RE:RE:RE:correct me if I am wrongrad10 wrote: meetoo1600 wrote: daveinmiss, as I have said earlier, there is a wide range of possibility within the range of reasonable outcomes. One factor that will be taken into consideration by those negotiating is that, even if the cancelled debt gets 97.5% of the company, it will serve those debtholders no good if the shares are worth only $0.01 or any amount close to that. After restructuring, their interest will suddenly turn, and they will want the stock price to be as high as possible.
Then there is the likelihood that they will want to keep the Nasdaq listing, in which case they have to ensure a share price of at least US$1.00. Nasdaq may give them time to recover to that, but they would have to apply for that, and rarely is more than one year given. So they will likely want the deal to result in a share price of at least US$1.00. Of course, there is the possibility that they will let the Nasdaq listing lapse, and simply trade on the TSX, but I tend to doubt that they will do so.
The thing that most people are missing is that, while historical management made some stupid and, probably corrupt, decisions, with the result that the company is laden with debt, the moment that a big chunk of that debt is removed, it becomes a substantially cash-flow positive going concern, with revenue in excess of $600MM, hundreds of employees, mature manufacturing and distribution arrangements, all in an environment where generics will continue to play a significant role in healthcare worldwide. They just have to neutralize the idiocy of the past, and the restructuring will do that.
If you go into the analytics, and look at industry norms, a generic pharmaceutical company with $300MM+ in positive cashflow and book value of over $600MM, is worth a lot of money, possibly as much as $3B, although the multiples for this company would likely be discounted for awhile in light of its horrible history. But that the resulting entity, after restructuring, minus $2B in debt, would be worth $1.5B or more, is certainly not out of the question. In fact, that value would be low using industry norms.
If one can accept a post-restructuring value of $1.5B, then the only question that remains is how much of the emerging entity will be owned by the pre-restructuring common equity. If it is to be only 2.5%, then they will have to create a total about 2,051,800,000 shares, with the result that each share should trade at $0.73, with that number going up as retained earnings start to build and the past misdeeds are forgotten. On the other hand, if existing common shareholders retain 15% of the equity after restructuring, then they only have to create 341,866,666 shares, with the result that shares should be worth and trade at $4.38 and climb from there.
There is no CBCA restructuring case where the pre-restructuring shareholders retained less than 2.5% of the equity post restructuring. On the other hand, there are quite a few where they retained considerably more. In the case of Yellow Media, it was 17.5%, If it turns out to be the same percentage in the case of CXR, the stock could quickly rise to $5.12 per share and slowly climb from there.
I do not believe that the examples that I have provided above represent the full range of options. The result could be better or worse for existing common shareholders, but it is not because my numbers or analysis is faulty. It is because, historically, these people have not been honest. It took them three quarters to correct asset values that should never have been there in the first place. It's not that the subject drugs, i.e., Donnatal, Plaquenil, etc., have lost value. It is that they never had the values the company (and its auditors, it should be noted) ascribed to them. Those numbers were tantamount to fraud. They were based on hugely jacked up pricing, (and possibly industry collusion), not increased sales volume, demand, or anything like that. It was stupid, but it gave Thompson and Kupinsky the opportunity to pump and dump their stock before the charade was no longer sustainable. As long as current management have come clean, and as long as they show reasonable respect for existing common shareholders, my analysis should hold. It is just pure arithmetic, based on conservative multiples.
But it is not clear that management has come clean, or that it will show reasonable respect for the existing common shareholders. And that is where the risk resides.
Good post Meetoo - I had front row seats at the yellow media restructuring and I am deeply indebted to the ineptitude of Marc Tellier - he is now a McKinsey Consultant which horrifies me! My McKinsey buddies are all absolutely the cream of the crop - I am scratching my head as to how Mr Tellier even got an interview there. There must be something about the initials MT when it comes to Canadian Corporate douchebaggery!
Don't mean to nitpick - but it was shareholders / preferred holders AND unsecured debenture holders COMBINED that retained a high teens percentage of the restructured company. The deal only went through after a significant sweetener was thrown to the debenture holders at the 11th hour. Personally I would have been happy to let it go to CCAA - would have fared marginally better.
Mid term note holders who picked up notes at 40 to 50 cents on the dollar scored the big win with the yellow restructuring. The other big winner was debenture holders who scooped up after the interest default announcement - having called the Tellier bluff.
Interesting times ahead - sit back get the popcorn and enjoy the fireworks.
You piqued my curiosity, so I spent some time today studying the Yellow Media case. The pre-restructuring common equity in that case retained 9.174% of the company post-retructuring. If that were to happen with CXR, it would suit me just fine; actually more than fine. I would be elated. Using a conservative post-restructuring value of $1,500,000,000, the stock would immediately jump to just above $2.63. That would give me a very nice gain. But, more importantly, in the year following the restructuring, Y.TO's stock price tripled, as the debt-holders now shareholders started strategically pumping and unloading their stock. This too will happen with CXR. Of course, Y.To's stock price did not sustain, although it lingers today as a going concern. But that's because, fundamentally, its franchise (business) is not a good one.
Now hear me on this: Fundamentally, CXR's business is not only a good one, it's a great one, as are the businesses of most generic pharmaceutical companies when run properly. In that regard, it must not be subjected to the insanity introduced before, and mostly, during the period of Cinven's ownership. I am talking about the jacking up of prices by as much as 6,000% and possible collusion with other market players. Cinven's plan, excellently executed, was to use the new-found revenues to present a exciting story that would allow it to unload the companies that it had aggregated under what is now the Concordia banner to some unsuspecting buyer at a ridiculous price. Thompson and his gang were only too pleased to oblige, borrowing most of the money to do it. I am not convinced that Thompson and friends were as stupid as the record makes them out to be. I think that they knew that they were overpaying, but they didn't care. They needed a big transaction to put into their Alberta Capital Pool company in order to creat a period of hype and irrational exuberance, during which time they unloaded their shares (in Thompson's case through questionable means) before anyone could really see what was really happening.
There are too many eyes, governmental and otherwise, on the generics pharmaceutical industry for CXR to continue in that mode post-restructuring, and the company does not have to in order to be a successful going concern. And I am willing to bet, dollars to donuts, that, 10 years from now, the company will still be around and doing fine. Perhaps it will have merged into or have been acquired by another entity, but it will be as the result of an opportunity, and not as a result of stresses on the business, financial or otherwise.