$8 per share...? I'll have what you're having...!
Debt was $800M 2 years ago -
however the company's assets were also valued at an additional $1.3Bn - goodwill value which has subsequently been written off down to nothing. Zero.
This is the because the Quindell business was effectively worthless.
Turning the UK operation around is more than a simple re-branding exercise - the UK business numbers are stark testament to this.
Think of it this way... if you borrow $1M to buy a limited edition comic book, and it turns out to be a fake, you still have the $1M debt, but you no longer have the limited edition comic book "asset". i.e. You just lost $1M!
Or if you buy a widget factory for $1M that is supposed to produce widgets for $1 that you can sell for $2 - and you discover that the factory is really an empty shell and the widget machines are broken - and that the market will only pay $1.05 for your widgets (after the widget reform laws were passed) - then your "investment" is practically worthless - but you still have the debt.
Multiply those numbers by about a thousand and this is what SGH management did on behalf of their shareholders!
Since the high point of $8, debt has gone down by about $50M. Asset value has gone down by $1.3Bn. (And they need at least $50M to cover short-term cash requirements, so debt will probably end up back around $800M).
Compounding this are current cash position (parlous), operational cash flow (negative), plus the headwinds facing the business in both Australia and the UK (as acknowledged by management in their recent results announcement). Plus the whole WIP accounting model that was used to justify the SP premium is no longer accepted.
And all of this has exposed the business model itself as pretty fragile - effectively SGH is exposed as just another example of continual "roll-up" acquisitions (G8, ABC Learning, Bond Corp etc.), being used to cover-up underlying cash-flow and profitability problems. Once the music stops, it all falls apart.
So whereto from here for shareholders...?
There will very likely be dilution through a debt-for-equity swap, effectively reducing existing share value by 80% or more (so equivalent to maybe (generously!) $0.05 in today's share price). This is unlikely to remove all of the debt - maybe half - so the company will still need to make interest payments which will weigh against future cash flow.
You are correct in saying that current shareholders will have the opportunity to vote on the D4E swap. What you don't seem ready to accept is that the choice will effectively be to accept some (token) amount for your current shares (through dilution) or get nothing at all.
Anchorage are going to do all they can to protect and maximise their return on their $200M+ investment. So, if shareholders don't accept their offer - no matter how offensive it may be - Anchorage can always simply push the company into administration, break it up and sell off the pieces. As the senior debt holders, they would still make a significant return on their investment - and existing shareholders would get zero.
Given all of this, getting back to $1 per share (pre-dilution equivalent) within the next 2-3 years would take a miracle. And I'm sorry, but $8 per share is just pure fantasy - it's not going to happen. I think htran is probably closer with an estimate of $0.30.
Getting the company to generate positive cash flow is the first step.
I do hope Anchorage take a long-term view on this and work with the board to stabilise the company, offer a debt-for-equity and recapitalisation plan that is tolerable for existing shareholders (possibly offering them the opportunity to tip in some cash to minimise dilution) - and that they put some professional management in place to work on stream-lining the business, possibly offloading some non-core areas to free up cash and pay down debt. I am very interested to see how the deal is structured.
Assuming a positive outcome on the recap plan, this will be good for SGH, their staff and their customers, and will work out very well for Anchorage. Existing shareholders will be diluted - but those who are very patient may also be rewarded eventually - and you sound like a very long term investor, so you're probably happy to wait for 2-3 years for the SP to start to get back towards blue-chip territory.
This does sound like where things are heading - but until plans are actually announced, we are all just investing (or gambling) in the dark. There will be short-term trading opportunities in the mean time - but the risk of being caught out by a trading halt (which may stretch over any T+2 settlement timeframe) make these very risky trades - only for the brave... or foolish.
I suspect better buying opportunities will present after the D4E deal is announced.
So, would I buy any SGH shares for $0.125?
Absolutely not!
