Analysts Believe Caremark Stockholders Are Real Winners in Takeover by Baxter

Caremark Inc. stockholders are not only getting a good value by turning in their shares for stock in Baxter Travenol Laboratories Inc., they’re becoming part of a company with a bright future and surging stock value, according to analysts.

Shareholders of Newport Beach’s Caremark approved plans this week that call for them to exchange each share of their stock for 0.87 of a share in Baxter Travenol.

At Baxter’s closing price Friday of $27 in trading on the New York Stock Exchange, Caremark shareholders will be receiving nearly $600 million in Baxter stock, or the equivalent of $23.50 a share.

“It was at $14 on its way to $10, and they’re getting ($23.50). I’d say that’s a good deal,” said Kenneth Abramowitz, an analyst with the New York securities firm of Sanford C. Bernstein & Co.

But Caremark shareholders are getting more than an immediate reward. Analysts say Baxter Travenol has gone through a metamorphosis from its reputation as an old-line, high-quality institutionally owned company. New lines, digestion of big acquisitions and government cost controls on the medical industry have disappointed the institutions, and speculative investors have crept in.

Baxter is primarily a manufacturer of health-care products, while Caremark is a leading provider of home health services.

But Baxter’s changing image doesn’t mean diminished quality, said Eugene Melnitchenko, research director at the Dallas investment firm of Eppler, Guerin & Turner Inc.

The changing character of Baxter Travenol investors has held the price of the stock behind the market in recent weeks, said George Wright, an analyst at the New York investment firm of First Manhattan. Only this week did prices go up, spurred by reduced fears that recent acquisition would have a dilutive effect on current shareholders and a feeling that the price has been sitting flat too long.

Caremark closed Friday at $23.25 a share, up $2.13 for the week. Baxter Travenol gained $3.25 a share over the week to close Friday at $27. It hit a new 52-week high of $27.50 during trading on Friday.

Merrill Lynch reiterated its recommendation for purchase of Baxter Travenol shares, and other analysts didn’t restrain their optimism of the stock’s future. The Caremark purchase had an effect on this week’s increase, but it wasn’t the sole reason. After all, Caremark will only be a small player at Baxter Travenol. Its 1986 sales of $135 million are dwarfed by Baxter Travenol’s $5.5 billion in sales last year.

Wright, of First Manhattan, predicts a 43% increase in net income next year and at least a 20% boost each of the next several years.

The 22 million shares being issued by the company will pale to the 220 million shares already outstanding. And the dilution of earnings is only expected to be three to five cents on next year’s earnings, Melnitchenko said.

“They’re a small player, but it’s obviously a good match,” Melnitchenko said.

“The purchase is a long-term positive for Baxter Travenol. It’s a minor positive as a whole, but it will only help,” said Abramowitz, of Sanford Bernstein & Co. He estimated Baxter Travenol’s home health operations will generate about $675 million this year, and Caremark will post sales of about $200 million.

In the long term, Baxter Travenol obviously thinks it can do something with Caremark. And even though Caremark overexpanded itself, which cut into earnings, it is still an attractive company and the largest player in the market, Melnitchenko said.

Plans for management of the company haven’t been announced, but David Goldsmith, an analyst at Robertson Colman in San Francisco said he’s “tremendously” optimistic about the management prospects.

Analysts expect Caremark shareholders to hang onto their new prize. The company has been especially heavily traded from the time earnings declines were reported earlier this year to initial rumors about a sale. But current holders will stay on, especially because it is a tax-free exchange, meaning holders won’t have to pay capital gains taxes for obtaining new shares, Melnitchenko said. “They’re getting better quality paper without doing anything. There’s no reason to expect a sale.”