Indigo NV INDG
December 11, 2001 - 1:03pm EST by
2001 2002
Price: 7.15 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 800 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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On Sep6, 2001, HWP and INDG entered into an agreement for HP to acquire the 86.6% of INDG that it didn't already own. Under the terms of the agreement, HP will acquire the shares for approx. $629M in HP common, and CVR's worth up to $253M. INDG s/h's have the choice, subject to limits, of either $7.50 in HP stock or $6 in HP stock, plus one CVR entitling its holder to a cash payment of up to $4.50/shr if INDG achieves a total of $1.6B in cumulative revenue over a 3yr post-acquisition period. The value of the CVR increases linearly from zero to $4.50 as this cumulative revenue increases from $1B to $1.6B. The HP stock price used to determine the exchange ratio will be the avg. closing price during the 20 trading days ending 3 days prior to the closing, with the stipulation that the avg. price can be no less than 16.69 or more than 23.68.

Barring a miracle, the CVR's are apt to be worthless. However, the Landa Family Trust, headed by INDG's Chairman Benzion Landa, has committed to take whatever option is undersubscribed. For this analysis, I will assume that this is the $6 + CVR option. Using the conservative assumption that everyone else will choose the all-stock option, and that the CVR's are worthless, the value of the deal drops to 7.23. Again, if others take the CVR option, the expected all-stock payout would rise.

So, why does INDG at 7.15 have "value", you ask? Because of the embedded 23.68 "call" in it. With HWP at 22.75, and about two months until the deal is expected to close, the expected value of this payout is $7.84. If HWP rallies above 23.68, the adjusted exchange ratio becomes fixed at about .31, and the deal is worth 31cts more for every $1 rise above 23.68. Below, 23.68, you get 7.23 in HP stock (assuming we don't cross the 16.69 threshold). This embedded option combo adds value and makes for some interesting ways to play this deal; particularly with HP's CPQ deal adding possible volatility to the HP common. We can discuss various hedging strategies.


The rise in HP underlying stock has made the embedded options in INDG "cheap"; Possible HWP/CPQ deal bust adds volatility; INDG deal's anticipated early Feb closing.
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