I am going to go out on a limb here and vary the above scenario adopting a "doomsday" approach.
The key assumption I will vary is the price at which units are allocated to the deep value investor. Instead I will vary this to be $1000M at 0.5 cents rather than the diluted original 1.33 cents per BBI.
Numbers affected are highlighted in bold and underlined
I am not changing the rather high 7 cents conversion price of BEPPA/SPARCS, this allows for a little more prudence in my numbers. More likely the price would be lower than 5 cents, but leave that as unrecognised upside.
The same upside as noted in the original post exists except I now consider that the following should be added:
a) There will be a non-renounceable rights issue after a reconstruction.
b) The real value to the deep value investor is moving the BBI assets out of BBI into a fund. To do this cleanly they need 100%. So I can see a situation where any investors still in the game after the above has transpired will be bought out at a premium to current market prices.
BBI is now taxing my brain and I am more and more of the view that there is pretty good upside if you bought in below about 10 cents.
Cheers
I think you are just kidding yourself that the investor is going to be so kind to us. Two things you didn't consider are that the investor is most likely going to steal one of our key assets (probably DBCT or NGPL) at below book value and also a private equity investor is never going to accept a deal of this type that doesn't leave him in control of 51%+ of the equity.
These kinds of deals are typically based on a proposed valuation that is a calculation of a distressed EBITDA multiple, not based on net asset values. So here is one typical deal that could happen:
1) All hybrids are converted 10 to 1 (I think the real number will be between 3 and 5 to 1 because if you don't lower the conversion ratio the BBI common are destroyed and will never vote for the deal, but let's use a favorable case for BEPPA and do this with a 10 to 1 conversion). This gives us a new share count of 95.79B
2) Sell DBCT at $2016, which is an EBITDA of 9 against 2010 earnings. That nets us $210M cash over the debt recorded on the books. It would be a crime to sell it at this price, but please everyone stop being optimistic about the asset sales. We have a private equity investor and these people are vultures and they will extract their pound of flesh. Whatever asset we sell, the price is going to be ugly.
3) I took BB's old model which included a distressed EBITDA multiple against 2011 earnings for each asset, and I adapted that with my own more pessimistic numbers. I then took a midpoint of the two estimates. Excluding DBCT (which by hypothesis we have sold), the valuation for the remaining businesses is $7,184M using this midpoint number.
4) We subtract out the adjusted debt, which is now $6,379M ($9.1B - $915M hybrid debt - $1.8B DBCT debt)
5) We add back the net cash on hand which is now $470M ($260M + $210M net from DBCT sale)
6) This gives us a proposed market cap of $1,275M *pre-money*.
7) Assume the investor puts in $700M. This gives us 116.6B new shares and investor takes 54.9% of company. The new value per share is 0.6 cents. Hybrids converting at 10 to 1 are valued at 6 cents.
It would be ordinary in a deal like this for the shares to immediately double in value because of the release of the company from crisis, so 6 cents might quickly trade to 12 cents. But that's hardly a windfall for the BEPPA.
8) Assume the investor puts in $1B. That gives us 348.3B new shares and the investor takes 78.4% of the company. The new value per share is 0.29 cents. Hybrids are worth 2.9 cents at 10 to 1, and trade up to 6 cents as deal nears completion.
At the end of this, we haven't really cleared our problems. We have simply substituted a taskmaster (the banks) for a slave master (the private equity investor). Sure, we avoid Administration, but most of the value we unlock here is for the investor and not for us.
Some things to consider that should temper your optimism:
1) A private equity investor will most likely do this deal with convertible preferred shares that pay out 8% or higher interest. So we just substitute the bank's interest payments with payments to the investor. He takes his common shares much later in the game when he is ready to cash out.
2) In any scenario I could develop, the BBI shares are just worthless. At what point do BBI common investors revolt and flip the finger at BBI and refuse to do the deal, sending the company into Administration?
To save the common and provide BBI some value, the new deal could instead shaft the BEPPA and propose a 3 to 1 or 5 to 1 conversion. At that point do the BEPPA revolt and refuse the deal?
So in my estimation, BBI are screwed, no matter what deal is done or not done.
BEPPA are at best looking at a risk reward that keeps them even in a best case and sends them to $0 in a worst case.
If anyone can invest on terms the new investor is getting, that is probably a sweet deal.
Let's see whether the new investor is actually a white knight and looks for a way to give value to shareholders. You find such an investor in one out of 10 deals of this type. So don't hold your breath waiting for it, but if it does kiss the ground and count your good luck.
For me, this isn't an investment; it's a crap shoot.