Nuance Communications, Inc. (NUAN)

[chmcnfunds]

Didn't post the negative SA article, but here is a positive one just out:
____________________________________

Nuance: It's All About The Debt Redemption Baby

Aug. 13, 2014 11:46 AM ET | 1 comment | About: Nuance Communications, Inc. (NUAN)

Disclosure: The author is long NUAN. (More...)
Summary

Nuance’s $250 million 2027 Convertible Notes redemption is either a signal of an imminent buyout or a red herring.
Shareholders win in 2 of 3 possible motivations behind the debt redemption.
Stock could be worth over $23 or 40% upside in the next 6 months.

Another quarter of missed expectations and poor transparency by Nuance (NASDAQ:NUAN) has punished the stock by 10% this week. It is now trading at $16.50 per share, a 18% discount from its 2014-high reached on June 18th when WSJ reported that Nuance was in talks with potential buyers on June 16th. Link to WSJ Article

If one read between the lines and disregarded the noise during Monday's earnings, a very interesting event was announced which could signal a buyout is on the horizon: Nuance is calling back all of their $250 million, 2027 Convertible Notes (at 2.7%).

It is my belief that the redemption of these notes is in anticipation of a buyout in the near future. It would help the acquirer save over $50 million from the convertible liability if the company is bought for over $23.36 per share.

Info on 2027 Convertible Notes

Issued in 2007, $250 million of Callable Convertible Debt at 2.7% NUAN 10-Q, pg. 35 filed 8/11/2014
Initial conversion price of $19.47 per share
If current price equates to 120% of conversion price or $23.36 for 20 days in the last fiscal quarter. Holder can convert bonds into shares.
One of the last times the convert was "in the money" was back in late 2012. NUAN 10-Q, pg. 13 filed on 2/8/2013
What about the 2031 Convertible Debt?

The debt is not convertible until the shares reach approximately $32.30.

3 Motivations to Buy Back the 2027 Debt

Lower Interest Expense and Leverage
I am going to debunk this right away. $250 million is a small portion of their debt and only costs 2.7% per year. That is some cheap debt... To really save interest expense, they could retire Senior Notes costing 5.3% that is due in 2020.
Management is extremely bullish on the company and believe the stock will go up…eventually. Calling back the debt will save them millions of dollars in convertible liabilities.
A buyout offer is on the table and calling back the debt will save the future acquirer ~$50 million from a debt to share convert.
Shareholders will win big if #(2) or #(3) come to fruition. Motivation # (1) will not create value for Nuance.

My Top 2 Possible Suitors
Nuance's growth pipeline features businesses (healthcare solutions, virtual assistants, security, voice ads) that would fit well in IBM and Oracle's portfolio of businesses while innovating current services.

IBM (IBM) - A long time partner of Nuance could energize WATSON cloud business and take out a potential disruptor at the same time.

Oracle (ORCL) - Has been integrating Nuance technologies into its productivity apps, their technology would be great asset to their portfolio of enterprise businesses.

In my opinion, if Nuance were to be acquired, it would be bought in the range of $23.50 to $32.

Acquisition Price Target: $25.30 per share
Price-to-Sales:
4x
Total Deal Value (including debt) ~$10 billion
If I am correct, all of the unintelligible operating metrics that the Paul Ricci & Company has divulged through the years will be forgiven (if you follow Nuance closely, you know what I mean). Nuance management gift-wrapped the ultimate "tell" for the diligent investor. I will let time be the judge.
__________________________________
http://seekingalpha.com/article/2418935-nuance-its-all-about-the-debt-redemption-baby

NUAN