Post Reorg Equity - Visteon Revisited (VSTOV)
A few months ago, we did an introductory post the distressed debt situation of Visteon. In the last paragraph of the post, we noted that we believed the company had equity value, but the "J Factor" was a serious concern to potential equity investors. It turns out that pre-reorg equity got the shaft here - why? Making a long story short, bond holders, by getting management on board, the senior lenders on board, and stepping up for a right offering, are stealing the company. Let's look at the post reorg equity of Visteon
In my 8 years on the buy side, in distressed and high yield land, I have never seen a more consensus long than Visteon's when issued equity. Simply put, Visteon's equity to distressed funds is like Apple to Long/Short funds. Many people I know are long it (including myself) - The only thing I can't figure out: who is selling?
All this being said, when everyone is on the same side of the trade, I start to get worried. But let's go back to my valuation analysis, and update for all the new information that has come out of the docket in the past few months. In my opinion, Visteon is quite easily to analyze. I'll do it in steps so it is easier to follow:
- Visteon owns 70% of Halla: At the USD equivalent market cap of ~$2B, gives us $1.4B of value
- Visteon owns 50% of Yanfeng: We will use a 10x multiple, ~$900M of value [note I am seeing analysts put a 12-15x multiple on this business]
- Cash at Exit: $785M
- Added Cash from Warrents: ~$100M
That gets us to $3.2B before adding any value to the US operations. From this we subtract:
- Term Loan: $500m
- Cash at Halla ~$150M (as to not double count)
Which nets us to $2.55B of equity value. Still before US operations. 54M shares outstanding translates to $47/share. Given the $56/share price today, there is a $9/delta or $500M. This is where the market is currently valuing Visteon's US operations.
And that's where we say: "You've got to be kidding me?"
Everyone in the market knows Visteon sandbagged their numbers. Why? Because management is getting a good deal of equity post emergence. But let's say they are right - the 2011 plan calls for $550M of EBITDA. You have to deduct Halla from this which nets you do approximately $300M.
Therefore the market is valuing the US operations at 1.7x. For a company with a net cash position...Here are some 2011E EV/EBITDA comps for your reference: TRW: 4.1x, LEA: 3.9x, Fed Mo: 5.0x, Dana: 3.9x, Tenneco: 4.9x. Let's be conservative and use 4.0x and see where the value gets us to: Add $1.2B to our sum of parts above, gets us to a $70/stock. And I will tell you, I am probably one of the more conservative estimates out there.
I want to know who is selling this stock? Is this side as one-sided as I believe it to be (at $55/share)?
8 comments:
Why does everyone assume that Visteon should get full credit for the Halla stake? Unless they are likely to sell it or the investor is hedging it out, I would say that there needs to be some discount attached to this stake. With a 30% discount, the implied value is ~950mln which would value the US business at ~3x EBITDA which is not that different from its US peers. Not a situation I know well so maybe I am missing something but this has been my knee-jerk reaction to this name every time I have been pitched it.
Visteon runs negative EBIT pretty consistently. It did so in 8 of the last 10 years, and did so last quarter. EBIT is independent of capital structure, so canceling debt doesn't fix it.
A buy recommendation based on EBITDA should justify the choice of EBITDA rather than EBIT in the analysis. If that can't be done, then in the long run, the company is a money pit, and money pits aren't worth much.
I am neither short nor long; I just like to argue. :-)
Yeah - that was exactly my thought too actually. It's hard for me to put any value on it by simply using comparable companies. I realize that it simply works in many scenarios, but it isn't good enough for me because it assumes others are right about the competitors' valuations. (Maybe this is where you'd go long 1 and short another)
Management has a nice chunk of equity now though, so that might be the motivation for them to actually make the business profitable.
When I started my business, the whole idea of it was that I could build the business and then sell it for a multiple of *earnings*. That was such a motivating factor because if the multiple is held constant, you know that by increasing net income by $1 means that you get $8 in a sale that's not too far away... that's a motivating factor. In the moment, you see it as working really hard for a year and then getting paid for the next 8 years of maintaining a constant cost structure. Instead of $1, replacing it with something larger, and you'll see why it finally becomes relevant.
Because the current market valuation already factors in significant future earnings at present value, it's hard for me to see what will motivate the management to push beyond what they're setup for at present time.
Ankit
How did you arrive at outstanding shares of 54 million ? Jun 10-Q states 131 million
There are other non-consolidated subsidiaries that are profitable. Those should be added to the analysis. It magnifies the undervaluation.
The 130 mil shares is for Old Visteon equity. The 54mil in new stock is a little gray since some of those are warrants, but it is very close.
As for historical negative EBIT, the company is likely to perform differently with its revised capital and cost structure. For example, the recent Ford agreement is not in any historicals. Customers may also be more likely to buy from a company not in bk, too.
I would assume the sellers are the former bond holders who do not really want to invest in equity because its not what they do. It is harder to value a company emerging from bankruptcy, too, so I suspect most asset managers don't bother until they have to (ie its in their benchmark).
Does anyone know how long of a time period you have to claim the warrants on new shares if you were an old shareholder? Thanks
reminds me of SPMD which people pitched at 40 and said it was worth over $100...look at paulson's baby now
So what was the final unsecured Bond recovery? I feel like with the given equity and the rights offering which were at an almost 50% discount to post emergence when-issued price it has to be close to 150%. I know the bods were trading near 115.
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