the value of the new common shares If the deal goes through, this will be the situation of the new common shares:
- A company that has $850 million dollars of debt (a gross debt reduction of $1.1 billion and net debt reduction of $800 million from the current situation) and much less chance of entering CCAA or liquidation
- Most of the common shares will be owned by those of the the current MTN holders who choose to keep their shares (assuming none of the banks will keep their shares and some of the MTN holders will also dump them)
- The dumping of new common shares may drive down the price
- The company will pay less interest than they pay today (a higher interest rate on a smaller principal amount)
- The company will be required to use most of their free cash flow to buy back the $750 million senior bonds at par
- By the time the $750 milion senior bonds come due, most of them will already be paid off
- If Yellow Media ever gets any additional financing, they must first offer the senior bonds the chance to be bought out at par. Any amount that the senior bondholders don't claim can be used for other purposes.
- Nobody knows what the new stock price will be on day 1, and nobody knows what will happen later
- Since there will be effectively a 200-to-1 reverse split, the best neutral guess (not assuming anything particularly good or particularly bad) is that the opening price will be 5.5 cents * 200 = $11. This estimate could be wildly off in either direction.
- The $100 million junior bonds will have the option of converting to common shares at a price of $21.95. They won't necessarily take up this option (if the company is doing well enough to have a share price of $21.95 the junior bonds will presumably trade at a premium to par) but if the share price gets well above $21.95 presumably most or all of the junior bonds will be converted. This will dilute the common shares but also reduce the debt load. The threat of junior bond conversion may make it difficult for the share price to move above $21.95.
- After the senior bonds are paid off, Yellow Media can buy out the junior bonds at a small premium to par.
- Existing shareholders and convertible debenture holders will get a significant number of warrants that can be executed at $31.67. Any price move above $31.67 will presumably trigger the execution of a lot of warrants. This threat may make it difficult for the share price to move above $31.67. (Some people have said that they assume the opening share price on day 1 will be $31.67. That seems ludicrous to me.)
- The company is not allowed to pay dividends on the new common shares until the $850 million debt is paid off.
As I said before, nobody knows what the price of the new shares will be. Since a new share (plus a fraction of a warrant) will replace 200 existing shares, my best guess is that the opening price will be 200 * the last closing price of the old shares. After that, a new share will give you a fractional interest in whatever revenue the company eventually generates after paying off the $850 million debt but you will need to wait several years before getting your first dividend.