The company has generated positive FCF of 7 million in the TTM which may or may not reverse in the second half of the year: it may need 150 days of working capital in Q3 which would translate into an extra $7-1$10 million in additional cash required to fund the quarter, or it may have improved its cash conversion cycle so that the additional working capital requirement is negligible.
If it doesn't make it through to the next 10-K, the bankruptcy case may look something like this:
Assuming that Apollo would prefer 49% of $89.8 million to 25% of $3 million in the absence of the NOLs, the bankruptcy put may be ~$45 million to the common.
If it does make it through, then we're most likely looking at $20 million in cash earnings that grow over time -- through refinancing, debt paydown, organic growth, and a possible clawback.
This is an aggressive conservative investment and it's important to rely on your own research and intelligence rather than on my judgment.
Addendum: October 17th
Someone much smarter than I sent me a note that pointed out that (1) the value of the NOLs would likely be severely impaired in a BK because the company would have undergone a change of control, and (2) the EBITDA multiple envisaged for the enterprise might be too conservative because
(a) this is a line of work in which relationships and revenues are recurring and stable -- that is, attractive in its own right;
(b) competitors could strip out a great deal of the administrative costs in the event of a takeover; and
(b) rivals may vie not to let the other guy achieve scale on the cheap.
I've amended the base case scenario accordingly to show the range of possibilities:
I do still think that a BK filing is an improbable outcome. As my correspondent noted, the service disruption that may result -- customers not getting their DTV connected in the busy season -- may have prompted Unitek's customer(s) to prepay some of the accounts receivable to make that scenario less likely. That may be where the improved cash conversion came from.
In any case, as with most distressed situations, there's a lot to think about and hitting on the most plausible narrative is the main thing.
Hi Red,
ReplyDeleteThanks for your post and for your blog. I have learnt a ton from reading your posts. Quick question regarding the NOLs.
"Assuming that Apollo would prefer 49% of $89.8 million to 25% of $3 million in the absence of the NOLs, the bankruptcy put may be ~$45 million to the common."
Even if the firm did enter Chapter 11, wouldn't Apollo still be entitled to the NOLs since it owned the debt 18 months prior to Chapter 11?
Hi,
ReplyDeleteI think that point is moot. In this morning's addendum to the post I clarified that the Section 382 rules on change of control would really limit the value of the NOLs. The warrant holders essentially own more than the threshold 5% of the company so that's that:
http://www.gibbonslaw.com/news_publications/articles.php?action=display_publication&publication_id=2754
Best to forget the NOLs and to take up the story knowing that the equity could go to zero in the worst case.
Thanks for the question
Hi Red - Nice job on the liquidity table. One quick question, I can back into all your costs except for the Apollo commitment fee. Would you mind pointing out how you got the 6 number? Want to make sure I'm not missing a data point. Thanks!
ReplyDeleteHi Martin,
ReplyDeleteBest to start with the 10-k and the section that reads ...
"Our Revolving Loan Agreement was refinanced in July 2013, at an interest rate of LIBOR plus Applicable Margin (as defined in the agreement), along with additional fees that would result in cash paid for interest and recurring financing fees that would result in an additional $3-$4 million of cash payments per year using the assumptions above as well as an assumed issued letter of credit balance of $24.0 million. " on page 57...
and then update the assumptions from there. I think 6 is close.
Hi Red,
ReplyDeleteQuick question on EBITDA adj.: The company reported 17m in H1 13 and 40m in FY12 - how do you get to 50m for the TTM respectively and how do you get to 45m as a base case assumption going forward? To me it appears more as if they are on a run-rate of 36-40m. Thank you for the insights.
Kindly Sascha
Hi Sascha,
ReplyDeleteSkylink was acquired in the middle of September 2012. It generates $2.2m in quarterly operating profit, so adding that amount to the June to September 2012 period should bring pro-forma TTM EBITDA up by at least $2.5m:
Here's how I see it:
https://docs.google.com/spreadsheet/ccc?key=0AoCLhoPnjQDgdEN5OGlFQTZlX0c0UW40cFVsOEtmalE#gid=17
BK is out of the question, imo, it constitutes a breach of contract. So the most likely outcome is not BK but large dilution of existing shareholders and/or recapitalization. So I would wait until things shake out. Your own calculations indicate equity is worthless. As for big cost savings or potential acquiror, I don't see it. MBND was not acquired at any big premium. The variable costs are high, so no great margin gains if acquired. It is a fundamentally favorable business with high ROI, but that's mitigated by dependence on one profitable customer. And do your ebitda calculations include the capitalized lease payments? Deduct another $10M from ebitda.
ReplyDeleteThanks for the comment. I suspect you're right that BK may be out of the question and that, n any case, dilution would be the more sensible option.
ReplyDeleteMBND was acquired at 7.4x underlying EBITDA. At the same multiple, UNTK's equity would be worth ~125m.
Why would anyone pay 7.4x Unitek's EBITDA? Because if you're a well financed buyer, you can cut the debt in half, lower the interest rate to 6 or 7% and earn yourself a cash-on-cash 15% rate of return.
(E&C is probably loss-making sou you could shut that down and earn an extra 1-2 million but we'll ignore that).
The risk is not, I think, in the value of the enterprise. The risk is in the process.
I do think, though, that waiting to see how it plays out is a smart strategy.
MBND and UNTK use very different accounting for leases, so it's not apples to apples. I was in MBND and it was not acquired for 7x, it was acquired closer to 4x if you apply the same treatment to capitalized leases. This is a good business buried under a mountain of debt. Romanello did a good job last quarter in a tough situation, and I suspect there is much room for improvement as an operator cobbled together from many different acquisitions. Just not clear whether the equity will benefit.
ReplyDeleteThanks for the insight
ReplyDelete