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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Don Earl who wrote (15960)	12/27/2002 8:30:30 AM
From: TimbaBear	Read Replies (2) \| Respond to of 78633

Don Earl I do agree with you that the shareholder's place at the table of bankruptcy proceedings needs to be improved. Especially for those situations where liquidation is not a likely outcome. While your use of it probably didn't have any positive connotations, I understand that pond scum is alleged to have some beneficial uses! :~) My first post to this on the subject of ACKHQ as a possible coming-out-of-bankruptcy play was conceptual in its framework. Now I'll put a few numbers together. Some Assumptions I'm making: 1). "New Common" shares will be issued for the emerging from bankruptcy company and they will be somewhere between 60 million shares on the low end and 70 million on the high end. 2). Warrants will be issued to existing shareholders to partially compensate them for their equity interest and these warrants will be the total compensation to the existing shareholders. 3). The number of warrants issued will be 5% of the "New Common" shares. 4). The number of existing shares of the bankrupt company is 40.7 million shares. 5). The existing cash flow of the company at the existing number of shares is $1.70/share. Some manipulations of numbers using the above information: 5% of 60 million is 3 million new warrants on the low end; 5% of 70 million is 3.5 million new warrrants on the high end. I'll use the lower number of new warrants, as this is the most conservative approach. Therefore, 3 million warrants replaces 40.7 million shares which means a reverse split on the order of 13.567 to 1 [40.7/3.0=13.567] To try and determine what the cash flow would look like for the new situation, I took the current cash flow per share, multiplied it by the current number of shares to get total cash flow and then divided it by the new number of shares to get the cash flow per "New Common". I used 70 million as the number of new shares, because, again, this represents a conservative approach: $1.70 X 40.7 = 69.19M divided by 70 = .988/share cash flow for the New Common. So, what would I pay for .988/share cash flow? Well, I like to get twice the going CD rates for a return for any money I invest in the market. I'm lazy so I still use a 6% rate for CDs, so I'll use 12% as the rate of return I'd like to have. (Again, this is conservative as a lower required rate would yield a higher price that I'd pay). So, I divide .988 by .12 and get that I'd pay no more than $8.23/share for that cash flow. To convert that into today's common, remember that we will be looking at a reverse split of 1 warrant for every 13.567 shares of common we currently hold. So, if I divide 8.23 by 13.567 I get that I should pay no more than .607/share for today's stock. But wait, you say, surely the warrants aren't the same as buying the stock? True enough, and very astute observing fellow value sleuths! The reorg plan that has been filed indicates that the warrants will entitle the holder of the warrants to buy the common at 125% of Fair Value. Since I don't know what they say fair value will be, for this discussion, I'm going to use .607/share as fair value for the current common stock, because that is what it is for me. So, if I divide .607 by 1.25 (125% = 1.25), I get that the current price should be .485/share. It is currently selling at .26/share which is almost half of what I would consider fair value using my conservative approach, which is why I am interested. By the way, although some of the numbers crunching I've done here may be somewhat unconventional, it appears the "professionals" are not nearly as conservative as I am. According to page 82 of the 8K filed with the SEC as the Disclosure Statement (which can be viewed here: sec.gov, Lazard comes up with a value range for the warrants of between $11.10 and $13.90 each. I hope they are more right than I am!! For, if they are, then using the low end of their range: $11.10 divided by 13.567 means that the current stock would be fairly valued (according to their methodology) at $.81/share. By the way, the intended Effective Date is 07/01/03. Since it appears that Armstrong has the support of the litigants, who are the biggest block to be concerned with, and since I believe I read somewhere that the lenders are on board, and since the shareholders have no choice but to vote for the plan and get warrants or vote against the plan and get nothing, I really don't see much reason for this to be delayed.....even if I squint! :~} Timba