The tax issue....I assume you are referring to the DTL from the Liberty debenutures? If so, then this is a Liberty problem and a layer above the structure. While it is a risk the companies are consolidated and file as one block, I find this lower probability for the reasons I gave before.
Thus the $1.3B DTL is not a QVC, Inc problem when they file but the HoldCo Liberty Interactive one. TJ focuses here because he understands taxes and also assumes the LME will have some of this as part of it. I can't get the LME math to work so I move on and focus on where this is likely going which is chapter 11.
As for the shares I never agreed with the thesis the comp plan prevented a bankruptcy - not how it works. These are cash settled RSU's so the fact the executives are being paid right away just tells ones skin wasn't fully in the game. The only way they could actually cancel equity, meaning QVCGA equity, is if they file a prepack/freefall. This is one of the other reasons I see an LME not working as senior holders will want the offset to be with equity in QVC, Inc especially if they're taking haircuts on cash.
If QVC, Inc files chapter 11 the business can continue to operate so it wouldn't necessarily impact the day-to-day in Q4 season. I do see them filing things in the next few days-weeks at most now. The biggest impact will be the funding of working capital as they have used their revolver for this which is now drawn. Ideally they will have inventory on hand to handle this season. QVC itself has $1,305M of capital between their $330M of cash + $975M revolver drawn (not free either). If we assume 20% of this cash is burned in bankruptcy that's only $1,044M left. Interest expense will halt for unsecureds if they file so that's annual freeze of $132.08M which will help - depending on how long this drags. If it's a lengthy chapter 11, >12 months, this cash position will bleed out fast. If the banks DIP though that interest will be paid but just as base the $132.08M is the now unsecured senior debt.
I was adjusting my chapter 11 model for QVC, Inc. I dropped the multiple to 4.5x instead of 5x as I think this is what creditors will roll with and closer to where QVC, Inc is actually at (not QVC Group). Assume 15% bankruptcy costs, 30% dilution, rights/backstops/various other exits costs after, and I will also assume $500M paydown of credit facility and now $1,000M conversion to new equity form facility. This $1,000M does dilute the senior holders but it makes the post organization stronger.
This leaves the new QVC, Inc with $1,400M in new paper and we will go with an interest rate of 9.06%. The nice thing is even with an EBITDA of $900M this drops leverage ratio to 1.56x and puts them on a decent path post reorg. Between no longer upstreaming the dividend to QVC Group ($108M) and interest savings on senior notes + revolver paydown/equity swap there's a total of $289.05M in gross interest savings (will decline as income taxes increase) which is now cash flow in the new org.
The leaner org + cash flows could now make them an attractive acquisition target for new owners as well.
It makes my QVCD returns a little less on just the swap though which has me rethinking a few things, but no adjustments yet.
We are in the waiting game now. No matter what, I agree, there is nothing here for QVCGA and certainly not the 100x gains many are putting their life savings in for.
-Sean |
