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CHATTEM's $ 20 PER SHARE DIVIDEND DEAL WILL GIVE A 25.6% EQUITY STAKE

This article was originally published in The Tan Sheet

Executive Summary

CHATTEM's $ 20 PER SHARE DIVIDEND DEAL WILL GIVE A 25.6% EQUITY STAKE to a regional bank, First Union National of North Carolina, in return for $ 14 mil. in cash and $ 100 mil. in financing to help fund the cash pay-out, the Chattanooga, Tenn. consumer products manufacturer announced May 17. Chattem has offered the Charlotte, N.C. affiliate of First Union Corporation nearly 1.87 mil. shares of common stock at a price of $ 7.50 per share. In addition, First Union is providing a $ 100 mil. "senior secured credit facility" that will be drawn on to fund the dividend. Following the transaction with First Union, approximately 7.4 mil. shares of Chattem stock will be outstanding, the company said. Chattem expects to have about 5.53 mil. shares outstanding once pending management stock options are exercised. By the company's closest estimate, 5.4 mil. shares are currently outstanding and eligible for the cash dividend, putting the company's total payment to shareholders at about $ 108 mil. This dividend will be paid "on or about" June 11 to common stock holders of record at the close of business on June 4. "The special dividend will enable all of the company's shareholders to realize in cash approximately 80% of the bid price for their shares, while at the same time retaining their existing share ownership," Chattem President and CEO Zan Guerry stated. The bank will not receive a cash dividend for its recently purchased stock. Chattem's agreement with First Union prevents the bank from selling its stake for at least two years. Before the deal, Guerry was the largest shareholder in Chattem, with a 10.7% stake in the company, according to Chattem's April 1992 proxy. The deal with First Union will likely dilute the Guerry family's holdings in the company. However, Chattem said that the full effect of the deal would not be known until top management exercises its stock options. Chattem said it is leveraging the company to provide the cash dividend so that the market value of Chattem stock will better reflect the anticipated performance of the company. Since a March 1992 secondary stock offering of 1.15 mil. shares at $ 27.50, Chattem stock has hovered within several points of the offering price until recently slipping to 25-1/4 on May 14. Wheat First, one of the lead underwriters of last year's offering, was asked to present its opinion of the dividend before the deal was announced and said it believed that the deal was "fair" to shareholders. However, an information statement sent to shareholders notes that Wheat First was not asked to speculate on what will happen to the stock's price after the dividend is awarded. Chattem stock closed at 30-3/8 on May 21. Chattem also expects the deal with First Union to lead to future funding arrangements as the company seeks to acquire additional OTC brands, a company spokesperson indicated. Reportedly, the bank would like to see the company make more acquisitions in the future. Chattem's most recent acquisition was the topical analgesic Icy Hot, bought from Procter & Gamble in mid-1991. Chattem used most of its proceeds from the offering to virtually eliminate its debt prior to the dividend. Guerry explained that Chattem management and its board "felt there were three primary reasons" to pay the special dividend: "The company's pro forma 1994 forecast calls for earnings per share of approximately $ 1, after payment of interest," he noted. "At current price earnings multiples in our industry, we believe there is an opportunity for stock price appreciation." Prior to the announcement of the deal, Chattem stock at 25 was trading at a price/earnings ratio of 13 based on net earnings projections prior to the dividend deal at between $ 1.90 and $ 2 a share. "The company's projections through 1998 show earnings per share growing at a more rapid rate than prior to the special dividend because of the company's leveraged capital structure," Guerry said. Chattem "is prudently using leverage with projected 1994 operating cash flow covering interest expense by [a multiple of] 3.6," he stated. The company said it "expects to service the indebtedness incurred in connection with the special dividend without any adverse effect on customers, suppliers, or employees," but that it will discontinue quarterly dividends "for the forseeable future." Chattem also highlighted the 1993 introductions of line extensions for its two best-selling consumer products, the topical analgesic Flex-All 454 ("The Tan Sheet" March 22, p. 10) and the menstrual pain reliever Pamprin, which will add two stockkeeping units -- one of which is a nighttime formulation -- to its line later this spring.
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