RE:RE:RE:RE:RE:RE:RE:RE:I posted the below on this board on march 3, 2018Yes you're right: deep value are "Net-nets", with the price below working capital or net cash, etc. Since those don't really exist like they did in the 60's, I use "deep value" to mean anything where the stock price is trading at a significant discount to liquidation value vs regular "value" to mean anything that is trading below some measure of intrinsic value (cash flows).
RE Aim and HCG, you're right that they took "work" to value but I think they were pretty straightforward. Maybe more complicated for people not familiar to those industries, but everyone has a different expertise I guess.
Aim was a sum of the parts with several outcomes. You're right it could have gone to zero, or 3 or 5 or 10 etc. The other scenarios offered a very high expected value to compensate for the risk of a run on the points. But at under $2 it was worth every penny of risk IMO.
HCG you just had to look at the assets (mortgages etc) determine what they were worth based on their performance (default ratios etc) subtract the debt etc. They actually sold some mortgages in the middle of everything at fair value so it was obvious the value was there. Of course you had assume the bank of canada and the government wouldn't let them fall etc, but I had confidence in the system and the housing market etc. If they went bankrupt, there was plenty of net value left if they sold the mortgages. Of course it could have come out worse, but at 5-6 bucks and a liquidation value of around $9-15 (my calc), it was basically worth the risk. EQB was an easy buy as well.
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Yes I agree that sum of the parts is a better thing to do here. But would perhaps impossible without the financials of all the assets? Some you can get by looking at historic acquisitions. If there is somewhere easy to find this let me know. Or you could just take the portfolio of assets, use the best case and worst valuation multiple and see what a reasonable range is.
Regardless of the debt to equity being out of wack, you have use EV because if someone wants to buy DHX or its assets, someone has to take over the debt (either the acquirer or the seller). So if the equity goes to zero, you still have to either take on the ~1B in debt or pay it off. Whether you value the assets individually and net out debt after or before, it doesn't really affect the math at the end of the day. So I think we are actually saying the same thing.
Sales is a crappy valuation metric for most assets, but the industry uses sales as an M&A metric unless they are buying the whole business (sometimes). If netflix or amazon or rogers etc want to buy only the content, they don't care about DHX's margins because they are going to incorporate that content into their distribution cost structure. They are buying the revenue (and merchandise royalties with no tag along costs, etc), not DHX's distribution margin (in most cases). That multiple may change if there is some high growth, which there appears to be organic growth at DHX in some assets. I do admit that DHX has some distribution assets. More complex models like DCF, forcasting etc, or whatever are really an internal tool to make sure the acquisition will make money, not as an acquition valuation metric. DCF is a good tool for valuing bonds but not equity. Here is where you can get industry valuation data (there are other sources, I just found this one first):
https://d3fbjrz68b519c.cloudfront.net/wp-content/uploads/2018/03/13172944/MediaFY2017.pdf
But lets say we use a high portfolio multipe for all the content, 3x sales. Then perhaps the forward sales are what, $120M x 4 quarters? 480M? Then 3x is $1440M in EV. Minus ~1B in net debt, we have the equity around $440M. If you use a 2x multiple then, you're in trouble, because the net debt wipes the equity out. Now we do know that the debentures are trading at 75 cents on the dollar (what are the bonds at?). An interesting note is the debentures carry a 8 dollar warrent or something (which is worthless at this point). But maybe someone could net buy the debt at 90 cents on the dollar and then the EV gets interesting.
So I would say that yes DHX has some good assets, but they more than likely paid too much for them with debt or they need more time for the organic revenue growth and cost containment to realize value here. By this one being "hard" I mean that this high debt level makes valuing the equity finicky while having a margin of safety. But I think if you could buy the whole business at $2 and the debt at 75 cents on the dollar, now we are talking! This is a good case study on how not to do growth by M&A compared to a MTY, BAM, or Constallation software.