For Those Who Care About FundamentalsI am reposting my analysis of the company's liquidity prospects for those who care to read about fundamentals rather than just noise and technicals. The current share price is not indicative of an imminent insolvency risk in my humble opinion. I invite everyone to do their own due diligence and research to vet my numbers.
The biggest concern about this company is that they will be insolvent in the near future. I beleive that is complete hogwash. At the end of Q2, the company announced they had $145M in cash on hand and a $200M undrawn revolver. $60M of the revolver can be drawn without the company having to meet any covenants whatsoever.
Based on the midpoint of the Company's revised guidance, they will generate an additional $242M of EBITDA in H2. Interest during H2 on the $3.2B debt (excluding Cinven earn out) is going to be $120M, The Cinven earn-out is due this year, although half can be deferred to next year by September 30th, and is now valued at about $192M USD based on the current 1.33 exchnage rate of USD to GBP. The earn-out was set in GBP at 144M. Now let's calculate the 2016 year-end cash balance based on all of the above and assuming full payment of Cinven earn out before year end.
$145 (cash on hand) + $242 (mid-point of EBITDA guidance for H2)- $120M ( 6 months interest on $3.2B of long term debt at a weighted average rate of 7.5% even though company disclosed that rate to be 7.25%)- $190M (Cinven earn-out)=$77M. I beleive H2 principal payments are in the range of $10M which will leave the company with an approximate $67M cash on hand cushion before it is required to draw on the revolver bearing in mind there are no covenants to meet to begin drawing on the first $60M of the revolver so the company would have to miss on their EBITDA guidance by 50% before there would be any potential concerns about liquidity over the next few months. Again, they can defer half of the earn-out if they forsee it getting too close by year-end.
Once Cinven is paid its earn out and assuming absolutely no growth for 2017 despite all of the product launches in the pipeline, the company should be generating annual cash in excess of $200M. Now the naysayers will tell you that the North American business is a mess and that there is very little value there. They are partially right. There were big writedowns in Q2 and Donnatal is experiencing market erosion so that is why I'm assuming no growth in 2017 as I think the North American business will continue to be challenged while the UK business should experince high single digit growth. Even if the North American business falters more than the UK buiness grows, it would have to virtually collapse accross the board to have $200M of EBITDA disappear in 2017. I think that is almost impossible. All that to say, insolvency is not a real risk in the forseeable future."