or cash for the amount exceeding the principle amount.
The debenture holders will receive 13.2319 shares of WellPoint for every $1,000 principle value of debentures, implying an initial conversion price of $75.575 a share. This conversion price denotes a conversion premium of 25% on the closing price of WellPoint’s shares on October 2, 2012.
However, the company will redeem the debentures before October 20, 2022 only on the occurrence of specific tax-related events. From 20 October, 2022 onwards, WellPoint can redeem the debentures fully or partly in cash, provided the last reported sale price of its shares is a minimum of 150% of the conversion price effective in no less than 20 trading days out of a period of 30 consecutive trading days before the date of the notice of redemption.
Debenture holders will receive the full principal amount along with the accrued and unpaid interest. Any applicable contingent interest or additional interest amounts will also be included in the redemption price. Further, till October 15, 2012, WellPoint can fully or partly redeem the debentures in cash at a premium price, on the enactment or issue of certain U.S. federal tax legislation, regulations or rules.
WellPoint will spend $400 million of the money raised from the debenture issue on share repurchase. The residual amount, including money raised from additional issue to initial purchasers, will be utilized for general corporate needs such as further share repurchase or debt repayment.
The debt issue and share repurchase is expected to increase the debt-equity ratio of WellPoint. The interest burden of the company is also anticipated to increase, although any debt repayment from the proceeds will partially offset this increase.
WellPoint, which competes with Aetna Inc. (AET), Cigna Corp. (CI) and UnitedHealth Group Inc. (UNH), carries a Zacks #4 Rank, which translates into a short-term Sell rating. We maintain a long-term ‘Neutral’ rating on its shares.
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WELLPOINT INC (WLP): Free Stock Analysis Report
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