Thanks Clownbuck. Glad to see others were interested in this one too. I spent a solid week pouring over how great a long this could be after I saw the price fall from $25 --> $7 at year-end and a potential housing recovery providing wind in our sails. Fortunately for my portfolio, I rejected my hypothesis (Note: it's only Scene 1 of the play, so I'm happy to be wrong here and join the longs for Scene 2 if ESL/Fairholme re-equitize the Company).
It's funny... the market *so clearly* got the spin-off price dramatically wrong. In the Company's own communication with the SEC prior to the spin, SHLD straight up told everybody that the OSH Common shares were worth $5-9/sh! I'll send you the EDGAR link if you're interested. And that was when EBITDA was $45m, not the $30m it is today. Nevermind the Form 10 also told us Run-Rate EBITDA would be lower by the following amounts:
- $3-4m = Impact of being a public company
- $2-4m = Impact of not having Sears' buying power
- $4-5m = Impact of Mgmt's Annual Incentive Payments (some of which is non-cash)
Why did OSH start off at a valuation of $25/sh? Who knows... dreamers, that's who. Jim Chanos has said it time and time again -- investors, especially institutional investors who have the luxury (read: crutch) of relying on Wall Street analyst research, don't read the SEC filings first. For god's sake, Morningstar screwed up the spin-off math so badly that they said this was worth ~$150/sh (that's a $1bn market cap for a Company with $45m of EBITDA and ~$10m of FCF).
You're absolutely right that the CEO/CFO are aligned with Eddie. They were hired by him and the hiring package is for Mark (CEO) to get 3% of the equity. I figure Chris (CFO) stands to get at least 1%. Since they have basically 0% ownership today as most of the equity awards are merit-based (and so much of it was struck at an idiotic $15/sh price due to the spin-off price euphoria), they could give two hoots about filing for bankruptcy / restructuring somehow that preserves their economics and wipes off a gigantic slug of debt. Mark and Chris seem like nice guys, but I've learned to always always always follow the money, and in this case, the money says to do something that eliminates a bunch of debt at the expense of the current OSH shareholders. At any rate, it'll be interesting to see how the CEO/CFO align themselves with Equity vs. Creditors, because (1) unlike other potential BK situations, the Creditors are (mostly) just a bunch of CLOs and Ares... neither of which are the types to be throwing large ownership % incentives in return for filing for bankruptcy, and (2) they were hired by Equity, so you'd think there allegiance would begin & end with them.
The one thing I keep scratching my head about is this -- most companies bordering on insolvency aren't making dramatic expansion plans (to wit, the 2 brand new stores in Portland, Oregon and this one in San Francisco -- socketsite.com ). There's a real business model here... it just remains to be seen who will benefit from it.
P.S. Have you guys ever seen an overlevered spin-off file for bankruptcy within ~14 months of the spin? Usually the ParentCo will try to do a primary capital raise (IPO) then spin the remaining 80% to shareholders if it's this levered. Perhaps they tried to do that and weren't able to garner any interest by prospective IPO investors. Otherwise I'm in agreement with you Clownbuck -- this one was doomed from the start. |
