I don't know why some small investors are selling out of this stock, it seems they are not informed and only reacting based on the running commentaries of the afr and the like, who tend to simplify and speculate more than the traders, not surprisingly they too get the call wrong most of the time.
Here are the most likely outcomes for those interested, and there is no bad news whichever way you look at it.
1) A recapitalisation is not a dirty word. The balance sheet will be greatly improved whereby Goldman Sachs will exchange debt for equity, refinance the remaining senior debt at more sustainable rates, rates that will allow distributions (profit) to flow through. They will also bring the troubled tenant NLG into the fold, as they have bought the 140 million debt at a massive discount for about 50 million. Why will they do this? Before we answer this question lets delve further. Keep in mind the assets of RPF alone are around 750 million and Laundy and Woolworths were willing to pay 80 million for NLG including the debt liability associated with it.
So as it stands at the moment Goldman basically owns NLG which will allow it to add it to RPF post recap adding more value, whereby it will be a separate incorporated subsidiary within RPF that will operate the leases and funnel profit back to RPF.
2) Share dilution is not a dirty word. One of the reasons the share price of RPF is so low at the moment, is a combination of uncertainty and small time speculators cutting and running, even though the shares are worth much more than they are trading at. Let?s delve into a hypothetical scenario to explain this point. At the moment RPF has 162 million shares on issue, let?s say that under a recap Goldman will exchange the 39% of debt it bought, bring in NLG without debt, and refinance the remainder of the senior debt at more sensible rates which it will have no trouble doing in exchange for say 70% of the total new entity. This would mean that there would now be about 770 million shares on issue in a highly profitable company on par with the Woolworths ale property group, which currently has a market cap of over 300 million.
Let?s do the math, assuming a market cap of much less, say 250 million in the new RPF. This very conservative scenario would imply a share price of 36 cents per share. In this scenario Goldman would have 175 million dollars in equity (70%) which also gives it 70% of distributions (income from the profit of the operation), also it has most likely hedged its purchase of the debt at a good margin to a third party which it will fund itself at a lower margin because the new capital structure is much more sound and deleveraged which allows it to extract a lower interest rate on the debt from the money market. And finally Goldman will still be earning its interest on the senior debt it will refinance.
So here it is simplified, Goldman spends about 250 million, gets 175 million in equity, earns 70% of distributions (say about 30 million per year) and earns a very tidy interest margin on the refinanced senior debt. It would also have the option through board control in the future to break off and sell a much more expensive and attractive NLG, which with a capital redistribution, 70% would go back in its pockets.
The media have very narrowly talked of share dilution in the context of the largest shareholder which owns about 48% of the current stock, that being suncorp bank. Of course with the aforementioned scenario its 48% stake at current might be reduced to less than 10%, meaning it earns a smaller stake of the distribution (profit). The amount of shares it owns stays the same but it becomes a smaller piece of the pie. I don?t think suncorp would be unhappy even though their influence on the board would diminish along with their share of the distributions because their 10% would still be worth in real dollars, much more than it is now.
There are many successful case studies of recapitalisations, most notably OZ minerals which recapitalised and diluted its shares during the midst of the GFC. Those that held firm profited greatly by holding the stock through its transition. I believe a similar outcome will be achieved in this case with RPF, this is a fundamentally good company with an experienced team dedicated to doing good, restoring profitability, value and growth.
So there you have it folks, all explained and I'm not even a paid reporter. So, for all you small time holders of this stock, including me, sit back, hold your fire and enjoy the ride of capitalism working itself out and restoring value for everyone.
Hopefully we?ll soon find out in the coming week.
RPF Price at posting:
12.0¢ Sentiment: Hold Disclosure: Held