Herb on thestreet.com piles onto WDRY
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Herb on TheStreet: Will Coinmach Take Investors for a Spin?
By Herb Greenberg
Senior Columnist
6/2/98 9:34 AM ET
Is it only a matter of time before Coinmach (WDRY:Nasdaq) puts its investors through the wringer -- again? The country's largest operator of apartment-house washing machines already filed for bankruptcy once -- in 1993 -- after taking on too much debt in a leveraged buyout. Now, with its debt-to-total capital ratio at a balance sheet-busting 86%, some critics think the company is headed down the same, perilous path. "They have no ability to service their debt," alleges short-seller Manuel Asensio, of Asensio & Co.
Indeed, the economics of Coinmach's business raise serious questions. The Long Island-based company has roughly $700 million in debt, or more than double its revenue. That breaks down to around $1,000 per washing machine -- more than triple the debt per machine of its closest (and only public) rival, Mac-Gray (TUC:NYSE). Trouble is, based on Coinmach's sales, its average machine grosses only $600 per year in revenue.
About half must be paid to the manager of the apartment house as rent. That leaves $300. But it costs $100 per year to service the equipment. And based on debt of $1,000, interest could be as high as $100. Then there are advance payments, plus other fees.
That leaves a profit of less than $100 per machine per year -- if that -- not to mention a negative cash flow. Considering that the typical machine has a 10-year life, the bottom line is that in the end Coinmach could wind up earning nothing on each machine.
Which brings us back to Asensio, who says that even at its current price of 24, Coinmach is "grossly overvalued." Other than a brief spike earlier this year, its stock has been dead money for the past 12 months. Yet, despite a history of losses, the company has managed to attract several large mutual fund companies, including Strong Capital, its largest outside holder.
What's the attraction? Officials at Strong declined to comment, but part of the bullish case has been that this is an EBITDA story. You know, earnings before interest, taxes, depreciation and amortization (or, as Fortune's Justin Fox recently wrote, "earnings before everything bad"). When companies can't justify their valuation on traditional methods, they're increasingly trying to turn Wall Street's eyes toward EBITDA, which gives the illusion that depreciating the cost of equipment isn't really an expense.
BT Alex. Brown analyst (and chief cheerleader) Perry Boyle adds: "Maybe it's not a stock, but a bond. It's like a utility," he says, noting that the company leases 20% of the laundry rooms in America. "If somebody wants to do wash, they put the quarters in the machine. The value isn't in the machines but in the laundry rooms they lease."
Perhaps, but "when Coinmach says they've acquired 'x' machines, what you don't know is how many of that 'x' will walk out the door" as leases expire, says one competitor. "All of us serve people who won't renew their leases. The debt is forever; the contracts are mobile."
What's more, according to the competitor, it has become a sellers' market in the laundry biz, which could explain Coinmach's high debt per machine.
Companies that sold for $700 per machine two years ago are now fetching more than $1,000 per machine. "People look at the prices and say, 'I'll never get that again,' so they sell," the competitor adds. And some of those selling have old equipment that will need to be replaced.
What's Coinmach's comment? Beats me. CEO Stephen Kerrigan didn't return several phone calls, over the past few weeks, seeking comment.
And this note: The BT in BT Alex. Brown stands for Bankers Trust -- the same Bankers Trust that (coincidence of coincidences) happens to be Coinmach's lead commercial banker.
According to Coinmach's SEC filings, the company has pledged the entire company, including all of its capital stock and real and personal property, to Bankers Trust. Interestingly, Alex. Brown became the lead underwriter for Coinmach's latest sale of stock. Part of the proceeds from the sale were used to repay Bankers Trust. (Pretty convenient, huh? Where's Glass-Steagall when you need it?) Bankers Trust declined to discuss its relationship with Coinmach. What about a possible conflict between Bankers Trust and Alex. Brown? A BT spokesman points to a disclosure about the relationship in the offering's prospectus. (And you wonder why commercial banks are so eager to acquire investment banks.)
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