I have been puzzling over why the stock has not gone up much in response to the "value-maximizing" project by the Board of Directors' new committee. McRae seems to be finally crystalizing the values in the company by doing real-world transactions. In fact, it's starting to sound like he is breaking up the company and retiring. But funds and arbs are not piling back into the stock for the short-term swing. The expected value (risk/reward) looks interesting, but they are holding back. Why? Here is what I think:
This situation is un-analyzable. There are too many unknowns.
- Proceeds are unknown. He is selling Animal Health and licencing Urocidin and maybe even selling the VMC. I think he will do a deal on at least two, but at what price? He has a history of selling for too low a price. (Yes HT, I think he will pull at least two rabbits out of his hat.)
- McRae has not said what he will use the proceeds for. He has a history of blowing all his loot on quixotic adventures such as Econiche, or on projects too large for his financial resources such as Urocidin, or on projects which may exceed his team's management skills such as VMC-GMP.
- McRae has not explained why he is selling Animal Health. Urociding licencing should be very lucrative. So why do we need to sell Animal Health? Why do we need a gargantuan amount of cash?
- The Board of Directors continue to exhibit capricious behaviour. First they decided to eliminate the cash burn. Then they change their minds and decide to go for revenue growth, so expenses will go up. But lately, revenue has stalled. Then they decided to spin Urocidin off into an incorporated subsidiary and hire a Urocidin CEO. Then they decided this was a lower priority than selling Animal Health, so they have not hired a Urocidin CEO yet. I'm really confused!
- Will Bioniche violate one of the three key loan covenants by June 30th? First, they cannot let cash go below $5million calculated daily. By my calculations on cash burn, they started factoring their receivables in mid-March to keep cash above $5million. That can't continue forever. Second, they have to grow revenue $3million per year vs last year's actuals. To do this, they have to grow 4Q-2013 revenue almost 50% year-to-year. I'm sceptical they can do it. Third, in return for the Texas lenders releasing the $100million milestone collateral, Bioniche must raise $5million of equity capital or licencing money. This is likely do-able. However, the company has been completely silent on the status of the first two covenants. If they breach one of the convenants, they must repay the $20million loan plus all interest owing to the end of the deal (approximately another $10million). Immediately. This is a big deal.
I now think the Bioniche stock price has a "McRae Discount". Investors have come to think that even though McRae might sell AH and partner Urocidin for big numbers, he will turn around and blow it all on his favourite projects. This matters a lot in the McRae vs G/W chess game. If McRae succeeds with his delay tactics and holds his first shareholder vote in November, he may have time to realize all the proceeds. But the stock price might not go up! Because big money doesn't trust him anymore. The deals will be announce at least 60 days ahead of the meeting so they can be described in the proxy solicitation. If the stock does't go up prior to the meeting, I will vote to replace McRae and the Board. And guaranteed G/W will get the Board replacement issue on the agenda for the November meeting.
The critical issue is a special dividend. Investors need a guaranteed special dividend before they will bid the stock price up. McRae could do this by putting a votable resolution on the agenda for the November AGM. Or G/W could put it forward. Right now, I don't trust either McRae or G/W. I want a special dividend. I want Court-enforcable guarantees. An old boss of mine once told me "Rube, never trust anybody and you'll never be disappointed."
So checkmate! McRae will pull two or three rabbits out of his hat. The stock won't go up until he provides a special dividend to prevent him from blowing all the money again. If we get to the November meeting with a low stock price, McRae and the Board will be removed.