The problem I have with the conversion is that it:
1) Creates more distractions for management around possible takeover scenarios as well as associated costs
2) Increases the changes of the company being 'taken under' through Champs time-wasting lowball offers
3) The 20% stake means that current shareholders would have less upside if the company ends up with a market value above 600m. After the results presentation I believe this is more of possibility with new managements plans for the future. I hope to post more on this in the future.
At 600m we would give up 120m of upside. We would also get a 70m in value from less debt and save 5.25m interest yearly which I value at 36m (5.25 x 0.70 tax effect x 10 multiple). This means in my view it results in a loss of 13m in value which may be made up the market valuing the business higher for having a cleaner balance sheet.
Above 600m we are giving away 20% of the cream! So how can it be avoided? One way out would be for the company to raise money through a rights issue to all shareholders for the purpose of repaying the debt. The conversion of the RPS would require approval from shareholders according to ASX rules. If in the event it is rejected then the amount is cash settled. The company probably wouldn't want to pay this using debt as it would get them close to covenant limits. By raising money we get rid of these vampires and get to participate financially in the bright future of this company.
Another alternative is to talk to them and convince them to accept a new deal say 10% converted and rest repaid from operating cash flow.
Looking at all the articles about Champ et al wanting to buy Braken and the question arises - Why do they want it so badly? I think they know its trading at only a fraction of it true worth
BKN Price at posting:
$2.31 Sentiment: Buy Disclosure: Held
