ACAS Soars On ...?

This morning, ACAS announced a private offering. The terms were that institutional buyers would get ACAS shares for a few pennies above $5. The result was ACAS, which had traded above that number, going up.

In recap: ACAS says it will sell shares for $5.06, and the market quickly bids ACAS toward $6.05. Got that?

So, what's going on?

1) ACAS could be selling shares to pay debt. This belief would not explain ACAS' price action. It also makes no sense: why would ACAS, which has close to $1B in cash without diluting shareholders, dilute shareholdes all of a sudden for a relatively measly $295M? If ACAS were about paying down debt, ACAS would have been able to do that with the $800B or so on hand. Also, selling shares for $5.06 doesn't explain why the shares would go from $5.50 up. A transaction like this would be dilutive and scare people from holding.

2) ACAS has a deal to eliminate all its debt and needs the remaining $295M to in a hurry to pull it off. The only way this is a plausible answer is if the institutional buyers on the other side of the transaction are ACAS' creditors, and the private issuance transaction is part of a larger transaction to solve the debt issues that have been repeatedly prolonged. In this scenario, people are celebrating because the acceleration risk ends and ACAS goes back to business as usual. The celebration is that with the acceleration risk off the table, and the technical default over, nobody views ACAS as a defaulted borrower ready to fold – a scenario painted by others who weren't noticing how ACAS was stockpiling cash and continuing to buy portfolio companies and make add-on investment in existing companies. This makes sense because with the cloud of fear gone, ACAS can raise toward NAV, and even diluting that NAV with cheap shares would raise the price. Having big institutional lenders interested in ACAS' success bodes well for ACAS' future dealmaking. ACAS could also be getting beneficial interest rates, an agreement to accept shares in lieu of cash at a time cash is valued at a premium in the M&A world, new debt caps, the future ability to pay down and draw on new debt without worrying about the debt, and improvement in ACAS' debt-to-equity ratio (because ACAS just got more equity; this is true if ACAS isn't also coughing up a boatload of cash to the creditors ... on the other hand, maybe the creditors want to keep debt deployed in the hands of a paying debtor).

3) ACAS is seen as able to raise cash. This is silly, but might explain the price action: if the market (falsely) views ACAS as a defaulted (technically true) debtor unable to satisfy its obligations because it lacks cash (false, it has cash just not assets surpassing a value threshold in a debt covenant), the ability to raise hundreds of millions of dollars at will "proves" ACAS has access to investment funds, can survive whatever creditors demand, and will have the ability to patiently wait for sales opportunities for its existing portfolio. I don't like this as a justification for a price rise, but it might sell to nitwits on the street.

4) ACAS' existing cash is locked up due to the lock-up agreements that prevent banks from accelerating, but ACAS has an opportunity to buy valuable but illiquid business opportunities for 10¢ on the dollar if it can raise cash from someplace not tied up in the lock-up agreements; selling equity for 50¢ on the dollar means ACAS gets a 5:1 return, and the result of the transaction is accretive rather than dilutive as would apprear from the press release, and the market is so sophisticated in its analysis of ACAS that it's picked up on this subtlety and is already celebrating. This is actually my favorite. But, no. It depends on the market pricing ACAS on the basis of fire-sale-bought investments' anticipated returns. Although a deal like this is consistent with what management has said it's interested in doing, it doesn't explain the market action. The market has generally underestimated or failed to understand ACAS' investment ideas rather than getting out in front and celebrating them. A secret deal to make a return on an investment ... this would not explain pre-transaction celebration.

Although (4) is the most exciting, my gut says that (2) is probably our winner. Let's watch and see if the buyers turn out to be ACAS' creditors, after all.