bendigo,Agree the stock intrinsically has more value that the...

bendigo,

Agree the stock intrinsically has more value that the current s.p over the long-term, given circa 3.5b in sales and the strong outlook for generics. However, retaining market share in this competitive market place is horrendous to earnings and cash flow.

The economic theory does not look too kindly on sacrificing profit for maintaining market share and Elmo has come out to say that he thinks that is more important in the current environment. Another example of misguided management from a cost accountant. Seriously, just because I bought a certain amount of drugs from one company one year doesn't mean I'll buy the same number of drugs the next year. Just a poor excuse for a bad result. I know a few people working at sigma and i understand morale is not very good and elmo is not well regarded there. Rumour has it that last year the pressure to make sales was so strong that extraordinary terms were being offered and sales reps were aghast at what they were asked to do. Good thing Hooper is coming on board.

Re the requirement for a capital raise. I am only an amateur, but here are the facts:
-$40m must be repaid by 30 September via 'permitted disposals'
-$50m must be repaid by 30 November via 'permitted disposals'
- $300m must be repaid by 18 September 2011 (or, I would imagine, be refinanced if balance sheet allows)
- Interest cover ratios are increasing from 2.5 tims to 3 times after 31 October (on rolling 12 months)
- Gearing ratios are also becoming more onerous (This effectively means asset sales at a discount to book value will be difficult given the impact on gearing)
- net assets of a $1b must be maintained (They have $66m of room and any subsequent impairments will mean a breach)
- Sigma needs to invest a further $13m in the Gateway Pharmacy Finance Facility, which at balance date was $42.8 million. This facility needs to be refinanced by 19 December 2010. In addition margins on this facility have increased, which will impact interest cover.
- There is $520m in the sigma rewards facility, with sigma required to maintain a first loss piece of 10%. In addition this facility has a maturity date of 15 March 2011. In addition the lenders, i.e. Allco have the ability to call the debt and demand repayment within 120 days.
- There is a $100 million Waratah facility which is due to be repaid on 5 Feb 2011.

So you see there is a f&$k load of debt that needs to be dealt with. Imagine the debt/equity ratio, with Sigma Rewards back on balance sheet?

Now, can they trade themselves out of it? Last year net operating cash flow was $19 million and the board has continued to flag difficult trading conditions. Also, with asset sales there will be associated costs and also reduced future earning capacity.

In my view, asset sales will be difficult, the company is not that attractive to Aspen. They will need to raise equity to do the deal so have a look at Aspen's market cap. While it would help the company in the long-term by giving it a large foothold, it will expose Aspen to significant risk... one which they won't want to take lightly. At the indicative bid price, this will raise the company's market cap by around 50%.