There's been some fear and uncertainty about ACAS in connection with the debt restructuring and the lock-up agreement's extension to June 8. Allow me to explain why I think ACAS is turning into a screaming buy.
ACAS is Solvent
ACAS hasn't failed to make any payment due under any of its debt agreements. It makes principal and interest payments timely, even at the jacked-up interest rates with which it's been stuck since the breach of the net asset covenant during the market collapse in 2008. Nobody at ACAS is going unpaid, and none of the creditors are being stuck with a bounced check. Under these circumstances, ACAS is not insolvent. ACAS is a diligent debt payor.
ACAS is also creating huge cash piles with which to pay obligations as they come due, including the anticipated obligation to make substantial principal payments in connection with a planned debt restructuring agreement.
Restructuring Isn't Liquidation
A bankruptcy court presiding over a proceeding conducted under Chapter 7 of the United States Bankruptcy Code is basically a funeral director: it invites all the mourners, says a few words over the corpse, and lets everyone go home red-eyed and empty-handed. (By the time a company files Chapter 7, even the optimists have long since given up; there's not much left to chew on.) Chapter 7 is the end of a dying business, and is conducted to wipe the slate clean of claims for whomever is left alive. Chapter 7 is the debtor's winter.
Chapter 11 is Spring. Under Chapter 11, a business with a liquidity problem can get turned around under a reorganization plan that takes account of everybody's interests. The alternative is a feeding frenzy that causes every creditor to tear flesh from the debtor as fast as possible in order to avoid losing the race to the assets. Chapter 11 is about the orderly process of reorganizing debtors' affairs with an equal eye to all the interested parties. ACAS has a reorganization plan to which 100% of its $1.4B in unsecured creditors agree, and varying percentages of its bond holders agree. The agreement ACAS has obtained is very close to statutory thresholds that would require the Court to order the reorganization plan urged by ACAS. With a few percent more of certain debt classes, ACAS would be entitled to stuff its plan down the throats of uncooperative debtors over their most strenuous objections. And let's face it: while ACAS continues to make all its interest payments, ACAS is entitled to continue to conduct its business as debtor-in-possession despite the preferences of some unhappy creditors. (Mind you, I don't think the creditors are unhappy at all: I think they love getting paid default rates of interest and don't want to see the golden goose killed, so they are doing everything possible to delay the debt restructuring. ACAS is so solvent, and so full of cash, there's no risk that other creditors would get advantage by delay – so I think all the creditors have a pecuniary incentive to toss sand into the gears.)
While ACAS continues its business, it becomes more liquid because it keeps piling up more cash. (By the end of April, unrestricted cash stood at $1.2 billion. Not million but billion.) At some point, ACAS can simply ask the Court to approve the payoff of the unhappy creditors' principal (the uncooperative creditors' claims are based on a few hundred million in principal, well within ACAS' budget), which would free ACAS to agree to a restructuring with whomever is left. That is, if the Court doesn't first order the parties to perform the restructuring plan urged by ACAS.
Of course, there are Chapter 7 debtors (like KSRP Ltd., now pending in the Southern District of Texas) that pretend to be Chapter 11 debtors. KSRP Ltd. has reported to the Court that it has no income and has made no expenses in the last year because it's had no active operations, but it turns out that lots of immigrants with H1-B visas are telling the INS they are employed by KSRP. Since KSRP hasn't had income or expenses in over a year, it's clear the only reason KSRP is trying to avoid liquidation is to keep all these fraudulent visas from being discovered by the INS and causing lots of deportations to India. For the employment with KSRP to have been legitimate, the immigrants would have to be drawing income from KSRP; it's a sham intended to perpetrate an immigration fraud. This, of course, all came as a surprise to KSRP's creditors – you don't expect the principal of a firm to admit all this under oath. Usually they are better advised and know when to plead the Fifth. Ridiculous Chapter 11 filings like KSRP Ltd. get converted into Chapter 7 proceedings pretty quickly.
But ACAS is a real Chapter 11 story: it has plenty of power to pay the interest on its debt, and even a well of cash for paying down principal without interfering with ongoing operations. So long as a Chapter 11 debtor can make interest payments at the non-default rates of interest, the bankruptcy rules allow the debtor to continue operating his business as debt0r-in-possession. If ACAS were to stop paying interest above the non-default rates while in bankruptcy court, as the Rules apparently invite, ACAS' NOI would soar as its cost of funds plummeted back not only to single digits, but to levels not seen since 2008. ACAS' NOI is based in large part on the spread between its borrowing price and the interest it is paid by portfolio companies, so ACAS really wins if it is allowed to pay only non-default interest as the price of continuing its operations. Unless ACAS decided to pay default rates of interest simply to keep creditors happy, ACAS' NOI could multiply overnight simply by making a $1039 or so filing fee with the local bankruptcy court.
Result
The question what happens in Chapter 11 is not "what" really, but "when" – ACAS has the power to pay creditors indefinitely, and despite the default interest, its business is apparently improving. It can either urge the Court to quickly approve its reorganization plan or it can enjoy the benefits of having creditors over a barrel to get a better deal and prolong the non-default-interest while doing business as usual. Creditors deprived of default-rate interest might suddenly decide the reorganization plan is attractive and sign on, but that's not essential to ACAS' financial success. Since no claims are being eliminated in the reorganization, and no creditor is becoming an equity owner, there's no impact on equity owners other than (a) the flight of institutions forbidden by their charters to hold equities under the jurisdiction of a bankruptcy court, and (b) the reorganization of ACAS debt to lower interest rates and the consequent increase in NOI as ACAS' cost of funds plummets out of the double-digit range.
Frankly, I can't tell why ACAS didn't file months ago.
Any big downward post-filing price move in ACAS shares is a buy: it's based not on rational appraisal of ACAS' likely long-term results, but on the fear caused by ignorance of Chapter 11 proceedings and terror of the stigma of bankruptcy courts. Also: imagine the post-bankruptcy pop when ACAS, free of any debt default, emerges with a low cost of funds to continue business as usual. Yes, a definite buy.
Even for the ACAS-overcommitted Jaded Consumer!
Thursday, June 3, 2010
Tuesday, June 1, 2010
And You Thought Your Potholes Were Bad
As you get further South, the cockroaches get worse, and apparently the potholes too. This specimen, developing in the wake of the tropical storm Agatha, was photographed in Guatemala:
115 died in Central America when the storm hit, and it'll be a long while repairing what isn't forever lost.
115 died in Central America when the storm hit, and it'll be a long while repairing what isn't forever lost.
Apple and the iPad Party
When the iPad was announced, a certain fraction of the gallery wondered what the big deal was; the market was so small for such devices that it could hardly be expected to matter to a company whose market capitalization is so large as Apple's.
After selling a million within a month (twice as fast as the iPhone) and two million in less than sixty days, Apple is now expected to sell more iPads than computers in the third quarter. Apple already sells more iPads than MacBooks.
Given that the iPad, like the iPhone, synchs to a computer, Apple is planting the seeds of more Mac purchases. Given that the iPad – like the iPhone and the touch-screen iPods – runs applications sold through a high-volume application store capable of generating substantial post-sales revenue, one might wonder whether the iPad is a bigger deal for Apple over the long run than desktop computers. (Though pricier, full-on computers' longer usable life combines with their lack of post-sales revenue to suggest second-fiddle status for many models. Complete computer systems from Apple have traditionally been out of the range of most global buyers, making the addressable market for iPads dramatically larger. Assuming iPad add-ons such as protective covers, docks, cables, and so on are also high-margin products, Apple may be making more money on iPads than the sticker price suggests.) Whether Apple can sustain 200,000 units per week is something we should learn over the next few quarters; much of this may be initial-order backlog not yet worked off by new unit production.
Apple seems to be doing for tablets what it did for music players: delivering an integrated package so attractive to users that it actually changed the size of the market.
In the meantime, Apple's competitor Google – also a global surprise for figuring out how to get rich from online search engine activity – is being depended on by people who apparently trust their common sense less. Ms. Rosenberg followed Google's walking-directions beta onto a freeway, where she was struck by a car, and has filed suit. I predict victory for the defense, though perhaps not cheaply. California is a famously costly place to litigate.
Apple's other competitor, Microsoft, said Google was doomed to play second-fiddle to MSFT in the tablet space. This ignores MSFT's effort to compete with Linux by dropping Windows XP licenses to $15 on netbooks (half the usual cost of the "Starter Edition"), and its subsequent effort to upsell OEMs to higher-cost versions in Windows 7. No news yet on how successful MSFT's upsell effort has been, but MSFT's history of declining OS revenues doesn't bode well for its future ability to keep the cash cow mooing as the world moves toward standards that devalue MSFT APIs such as Win32. The claim Google will never catch Microsoft curiously ignores that Apple has apparently taken the bulk of the previously-minuscule tablet market with a seven-digit-per-quarter sales volume.
Google will likely benefit from non-MSFT operating systems, whether they involve Google's Linux-based OS or anyone else's: Google will have a better chance to reach customers with standards-compliant browsers and search tools that aren't biased against Google. The primary losers in the move toward standards are sellers of developer tools such as Adobe and Microsoft. Google wins on search regardless who takes the OS share. Apple wins only to the extent Apple gains sales, but since Apple is apparently taking the lion's share of the tablet market and is likely to keep the high end of the market, this plays toward Apple in the foreseeable future.
UPDATE: Morgan Stanley offers some charts and numbers suggesting that netbooks may have peaked and that iPads are on track to eclipse the netbook market. The revised market numbers suggest iPad's release caused not just a flattening but a decline in netbook sales compared to the year-previous April.
After selling a million within a month (twice as fast as the iPhone) and two million in less than sixty days, Apple is now expected to sell more iPads than computers in the third quarter. Apple already sells more iPads than MacBooks.
Given that the iPad, like the iPhone, synchs to a computer, Apple is planting the seeds of more Mac purchases. Given that the iPad – like the iPhone and the touch-screen iPods – runs applications sold through a high-volume application store capable of generating substantial post-sales revenue, one might wonder whether the iPad is a bigger deal for Apple over the long run than desktop computers. (Though pricier, full-on computers' longer usable life combines with their lack of post-sales revenue to suggest second-fiddle status for many models. Complete computer systems from Apple have traditionally been out of the range of most global buyers, making the addressable market for iPads dramatically larger. Assuming iPad add-ons such as protective covers, docks, cables, and so on are also high-margin products, Apple may be making more money on iPads than the sticker price suggests.) Whether Apple can sustain 200,000 units per week is something we should learn over the next few quarters; much of this may be initial-order backlog not yet worked off by new unit production.
Apple seems to be doing for tablets what it did for music players: delivering an integrated package so attractive to users that it actually changed the size of the market.
In the meantime, Apple's competitor Google – also a global surprise for figuring out how to get rich from online search engine activity – is being depended on by people who apparently trust their common sense less. Ms. Rosenberg followed Google's walking-directions beta onto a freeway, where she was struck by a car, and has filed suit. I predict victory for the defense, though perhaps not cheaply. California is a famously costly place to litigate.
Apple's other competitor, Microsoft, said Google was doomed to play second-fiddle to MSFT in the tablet space. This ignores MSFT's effort to compete with Linux by dropping Windows XP licenses to $15 on netbooks (half the usual cost of the "Starter Edition"), and its subsequent effort to upsell OEMs to higher-cost versions in Windows 7. No news yet on how successful MSFT's upsell effort has been, but MSFT's history of declining OS revenues doesn't bode well for its future ability to keep the cash cow mooing as the world moves toward standards that devalue MSFT APIs such as Win32. The claim Google will never catch Microsoft curiously ignores that Apple has apparently taken the bulk of the previously-minuscule tablet market with a seven-digit-per-quarter sales volume.
Google will likely benefit from non-MSFT operating systems, whether they involve Google's Linux-based OS or anyone else's: Google will have a better chance to reach customers with standards-compliant browsers and search tools that aren't biased against Google. The primary losers in the move toward standards are sellers of developer tools such as Adobe and Microsoft. Google wins on search regardless who takes the OS share. Apple wins only to the extent Apple gains sales, but since Apple is apparently taking the lion's share of the tablet market and is likely to keep the high end of the market, this plays toward Apple in the foreseeable future.
UPDATE: Morgan Stanley offers some charts and numbers suggesting that netbooks may have peaked and that iPads are on track to eclipse the netbook market. The revised market numbers suggest iPad's release caused not just a flattening but a decline in netbook sales compared to the year-previous April.
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 :-)
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 :-)
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 ....
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 ....
Monday, May 24, 2010
Iced Tea Report: Ruggles
Friday night, some parents took their Kindergartners' teacher to a "nice dinner" at Ruggles' original restaurant location near Montrose. The event was held upstairs, the only plausible solution to the layout of the noisy restaurant, and an effective way to police the movement of the children: guard the stairs.
When we arrived, nobody took drink orders even as family after family arrived with children. Nobody took appetizer orders. It was an undirected mess for the better part of forty-five minutes while I walked around wondering who would take responsibility for ensuring that we were served. It took forever to get a waiter to come to our tables, and I knew the kids were at their limit.
The hunger-maddened children was my first order of business with the waiter.
"For the safety of your establishment," I began, "bring this girl --" and here, I pointed at a child who was past all patience but soldiering on like a champ "-- Mac and cheese as fast as it is possible for the kitchen to deliver." I gave this instruction before ordering anything at all. I kept pointing at the girl while I looked from the waiter to the girl and back to make sure he had directed his attention appropriately. I thought my point had been clearly made: this was an emergency.
After an eternity, one parent begged for some bread, or something, to aid the increasingly distressed children. By then some kids were past reason, unwilling to eat anything but what they'd ordered. Like the Mac and cheese ordered by my targeted would-be diner.
The girl held her abdomen as if in pain and said, "I'm hungry."
I found the waiter and urged him to do something about the kids' meals and the Mac and cheese I'd specifically requested be brought faster than anything else. He agreed.
Adults began receiving their appetizers, mine included, and I went in search of the waiter. I asked about the Mac and cheese. He said they were moving as fast as possible and he was doing everything he could.
The adults received their entrées. I tried to work with the little one about whom I was worried, and she was insensible. She was hungry past reason. She wept – literally wept.
I went asking after a manager, and found someone willing to enter the kitchen and ask for the Mac and cheese. Within a minute, Mac and cheese sat before all the kids who'd ordered it. One parent reported that from their arrival to their kids' receipt of food took an hour and forty minutes.
Then, I reached for my tea.
The big steak in the foreground of the photo on the left was well-favored, but I'd ordered it medium and it was delivered mostly well-done and therefore considerable drier in the middle than I am accustomed to eating and lacked the texture I expect in a quality steak. Despite the definitely-quality-steak price of the thing, I was starved and unwilling to wait again for food, and entirely unwilling to take up another customer service issue with the staff. The stress of telling people they've botched things when you are trying to have a sit-down dinner with your family and the kids' teachers is just not my idea of a good evening.
After a couple (2) of tea refills, they stopped sending anyone near enough to notice, or even to have their attention attracted to the state of my tea glass. So look carefully at the picture, paying special attention to the empty glass with the ice, lemon, and tea spoon: if you go to Ruggles, this will happen to you!
Eventually, dinner was completed around 8PM, and the kids needed to go home. Unfortunately, Ruggles doesn't help people get home with any more seal than they help people get food or iced tea. Those families that came in two cars split up: the bill was so slow coming that a paying adult was left to wait while the families took off for home and bed.
It took an hour from finishing dinner to see a bill. A dinner that "started" at 6PM didn't let me back to my car ($4 to valet, and no apparent parking anyplace) until after nine o'clock.
Everyone had pitched in to cover the teachers' bills, so they were together. Everyone else had a one-family bill. Nevertheless, despite the three- and four- and five-person checks, that characterized the room (we went so far as to place name tags on the table so the staff could tell whose bill they were serving), there was a 20% tip added. After an hour waiting, and with kids past sense, I had no possibility of spending time getting justice. The wretched service – one waiter for maybe thirty people who took up the entire upper floor of the restaurant, and not a very attentive waiter at that – wasn't worth 5%, except that I like to make sure the people who actually work get paid. (L's chicken was superb, but you won't want to suffer the rest of the experience to get it.)
By chance, I had a lunch date the next day at the more mainstream-priced Ruggles Café and Bakery in the Village on Rice Boulevard. I ordered a turkey Reuben and iced tea, with fruit substituted for the fried potatoes that are normally served with the sandwich.
The iced tea is self-serve, so you can get all the lemon and sugar and refills you care to pour. There is no tip tacked onto your bill, even when you eat with friends. If you are lucky enough to get a table close to the drink fountain, you can get refills without much hassle.
The picture on the left shows how Ruggles substitutes fruit in favor of fries.
My conclusion is that while there are outstanding elements at Ruggles' associated restaurants, there is no ethic of service at all, and the tea – despite being offered with lemon, a tea spoon, and even sugar in the raw – is a C at the main restaurant for want of service. It is a B+ at the Ruggles Café if you can get a table close enough to the drink fountain to make refills likely. (Otherwise you leave your company repeatedly to get refills, or forgo them, either of which greatly reduces the quality of your experience.)
Between the two, Ruggles Café is the one to visit. It is also vastly cheaper. You can easily get better service nearly anyplace else in town, though. For the price, what you get at Ruggles' main restaurant is awful.
When we arrived, nobody took drink orders even as family after family arrived with children. Nobody took appetizer orders. It was an undirected mess for the better part of forty-five minutes while I walked around wondering who would take responsibility for ensuring that we were served. It took forever to get a waiter to come to our tables, and I knew the kids were at their limit.
The hunger-maddened children was my first order of business with the waiter.
"For the safety of your establishment," I began, "bring this girl --" and here, I pointed at a child who was past all patience but soldiering on like a champ "-- Mac and cheese as fast as it is possible for the kitchen to deliver." I gave this instruction before ordering anything at all. I kept pointing at the girl while I looked from the waiter to the girl and back to make sure he had directed his attention appropriately. I thought my point had been clearly made: this was an emergency.
After an eternity, one parent begged for some bread, or something, to aid the increasingly distressed children. By then some kids were past reason, unwilling to eat anything but what they'd ordered. Like the Mac and cheese ordered by my targeted would-be diner.
The girl held her abdomen as if in pain and said, "I'm hungry."
I found the waiter and urged him to do something about the kids' meals and the Mac and cheese I'd specifically requested be brought faster than anything else. He agreed.
Adults began receiving their appetizers, mine included, and I went in search of the waiter. I asked about the Mac and cheese. He said they were moving as fast as possible and he was doing everything he could.
The adults received their entrées. I tried to work with the little one about whom I was worried, and she was insensible. She was hungry past reason. She wept – literally wept.
I went asking after a manager, and found someone willing to enter the kitchen and ask for the Mac and cheese. Within a minute, Mac and cheese sat before all the kids who'd ordered it. One parent reported that from their arrival to their kids' receipt of food took an hour and forty minutes.
Then, I reached for my tea.The big steak in the foreground of the photo on the left was well-favored, but I'd ordered it medium and it was delivered mostly well-done and therefore considerable drier in the middle than I am accustomed to eating and lacked the texture I expect in a quality steak. Despite the definitely-quality-steak price of the thing, I was starved and unwilling to wait again for food, and entirely unwilling to take up another customer service issue with the staff. The stress of telling people they've botched things when you are trying to have a sit-down dinner with your family and the kids' teachers is just not my idea of a good evening.
After a couple (2) of tea refills, they stopped sending anyone near enough to notice, or even to have their attention attracted to the state of my tea glass. So look carefully at the picture, paying special attention to the empty glass with the ice, lemon, and tea spoon: if you go to Ruggles, this will happen to you!
Eventually, dinner was completed around 8PM, and the kids needed to go home. Unfortunately, Ruggles doesn't help people get home with any more seal than they help people get food or iced tea. Those families that came in two cars split up: the bill was so slow coming that a paying adult was left to wait while the families took off for home and bed.
It took an hour from finishing dinner to see a bill. A dinner that "started" at 6PM didn't let me back to my car ($4 to valet, and no apparent parking anyplace) until after nine o'clock.
Everyone had pitched in to cover the teachers' bills, so they were together. Everyone else had a one-family bill. Nevertheless, despite the three- and four- and five-person checks, that characterized the room (we went so far as to place name tags on the table so the staff could tell whose bill they were serving), there was a 20% tip added. After an hour waiting, and with kids past sense, I had no possibility of spending time getting justice. The wretched service – one waiter for maybe thirty people who took up the entire upper floor of the restaurant, and not a very attentive waiter at that – wasn't worth 5%, except that I like to make sure the people who actually work get paid. (L's chicken was superb, but you won't want to suffer the rest of the experience to get it.)
By chance, I had a lunch date the next day at the more mainstream-priced Ruggles Café and Bakery in the Village on Rice Boulevard. I ordered a turkey Reuben and iced tea, with fruit substituted for the fried potatoes that are normally served with the sandwich.
The iced tea is self-serve, so you can get all the lemon and sugar and refills you care to pour. There is no tip tacked onto your bill, even when you eat with friends. If you are lucky enough to get a table close to the drink fountain, you can get refills without much hassle.
The picture on the left shows how Ruggles substitutes fruit in favor of fries.
My conclusion is that while there are outstanding elements at Ruggles' associated restaurants, there is no ethic of service at all, and the tea – despite being offered with lemon, a tea spoon, and even sugar in the raw – is a C at the main restaurant for want of service. It is a B+ at the Ruggles Café if you can get a table close enough to the drink fountain to make refills likely. (Otherwise you leave your company repeatedly to get refills, or forgo them, either of which greatly reduces the quality of your experience.)
Between the two, Ruggles Café is the one to visit. It is also vastly cheaper. You can easily get better service nearly anyplace else in town, though. For the price, what you get at Ruggles' main restaurant is awful.
Friday, May 21, 2010
CNAM: 1Q2010
The Chinese recycler and metal distributor China Armco (Ticker:CNAM) recently announced its results for the first quarter of the year. CNAM is another case in which ascertaining the enterprise value requires looking at more than the SEC-reported earnings, and snooping into the sources of reported income and expense.
CNAM's 1Q2010 revenues were up 59% from $5.4 million to $8.6 million compared to 1Q2009. Good, right? CNAM reports non-GAAP earnings of $670,000 or $0.06/sh, well ahead of its non-GAAP earnings of $185,000 or $0.02 per share in the year-ago quarter.
The GAAP earnings (the ones the SEC requires be reported) were only $53,000, or $0.01 per share, down from GAAP earnings of $0.03 per share in the year-ago quarter.
The difference is stark: up a third or down a third? And from how much?
So, what's behind this?
FAS 157.
When CNAM issued stock at $3 in a private offering in 2008 to raise funds to build its new recycling plant, it also issued warrants that could be exercised for shares at $5. As the price dropped in 2009, the value of the warrants under FAS 157 declined, and under GAAP, CNAM recognized "income" from the change in paper value of warrants that CNAM could not exit at a profit but seemed less likely to be exercised. As the price rose in the first quarter of 2010, CNAM was required by FAS 157 to book "losses" associated with value recovery in the same warrants. As CNAM went past $10, investors exercised at $5 and CNAM gained valuable capital with which to increase the size of its business deals.
What investors buy isn't the paper value of warrants a company can't exit, though. Investors buy a future income stream on a diluted-share basis. On that basis – the basis on which investors actually evaluate businesses – CNAM has shone. Net revenues increased 59% – in a quarter in which its recycling plant wasn't fully up and running. Net income (ignoring the warrants) increased 262% over the year-ago quarter. CNAM ended the quarter with over $4m cash, up from less than $750k in the year-ago quarter.
The best news? This growing income stream is in undervalued Chinese currency, the value of which will pop when prices normalize. CNAM is a buy at its current $4 because nobody is bothering to read the details.
CNAM's 1Q2010 revenues were up 59% from $5.4 million to $8.6 million compared to 1Q2009. Good, right? CNAM reports non-GAAP earnings of $670,000 or $0.06/sh, well ahead of its non-GAAP earnings of $185,000 or $0.02 per share in the year-ago quarter.
The GAAP earnings (the ones the SEC requires be reported) were only $53,000, or $0.01 per share, down from GAAP earnings of $0.03 per share in the year-ago quarter.
The difference is stark: up a third or down a third? And from how much?
So, what's behind this?
FAS 157.
When CNAM issued stock at $3 in a private offering in 2008 to raise funds to build its new recycling plant, it also issued warrants that could be exercised for shares at $5. As the price dropped in 2009, the value of the warrants under FAS 157 declined, and under GAAP, CNAM recognized "income" from the change in paper value of warrants that CNAM could not exit at a profit but seemed less likely to be exercised. As the price rose in the first quarter of 2010, CNAM was required by FAS 157 to book "losses" associated with value recovery in the same warrants. As CNAM went past $10, investors exercised at $5 and CNAM gained valuable capital with which to increase the size of its business deals.
What investors buy isn't the paper value of warrants a company can't exit, though. Investors buy a future income stream on a diluted-share basis. On that basis – the basis on which investors actually evaluate businesses – CNAM has shone. Net revenues increased 59% – in a quarter in which its recycling plant wasn't fully up and running. Net income (ignoring the warrants) increased 262% over the year-ago quarter. CNAM ended the quarter with over $4m cash, up from less than $750k in the year-ago quarter.
The best news? This growing income stream is in undervalued Chinese currency, the value of which will pop when prices normalize. CNAM is a buy at its current $4 because nobody is bothering to read the details.
Subscribe to:
Posts (Atom)