Bear analysts suggest Mail-Well 5% convertible as a short-term yield play

By Ronda Fears

Nashville, Tenn., Nov. 29 - Mail-Well Inc.'s 5% convertible due 2002 offers an attractive return on a short-term basis, said Bear Stearns & Co. convertible analyst Matt Hempel in a report Thursday.

Provided the planned sale of non-core segments goes as planned and management does not undertake any further acquisitions for the foreseeable future as they attest, Hempel said he is sufficiently confident in the company's ability to redeem the issue come maturity on Nov. 1 next year. The 5% convertible is only for investors with substantial risk tolerance interested in a short-term yield play, he noted, but added that the yield to maturity is relatively hefty at 16%.

"Some investors may not be attracted to the industry and/or the business model of this company, but we do not feel that is the most important issue for this particular analysis. The short-term nature of this convertible allows us to focus mainly on the ability of the company to honor the principal payment upon maturity on Nov. 1, 2002," Hempel said in the report.

"The market price of the convertible issue shows lack of conviction in this occurrence, which is not our view. Based on the realization of management's short-term goals, we feel comfortable with the likelihood of the principal repayment upon maturity. We recommend investors with significant risk tolerance looking for a very attractive short term yield play purchase this issue."

Mail-Well completed a comprehensive review of its operations in May and adopted a new strategy that focuses on its two core businesses, envelopes and commercial printing, with plans to divest its label and printed office products segments, and other non-core assets. Proceeds from the sales are expected to be a substantial cash infusion, estimated between $300 million to $350 million, to help bolster the company's financial standing, Hempel said. The divestiture process was under way and proceeding with an expected closure date within this year for total expected proceeds, until the terrorist attacks in September. Management confirms the sales are still on track for previously mentioned amount, but the closing dates have been pushed back until the end of the first quarter of 2002.

For third quarter, Mail-Well posted earnings from continuing operations before restructuring and special charges of $1.9 million, or 4c per share, versus $9.8 million, or 20c per share, in third quarter 2000. For the nine months ended Sept. 30, earnings from continuing operations before restructuring and special charges were $9.7 million, or 20c per share, compared to $29.9 million, or 59c per share, during the comparable period of 2000. The company attributes the earnings declines to lower sales and lower margins despite lower costs resulting from profit improvement initiatives.

Mail-well's main positive credit factor is its leading market position in the commercial print and envelope areas, Hempel said, with negatives consisting of narrow business focus, highly competitive market conditions, and the acquisitive nature of the company, something which management states will be lessened for the near future. Mail-Well has $300 million outstanding of senior-ranked 8.75% bonds due 2008, which were quoted as of Nov. 16 at 75 by high yield traders, Hempel noted, and the company has said it may attempt another high yield issue within the next year to help finance the principal payment of the convertible issue.

"The market's acceptance of a new issue by a company with Mail-Well's financial profile is questionable at this time, but not a necessity for the convertible to be paid down in a year," Hempel said in the report.

"There may be some concern in the Street that the sale of the divisions by Mail-Well could trigger a change of control provision, which would allow the senior debt holders to put the issue back to the company at par before the due date. This event could have an adverse effect on the ability to pay off the convertible. Management has stated this is not an issue, which is backed up by the indenture, which states a change of control put would be applicable in this case if substantially all of the assets are sold. The indenture goes on to state that there is not an exact definition of substantially all, but the fact that the divisions being put up for sale represent less than 50% of revenues gives us confidence this put will not be able to be enacted. Another key assumption of this analysis is that management sticks to their stated objective of reducing their debt burden."

During the first three quarters of 2001, the company only reduced long-term debt $39.2 million from $879.75 million to $840. 5 million, the analysts noted but added that he is confident the company will be able to pay off the convertible.

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