I agree that if they meet the EBITDA hurdles for tranche 3, then the value of the business will be significantly more than the current estimates and so, in that sense, it is not necessary to worry about the tranche 3 liabilities.
However, if that does not eventuate, I think there is still a strong reason for taking the tranche 3 liabilities into account for valuation purposes:
Under the terms of the deferred consideration agreements, Photon cannot pay dividends until the earlier of either the tranche 3 payments being made or the sunset date (September 2018). So if tranche 3 payments are not made, PGA will not be paying dividends for 7 years.
Given that PGA is debt free, accumulating 7 years of free cash without doing anything with it is not realistic. They will either have to resolve the tranche 3 issue or they will be effectively forced to pursue an acquisition strategy over the medium term. Either option is a negative in terms of valuation.
PGA Price at posting:
$1.15 Sentiment: LT Buy Disclosure: Held
