There are lots of rumours surrounding MFS. So let’s focus on the fact and work it out.
Share price:
The share price for MFS was around $4.50 at the beginning of the year.
Share price dropped to $3.55 on 11 Jan due to Centro proposal, (and director received margin call to dump 500,000 shares)
Share price dropped to $0.99 on 18 Jan due to Stella and Financial Services de-merger proposal with $550 recapitalising.
The rapid share price drop on 18 Jan was caused by chain reaction:
First hedge funds and shorters were shorting the stock since CNP disaster.
Then sensitive Investors started to dump the shares when de-merger proposal announced.
The low share price triggered the margin call again, so you got millions of shares were forced to sell in just couple of hours by the margin lenders (including the director’s).
Plus the computer at Barcalys – (one of MFS major shareholders) was issuing sell signal. Some of you may not know, Barcalys runs quant-style funds – that is, with a computer rather than a human deciding when to buy and sell. In result, 10.5 million MFS shares were sold (that is 2.18% of the company).
Then follow by small investors, who were scared, and joined the selling force. At the end of the day, the share price closed at $0.99, that is 69% down in single day.
Large shareholder trades:
Former Director Michael Hiscock sold his 500,000 share due to margin call on 11 Jan, (he still hold around 4.5 million shares after resignation)
Merrill Lynch acquired a net 6,447,373 MFS shares between January 9 and 15, increasing from 35,109,585 shares (7.26%) to 41,556,957 shares (8.59%).
Director Paul Manka sold all his 5 million shares due to margin call on 18 Jan.
Barcalys sold 10.5 million shares on 18 Jan (reason explained about)
Former company's CEO Mr King is still the third-largest shareholder and hold over 32 million (6.85%) MFS shares (As far as I know, he only sold half million shares at the beginning of the year.)
Total Debt position: (correct me if I am wrong)
On MFS 2007 annual report page 43 and page 53, it stated the company total debt was $2.2 Billion. To my understanding, the debt related to Stella was placed in current liability as “liability classified as held for sale” in the report, (see in section “Stella – discontinued”, page 51). So compare to the announcement on 23 Jan, it’s in better position (in term of debt) compared to six months ago. However, most of the media reports said "debt blow out of control" and "debt had nearly quadrupled”, looks like they only consider the “Non-current liabilities” as total debt for the company at that time, I wish the media could provide detail explanation to support their side of the story.
Company Value
MFS’s business excluding the Stella was valued at 1.33 billions at the time when CIY offered merge proposal.
Nobody knows the exact value of Stella, the only thing we know is Stella has lots of quality assets and it was making over $100M EBITDA in last 6 months.
Short Term debt and Cash:
The company need to refinance or repay $220M ($150M Fortress loan + other $65M primarily margin loan facilities without a fixed term) by March. It has $136M cash (Excludes client cash of $48 million held in the travel services business).
Here is my opinion:
CIY must had details study on MFS before they came up the proposal, the valuation was considered undervalued by other financial analysts, as usual, if you are the buyer, you want to pay less, especially in this market condition. Although CIY had withdraw the proposal at the end, but the fundamental value of the company shouldn’t change in just couple days. I can understand the reason behind the withdraw, in fact no one on earth will dire to go ahead after you just saw your target company share price drop 69%. So the valuation is quite correct.
Some articles said: “the company revealed loans previously not disclosed, its short-term debt facilities suddenly blowing out from $150 million to $220 million”. It depends on you how to classify the $65 million margin loan facilities. Some of you may have non fixed term margin loans, and then you know they could be as long term as you willing to pay the interests, of course, if you never meet the margin call. Unfortunately the shares market dropped dramatically this month, so the margin loans suddenly had to be covered in this case. I think the margin loan facilities are some how associated with the investments in HFA, BBC & MFT shares, as the company was reported that, it just sold $43.5 million worth of HFA, BBC & MFT shares due to margin call in last couple of days.
After commonwealth bank rejected the $150 million refinance (assume this is the last source), MFS has to sell off partial Stella to cover all the short-term debt, so let’s work it out. You have $220 million debt, on the other hand, you have $136 million cash + another $43.5 million cash from selling of HFA, BBC & MFT shares. Then you don’t need to sell much of the Stella assets to cover the rest, I believe any sells will be in discount price, but can’t really see it’s a fire-sell situation.
In the past, I had seen many large companies went under after their share price crashed, but also seen many of them returned back even stronger. They all seem to share a common rule – profitability.
MFS is profitable company and marking reliable income cash flow, at lesase, this one is commonly agreed so far.
After sperate the fact and rumours
Is MFS really as bad as the media says?
Will the company change its fundamental value after reply the remaining (debt - cash) short term debt?
Is MFS worth less than half billion $ market cap?
That is up to you to decide ….