To: Jay Arkay who wrote (497 ) 3/5/1998 10:22:00 PM From: clear.thinker Read Replies (1) | Respond to
Jay, regarding dbco post the ecgof conference call, I'm surprised that you find the investment attractive. (a) Assuming the deal happens, and assuming that ecgof has the money to pay, you will be required to hold your dbco for at least 3.5 years (remember, the earliest the deal will close is July). So the "50%" return you speak of is actually less than 10% on a present value basis. (b) Will the deal actually happen? The press in Canada is speculating to the contrary. Remember that these guys previously announced a deal in February which was never consummated. (Check the accusatory words and tone these guys hurled at each other then.) (c) We agree that the possiblity of ecgof appreciating to 15 in the short or mid term is remote. The CEO (apparently shooting off his mouth to analysts earlier, predicting $1.20 earings/share w/o checking his math, while actually making 10% per share less) hardly inspires confidence. (d) ecgof is highly leveraged, dependant on many cyclical businesses (check their oil and gas industry exposure and see for yourself when 1Q earnings come out)and not the best of credits. How can you be confident that it will have the financial wherewithall to pay the $3 when due? Remember that this debt will be the lowest debt in the capital structure, lower than all of its bank debt and any other debt it issues to finance ongoing acquisitions. It gets repaid only after every other debt gets paid. (e) Perhaps most important of all: again, assuming the deal happens and that there is money to make the periodic interest payments and the final payment on maturity, all of the payments are interst and regular income...not capital gains. So, this deal strips taxpaying investors like us of the 20% capital gains tax advantage, making us pay the full rate instead. Thus, slice another significant chunk of your total return for the tax hit.
