Goodwill in WellPoint Merger Gets Thumbs Down From S & P;

WALL STREET WEST

Insurance Commissioner John Garamendi fears the effect that Anthem Inc.’s proposed acquisition of WellPoint Health Networks Inc. will have on consumers, but he isn’t the only one voicing concerns.

Earlier this month Standard & Poor’s issued a report decrying the deal as the most “glaring example” yet of a growing problem in the health insurer M & A; market: the tendency of acquirers to pay far above book value for their acquisitions, resulting in huge goodwill balances on their books.

Acquirers justify this because goodwill is an intangible asset that reflects the targeted company’s strong earnings, which itself can be a reflection of its brand or negotiating power.

But the problem is that such “soft” assets can easily evaporate, causing the goodwill to become impaired and forcing the acquirer to write off the asset from its books. That’s a problem with all goodwill, of course, but it’s especially so in the health insurance sector where companies have fewer hard assets, the report points out.

Anthem intends to pay about $16 billion for WellPoint, a company with a book value of only about $5 billion, adding $11 billion in goodwill to the $7 billion that is already on Anthem’s books.

The Standard & Poor’s report contends this will reduce the “quality of capital” of the Anthem corporate parent, which it expects will be given a BBB-plus credit rating, rather than the A-minus it could have carried. However, the operating subsidiaries, including Blue Cross of California, are expected to maintain an A-plus credit rating.

A spokeswoman for Anthem said the company was aware of the report, but noted that despite the concerns raised by Standard & Poor’s the merged company was expecting a stable credit rating from the agency.

Laurence Darmiento

Bear Watch

Shares of Amgen Inc. could be due for a decline at least that’s the word from Cincinnati-based technical stock analysis firm Schaeffer’s Investment Research, which recently issued a note on the Thousand Oaks-based drug company.

“There’s really no sideline buyers out there,” said Joycelynn Drake, an analyst at Schaeffer. “There’s a lot of optimism that needs to be unwound.”

Drake said Amgen’s stock has been trying to come up off its May low of $53.26, but isn’t able to break above its 10-day and 20-day moving averages.

“This technical formation is often a signal of further downside in the shares,” said Drake, who noted that despite the resistance, there’s overwhelming optimism behind Amgen’s stock.

Net income for the quarter ended March 30 was $690.2 million, compared with $493 million for the like period a year ago a jump attributed to higher sales of its drugs for arthritis, anemia and depleted white blood cells.

Drake notes that of the 23 Wall Street analysts covering Amgen, 18 rate the stock a “Buy” rating or better. That, she said, doesn’t leave much room for upgrading. “Any downgrades could spell trouble,” she said in her report.

On the technical side, she notes that call option activity (a bullish bet on the stock) has jumped. Calls often act as a damper on future stock gains because they represent future commitments to sell shares.

Sena Lund, an analyst with Cathay Financial LLC, disagreed that there aren’t any catalysts for Amgen’s stock.

“The company is on track,” said Lund. “Quarterly earnings in July should be strong. They have the initiation of drug trials later this year. There are also some medical conferences coming up.”

Lund rates Amgen shares at “outperform,” which is the company’s highest rating for a stock. His price target is $73. Amgen shares closed at $55.37 on June 10.

Andrew Simons

Staar Rising

Staar Surgical Co. is having regulatory problems with the Food and Drug Administration but it’s apparently not enough to scare off some investors.

The Monrovia-based maker of ophthalmic products announced last week that it had sold 2 million shares of common stock to private institutional investors at a price of $6.25 per share, with Pacific Growth Equities LLC acting as the placement agent.

Staar Surgical is awaiting FDA approval for a new implantable lens it hopes can grab a big share of the market for patients wanting permanent vision correction who now seek laser treatment.

The company’s efforts, though, to get the lens approved have run into a series of problems with the FDA, which in January warned about quality control problems and then in April raised questions about its clinical trials. Company officials say they should get approval before the end of the year, assuming they pass an FDA inspection of their production facilities.

The company declined to state what it planned to do with the $12.5 million in proceeds from the stock sale, but stated in its recent 10-Q that it is in default of loan agreements and will need substantial sums to properly market the lens.

The stock closed at $7.14 on June 10, not far from its 52-week low of $6.65.

Laurence Darmiento

Smart Drop

Shares of Commerce-based Smart & Final Inc. got a jolt June 4, when shares dropped 11 percent on higher than normal volume.

The drop was enough for the grocery store chain to issue a statement saying it had no idea why the stock dropped as much as it did.

“The company is not aware of any material developments that are contributing to the price and volume movements,” it said in a statement.

While the drop remains a mystery, one trader noted the spike was probably due to a holder that wanted to sell a large lot at once and could do so at a lower price.

The reason, he said, is because in the time periods before and after the June 4 drop were also on high volume, but the stock went up in those cases. “This stock it is under accumulation,” said Mike Cullen. “The stock pulled right back.”

Smart & Final’s sales have boomed recently.

For the first quarter ended March 31, net income was $6.2 million, compared with $163,000 for the like period a year earlier. Sales jumped to $423.5 million from $354.6 million.

Smart & Final was a big beneficiary of the supermarket strike that hit Southern California from October to February. During the dispute, many shoppers opted for alternative grocers, such as Smart & Final.

Andrew Simons