Wednesday, May 26, 2010

ACAS: On The Eve of an IPO

ACAS rose above $5 this morning, possibly on sentiment related to the soon-to-close Mirion IPO. If the deal closes this week, ACAS will be repaid all its MION-related debt and will exit millions of shares, and will end up with what is probably a control block (not a majority stake, but enough to direct the business) of a publicly-traded company with fortunes that will likely only improve with the rise in demand for both energy and non-petroleum energy.

Of course, the last couple of weeks' lousy market has impacted the valuation of companies, including Mirion at IPO, so the $16 discussed in MION's last filing is sure not to occur as hoped. However, the ~8m sh ACAS is selling isn't the only place it gets benefit from the IPO. ACAS gets its debt repaid, and it gets to change the value of the ~10m shares ACAS will keep on its books. ACAS turns illiquid holdings into cash, plus liquid shares that no longer suffer an illiquidity discount. Under FAS 157, ACAS may even be able to apply a control premium. ACAS gets cash and it gets to engineer its FAS 157 valuation of its remaining MION shares toward the good side. On my math, at the plausible IPO price range, ACAS should get at least $150m and the ability to re-price its remaining equity consistently with FAS 157. The NAV impact of the issuance is thus highly advantageous to ACAS at any plausible IPO price, which I'm currently guessing (Warning: WAG) to be north of 10 despite the current market.

The next question is what ACAS will do with all that cash.

If ACAS' lenders don't sign on to the proposed refinancing arrangement, ACAS will eventually have enough to just pay them off. I don't see that happening, though. ACAS' management said earlier that they thought ACAS' refinancing deal would turn out to have good long-term financing terms, and I don't see ACAS wanting to start over from scratch with new lenders. Maybe if ACAS found lenders who wanted to lend to ACAS and refinanced to pay off all the departing lenders and much of the remaining lenders, ACAS could more forward with a credit line reduced by the size of the portion underwritten by the departing lenders. Honestly, one could go blind working out what might and might not be possible – the real questions are what management wants to do, and what the hold-up is with the current lenders. Is ACAS trying to renegotiate the deal on the basis of its improved prospects, or is the hold-up really with the lenders?

As attractive as bankruptcy is for solvent debtors, it would frighten some owners out and force some instutitions out (who can't hold "bankrupt" equities), and tarnish management's reputation for being able to perform its contracts – having its banks forced by court order to take a deal they didn't agree to take isn't the way we want our company to be seen to operate, is it? ACAS has a strong incentive to avoid bankruptcy, but also a strong incentive to refinance its 10%+ debt back into the single digits. The liquidity and FAS-157 impact of the IPO will help improve ACAS' flexibility and negotiating position, and leave us with optimism for the future but continuing puzzlement about the delays in the debt refinancing we'd expected to be done late last year.

I'll look forward to evidence of the MION IPO pricing and ACAS' take from the deal, and I'll look forward to evidence of ACAS' plan for its refinancing debt. Of course, with the banks currently enjoying default interest rates, banks may be dragging their heels on purpose without any intent to shut down dealings with ACAS at all ....


Anonymous said...

Acas postponed its offering....dissapointing but not unexpected in this market for private equity deals. Now..does the debt exchange not come through either?

Jaded Consumer said...

ACAS needs to get the debt renegotiated to stop paying default-rate interest. ACAS would not jeopardize the refinancing by killing a realization like this if it would actually prevent the refinancing.

ACAS has a ton of cash right now, more than needed to make the payments contemplated by the debt exchange deal described in the publicly-released materials. ACAS didn't need this to pay lenders. ACAS needed it to boost NAV and create liquidity for new deals.

The MION postponement is a bummer, for sure, but not something over which to jump from a window. Think about it for a moment. The fact that ACAS killed it rather than launch it at the wrong price tells us ACAS is not a forced seller, and is not required to accept whatever price it is told to take, but instead is willing and able to be more patient to get a better price. ACAS is keeping most of its MION shares in the deal, but that 8m or so shares means a lot of money if the offering price is more than a little off the target price. If it was going a lot less than the apparently hoped-for $16, ACAS could decide it was a material issue and not worth doing at the market's currently-offered price. Particularly if MION has more good news on the horizon, ACAS benefits from patience. Also, have a look at the yield on the MION debt: ACAS gets paid for its patience, too. If ACAS just took whatever was offered, even though it was less than ACAS thought MION was worth, that would seem a sign management was either desperate for some reason or had stopped working to maximize returns. I'm glad they're willing to work for a few million (or tens of millions) more. I like seeing ACAS as not-a-forced seller, so I like to see evidence ACAS didn't cave to whatever lowball price was on the table. If it had gone at $10 a stub, I'd have felt ACAS had lost something in the sale of its shares even though I believe the debt repayment and liquidity improvement (loss of illiquidity discount on MION holdings) are valuable and would likely result in net NAV improvement on exit. This way, ACAS keeps building MION and launches at a better price, possibly based on both better company metrics and better market multiples. Remember, MION is one of ACAS' largest holdings. Maximizing returns on the MION investment is material. I find myself unexpectedly reassured by ACAS' apparent demonstration of patience.

I think the issues surrounding the debt exchange are linked to things like the MION exit only in that they are signals that ACAS is functioning normally. ACAS' cash position ensures that it's easily able to perform its repayment requirement the moment the banks say "yes". Something other than ACAS' liquidity is holding up the deal.

What, I don't know. Is ACAS trying to get better? Are some banks trying to improve their security or obtain terms that are harsher for ACAS? From where I stand, these answers aren't visible. Anyone with insight is invited to post!

Imperator said...

Found this little bit about ACAS, nothing major.

Disappointing about the Mirion IPO. The increase in volatility isn't really a very good market in which to IPO all of these portfolio companies.

The market volatility does make for an interesting opportunity to sell puts on ACAS at levels that look like a good deal, i.e. the 5 dollar strike price.