Special Opportunity For Small Investors In WebMD Health

| About: WebMD Health (WBMD)

Summary

On Nov. 14th, 2016, WebMD announced its intention to commence a tender offer for approximately 5.1% of its common stock at a price of $55 per share.

Two days later, on Nov. 16th, 2016, WebMD announced that it had commenced the tender offer. The offer expires on Dec. 15, 2016.

WebMD also announced on Nov. 16th, 2016 that it will purchase shares tendered by those stockholders owning fewer than 100 shares without proration.

From the Nov. 14, 2016 announcement through Dec. 5, 2016, WebMD has consistently traded below the offer price of $55 per share providing an opportunity for small investors.

WebMD (NASDAQ:WBMD) offers an opportunity to investors with a small amount of capital to earn a quick return with low risk. Specifically, WebMD has announced an issuer tender offer to purchase 99 shares or less without proration at a price of $55 if properly tendered by December 15, 2016.

WebMD is a company whose primary business is providing health information to consumers, doctors and healthcare professionals through public and private portals. The primary revenue sources are advertising, sponsorships and subscriptions. Below is some portal traffic numbers provided by WebMD.

By the Numbers

Source: WebMD Press Center

From a financial perspective, we see that WebMD is profitable with a decent five-year tread in earnings per share. WebMD's share count has been going down through buybacks allowing its earnings to be spread over a decreasing number of shares. You can see the positive affect this has had on earning per share in the below income summary from 2011 to 2015.

Earnings 2011 - 2015

Source: MarketWatch

Opportunity

Irrespective of WebMD's business or financial performance, this opportunity is all about management credibility. WebMD has announced an issuer tender offer, and with the odd lot provision, this investment is more dependent on the probability of WebMD carrying through on its commitment to close the tender offer than any other factor. WebMD reports having over $1 billion in cash and investments to use to fund this tender offer of approximately $110 million. Therefore, the ability to buy the shares back exists.

Here is how you execute the investment. Purchase 99 shares or less of WebMD at a price below $55 and tender into the offer as an odd lot. This will provide a profit assuming WebMD does not cancel the offer. There have been plenty of opportunities to purchase below $55 since the offer announcements were made. Here are the prices WebMD has traded at since the day before the offer intention announcement was made until the date this article was submitted.

Recent WebMD Prices

Date

Open

High

Low

Close

Volume

Dec 05, 2016

53.16

53.39

52.92

53.31

544,767

Dec 02, 2016

52.7

53.4

52.35

52.67

754,700

Dec 01, 2016

53.35

53.52

52.23

52.68

2,255,800

Nov 30, 2016

53.56

53.74

53.2

53.34

2,044,200

Nov 29, 2016

53.55

53.86

53.35

53.48

1,826,900

Nov 28, 2016

53.75

53.89

53.45

53.57

2,103,600

Nov 25, 2016

53.63

53.87

53.63

53.7

482,100

Nov 23, 2016

53.97

54.08

53.6

53.81

900,500

Nov 22, 2016

54.02

54.14

53.73

54.04

974,800

Nov 21, 2016

53.81

54.13

53.66

53.89

642,600

Nov 18, 2016

53.95

54.19

53.64

53.78

440,800

Nov 17, 2016

53.82

54.3

53.77

53.91

620,300

Nov 16, 2016

54.26

54.45

53.43

53.6

1,103,100

Nov 15, 2016

53.69

54.37

53.69

53.83

357,900

Nov 14, 2016

54.6

54.99

53.53

53.56

772,500

Nov 11, 2016

53.42

53.72

52.84

53.38

465,900

Source: Yahoo Finance

Without considering commissions and taxes, below is a table that lists the absolute profits, absolute returns and compounded yearly return assuming a purchase was made at the open price for each of the last trading days since the offer was commenced until the date this article was submitted. The compounded yearly returns assumes you could immediately reinvest the proceeds in an identical opportunity six trading days after the expiration of the offer, or Dec. 23, 2016. This date was picked because it typically takes about a week beyond the expiration date to receive the cash paid for tendered shares.

Payout Analysis

Date

Open

Shares

Investment

Cash Received on Shares Tendered

Absolute Profit

Absolute Return

Compounded

Yearly

Return

Dec 05, 2016

53.16

99

$5,262.84

$5,445.00

$182.16

3.46%

97.49%

Dec 02, 2016

52.70

99

$5,217.30

$5,445.00

$227.70

4.36%

107.99%

Dec 01, 2016

53.35

99

$5,281.65

$5,445.00

$163.35

3.09%

64.61%

Nov 30, 2016

53.56

99

$5,302.44

$5,445.00

$142.56

2.69%

51.48%

Nov 29, 2016

53.55

99

$5,301.45

$5,445.00

$143.55

2.71%

49.30%

Nov 28, 2016

53.75

99

$5,321.25

$5,445.00

$123.75

2.33%

39.24%

Nov 25, 2016

53.63

99

$5,309.37

$5,445.00

$135.63

2.55%

38.31%

Nov 23, 2016

53.97

99

$5,343.03

$5,445.00

$101.97

1.91%

25.47%

Nov 22, 2016

54.02

99

$5,347.98

$5,445.00

$97.02

1.81%

23.22%

Nov 21, 2016

53.81

99

$5,327.19

$5,445.00

$117.81

2.21%

27.90%

Nov 18, 2016

53.95

99

$5,341.05

$5,445.00

$103.95

1.95%

21.93%

Nov 17, 2016

53.82

99

$5,328.18

$5,445.00

$116.82

2.19%

24.22%

Nov 16, 2016

54.26

99

$5,371.74

$5,445.00

$73.26

1.36%

14.09%

Source: Yahoo Finance data with my spreadsheet

As you can see, although the absolute returns are small, the compounded returns are quite attractive. In this particular tender offer, we also can see that as the time to expiration decreased, the investment returns became larger. However, the price could have just as easily moved higher or above the tender offer price, removing the event based opportunity. Therefore, it may not be advisable to wait to purchase the odd lot when a compelling absolute return presents itself.

Risks

For those considering this investment with an odd lot (less than 100 shares), the risk is that the tender offer will be cancelled. WedMD has a track record of completing tender offers. As they say, past performance does not guarantee future results. However, all else equal its nice to see WebMD following through on the past issuer tender offers they commenced. Here is a history of WebMD tender offers since 2009.

WebMD Tender Offer History Chart

Tender Type

Date Results

Announced

Expiration

Date

of Offer

Purchase Price

Shares

Purchased

Aggregate Purchase Price

Shares

Properly

Tendered

Final Proration

Set Price/Odd

Sep 15, 2014

Sep 9, 2014

48.50

2,000,000

$97,000,000

4,900,000

38.9%

Set Price/Odd

Sep 16, 2013

Sep 10, 2013

34.00

5,000,000

$170,000,000

26,100,000

17.5%

Dutch Auction/Odd

Apr 10, 2012

Apr 3, 2012

26.00

5,769,230

$150,000,000

18,000,000

32%

Set Price/Odd

Sep 14, 2010

Sep 8, 2010

52.00

3,000,000

$156,000,000

13,978,001

20.79%

Set Price/Odd

Apr 14, 2010

Apr 8, 2010

46.80

5,800,000

$242,100,000

5,172,210

100%

Set Price/Odd

Dec 16, 2009

Dec 10, 2009

37.00

5,700,000

$220,300,000

5,954,251

100%

Sources: WebMD Press Releases

2014: here

2013: here

2012: here

2010: here

here

2009: here

For those tendering into this offer with 100 or more shares, there is an additional and almost certain risk of proration (the risk that not all of your shares are purchased at the $55 offer price). This article did not address or analyze the scenario where 100 or more shares are tendered.

In the unlikely but possible event that the WebMD tender offer is cancelled, you will be left long the 99 shares you purchased without the cash payout at a premium. In this case, you should be aware that at a price of $53, you are buying WebMD at a multiple of 30 times over 2015 earnings. That may be a reasonable multiple for a growing company, but what you really want is all your shares purchased for cash. It is the event based transaction that is compelling.

However, if WebMD does not complete the tender offer and you are left long the stock, I think there are some nice trends working in its favor. First, the information portals WebMD owns are very popular and once a site becomes the go to destination, that early mover advantage is difficult for competitors to overcome. Second, the global demographics of an aging population that lives longer works to make the healthcare industry overall a growing market. Third, with rising healthcare costs, consumers are increasingly using information to do preliminary research increasing the traffic to health information sites like WebMD. Lastly, there is also the long-term trend for consumers to take more ownership over their healthcare. Although the primary reason cited in this article was to take advantage of the event based transaction as an odd lot preference, it helps to know the macro trends impacting this industry and this stock are positive if it is not completed.

Disclosure: I am/we are long WBMD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Do your own research, make your own investment decisions, and own those choices.

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