I think your analysis of the situation is on the mark - I can't see SWM wanting to make a play at PRT's assets and business until after it has negotiated a new rights agreement (as the new deal will have a negative impact on PRT's free cash flow, TV licence values (which I suspect will be impaired after a new rights deal at the latest) and SP and set the level from which a bid would be judged).
Reading through the ARs recently I suspect if a sale is to happen it would be an asset sale to SWM (with transfer of necessary employees and contracts) rather than a direct bid for the shares. I suspect this because it would reduce the level of influence Gordon can play in the sale discussions and management has mentioned in the FY17 AR it has sufficient unbooked capital losses to offset any tax payable from an asset sale of the TV licences at their current carrying value.
The balance sheet is interesting (which will become more relevant when a bid is forthcoming I suspect rather than an earnings multiple).
* PRT should largely be debt free by FY19 (I think they will sacrifice dividends to keep paying down debt)
* The $17.7m DTL would disappear in an asset sale (per management commentary on FY17 results) leaving few liabilities outside trade creditors
* Land and buildings acquired some time ago are carried at NBV. Maybe management should consider changing the accounting policy to market value given the $1m+ uplift from selling surplus property in Tamworth recently so people have a better understanding of the value of PRT's asset base. The uplift would partly offset the likely impairment impact to the TV licences after the next rights renegotiation
* There should be a franking credit balance of ~$55-60m in FY19 as free cash flow is being directed to debt reduction rather than fully franked dividends. This means a sale to SWM could probably be completely structured so that the sale proceeds flowed to PRT shareholders as a fully franked dividend (providing a 42% uplift to the price paid by SWM) which would be taxed more concessionally for domestic shareholders than a straight purchase of the shares (assuming SWM doesn't make a 100% scrip bid).
The downside risk is that SWM doesn't make a bid in the near term following a rights renegotiation and allows PRT to limp along with little, if any, free cash flow available to distribute to shareholders if GM% gets crunched, opex grows at CPI and maintenance capex returns to levels similar to D&A charges.
Still more work to do but it potentially looks interesting.
PRT Price at posting:
32.0¢ Sentiment: None Disclosure: Not Held
