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Roche Healthcare

Agenda. Theory ReviewRoche HistoryRoche ? Financial StrategyAnalyzing ReturnsBond HolderWarrant HolderBond Cum WarrantCostsConclusionsQuestions. Theory. What is a warrant?. What is an option?. -rights can be in the form of call options, put options or futures contracts (or any combination

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Roche Healthcare

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    1. Roche Healthcare Presented By: Andrew Bishop Risk Management & Insurance February 10th, 2005

    2. Agenda Theory Review Roche History Roche Financial Strategy Analyzing Returns Bond Holder Warrant Holder Bond Cum Warrant Costs Conclusions Questions

    3. Theory

    4. Theory Short term (< 1 year) Issued by financial intermediary Issued independently from any other debt instrument Issued at a variety of strike prices Financial intermediaries meet the demand of investors exercising their options Long-term Issued by firms Usually issued in combination with debt issues Often issued considerably out of the money and at one strike price per embedded warrant Company meets the demand of investors exercising their options

    5. Hybrid Securities

    6. Hybrid Securities Cont. Rodeo Sumo LYONs

    7. Roche - History Founded in 1896 as an entrepreneurial venture dedicated to manufacturing, for worldwide distribution, drugs with uniform strength and quality World leader in diagnostic instruments and reagents, vitamins and fine chemicals (divested) and flavors and fragrances (divested)

    8. Roche - History Currently Roche has two major divisions: Pharmaceuticals (view products) Diagnostics (view division)

    9. Roche Capital Structure Voting shares owned by a small group of investors Group ensures majority voting power by restricting equity issues This also gives them power over key corporate decisions How could Roche raise capital at a low cost?

    10. Roche Financial Strategy Build an acquisition war chest Borrowing was done at opportune time (low cost) Borrowing was targeted to specific investor groups

    11. Roche Cash Strapped

    12. Roche- Financial Strategy Minimize Cash Outflows Maximize initial sale price of debt instrument Minimize cash outflows from borrowing Increase the placement power of its investment banks

    13. Roche- Financial Strategy Prune divisions and sell of dead wood Used to increase cash flows

    14. Roche- Financial Strategy 5. Improve financial transparency and stock market profile.

    15. Roche- The Bull-Spread Issue Entire Issue - Face Value: $1 Billion Years to Maturity: 10 yrs. Coupon Rate: 3.5% Individual Bond Face Value: $10,000 73 Bull Spread Warrants Warrant Characteristics 3 yr. Maturity 100 Bull Spreads redeemed @ SFr7,000 (if < SFr 7,000) Or 1 share Or SFr10,000

    16. Analyzing Bondholder Return

    17. Analyzing Warrant Holder Return Value of Warrant @ time of issue: $3,356 or SFr4,833.55 Each note had 73 warrants so each individual warrant is worth SFr66.21

    18. Analyzing Warrant Holder Return Share Price < SFr7,000 Investor has right to sell 100 warrants for SFr7,000 Guaranteed Return of SFr379 (or 1.9% over 3 yrs.) Share Price > SFr 10,000 Roche has right to purchase 100 warrants for a maximum price of SFr10,000 The most investors could earn was SFr3,379 or 14.7% Annually Share Price > SFr7,000 but < SFr10,000 Investors would receive one-for-one earnings Between SFr379 and SFr3,379

    19. Analyzing Warrant Holder Return

    20. Analyzing Bond Cum Warrant Return Consistent bond returns PLUS Varying return on the warrant

    21. Analyzing Costs to Roche Costs to Roche are Dependent Upon Hedging Strategies Market Imperfections

    22. Conclusion Although the text didnt disclose if the firm engaged in hedging strategies (which is highly likely given Meiers background), we were able to develop an understanding to the importance and usefulness of hybrid securities in reducing the cost of capital for a corporation. Hybrid securities combined with hedging strategies enable firms to reduce their cost structure.

    23. Review Questions

    24. Question 2-1

    25. Question 2-2

    26. Question 2-3

    27. Question 2-4

    28. Question 2-5

    29. Question 2-6

    30. Question 2-7

    31. Question 2-7 cont. Share Price < SFr7,000 Investor has right to sell 100 warrants for SFr7,000 Guaranteed Return of (7,000-5,295) SFr1,705 or approx. 10.73%

    32. Question 2-7 cont. Share Price > SFr 10,000 Roche has right to purchase 100 warrants for a maximum price of SFr10,000 The most investors could earn was SFr4,705 or 29.62% Annually Share Price > SFr7,000 but < SFr10,000 Investors would receive one-for-one earnings Between SFr1,705 and SFr4,705

    33. Question 2-7 cont.

    34. Question 2-8

    35. Question 2-9

    36. Question 2-10

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