UK Investment SIPP blog for the longer term

Note: I am not shorting this in my SIPP account. 

Erinaceous

Overview

Debts of 170 million @ 10% interest per year - £17 million in interest.  6 months to 30 june 07 - revenue £116.5 - pre tax loss £3.9 million.

The company recently announced that it may have problems continuing as a going concern and indicated it may break up the company and consider deals. Now Vincent Tchenguiz is sniffing around the shares. What would he offer and for what?

Eranaceous is losing money. But are the problems just short term or potentially lethal for the shareholder? Lets do some digging.

For example, would Vincent Tchenguiz offer 66p per share for the whole company, a 11 pence premium from the current price level. This would value the co at 72 Million. What would he get for his money?

If he took over the whole company and was able to refinance the debt at 6.75 then interest would cost 11.47 million per year. With my estimation on the very high side profit levels - say 20 million, it would make 8.5 mill profit a year. On a multiple of 8 the company could be worth 68 million - 10 million over where it is now - and that is if the company is performing brilliantly. However, with £3.9 mill 1st half loss already, if they could return a second half 4.25 profit (high est) if refinanced, the company would just turn a profit of 0.575 million - not a lot. If this happened a valuation is difficult but lets try anyway - say £8 mill future profit at 8 to 15 times multiple would be approx £64 - £120 million come next results! Therefore he would pay £72 million for a £64 to £120 million pound company in 7 months if it performed excellently. Unlikely? Yes. The company is in tatters. Why not just cherry pick and buy the underlying businesses and not the debt.

More likely - Firesale

I think that there will be a fire sale of assets to get cash and reduce debt. So they may sell off some good parts of the business.

With all that taken into account - they may sell a divison -eg. commercial property for (very high estimate) 15 times profit = £60 million. This would reduce the debt to £110 but would also be like throwing out the baby with the bathwater. Erinaceous would earn peanuts, if anything, this year, but could use the cash to continue. However, I think the banks would want their cash first.

I cannot see this company trading out of this situation, and a fire sale will not benefit the shareholders. Erinaceous could sell the assets without the debt for around £150 mill max - then the shareholders will end up with a shell company with 20 million of debt. Absolutely worthless.

Also, are potential bidders just wanting knowledge of Erinaceous’s future property transactions with no interest in making an offer? Or do they want to poach key people? Or are they shorting the stock and benefiting when they pull out and declare they have no interest in the company.

Either way, the shareholder is shafted. If I don’t make money on this short I will eat my hat. I am shorting tomorrow at hopefully 55p if possible, though I will wait to see if the Tchenguiz news will push the price up first.