Clearly you wouldn't touch it without the scheme in the background. As long as that lives banking covenants won't matter. All of the matters you raise are bundled up in the $74m uncollected working capital. Goodwill issues were obviously considered by RCR in coming to their 38c valuation (based on $76m net debt). The only thing to stop this transaction will be the quality of future contracts work - everything in the past, as horrifying as it is, is catered for by the massive write off of half the $74m and the other provisions announced a few months back. RCR seem happy enough with the goodwill values. If you do the sums they are basically offering to pay the forecast end of FY13 book value without any goodwill write downs. Even at the low end of FY14 forecasts and pre-synergies that still allows them a very nice return on equity and reasonable return on capital when compared to the 4% they are currently earning on cash to be deployed for part of the purchase and the relatively cheap (compared to NFK) borrowing costs for the rest.
No doubt there is some risk RCR will look at at the basis for the FY14 forecasts and decide they are too ambitious. but they will likely back themselves to knock a few things into shape and with the low-ish purchase price and potential synergies, back their better management to make it a good deal. Certainly the RCR share price suggests their shareholders are comfortable with it all. As I say, there would need to be a lot wrong with the FY14 forecasts before this starts to look like a bad deal for RCR and they start to hesitate.
Its a bit of a binary proposition so no doubt you need some big ones to put a lot of cash in at 50c - but the risk weighted odds are heavily in favour i reckon. 12-18c upside vs a 20-25c downside, but far far more likely that punters will collect on this one than miss out.
Ps. I understand the Hastie analogy but things aren't that grim. If they collect the low end of their estimate of the working capital within a few months they will have net debt of around $40m vs equity of around $90m or gearing (ND/ND+E) of just over 30%. This equity figure doesnt include any write down of goodwill but if you accept their estimate of $25-30m FY14 ebit then there is no need for any write down when looked at from a group perspective - entirely reasonable return on equity and sufficient to justify the goodwill (as long as this doesn't include more dodgy claims/amendments). The market will nonetheless smash the price down to a FY14 PE of 3 or 4 if the RCR deal falls through (25-35c) simply due to loss of trust in management and possibility of a capital raising.
NFK Price at posting:
50.0¢ Sentiment: ST Buy Disclosure: Held
