SGH 0.00% 54.5¢ slater & gordon limited

This again!! I know you're just winding me up - ha ha ha very...

  1. 417 Posts.
    lightbulb Created with Sketch. 3
    This again!! I know you're just winding me up - ha ha ha very funny.. we've been through this rigmarole before - the $3 per share is your number - not mine - I just hit the calculator buttons! Don't come crying to me when it does not materialise (hint: it won't!!)

    And even if the debt holders accepted $3 per share valuation based on discounted cash flow analysis - that doesn't mean that this is the price that a debt-for-equity deal would be done at.

    Think about it for a moment... why would someone give up $1 in risk-free debt paying 5% interest in exchange for $1 in risky equity that relies on forecast revenue and margin figures to deliver a return.

    This is why there is always a risk premium factored into a debt-for-equity exchange.

    The "risk free" factor is 4x (for an ASX300 index fund) - so at the very least, you would be discounting by 4x - so that brings the $3 down to $0.75. SGH may attract a different risk premium - I'm not sure they are quite as "safe" a bet as an ASX300 index fund - they are certainly not SAFER than an ASX-300 fund - so 4x feels like a perfectly reasonable (some might say optimistic) assumption to work on.

    Now - you can "respectfully disagree" with the calculation all you like - however there is very little "guesswork" involved. All of the figures for amount of debt, interest rate, current shares on issue etc. are drawn from SGH's reported financials. If you think they are wrong - point out where.

    The inputs (assumptions) are revenue, margin, risk-weighting and amount of debt to swap - everything else is simply maths - and I even provide the formulas. If you think the formula or calculations are wrong - again just point out where. I'm happy to correct any errors.

    The figures I have used for revenue and margin are based on SGH's H1 2017 reported revenue uplifted to a full year figure (=$680M which I rounded up to $700M). Margin at 10% would be a miraculous achievement for SGH on their past margins performance (which is a FAR more accurate indicator than a survey of loosely relevant businesses in case you're thinking of waving that Crowe Horwath report around again).

    They owe $810M and have several times spoken about getting back to a "solvent footing". Is $200M enough debt to swap to achieve this? $300M? $500M?

    Based on the assumptions you can come up with quite different outcomes, the question really is how valid / likely are the assumptions. After you run multiple what-if scenarios and weight the likelihood of each outcome (based on the likelihood of the underlying assumptions) you will end up with a bell-curve of possible outcomes - and the most likely outcomes for D4E come in at under 10c for the majority chunk of the equity.

    Now - as I said above - that's not to say that the debt holders may not make a more generous offer in order to get the recap deal over the line. But "more generous" might add a few more cents - it's not going to turn into a $3 per share offer!

    Why would you sell your share for $0.09?

    You won't sell your share - you will hold that share tightly through the entire debt-for-equity recapitalisation saga, proclaiming loudly that no-one will be getting your share for $0.09 (or $0.05 or whatever the number is)... encouraging others to join you in fighting the horribly unfair proposal to shareholders to exchange several hundred million dollars in debt for 90%+ of a company that the market currently values at less than $40M.

    And after the dust settles and the recap is done - guess what... - you just MAY discover that holding on was a good decision - and that without the crippling debt burden, and a revamped board and management team, SGH starts to turn around and the market cap starts to reflect this improvement. The climb up will be slow with so many more shares on issue - and may start at a somewhat lower point than the current SP - but you and other holders may just come out of it ok. No guarantees - but hedge funds are pretty good (read: ruthless!) at the turnaround game. This is also why I think there may be a good opportunity to get in AFTER the recap - for now I will continue to wait and see.


    The Watchstone documents are fascinating - certainly does look like some intentional deception happened there - though I equally see an appalling lack of due care and diligence on the part of the SGH team evaluating and negotiating the deal. "Trust us!" is hardly the basis on which I'd be cavalierly handing over $1B of other people's money that had been entrusted to me - very poor stewardship in my opinion.

    Irrespective - whilst Watchstone is an interesting development - it's still hard to see it being resolved quickly - and even if it is found 100% in SGH's favour - hard to see them actually recovering the money. Insurance won't cover fraud and Watchstone don't have the cash any more. There may be a case for it being declared an "improper dividend" under UK company law - but clawing it back I expect would be both time-consuming and expensive. I can't see them recovering it.

    It MAY prove a mechanism for unlocking the escrow - and MAY provide some protection against the CA's currently facing SGH - so it may have value - but I don't expect that value to be 637M pounds turning up in SGH's bank account!

    SGH may also end up owning the remaining assets of WTG - not sure this would necessarily be a good thing though. They had enough trouble integrating another law firm - they would make a right mess of managing a healthcare technology conglomerate or whatever else is left in WTG!

    Finally... to the shorters
    PLEASE can the rest of the shorters close their position so @SWC will stop banging on about them. Honestly - we're now talking about 5M shares out of a total of 352M - it's hardly worth mentioning, surely??

    They were in - they got out... they must know something that you don't know... absolutely no arguments from me on that point... everyone gets it and we all agree - now will you please change to a new record??
 
watchlist Created with Sketch. Add SGH (ASX) to my watchlist

Currently unlisted public company.

arrow-down-2 Created with Sketch. arrow-down-2 Created with Sketch.