RE:RE:RE:Nice Summary Here Fabozzi wrote: lostcauses wrote:
Thanks Fabozzi for the link, nice write-up.
Which one do you think is the most likely to happen ?
- 1 - Maybe SIR goes bankrupt. This probably isn’t great for SRV unitholders, at the very least it is another undetermined amount of time without receiving distributions.
- 2 - Maybe SIR realizes it isn’t going to be able to steal SRV and raises its bid. SIR is the buyer who can bid the most – SIR eliminates half its debt, deferred interest and royalties, and future royalties by acquiring SRV – and can easily pay a lot more and still be laughing.
- 3 - Maybe this unnamed buyer decides to buy SIR outright, and SRV finds itself with a stronger operating partner.
- 4 - Maybe SIR is able to wait out a vaccine and things just carry on. This would also would likely lead to a rerating.
I think 2 or 4 are the most likely to happen.
Logically 2 makes the most sense. Perhaps the biggest impediment now is how much of a bump in price SIR would have to make in order to get something done.....It would make the initial offer very clearly opportunistic and reflect poorly on them in my opinion. I think 1 is unlikely as there is interest in the sector as longer-term focused investors look past the pandemic. Let's remember that SIR has indicated they received funding for their initial proposal so if it's 1) bank funding (which i think is unlikely) then that reduces the possiblity of bankruptcy as I'd presume funding would be available without the offer going through or 2) private equity type funding with equity upside that sees a very cheap asset and are confident of the longer-term outlook for SIR.
Full disclosure, I wrote that blog post. I agree it's unlikely SIR Corp goes bankrupt, but I don't think it's out of the question. If you add the deferred royalties, deferred interest, and deferred rent to the debt total, SIR's debt is like 10x 2019's earnings before interest and taxes, pretty high. SIR realizes it is just kicking the can down the road, every month more interest, royalties, and rent get deferred and the liability builds up.
SIR's financing most likely was equity fianncing, but it could have possibly been bank financing. Think about it, as a bank you'd be loaning SIR $30 million and SIR wipes out a $40 million loan, plus a royalty, plus the deferred royalties and interest. SIR's balance sheet, even if it was debt financing, gets infinitely better by taking a loan to buy SRV.
I also think that any financing SIR Corp had in place probably did depend on a deal, for the same reason. If you were investing in a restaurant company and they say "We're going to use the proceeds to buy out this loan below par AND get rid of this big royalty we have to pay", you would jump at the chance to invest in SIR. Vs SIR saying "if you invest in us we will have to use the money to pay off our deferred rent, our deferred interest, our deferred royalties, and then maybe we can use a bit of the cash to grow".
As an investor, the first use of money is WAY better than the second. To get financing just to pay off all those deferred expenses will be way harder than getting financing to buy SRV.
Again, I don't necessarily think SIR Corp will go bankrupt, but I can see them doing it. My point for including that option was just to show that even if it did happen, SRV is probably still a good investment.