Monday, May 31, 2010

What Does The MION IPO Delay Mean for ACAS?

The Question
After the MION IPO didn't go through last week at 16, and had apparently been attempted at 14, and had the plug pulled on it at 11, I was emailed a question recently about whether ACAS had valued its Mirion holdings at 16 or 17.

Why Ask?
If ACAS had valued its Mirion equity at 16 or 17, the market's reception to the IPO would be a rejection of ACAS' supposed "fair value" and a bad signal for ACAS' NAV. So, the question was eminently worth addressing. Did ACAS have a bad value on the books?

The Answer
The answer, as it turns out, is "neither".

In the 10-Q filed most recently before the non-IPO, ACAS declared its entire holdings in Mirion Technologies, Inc. to have a FAS-157-compliant "fair value" of $322.9m. ACAS' investment in MION is, however, dominated by debt: ACAS holds MION senior and junior debt valued at $181.8m, leaving the value of ACAS' entire equity interest (including not only common shares but convertible preferred and warrants) at $141.1m. Although the convesion features aren't discernible from where the Jaded Consumer stands, the MION filings make clear that when all its interest has been expressed, ACAS' holdings will total some 14,020,037 shares (ignoring those it will sell in the IPO). This leaves a per-share value that rounds to $10.06.

What The Answer Means
While one can make arguments about the value of a control premium or an illiquidity discount in figuring the "fair value" of holdings, I would submit that controlled but illiquid interests creates a circumstance in which there effects might tend to cancel. If it is true that ACAS could have consummated the deal at $11 and chose not to, it means that ACAS decided to forego the advantage of eliminating the illiquidity discount to the fair value of its post-IPO MION equity in order to obtain something closer to what ACAS considered the company's fair value, and thereby delay the possibility of increasing the FAS-157-compliant reported value of MION from "base plus control premium minus illiquidity discount" to "base plus control premium". If ACAS really could have agreed to be picked off at $11, ACAS' decision not to do so (and therefore, a decision not to be paid a couple hundred million in cash) strongly suggests that ACAS had more important things on its mind than raising cash or propping up NAV.

Especially since Mirion Technology is among ACAS' top few holdings, ACAS' stewardship of the investment is worth watching. Had ACAS been truly desperate for cash, ACAS could have taken the deal at $11, knowing that it would still be repaid its debt in full and would enjoy subsequent appreciation on its retained >40% interest. ACAS' conviction that MION is worth more than $11, coupled with its patience in accepting an exit offer, shows that management is willing to go through some noticeable trouble to get the most out of its investors' capital. ACAS will presumably continue to shop MION to institutions interested in energy plays, alternative energy plays, and safety equipment and services – in the expectation of peddling the equity again when multiples are better.

The Future of ACAS and MION
With this in mind, what is ACAS' position for the future? There is a short answer: Much as its position has been in the past.

ACAS is being paid interest on its debt and dividends on its convertible preferred, and it is working to produce an exit that allows ACAS' investors to enjoy ongoing returns. Unlike the Riddell investment, in which ACAS ended up with a few percent interest in a privately held company that might not pay dividends, Mirion offers a control block in a publicly-traded company with at least one easy exit alternative open on any given trading day. (Of course, realizing the control premium requires more work.) Mirion would presumably be of a like position as AGNC: an ACAS-controlled investment in an enterprise with potentially broad third-party participation, serving as an ongoing advertisement for ACAS' operations expertise and private equity services. Although ACAS won't get a management fee from Mirion, it will be in a position to enjoy subsequent capital appreciation and dividends – which have proven much more valuable at AGNC than the management fee. Moving MION into a position from which ACAS is less interested in developing exit strategies is an attractive move, not the lease because the new (lower) headcount at ACAS surely can't support as much simultaneous strategic activity as before, and ACAS still has a lot of our money to multiply.

The Immediate Furure of ACAS
While news on the MION IPO is welcome, the next big news will likely be in connection with the debt restructuring project. If the lenders don't all get onboard with the plan, ACAS' move will be to a court with the jurisdiction to force them into agreement. Unfortunately for short-term ACAS holders, the name of the court having this jurisdiction is the United States Bankruptcy Court, and parties havign business before that court get rough treatment in the press. Some investors' charters prohibit investment in companies before the court, which would cause a certain amount of exodus completely aside from the stink and noise of the proceedings. The immediate results would be favorable to ACAS' business operations, however: as a Chapter 11 debtor, it is entitled to operate its business so long as it continues to make timely payment of non-default-rate interest. This means that ACAS could possibly improve its margins overnight with a $1039 bankruptcy filing fee. All that money ACAS lends to portfolio companies is financed, and improving the spread on the paying debt would dramatically improve ACAS' NOI. I don't know how long it would take ACAS to get the Court to order the debt restructured in accordance with the plan to which I understand most of the lenders have already agreed, but during that whole time ACAS will be sucking in more cash than it has in years.

The downside of debt restructuring under these circumstances is that ACAS gets the "black eye" of bankruptcy court and the scorn of financial counterparties who see that ACAS wasn't able to "take care of business" by contracting and performing, but was required to get a court to bully its counterparties into line. While the long term would not likely suffer, it's a reputational hit that will take a little while to get over. I can't estimate whether this is or is not material to ACAS' business. On the other hand, the "getting out of bankruptcy" pop some companies get when everyone thinks the restructuring has given a firm a new lease on life could be just the thing ACAS needs to get attention drawn to it for the right reasons.

For preference, and to avoid surprise, the better alternative is of course to see ACAS reach agreement with its creditors. Unfortunately, without knowing what the hold-up is in the deal (unreasonable lender terms? 11th-hour effort to renegotiate in ACAS' favor?), we can't know whether to hope compromize is reached or to hope the court quickly orders the reatructuring as planned.

Any thoughs welcome :-)


Anonymous said...

If ACAS does not reach agreement with its creditors and moves to chapter 11, will the investors of its ACAS stock be wiped out? I believe ACAS is a great company but this chapter 11 is scaring me.

Jaded Consumer said...

You may be confusing Chapter 7 (liquidation) with Chapter 11 (reorganization). Also, some Chapter 11 reorganizations are done to keep broke businesses in business, and some are done to put sound businesses in a position to pay everyone without a bunch of litigation over things that don't have to do with the Company's ability to pay the interest on its operating funds.

ACAS is solvent. Nobody is going to get squashed, creditor or otherwise. ACAS has plenty of interest coverage, even at the default rates it's being forced to pay.

In a Chapter 7, equity holders would get squashed and some of the creditors, too -- maybe all of them. Chapter 7 is a "run for the hills" situation.

Chapter 11 is all dependent on the company's situation. ACAS is much more solvent heading into Chapter 11 than either Continental or Chrysler when they reorganized in the 1980s, and can be expected to spend a lot less time before the court. ACAS (as I read it) just needs to get some bond holders ordered into a debt swap already agreed to by the vast bulk of the debt holders. ACAS doesn't need protection from the obligation to pay interest, and doesn't need protection from the obligation to pay principal. ACAS is paying all its bills.

ACAS is also stuffed full of cash.

The fun part is that (as I read the rules) a Chapter 11 debtor can continue operating its own business as debtor-in-possession so long as it continues to pay interest at non-default rates. This means that ACAS could get a NOI boost by filing bankruptcy because its interest rate the Court would require be paid would be only the non-default rate (if I read this right). ACAS' margins would increase dramatically, and its NOI soar, if I'm following this correctly. If I have this right, ACAS' profit would bloom overnight.

Chapter 11 is a great place for a solvent debtor to avoid the unreasonable demands of creditors whom it's able to pay. The threat of Chapter 11 is to unreasonable creditors, not the solvent debtor.

There are some institutions whose governing documents prevent their holding equity in bankruptcy, and those folks would be forced to sell. But the short-term hiccup associated with filing has nothing to do with ACAS' prospects for the rest of the quarter or year, much less its long-term.

As solvent as ACAS is, a filing dip would be a buy op. Even I, overweight as I am in ACAS, would be tempted to add.