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

To: TimbaBear who wrote (15961)	12/27/2002 9:46:52 AM
From: sjemmeri	Read Replies (1) \| Respond to of 78633

Timba, I followed you fine up until this point: '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.' Doesn't a higher estimate of fair value imply a higher warrant strike price and therefore a lower warrant value? Don't you need to apply Black-Scholes or some other option valuing method at this point? steve

To: TimbaBear who wrote (15961)	12/27/2002 11:04:08 AM
From: Don Earl	Read Replies (1) \| Respond to of 78633

Timba, A couple things you missed: Shareholders don't get to vote on the plan. If the warrants are approved, it will be by the class 6 creditors, which I believe are the unsecured creditors. I'll speculate that there isn't much downside to the warrants being approved, as if they are exercised, it puts money back into the creditors pockets, and if they aren't, no big deal. The filing does give the "estimated" total value of the warrants as something between $40-$50 million with a median range of $12.50 each, that would come to about 3.6 million warrants to be distributed to the holders of 44 million shares, or about 1 warrant for each 12 shares. If a person has enough blind faith to accept those numbers, then the stock is worth around a buck a share. Since the "estimate" is a $30 price range for the new common, you're probably looking at something in the neighborhood of a $40 strike on the warrants. In the real world, I don't think you're going to find a market for that many out of the money options, and if there were a market for those options, selling pressure is likely to be intense right out of the gate. I also think it's safe to assume there will be an IPO connected with the company coming out of bankruptcy, and a whole bunch of creditors looking for suckers to take a ton of stock off their hands. I don't think I need to mention what the IPO market has been like for the past few years. I'd be surprised to see the stock priced North of $20, and $17-$18 strikes me as more likely. That would make those options a real long shot in the $2-$3 range even with the long contract period. To put things a little more in perspective, you can currently buy January 05 contracts with a $40 strike on INTC for .95. You don't have to wait for the company to exit bankruptcy. You don't have to see if anyone will approve the conversion of canceled stock into warrants. You don't have to guess if there's a market for the contracts. And, you don't have to guess the market value of the stock. If you want to trade options, there's a lot easier way to do it than jumping blind into OTC stocks in bankrupt companies. I don't think there's anything wrong with looking at cash flow, but isn't that putting the cart before the horse when you're sitting at a table with so many jokers in the deck?