NME to Bolster Earnings With Debt-for-Equity Swap

National Medical Enterprises announced Friday an offer to trade up to a quarter of its equity for debt in a move seen as boosting earnings per share and shoring up investor confidence after the sharp drop in the company’s share price last week.

NME said that it had been planning the offer for several months and that it was not specifically a response to the 20% drop in its share price last week after reports of fraudulent billing and other unethical practices at some of its psychiatric hospitals.

In composite trading Friday on the New York Stock Exchange, NME closed at $17.375, up 12 1/2 cents, but down from a high earlier this year of $25.8125. The announcement of the offer was made after the market closed. However, NME Treasurer Maris Andersons said, “I do believe this will be viewed as a positive statement on the part of management as to the company’s future.”

The transaction would yield significant gains to the company if its stock appreciates significantly in the next several years, as company officials say they expect it will do.

Andersons said the transaction will not significantly increase the company’s debt load because interest expense would be partially offset by tax benefits and savings on dividends.

The offer introduces a new type of investment instrument that allows shareholders to reduce the risk of a drop in share price by giving up some of the potential gain.

The company said it would buy back up to 20 million shares, or about a quarter of shares outstanding. Each share would be exchanged for what is in effect an unsecured bond that matures in seven years with a yield of 8.7%, and a warrant to purchase eight-tenths of a share of common stock, Andersons said.

The warrant allows the holder to enjoy some of the gain if the stock price goes up. The holder will realize 80% of the increase in market price above a level that is 25% above the principal amount of the note, while giving up the benefit of appreciation up to that level.

Analysts said the move made sense for the company because it would help raise earnings per share, which stood at $1.73 at the end of fiscal 1991, by reducing shares outstanding. In recent years, the company has shown steady growth in earnings per share, from $1.15 in 1988 to $1.52 in 1990 and $1.73 in 1991.

Before today’s announcement, a number of analysts had scaled back earnings per share for the current fiscal year ending in May, 1992, from $1.75 per share to about $1.70 per share after the drop in its share price.

Randall Huyser, an analyst with Furman Selz, said he expected that the present deal will improve earnings per share somewhat, but not dramatically.