melua's bbi restructure

This scenario requires two critical things to happen first:

1. Corporate debt must be reduced dramatically. (The only way that can happen short term is for DBCT to be sold for circa $2.7Bn).
2. A cornerstone investor with large pockets must be willing to inject new equity into BBI.

If the first happens, the company then can go about unlocking the value in BBI. This will not be of any interest to those who do not believe the book values of BBI are a true reflection of the real asset values because a restructure that is beneficial to ALL stake holders can only happen if the NAV right now is a large multiple of the current BBI security price.
On my calculations, the NAV after DBCT sells for $2.7Bn (An “if” at this stage) is circa $2Bn. This is NET of hybrid debt (SPARCS and BEPPA). Throw BEPPA and SPARCS back in (assuming they will be converted via my plan) and we have an NAV of circa $3Bn or roughly $1.15 per BBI security. Now we all know BBI is trading at roughly 7c. That is a massive discrepancy and hence the opportunity.

To recapitalize BBI, they can go down many avenues as other companies have done recently. The following is just one option:
Please be aware that this is all “back of envelope” stuff. People with far more corporate restructuring acumen than me can probably come up with something more sophisticated.

After DBCT sells for $2.7Bn (a big IF I know but bear with me), corporate debt will be reduced to the NGPL amount maturing in June 2013. That equates to US$250M or roughly $300M AUD.
One would suggest that the BBI price would realistically be re-rated back to the 15c-20c mark. Note, it doesn’t really require this to happen for the restructure to work. More important is the willingness of a cornerstone investor and/or institutions to recapitalize BBI with circa $500M cash and be prepared to accept BBI securities at circa 20c (even though the market price may be a tad lower). For this to happen, the new investors must be:
1. confident that the NAV is accurate (give or take 20%).
2. sure the company is “clean”. That means management of the assets must be internalized and all hybrid securities are converted to equity.

If that happens, the next step is conversion.
Currently there are 2.6Bn BBI securities. The new cornerstone investor would be issued 2.5Bn BBI’s at 20c and contribute $500M cash.
The SPARCS and BEPPA would be converted at the same price. 20c. That means SPARCS and BEPPA holders receive 5 for 1. That adds an additional 4.5Bn BBI’s to the register. (120M SPARCS plus 780M BEPPA = 900M bits of paper).
Throw in a 1:2 rights issue for existing BBI security holders and you have another 1.3Bn BBI’s issued and raise an additional $260M. Use that and part of the $500M from the cornerstone investor to clear the NGPL corporate debt.
Where does that leave BBI?
Corporate debt free
Zero hybrid debt
All assets kept except DBCT (DBCT being the catalyst for this restructure)
Number if securities now on issue: 10.9Bn BBI
Working capital of $460M
EBITDA of remaining assets: Circa $900M
Free cash flow generated per annum: $200M
Interest savings of circa $150M per annum (No corporate debt, no hybrid debt).
The NAV would be $3.76Bn ($3Bn prior to this plus $760M new cash)
NAV per BBI security: 34c.

With no corporate debt, management internalized and a change of company name, the market would more than likely price BBI close to NAV (circa 34c).
All free cash could be paid in distributions equating to roughly 2c per BBI. New investors at 20c can then expect a 10% yield on their investment at 20c per BBI.
OK, older investors who paid circa $1+ per BBI take a big haircut although they do have the opportunity to lower their average via the rights issue or on market.

Feel free to pick it to pieces.