Steve --
Do you know any of the terms of the MGRA deal? I have been trying to figure out how to value HNLY, and the MGRA deal is a big missing piece (although not the only missing piece) to the puzzle.
I figure that HNLY, assuming it closed a deal for about 64 percent of MGRA's shares, has somewhere in the vicinity of 13 million MGRA shares.
According to the MGRA "Management Proxy/Information Circular" that was filed in February, 1998, MGRA had 19,737,448 shares outstanding. ( sedar.com is the Canadian SEC's website, which contains this and other filings). 64 percent of this figure is about 12.6 million.
This number is pretty consistent with the number of MGRA shares held by Rocco Magnotta and his wife, Tina. Between the two of them, they had (again according to the Proxy/Info Circular) about 13.3 million shares, of which 397,000 were owned by Rocco indirectly though "1161575 Ontario Inc." If you leave out those 397K shares, you're left with about 12.9 million, or about 65.3 percent of the outstanding shares. Maybe the Magnottas held onto a few of their shares (or sold them separately), or maybe the number outstanding went up a bit, to get the HNLY acquisition to about 64 percent.
In any case, if we use the round number of 13 million (which is actually a little high) for total MGRA shares held by HNLY, we can start to value HNLY. As of now, MGRA shares are trading at 1.05 dollars Canadian. Using a currency conversion website ( oanda.com ), 1.05 Canadian converts (at the interbank rate, which is better than most people can get) to $0.7407 U.S.
13 million shares of MGRA at this price would be worth $9.63 million (leaving aside any control premium, which I personally would view as having little value as of now).
Assuming HNLY (or rather its subsidiary M.A.P.) owns roughly 13 million shares of MGRA outright, it probably would carry the shares on its books at some large percentage of the shares' current market value. It seems to me that, with regard to MGRA, HNLY is in effect a sort of mutual fund. Unless and until MGRA pays dividends, HNLY makes money off of MGRA only in the sense that the MGRA shares appreciate. So, unless HNLY sells off some MGRA shares, I don't see how MGRA can contribute to HNLY's cash earnings. (For smebody who likes MGRA, there's a decent argument for buying MGRA and not HNLY.)
HNLY's website says there are 8.088 million HNLY shares outstanding. I have serious doubts about this number, since the MC Technologies, Magra, and investment banking company deals well may have included stock, warrants, convertible debt, or other instruments that make the fully diluted number of shares much higher.
But let's run with the 8.088 million figure for a minute, and round it to 8 million. The approximate $9.6 million market value of 64 percent of MGRA would suggest that each HNLY share owns about $1.20 worth of MGRA.
BUT this calculation does not take into account what HNLY paid for its MGRA shares. Since I don't know the terms of the deal, I can't take these calculations any further without guessing.
If we guess that HNLY paid cash (meaning, I suspect, a note) for the MGRA shares, and the payment was about equal to the current market price of MGRA, this would suggest that HNLY took on about $9.6 million in debt. Put another way, HNLY would hold $9.6 million worth of MGRA shares -- but owe the same amount in debt. The net book value/shareholders' equity effect would be, at the moment, zero (leaving aside any interest on the debt).
Let's instead guess that HNLY paid for the MGRA shares with stock. If HNLY paid roughly $9.6 million worth of stock to Mr. and Mrs. Magnotta, the number of shares would of course depend on the value put on the HNLY shares on the date of the deal. If HNLY stock was valued at 40 cents for the deal, the Magnottas would get 24 million shares. At a quarter per HNLY share, they would get 38.4 million shares. At 20 cents, it would be 48 million shares.
If HNLY started with 8 million shares and issued another 24 million to the Magnottas, we now would need to divide the $9.6 million market value of the MGRA interest by 32 million shares -- meaning that the MGRA interest would be worth about 30 cents per HNLY share. If HNLY issued 48 million shares to the Magnottas, each of the resulting 56 million HNLY share would own roughly 17 cents worth of MGRA stock. In any event, the Magnottas would essentially own HNLY.
I don't know whether any of these scenarios reflects the actual MGRA deal. But I take three points away from this analysis.
First, in order to buy a controlling interest in MGRA, HNLY will have had to give up a lot. Unless the Magnottas got badly outbargained, they should have gotten a lot of money and/or stock in return for their MGRA shares. Indeed, if HNLY paid a premium for control of MGRA, it may have paid more for the MGRA shares than they are worth on the open market -- meaning that each HNLY share may have gained more debt or dilution than the value of MGRA stock it received in return.
Second, if HNLY paid for MGRA with debt, the terms of the debt are critical. Since MGRA won't put any cash into HNLY's pocket unless HNLY sells some MGRA shares or MGRA issues dividends, any interest or principal payments that come due in the near future will have to come from cash generated by HNLY. Either that, or perhaps interest on the debt will continue to mount until HNLY can start paying it off. This could be a big future drain on HNLY, or could leave HNLY management inclined to push prematurely for dividends from MGRA to get cash.
Third, HNLY's claimed "book value" is looking less and less credible. MGRA may contribute an asset value of perhaps $1.20 per HNLY share (using the dubious 8 million share figure from HNLY's website), but the debt or dilution involved in the deal will knock the contribution of MGRA to HNLY shareholders' equity way down, and perhaps even into negative territory.
HNLY's other subsidiaries are M.A.P. (which I think is probably just a shell) and MC Technologies. Neither one of these seems to be anywhere near as big as MGRA. The idea of a $2.28 book value that represents anything remotely tangible, therefore, is hard to accept.
HNLY, before it had the name HNLY, was Advent Technologies and then NewReach. Advent certainly carried a lot of intangibles on its books, and perhaps NewReach added more. My guess is that HNLY's "book value" largely reflects goodwill and other intangibles which reflect how much Advent and perhaps NRCI paid in excess of the asset value of the companies they acquired.
If, as I suspect, HNLY's book value contains a lot of intangibles, one of two things is likely to happen. One possibility is that HNLY continues to amortize these intangibles over time, creating a (noncash) drag on earnings as the intangible book value slowly declines. A second possibility is that HNLY writes down these intangibles (many of which may come from businesses that HNLY no longer owns or runs), reducing future amortization but sharply reducing this "book value" figure.
From an accounting standpoint, there may be nothing wrong either with a book value loaded with intangibles or with a future write-down, but it doesn't seem candid to toss around the "book value" figure as if it's really a meaningful guide to value.
It would be nice if HNLY would get into the habit of announcing the general terms of its deals when it makes them. Shareholders shouldn't have to guess about things that are this important to the valuation of the company.
Any thoughts about valuation?
-- Jim |
