The investment analysis below is our eighth in our ongoing series of guest write-ups, and is brought to you by friend of the blog Ben Rosenzweig. Ben is an analyst at Privet Fund Management, a value oriented event-driven hedge fund in Atlanta, GA. Privet was formed in February 2007 and has a compounded annual return of 9% since inception (which we would note is incredible given the relevant time period and relative to the various benchmarks).

Anyhow, for those unfamiliar with GSI and/or the investment attractions of post reorg equities, please read Ben’s fantastic thesis below as well as our recent Visteon write-up for some additional color. We plan on posting our own updated thoughts/analysis on the opportunity soon, so stay tuned. Essentially (long story short), we have a hard time seeing how GSI’s equity doesn’t trade north of $4 within a relatively short time period (year or so) as the catalyst’s outlined below play out and Mr. Market begins to award this quality business with a much more appropriate valuation.



Update 10-27-2010

Here’s a mini-update that notes the following events and upcoming catalysts:

1. The release of 2009 financials with 2009 EBITDA being higher than originally disclosed in the Disclosure Statement
2. 2010 announcements show continued bookings growth within the business; my estimate of $60mm in 2010 EBITDA continues to look accurate
3. 2010 financials being caught up completely by December 31
4. Plans to reverse split the stock in late February
5. Plans to re-list on NASDAQ following the reverse split
6. Sizable investor interest sure to follow once the stock is re-listed and trading at a higher price

Update On Rights Offering – yesterday GSI announced the results of its rights offering in conjunction with its Plan of Reorganization. Please see the attached chart for an updated capital structure and transaction sources and uses. In summary:

  • 80% of eligible shares subscribed
  • $20mm Noteholder backstop
  • Additional $5mm of Notes exchanged for new shares
  • $10mm in excess cash used to pay down Notes
  • Emergence from bankruptcy expected to occur on July 23, 2010

This results in a total of 51.6 million new shares issued for a total post-emergence sharecount of 99.5 million. After the paydown of the Notes, new face value on the 12.25% Senior Secured PIK Notes will be $107 million.

The credit profile of the company post-emergence is phenomenal. I am very conservative with my projection for cash, as I feel it is very likely the company has been generating cash since it last reported its balance in the initial rights offering package on June 4. I also use $60 million for 2010 EBITDA as they have reiterated their forecast of first half EBITDA of $23-27 million and I fully expect the second half to continue the strong trends projected for the second quarter. I see a maximum leverage ratio of 1.1x and minimum interest coverage of 4.6x.

I think that the shareholders that fully subscribed should be happy that the overall percentage of holders to subscribe was under 100%. From the perspective of holders who purchased the maximum number of shares at $1.80, we should want the least amount of dilution possible. To get the maximum return on our investment, we should want as much debt upon emergence as possible (considering the net leverage is around 1x and the interest, which PIKs anyway, is very well covered).

Please see attached pdf for full investment thesis including multiple charts and tables. I am also attaching our prior objection to the previous plan of reorg that we filed 4/27/10. Please feel free to read the objection after the investment thesis.

Thesis Summary:

Privet Fund LP is long GSIGQ common stock. Our post-emergence price target is $5.00 per common share, an internal rate of return of 123% based on closing price of $2.70 and right to purchase .99 shares for every 1 share currently owned at a price of $1.80 per share. The market has failed to fully price in the impact of the Plan of Reorganization that was confirmed on Thursday, May 27, 2010.

We believe GSI is an attractive investment opportunity for the following reasons:

  • Due to the efforts of the equity committee throughout the bankruptcy process, the pre-emergence equity holders will be able to maintain an 87% ownership in the post-emergence company, up from an initial distribution of 18.6% in the first Plan of Reorganization
  • The end markets for the Company’s precision technology and semiconductor products are coming out of the trough of a cycle and, as a result, GSI’s bookings have been increasing at an exponential rate
  • The purging of the previous management regime opens the door for an experienced operator to run the Company much more efficiently and make strategic decisions with a view toward enhancing the value of the enterprise
  • The significant reduction in debt gives management the needed flexibility to focus solely on improving operations. This should result in significant fixed cost leverage going forward as evidenced by the Q1 2010 EBITDA margin of 14%, a figure that previous management suggested was not achievable until the end of 2011
  • The current market valuation, which includes the right to buy .99 shares at $1.80 per share, implies a 2010 sales figure and discounted cash flow valuation that is simply not possible even if the Company’s financial performance does not follow through on the radical improvements that have been shown during the past two quarters

Business Description

GSI Group, Inc. (“GSI” or the “Company”, OTC:GSIGQ) designs, develops, manufactures and sells lasers, laser systems, precision motion devices, associated precision motion control technology and systems for use in the products and manufacturing processes for a wide range of applications in the industrial, scientific, electronics, semiconductor, medical and aerospace sectors. The Company’s products enable customers to make advances in materials and processing technology and to meet extremely precise manufacturing specifications. GSI’s products are grouped into the following three segments:

  • Precision Technology- The Precision Technology Segment has six major product lines, including lasers, scanners, optics, printed circuit board spindles, encoders and thermal printers. GSI sells the products in the Precision Technology Segment both directly and indirectly through resellers and distributors.
  • Semiconductors- The Company’s Semiconductor Systems Segment designs, develops and sells production systems that process semiconductor wafers using laser beams and high precision motion technology. The Company sells manufacturing systems to integrated device manufacturers and wafer processors. The Company’s systems perform laser based processing on all of the following types of semiconductors: general wafers used for logic or memory purposes, dynamic random access memory (DRAM, NAND) chips and high performance analog chips.
  • Excel- Very similar to Precision Technology. Excel was acquired by GSI in mid-2008 and, as of last filing, was not yet fully integrated into GSI’s operations.


In August 2008, GSI acquired Excel Technologies for approximately $369mm. Excel was a direct competitor to the Company’s Precision Technology segment. Coming off of a relative peak in the business cycle, Excel looked like a strong target. During fiscal year 2007 GSI posted net sales of $318mm and Excel had net sales of $160mm. Pro-Forma combined sales for the first half of 2008 (a slowly declining operating environment) was still $218mm, or roughly $436mm annualized. To fund the acquisition, GSI issued $210mm of 11% Senior Notes due 2013 in a private placement to certain funds.

Right away the Company had difficulties integrating Excel’s financial accounting systems. Prior to filing its Q3 2008 form 10-Q, on December 26, 2008 GSI announced that it had identified potential errors in the recognition of revenue related to sales in the first and second quarter of 2008. The Board then decided to conduct a review of the timing of sales going back to 2006. Because of the delay in filing financial statements related to the review, on November 13, 2008 GSI received a letter from NASDAQ advising it of non-compliance. After numerous extensions, including a panel hearing, GSI was finally delisted on November 5, 2009.

In December 2008, in connection with its failure to file financial statements, GSI received notice of its breach of a covenant within its Senior Note credit agreement. In February 2009, GSI entered into a forbearance with the Noteholders while still engaging in discussions with them. On June 30, 2009 the Company announced it had reached an agreement on a non-binding term sheet with the Noteholders to restructure its debt that would, in essence, exchange $115mm of the notes for 81.4% of the new equity. On November 20, 2009 GSI filed Chapter 11 in order to facilitate a pre-packaged bankruptcy that would give the Noteholders an amount far in excess of their claims.

Stephen Bershad

Stephen Bershad, the Chairman of the Equity Committee and the largest shareholder of GSI (over 13% of the common equity), is the former Chairman and CEO of one of GSI’s competitors, Axsys Technologies. Bershad spearheaded the sale of Axsys to General Dynamics in mid 2009 at an extremely attractive valuation (2.4x sales). Bershad had previously headed up Lehman Brothers’ Merchant Bank and had been at the helm of Axsys and its predecessor since 1980. In early 2009, as GSI stock had been in free fall from its accounting mistakes, Bershad began to opportunistically purchase the stock. He had done extensive diligence of Excel while at Axsys and knew of the significant opportunities that the combined entity had in the market.

On February 3, 2009 Mr. Bershad met with GSI’s CEO Dr. Sergio Edelstein to discuss Bershad’s interest in GSI and GSI’s operations. Directly following this meeting, Dr. Edelstein entered into a Termination and Change-In-Control Agreement with the GSI Board providing a “golden parachute” payment to Dr. Edelstein if his employment was to be terminated following a change in control. Between February and late April 2009 Mr. Bershad had multiple conversations with Dr. Edelstein and members of the Board regarding GSI’s prospects and general strategic and governance matters which culminated in a meeting with Dr. Edelstein on April 23 to discuss Bershad’s interest in obtaining Board representation. Following these conversations, once it became sufficiently clear that Mr. Bershad was interested and capable of exerting control upon the Company, in June 2009 GSI announced its first plan to restructure its debt by transferring 80% of its equity ownership to Noteholders along with a new $95 million secured loan.

In November, after Mr. Bershad had acquired over 10.94% of GSI’s outstanding shares, he requested that the Board call an annual meeting of shareholders for the purpose of electing directors. Once rebuffed, Mr. Bershad informed the Board that he had decided to submit a slate of directors at a Special Meeting of Shareholders and requested that the Board not “undertake any extraordinary transactions” until the shareholders had “exercised their franchise to elect a Board”. Less than one week later, GSI filed for Chapter 11 protection in order to cram down existing equity holders.

Bankruptcy Process

Upon filing, Mr. Bershad formed an equity committee to fight the unnecessary transfer of value from the equity holders to the Noteholders. It is necessary to remember that at filing GSI was not a bankrupt company. It had been caused to enter Chapter 11 due to the technical default of not filing financial statements. So although more than solvent (GSI entered bankruptcy with over $60mm in cash), the poor decisions of management and the shareholder un-friendly corporate governance necessitated that the equity committee be formed to realize the rightful value of its ownership stake.

Even with the sandbagged forecast that management had presented in the initial Disclosure Statement that was conceived in November 2009, it was impossible to arrive anywhere near the valuation found in the initial plan (First Modified Plan). Once the equity committee was formed and Jefferies was appointed as financial advisor, some of the Company’s information was shared with the equity for the first time. At this point, the equity committee began looking for sources of alternative financing and considering other restructuring options that would result in less dilution to the pre-petition equity holders.

On February 19, 2010 GSI came out with an 8-K that contained the amount of bookings made in the fourth quarter of 2009. Fourth quarter bookings of $77mm blew away the comparable numbers ($54mm in Q4 2008 and $60mm in Q3 2009) and showed how ridiculous it was that the Disclosure Statement projections had 2010 net sales of $251mm. It was now possible that the $251mm forecast could be reached after only three quarters. At this point, knowing that the Company could no longer rationalize an 81% equity gift to Noteholders, on March 16, 2010 the Company announced a new plan (Second Modified Plan) whereby the Noteholders would convert $100mm of their notes into 58.9% of the new equity. In accordance with the new plan GSI released new financial projections which forecast 2010 sales of $284mm.

The confirmation hearing began in mid-March with the testimony centering on valuation. Three different experts testified as to the correct weighted average cost of capital, definition of “excess cash”, correct comparable company set and many other variables that all impact valuation. As the hearing unfolded, it turned out that the biggest determinants of value were that the Company’s operating performance, and that of its peers, kept improving and that there was real interest from multiple strategic buyers to perform due diligence in the hope of acquiring the complete enterprise.

It is necessary to now point out that not only was management completely inept, they were grossly conflicted. According to the most recent proxy statement filed (2007), the NEO’s that were employed by the company (Dr. Edelstein and Mssrs. Federico and Lyne) owned a combined 746,500 shares, or 1.6% of the shares outstanding, much of this a result of option and stock grants. However, if the Plan were to be confirmed, management stood to gain up to 8% of the new common shares of the post-petition Company under a new management incentive plan. If the Plan were confirmed, the Noteholders would own a majority of the common equity and control the Board, enabling them to grant management the full amount of their incentive plan. At market value, this equated to a grant valued at more than $21 million. Conversely, if the Company were to be sold to a strategic buyer, the most likely outcome would result in senior management losing their jobs. Further, it is our belief that, had management and the Board not pushed the Company into Chapter 11, Mr. Bershad would have taken all necessary steps to ensure that his slate of directors, including himself, would be elected and take control of the company, replacing the current Board of Directors and senior management. Because of this, the people driving the bankruptcy process were never interested in maximizing the value for the equity holders. They took every step to deny the potential acquirers the ability to conduct thorough diligence. They dismissed the offers as “not having any certainty of close” while at the same time prohibiting the interested parties from getting a better look at a Company lacking 5 quarters of financial statements. It was at this point, April 27, 2010, that we at Privet Fund Management LLC filed an objection with the court alleging that the Debtor had aligned itself with the Noteholders and was purposefully engaging in a campaign to withhold information in order to conceal the true value of the Company. (We also detailed several reasons why, at the time, the Plan of Reorg significantly undervalued the Company).

As the proceedings continued over many weeks, the operating business kept improving. Due to the high switching costs associated with semiconductor systems and the continued financial solvency of GSI, there was very little danger of losing market share. Once the Company closed its first fiscal quarter and shared the results with all parties subject to an NDA, it became evident that the dilution associated with the Second and Third modified plan (Third and Second had the same terms but some different legal jargon) was no longer defensible. On April 29, 2010, the equity committee filed an objection to the Plan where the members proposed their own financing transaction. They proposed a rights offering that they were willing to fully backstop in order to reduce the principal of the Notes. After about two weeks of negotiations, all parties settled on what would become known as the Fourth Modified Plan in which there would be a rights offering that would be backstopped by certain Noteholders (who acknowledge how valuable GSI is and have wanted as much equity as they could get all along) and would result in the pre-petition shareholders receiving as much as 87% of the post-petition company (contingent upon the rights offering being fully subscribed). To recap, when GSI filed in November 2009, the equity was slated to get 18.6%. After Q4 numbers came out the equity recovery was bumped to 41.1%. Finally, after Q1 numbers were about to be released and the equity committee proposed a transaction in which they would backstop a rights offering, the equity was able to come away with 87% by offering the Noteholders the opportunity to participate in the equity upside through the backstop of the rights offering.

Terms of the Fourth Modified Plan

  • $85mm rights offering to existing shareholders at a purchase price of $1.80 per share (47.2mm new shares issued to existing holders)
  • $5mm of Notes to be exchanged for equity at $1.80 per share
  • $20mm of Notes from Noteholders who agreed to backstop exchanged for equity at $1.80 per share
  • $10mm in Balance Sheet cash to be used to pay down the principal on the Notes
  • New $90mm 12.25% Senior Secured Note issued to existing Noteholders
  • The rights offering will commence June 4, extending for 20 business days until approximately July 8. With July 5 as a market holiday, the ex-date to purchase the stock in order to receive the rights is July 2

Perhaps just as importantly as the financial terms, as part of the agreement there will be significant management turnover with the existing CEO, Dr. Edelstein, resigning. His temporary replacement will be Michael Katzenstein, a Senior Managing Director at FTI Consulting, who will serve as Chief Restructuring Officer. Also, the Board of Directors of the Company will be radically altered to include two directors selected by the Noteholders, two directors selected by the Equity Committee, one director selected by mutual agreement between the Noteholders and the Equity Committee, one director to be selected from the Company’s current board of directors, and the chief executive officer of the reorganized Company. It is widely assumed that Stephen Bershad will be the non-executive Chairman of the Company upon emergence. The Plan will likely become effective by late July. To understand the effect that the rights offering will have on GSI’s capital structure, see below.


In the same press release as the announcement of the Fourth Modified Plan, the Company disclosed that its bookings for the first quarter of 2010 were $95mm. This compared to $77mm in the fourth quarter of 2009, a massive sequential improvement. Since the business lacks seasonality, the uptick in bookings over the past few quarters shows that the worst part of the cycle is now over and that growth has returned. On its first quarter conference call, the CEO of Newport Corp, one of GSI’s closest competitors said the following about the trends he sees in the market:

“As mentioned earlier, we have seen meaningful improvements in activity levels, in all of our key end markets, which we expect to continue throughout most, if not all of 2010. Our strong order level in the first quarter reflected these market conditions and was also boosted by a few large blanket orders from OEM customers that will begin shipping in the second half of 2010 and into 2011. As such, we expect second quarter revenue to be similar to, or perhaps slightly higher than, the first quarter level.” (Robert J Phillippy, NEWP Q1 Conf Call 4/28/2010 pg 3)

Also, taken from the second fiscal quarter (ended 4/03/2010) conference call of close competitor Coherent Inc:

“The strong first half performance combined with a record backlog supports increasing our full fiscal year net sales outlook to a range of 590 to $600 million, which represents a very healthy 35 to 38% increase over fiscal 2009.” (John Ambroseo, COHR Q2 Conf Call 4/29/2010 pg 3)

Due to the limited amount of financial information for GSI since the Company has not filed 5 quarters worth of financial statements, it is necessary to attempt to extrapolate year-end 2010 sales through the information that is available. We examine three scenarios. In the first scenario, Q1 was an outlier and bookings for the back half of the year will slow markedly. In scenario two, we simply assume that bookings remain flat for the duration of the year. In our third scenario, what could be called optimistic but what we still view as very conservative given all of the industry color and where we are in the cycle, we forecast a modest 5% sequential growth in bookings for the next three quarters. The assumptions that underpin our analysis are fully explained in the footnotes found below. Further, in a disclosure found within GSI’s Rights Offering Package filed with the court on May 24, 2010, GSI disclosed that Q1 actual revenue was $73.2mm. We use this within our analysis to back-in to an 80% figure for the percentage of prior quarter bookings that ship within the current quarter.

To ascertain the most relevant enterprise value, we took the midpoint of our sales estimate (as we believe it to be extremely conservative) and the high end of our estimate and attempted to apply an enterprise value multiple that compared to GSI’s most relevant competitor set. We break out our comp set into two tiers to show the companies that are most similar to GSI and the companies that GSI may compete with across one or more product lines. We then examined the relevant multiples of Enterprise Value to both LTM and forecast 2010 sales in order to arrive at our multiple range. By using a sales multiple range of 1.0x – 1.4x we arrive at an Enterprise Value range of $393mm – $550mm.

Next, using our 2010 sales estimate midpoint, we attempt to produce a full financial forecast for the next five years. It is necessary to understand that we based the full extent of this analysis on the forecast that GSI management filed in tandem with its Second Modified Plan in early March. Although we altered the 2010 sales figure, we kept the basic framework of the forecast. We extrapolated Gross Profit and all expenses based on the Company’s predicted stabilized margins. We altered the interest expense based on the face value of the new notes. We kept the same nominal amount of depreciation as the asset base has not changed and we also maintained the forecast of capital expenditures. It is very likely that these margins are low as there is a good bit of fixed cost leverage inherent within the business and it is very likely that new management will take an even more active role in reducing costs. However, for conservatism, we will maintain management’s forecast margins. (It is also necessary to remember that this forecast was used to back up a valuation that necessitated in the equity only receiving 41% of the Company when, in reality, that recovery has now more than doubled as actual performance has been shown to be much more robust than this forecast would suggest). Further, in the Rights Offering Package filed on May 24, GSI disclosed it had generated $10.2mm of EBITDA in Q1 and was projecting $13mm to $17mm in Q2. This is a first half midpoint EBITDA of $25mm. Comparatively, GSI’s plan forecast EBITDA estimate is only $29mm for full year 2010. This should show how sandbagged the forecast is that we are using as the basis of our analysis.

Our full Income Statement and Cash Flow Statement can be found as an appendix at the end of this report. Shown below is our discounted cash flow analysis which shows a post-emergence, fully-diluted share price of $4.53. This assumes a terminal growth rate of 2% and a WACC of 12%.

Before we present our full valuation conclusion (shown below) it is important to explain how to appropriately calculate an internal rate of return for the investment in the pre-emergence shares of GSI Group. Due to the size of the rights offering, the purchase of 1 share of GSIGQ right now entitles the bearer to a right to purchase .99 additional shares at a price of $1.80 per share. By weighting our Comparable Company Analysis equally with our Discounted Cash Flow Analysis we arrive at a low-end post- emergence stock price of $3.65 and a high-end price of $4.88. Now, assume the purchaser invested in one common share of GSIGQ right now at the market price of $2.70. Upon emergence the purchaser would then exercise his right to buy .99 shares at a cost of $1.77 (.99 shares x $1.80). Total cost basis for 1.99 shares would be $4.28. At our low-end estimate of $3.65 per share, the market value of the purchaser’s 1.99 shares would be $7.25 (1.99 shares x $3.65). This results in an IRR of 62% on our low-end estimate and an IRR of 117% on our high-end estimate.


The only reason that GSI Group was forced to enter bankruptcy was due to a technical default resulting from its inability to file financial statements. This company has been and continues to be solvent and capable of generating significant amounts of free cash. Now that equity holders have successfully fended off an attempt by creditors to effectively equitize a large portion of their debt, the focus can shift back to the improving industry landscape and the value inherent within the business. The most exciting thing for investors might just be the ouster of the management that continuously attempted to destroy equity value and the Board that facilitated their actions. The new Board members have no agenda other than maximizing the value of this company. It is very possible that they will explore selling the company in its entirety or divesting business lines that are believed to be a drag on profitability. I also believe that if there is a chance to roll complimentary businesses into the GSI platform, the Board will examine that option very carefully.

With the current valuation implying a 2010 sales figure of approximately $280mm , the stock is priced as though the Company is approaching the trough of the cycle when, in reality, it is at least two quarters removed.

Near-term catalysts include:

  • The distribution of the rights on July 8th (ex-date July 2nd);
  • The filing of five quarters of financial statements;
  • The re-listing of the stock on an exchange; and
  • A plethora of operational enhancements to be made by a vastly improved management team that should continue to yield visible financial results.

Appendix: Financial Projections

GSI Group Investment Thesis (Privet Fund) 6-2-2010

GSI Group Post Rights Offering 7-14-2010

GSI Group – Privet Fund Objection – 4-27-2010


A fantastic reflection on the wisdom of young Buffett and the the enduring brilliance of his early partnership’s investment framework.


Hat tip to Hunter at Distressed Debt Investing for putting this relatively unknown firm on our radar. If you enjoy the letter below as much as we did, you’ll probably want to check out DDI’s  excellent interview of Greenstone from a few months back. Both are fantastic reads.

Q3 Letter to Partners

Friend of the blog Jared Levin was kind enough to offer our readers an update on what we believe is hands down the very best opportunity in the gold mining space today.  For those who may have missed it, Jared’s original write-up can be found here.

On a side note, we also highly reccomend our readers check out The Gold Reports recent interview with Byron Capital’s Drew Clark. The late September interview offers investors both Drew’s latest thoughts on YNG (and why he believes it remains a table pounding value proposition) and better yet, one of the best primer’s on how to intelligently “think about thinking about” investing in miners (or any commodity producer for that matter) we have ever seen.



(1) My impression is that company is on track to produce 12k oz in Oct, which is a run-rate close to their targeted 150k oz for the 12 months from August. This is a nice improvement from the ~8.5k they did in September, their second month in commercial production. Production is supposed to ramp up further in early 2011 when their second mine, SSX opens, as SSX ore is higher grade than the stock-piled that is using up part of their current capacity. Once SSX opens, they will be processing 2.4k tons per day of their own ore at 0.25 oz/ton, or 600 oz per day, plus another ~1k tons per day of remaining stockpiled ore at ~0.07 oz/ton, or 70 oz per day, for a total of 670 oz per day, or more than 230k oz for the year. Blended costs on this production could run around $600, which at current metal prices would generate $750 per ounce, or close to $175 million of Cash Flow from Operations. This annual cash flow will grow further when YNG’s Starvation Canyon mine opens in 2012 and YNG’s contract with their contract miner expires (also in 2012), which at current prices could boost annual Cash from Operations to over $200 million (I’m happy to walk anyone through the math). This does not include any contribution from Ketza river, an ore JV or any acquisitions. So if management did not succeed in anything else, the company would be trading for an EV / CFO of ~3.0x

(2) It sounds as though YNG is getting closer to announcing an ore JV with a neighboring mine. As a reminder–YNG has one of only 3 refractory ore roasters in Nevada (no other roasters are likely to be built, as they are very difficult to permit and take years to build). There are several neighboring mines that are stockpiling medium-grade refractory ore that is not economic for them to process and is lying worthless. YNG believes they can structure a deal for partner to put ore into a JV at the cost of producing it, while YNG contributes the refining process and they split the profits. An illustrative deal might be to have enough ore for 2k tons per day * 0.30 oz/ton, or 600 oz per day, or 210k oz per year, with YNG’s profit share at current gold prices of $350/oz. This would add a low-risk 210k oz * $350/oz = $73.5 million to YNG’s Cash from Operations, bringing their total (adding (1) above) to ~$270 million, implying an EV / CFO of 2.2x

(3) There are as many as 15 properties surrounding Jerritt Canyon with refractory ore than cannot be economically processed. Company is in active discussions with many of them, exploring a potential acquistion, most likely to be funded by debt. Management envisions a plan whereby they acquire a decent-sized deposite (say, e.g., 2.5mm oz) and install a “concentrater” on the property, allowing them to condense 0.2 oz / ton ore down to 1.0 oz / ton ore, which would be very economic to ship. Over the next few years, imagine a scenario whereby YNG can utilize its 3k tons/day of excess capacity with its own 1 oz/ton ore from a nearby property. This would generate 1 million oz per year. Try the math on the cash flow contribution. Such a scenario would be quite exciting, but it cannot be counted on at the current time. But I am encouraged to see the way management is thinking about growing value here. A further point here is that an acquisition of any company possessing oxide ore might allow YNG to re-open its idled 5k ton / day wet-circuit mill. Again–let’s watch and see if management can execute on this–at the current valuation, we are not paying for it after all.

(4) As an encouraging FYI, Sprott Asset Management recently increased their equity holdings to 19.9% of the outstanding stock–a nice vote of confidence.


(1) Potential ore JV (see above)

(2) The bulk of the Company’s warrants expire in Q1 2012. They are in-the-money and would bring $80 million of cash into treasury. The Company is talking to the warrant holders about converting early, since the money could be put to good use today, whereas by 2012 they should be swimming in it. It remains to be seen if they will be successful at accomplishing this.

(3) YNG is targeting a reverse-split and Amex listing in the first half of 2011. Capital Gold recently accomplished this successfully. This would potentially qualify YNG for participation in gold ETF’s and indexes.

(4) A few analyst initiations are expected to come in next few quarters

(5) YNG will be presenting at the John Tomazos conference in November–further exposure of the story can only be helpful

Great read on how blogs, online networks, and other social media are transforming the investment research industry.

Via Institutional Investor

H/T to Hunter (of Distressed Debt Investing) for the heads up

The investment analysis below is our seventh in our ongoing series of guest write-ups, and is brought to you by friend of the blog Adam Wyden. Adam is a graduate of Wharton, Colombia Business School, and founder and managing partner of ADW Capital Management. Per Adam, ADW Capital Management, LP (“ADWCM”) is a long-term value partnership with a Jan 1, 2011 anticipated launch date. ADW strives to produce high risk-adjusted returns through conservative yet catalyst driven equity investing in small under-followed businesses primarily in the US, Canada, and select opportunities in Western Europe.

ADW’s approach is modeled after the philosophy and structure of Buffett Partnership, Ltd (managed by Buffett from ‘56 to ’69) and seeks to evaluate all its investment ideas as if one were buying the entire company while thinking about “long term franchise value” versus simply “price”. We narrow our universe to great businesses with sustainable franchises, stand-up management teams (significant skin in the game), competitive moats, and a long runway for value creation. We also only invest in situations with large margins of safety, an asymmetric risk-reward, and where we feel like we have a real edge. By concentrating our time and effort solely on the best ideas we avoid “idea dilution/crowding” and minimize risk of significant capital loss (please direct any potential inquiries to adam@adwcapital.com).

What’s not to love, no?

For those unfamiliar, we think CTMMB is an attractive (read dirt cheap) micro-cap spin-off, with an interesting/misleading past, as well as some very favorable underlying dynamics that the market is not currently recognizing/giving the company credit for. Adam’s take is that CTMMB will eventually garner a much better multiple on much higher profits at some point down the road – as management continues to re-engineer/reconfigure the company’s portfolio of businesses in a manner that will likely continue to create significant shareholder value. We agree.

Anyhow, below is an updated version of Adam’s mid-January thesis of CTM Media. Enjoy!

Original Write-up date: 1/19/10

CTM Media is a very interesting business with a very interesting story and a even more interesting chairman. CTM Media was spun out of IDT in July 09. For those of you familiar, IDT was the company that invented Net2Phone and basically was the undoing for long distance telecom providers. With the advent and proliferation of free long distance on cellular, VOIP, and competitive triple play offering from Cable providers, IDT began to diversify out of its core businesses — telecom which was dying and publishing/media a stalwart provider but with little “perceived” growth. The engimatic chairman who build this company from scratch has suffered from severe bouts of depression and unfortunately took a sabbatical from the company and went to study torah in Israel when IDT needed help the most. Fortunately, Howard came back to the states and reality and stepped back into the role of right sizing IDT. Unfortunately, Howard came back when the world was falling apart — Sept. ’08. If we fast forward to today, Howard has succesffully cut costs and is running an asset rich business (Real estate holdings, telecom biz which is worth something to someone, and this utility business that is doing unusually well, and the co. itself is profitable and trading below EV). There are alot of moving parts in the IDT business and value at first glance is not clear. What is clear is that Howard Jonas — CEO/Chairman is focused on bringing all his companies back to profitability and building shareholder value — namely for himself.

It is unclear why Howard decided to spin-off CTM Media to its shareholders given that its a profitable and stalwart franchise. My only guess is that b/c IDT is comprised of so many disparate parts, the market would never put the multiple it deserved on this business and its profitability would be masked by IDT’s struggling telecom biz.

In my mind, CTM is a once in a lifetime opportunity and those who were fortunate enough to get this business at .70 post-spinoff will be the source of my envy for a great while. The Company’s core business is very simple to understand. It’s CTM business stands for creative theatre marketing. Those of you familiar with NYC might recognize the brochure stands that exist at public locations throughout NYC — statue of liberty, ellis island, empire state bldg, penn station, and various hotels. CTM not only has the rights to place these stands — colloquially know in the biz as “CTM’s” but publishes the brochures for the relevant purveyors of survices — largely theatre companies and other tourist attractions. My channel checks with various people in the theatre/hospitality business tell me that they have a great reputation and are a critical part of their marketing efforts. I have been told that pricing increases 3-4pct a year and requires almost no capex — great for a PE type buyer or a roll up for a WPP, Omnicom, etc. On a nomralized basis I think this busness can do about 4mm of EBITDA a year — that alone should signal a real deal.

It’s other businesses include IDW and a radio station that they are in the process of selling. MY PF EBITDA calculation takes into account the radio station running at breakeven though my EV calculation does not include the $4mm potential of cash/promissory note that might come from the sale of its WMET radio station. I purely assume they can give it away and increase EBITDA by its run-rate loss (very conservative in my opinion and valuation changes dramatically if radio station deal goes through at $4mm). IDW on the other hand could be a source of real value. The company is a publisher of sorts specializing in comic books/graphic novels and recently childrens books. Those of you familiar with sci-fi/fantasy, IDW published comic books/graphic novels for 30 days of nite, GI JOE, Transformers, Star Trek, and many more. The company has been working feverishly on distributing these titles on Ipod, Iphone, Itunes, PSP, etc. and have been told that will be incrementally high margin. IDW is also responsible for the children’s publishing arm that Howard Jonas purchased while at IDT that I am told is relatively stable and could provided future avenues for growth. In 2008, the Company did almost 1.8mm in EBITDA which was unusually high but was a byproduct of many major movies coming out — GI JOE, Transformers, etc. It was fortunate b/c it offset some losses the CTM business was experiencing from some of their customers going out of business during the great recession. Fortunately, the CTM business has shown signs of life and carrying its weight with IDW doing about half of what it did last year which was a breakout year for them. After many talks with Ted Adams, founder of IDW, I am confident and he is as well that they will continue to methodically grow this business. My valuation does not take this into account as I assume about a 1mm EBITDA less the 23 pct non-controlling interest of this business segment (in all likelhood mgmt. will buy this out at some point) which is a run-rate of last qtr. (very conservative) and could significantly outperform my expectations. Again, this is a low capex business which great brands and operators who are focused on quality over quantity. Those familiar with comic books know that IDW is a close 3rd to Marvel and DC.

If you assume my PF numbers which are very conservative and do not take into account proceeds from the sale of the radio station, the company is trading at 1x EBITDA and 1.56x EPS (net of cash). The valuation is significantly better if the sale goes thru. FYI, Company was also able to sneak 1mmm shares through a tender offer at 1.10 and my math takes into account PF share count and cash used to repurchase. Mind you at 1.10 the company was repurchasing shares below cash– unbelievable.

My 4.00 PT assumes a 4.63x EBITDA for a business that is stable with significant opportunity for growth on the IDW side — stil very cheap. If we assume the company gets some $$ from the radio station, the valuation only improves. Realistically, I believe this company is worth north of five dollars to either a strategic or we get significant growth on the IDW side.

The company trades on the pinksheets under CTTMB.pk, CTMMA.pk, and CTMMC.pk — doesnt trade and is supervoting owned by Howard Jonas.

Also interesting to note that CTM’s second largest shareholder after HJ is William Martin of Raging Capital Management. William Martin was notoriously bearish on IDT when Howard left the company in arrears but suddenly got bullish when Howard came back to right size the ship. Martin received his CTM shares through the spinoff from IDT and has continued to buy — recent fliing shows him buying at 1.50+ where CTM represents a significant portion of his portfolio. Not to mention, this was a guy who was very wary of what HJ is capable of — shale oil and all the other nonsense IDT got involved in. It seems as if the p/value balance more than compensated for Martin’s HJ fears and it seems that HJ is continuing to do right by his shareholders and has drawn increased attention from people who initally doubted him, namely myself and Bil Martin.

Variant View

With only 1 qtr of published results as a standalone business I think the market doesn’t trust the strength and longevity of CTM’s two great core assets. I think the downside is that Howard Jonas spends your cash on value destroying business which is what happened to some degree at IDT. Fortunately, HJ is showing no signs of destroying shareholder value but realistically trying to create value for shareholders ( he is the largest shareholder and holds shares for his wife and children too in a irrevocable trust). The tender offer and the potential sale of the radio station give me some comfort that Howard is steering this ship right. Also, Howard has significant experience in the publishing business as it was his first business he started out of college — he is not operating a business outside of his core competency for now which is an additional source of comfort for me.

UPDATE 2-26-10

Radio station sale is going through and run rate earnings profile improves. Company approved special dividend of .25 and HJ mentioned they have no intent to keep unnecessary capital or invfest in value destroying ideas. Looks like Howard is looking for redemption for his follies at IDT and hes taking people by storm with CTM. Stay tuned….


If you include seller note for radio station the company is trading at 1x EBITDA again. When I spoke to Howard Jonas last he made a smug comment: “how did you get so much… I wish I owned more..” Read into it however you want. The Chairman likes the stock…he tried to tender for a 1/3 of the company last oct/nov. Do not be surprised if the valuation stays low like this if he tries to do it again. In the event that the stock trades up, perhaps he will do another special dividend. For those of you following the IDT story, Howard has breathed life back into that monolith and his paying himself a very nominal salary. FWIW, I think CTM’s divs is Howard’s key to paying for all the weddings of his twelve children. Not to mention, the Company has 48mm worth of NOLS — so it will not be a tax-payer for a long while. So the way I see it you got 5mm of untaxed CF next year for a 4-5m EV and the cash will get returned to you. Seems pretty good, right?

Friend of the blog Devon Shire (of the excellent Canadian Value) offers us his thoughts on what we believe remains one of the most attractive opportunities in the market today. Enjoy! 

ATP Oil & Gas Announces First Production at Second Telemark Well

There are events that are positive for companies and then there are events that transform companies. Today ATP Oil and Gas had an event that has completely changed the company.

The company announced first production at its second Telemark well. The first zone is already producing at 7,000 BOE per day (this is an oil well) and they will be commingling this with a second zone which should push total production to 10,000 BOE or more.

Consider what this means for ATP’s revenue and cash flow:

Entire company production prior to adding this Mirage well was roughly 21,000 BOE per day weighted 60% oil and 40% gas.

Rough estimate of the revenue from this production

21,000 BOE x 60% = 12,600 BOE of oil per day

21,000 BOE x 40% = 8,400 BOE of natural gas per day

Revenue per year

Oil – 12,600 x 365 x $70 = $321,930,000

Gas – 8,400 (50.4Mcfe) x $4 = $73,584,000

Total Revenue from existing production = $395,514,000

Rough estimate of revenue from Mirage well added today

Oil – 10,000 x 365 x $70 = $255,500,000

So while production increases an enormous 10,000/21,000 = 48%, the increase in revenue and cash flows is even larger $255mil/$395mil = 65%.

It pays to be an oil producer. And ATP has 5 more significant producing wells coming on soon.

I wrote in late August about a short squeeze coming:


The stock price then was $11 and we are now at $15. I believe the good times for shareholders are just beginning. As I’ve said many times, the big spending for ATP in the Gulf of Mexico to put in the pipelines and $700 million floating production unit is done. Now every dollar spent goes towards drilling a well, and that money quickly turns into increased cash flow and production increases.

50% of the float is still short. ATP has more financing than it needs with the recent ATP Titan deal. And on the very near horizon (within one year) for ATP are the following wells (things could get very interesting quickly):

MC754 – Expected to add 4,000 BOE in Q4 (already drilled)

Second Mirage well – 7,000 BOE per day

First Morgus well – 7,000 BOE per day

Gomez well at MC711 – 5,000 BOE per day

Second Gomez well at MC711 – 5,000 BOE per day

The lifting of the drilling moratorium will also likely be a big catalyst for ATP. I suppose that is obvious given they have another 30,000 BOE per day of production coming from locations where 100% of the required infrastructure is already in place.

Before the BP spill ATP was trading at $23 with production at less than 20,000 BOE per day and no clear plan for financing future projects.

Now production is over 30,000 and financing for the indefinite future is in place with the Titan monetization and this massive cash flow increase. The share price however is $15. There is a big move ahead of the stock just to get to $23. And $23 was cheap by any measure.

Valuation Approach #1 – Cash Flow/EBITA multiple

Here are my revenue and EBITA estimates using the production profiles provided by ATP (See their website for production profiles of Gomez, Telemark, Cheviot to arrive at the oil/gas mix). I assumed $80 oil and $6 gas in 2011 and $85 oil and $6 gas in 2012.

So to ballpark where ATP might be valued in the future I’ll use EBITA of $1 billion as it is where they will be running 2011/2012:
  • 3 x $1bil = $3bil enterprise value
  • 4 x $1bil = $4bil enterprise value
  • 5 x $1bil = $5bil enterprise value
  • 6 x $1bil = $6bil enterprise value

Net debt of the company is about $1.2bil

My estimate using this method then is:

  • $4.5 bil ent value (4.5x EBITA)
  • ($1.2 bil) net debt
  • $3.3 bil divided by 56,000,000 fully diluted shares = $58.92 per share

Here is link to a spreadsheet that was posted on the internet with ATP’s production numbers that calculates EBITA.


There are lots of variables. But per the Morningstar recap of the XTO/XOM transaction:

We presently expect 2009 average daily production of 2.89 billion cubic feet equivalent (82% natural gas). This prices the deal at a little more than $85,000 per flowing barrel equivalent. None of these measures appear unusual to us compared with other recent transactions.

If you look at the graph in the February 5, 2010 ATP presentation you will see that production hits about 60,000 barrels of oil equivalent for ATP around the end of 2010 and stays there, with Cheviot coming on production as Telemark starts to decline.

  • 60,000 barrels x $85,000 = $5.1 billion
  • Less the net debt of $1.2bil
  • $3.9billion divided by 56,000,000 fully diluted shares = $69.64

Valuation Approach #3 – Net Asset Value using PV10 of Oil/Gas Production

ATP recently issued a press release updating the PV10 value of its proved and probable reserves using Dec 31 strip pricing.

The reserve numbers that ATP provides are prepared independently by 3rd party reserve engineers.

  • PV10 of proved and probable is $6.4 billion. Proved alone is $4.0 billion.
  • Value of reserves $6.4bil
  • Plus value of infrastructure $1bil
  • Less estimate of taxes 35% of PV10 $2.2bil
  • Less net debt $1.2bil
  • $4.0bil divided by 56,000,000 = $71.42

Note that the infrastructure consists of:

  • ATP Titan $680mil cost 50 year useful life just deployed
  • Telemark Pipelines cost $160mil
  • Canyon Express Pipeline replacement value $200mil
  • 50% Interest in ATP Innovator $150mil

You are going to have to do your own thinking on how to include the infrastructure in the valuation. All of it has long term value. The two floating production units (Titan and Innovator) can be moved to other location and have long useful lives. The pipelines are always going to have value because there is little infrastructure out in the Deepwater and as development continues south and east these pipelines will be hooked into to transport production. Whether you include at the full amounts or less than that I’m not sure. I know it has value.

Hat tip to mwhitman for doing all the heavy lifting


The Visteon Corporation is a classic post reorg/special situation with a large margin of safety and substantial near-term upside potential.

Brief Business Description:

Visteon Corporation is a global Tier 1 supplier of automotive products to original equipment manufacturers (OEM’s). Visteon is a market leader in each of its three core product groups: climate, electronics, and interior systems. Visteon is geographically diversified and is not overly reliant on any one particular OEM. The company’s three largest customers are Ford, Hyundai/Kia, and Nissan/Renault (which make up 29%, 27%, and 9% of the company’s revenues respectively).

Opportunity Overview:

Visteon’s shares are currently trading on a “when issued” basis at roughly 3x 2011 EBITDA, and after backing out the company’s significant ownership in high growth subsidiaries, we believe the core Visteon business trades for between 1.5x and 1.7x EBITDA. Given Visteon’s multiple internal and external catalyst’s, highly attractive absolute valuation and the outsized spread between the company’s “when issued” shares and the already depressed valuation’s of its global competitors, we think that the stars are aligning for bargain hunting investors to generate spectacular returns of 30%+ in a short period of time with relatively low risk.  Keep in mind that this isn’t “your father’s” Visteon, as the company will exit bankruptcy permanently improved and completely transformed, offering investor’s both a 1) quick, high-return, relatively risk-free arbitrage and/or 2) an inexpensive way to play any upturn in – or at least the stabilization of – global auto sales and economic activity in general.

The idea here is simple. As Visteon exits chapter 11, the near to medium-term upside will likely be driven by a combination of 1) a couple of imminent, high probability catalyst’s that should force the market to assign this company with a much more appropriate valuation on an absolute basis and relative to its peers and 2) various operational and financial enhancements that the company recently undertook while in bankruptcy should continue to yield visible and increasingly positive operating results for the foreseeable future.

Our expectation is that the initial roughly 30%+ will come almost instantaneously (within a month or so) as 1) the stock begins to trade regular way 2) equity analysts initiate coverage and 3) various institutional and index funds that have been unable to purchase the stock up until this point (due to restrictions on purchasing company’s in Ch. 11), begin buying in droves.  Notably, the return assumption above assumes that upon re-emergence the company trade’s at an incredibly non-demanding multiple of 3.75x EBITDA or, to put it another way, in line with the cheapest automotive suppliers within the industry as a whole.  Keep in mind that we think this estimate is very (almost unjustifiably) conservative given that on average Visteon’s peers tend to be considerably more levered, and typically possess both lower EBITDA margins as well as less attractive long-term growth prospects.

A Quick Primer on the Investment Attractions of Bankruptcy:

The primary reason we tend to be attracted to investments in distressed and/or bankrupt securities is because it is another “secret hiding place of stock market profits” or put another way, one of those areas of the market that consistently tends to mis-price assets, and hence tends to offer investors every now and again the opportunity to generate outsized returns, with very little risk.

Additionally, like all special situation investing, distressed and/or bankrupt securities 1) are often not very sensitive to fluctuations in the general equity and debt markets. This is important, as the behavioral characteristics of “when-issued” post-reorg equities are actually very much like merger arbitrage investments, as their price fluctuations are driven much more by the progress of the reorganization than they are by the vagaries of the overall stock and bond markets and 2) in bankruptcy investing, the emergence from the reorganization process usually serves as a high probability catalyst for the realization of underlying value.  We think an investment in Visteon at or around the current price provides investors with a short duration, non-correlated event-driven investment, where an imminent catalyst is more likely than not to unlock substantial value regardless of what happens in the stock and bond markets.

Why is it mis-priced?

Historically investors have tended to perceive securities of financially distressed and/or recently bankrupt companies as highly risky, and therefore as unwise and irresponsible investments for the risk-averse investor (or so the story goes). We think the reality here is considerably different than what the conventional understanding would have most investors believe (surprise, surprise). Again, the paradox here is that contrary to what most think, the facts actually tell a much different story – as numerous studies have shown that distressed investing (properly implemented of course), actually results in the opposite outcome – i.e., it subjects investors to less risk and volatility, while offering significantly higher returns in comparison to more conventional forms of investing (a rather nice combination, no?).

Also, distressed securities are often illiquid, analytically complex, and typically require specialized knowledge to intelligently analyze, so most professional investors tend to be uninterested and/or reluctant (if not flat out unwilling) to put the requisite time in to understand and exploit this lucrative niche.

Other notable reasons for the mis-pricing include…

No Ticker Symbol – the company is currently trading on a when-issued basis and therefore does not as of yet have a ticker symbol and isn’t currently registered. This is obviously a temporary issue and we expect it to be at least partially resolved on October 1, when the company will receive a five symbol ticker listed on the pink sheets. Quickly thereafter (possibly as soon as November) the company should receive an NYSE listing, resolving the issue entirely. Fwiw, we think this is much more of a blessing than a curse given that most institutional investors cannot purchase when-issued stock, which in turn provides investors with the opportunity to essentially “front run” what will almost certainly be a large amount of institutional equity buying.

Economic Concerns/Fear of a Double Dip – another reason(s) for the current mis-pricing stems from concerns over the broader economy, but specifically worries about the potential for a double dip and the impact such an outcome would have on worldwide car demand. Clearly whether or not we actually experience a double dip is anyone’s guess, and the probabilities of such an outcome are open for debate – that said, we think that investors with longer-term time horizon (i.e., those who are interested in VSTN for more than just a quick arbitrage) are likely to do well either way, given we think the company’s current valuation already discounts a pretty unfavorable (and very unlikely) outcome. That said, it’s always possible to hedge most of the market risk here by simultaneously shorting Visteon’s more expensive peers.

Non-Economic Selling Pressure – a common problem/opportunity with investing in post reorg equities is the potential for a significant amount of non-economic selling pressure to take place once the company in question has been relisted and begins to trade again. This typically happens when the newly “equitized” former creditors cannot (due to institutional rules) and/or have no interest in (i.e., as former creditors they are just glad to get their money back) holding the new company’s shares upon re-emergence. So given this 1) ever-present reality and 2) the fact that so many of the recently listed post reorg stocks have traded down upon re-emergence of late, we think it would be foolish to completely discount the possibility. That said, we think any near-term downside volatility due to creditors selling would be a temporary issue and hence a non-concern. Fwiw, in Visteon’s case we actually think it isn’t likely to happen at all (or at least if it does, for any meaningful amount of time) given the oversubscribed rights offering and the fact that the current board/new shareholder base consists primarily of pre-petition bond holders who have every incentive to stick around and help bring about the continued realization of equity value. So given that, an enticing absolute valuation, and what we believe to be a considerable amount of pent-up demand from various sources this isn’t an issue that keep us up at night.

A Limited and Misleading Operating History – In our experience, any time a company’s future operating performance is unlikely to look anything like its past there is usually a good chance the market will mis-price the opportunity in question.  We think that’s definitely the case here.

For those of you who are unfamiliar, Visteon was the result of a poorly conceived spin-off from Ford in 2000, so the track record that does exist for the company is limited and (for reasons explained below) entirely unimpressive.  Much of the poor historical operating performance of the company wasn’t so much caused by permanent issues endemic to the business itself, but was more a function of both problems related to the spin (which have since been resolved) and other temporary, more macro orientated cyclical issues. For example, on the company specific side of things Visteon was originally spun-off with unprofitable Ford contracts, inadequate financial and admin systems, an overpaid union workforce and a debt load so large that the company never really had a real shot at viability, which actually almost got Ford sued for fraudulent conveyance after the fact. The only reason it didn’t was because by 2005 Ford essentially admitted as much and in an attempt to make amends ended up voluntarily agreeing to buy back a large chunk of Visteon’s money losing operations (and the large pension obligations, amongst other ongoing expenses/liabilities that came along with them) that were strangling the company to death at the time.

The reprieve was short lived though, as various macro/cyclical/financial issues facing their OEM’s began to overwhelm any of the relief that the 2005 restructuring provided. Like nearly all of the auto suppliers over this period, a few of Visteon’s bloated hugely indebted OEM’s began to squeeze them in a desperate attempt to stay afloat, which obviously had a negative impact on the company’s profitability over the period in question. For reasons discussed below, we actually think these issues won’t be nearly as large of a concern over the next few years, although it is undoubtedly something to keep a close, watchful eye on in the years ahead.

A Classic Low-Risk, High-Reward Investment Opportunity

Whether or not the company actually trades higher upon re-listing, we think it’s pretty hard to lose money (under nearly any outcome we can imagine) purchasing VSTN at $48/share or roughly 3x EBITDA when its margins are expanding and 2/3rd of its revenues are coming from Asia. After all, Visteon is an established and fast growing market leader with rapidly improving fundamentals and a sticky and above average customer base. Granted this isn’t the best business in the world, but given the nature of how the industry operates (LT contracts, etc.), the company does have a pretty defensible niche – especially given its improved financial position, revamped operations and its diversified client base (who are for the most part healthy and growing ). Again, the current price is simply way to cheap all things considered.

Granted, most investors familiar with the company probably think of the company as it was in its pre-bankruptcy days – where the company had a bloated cost structure, a large amount of debt, a more concentrated customer base, and the majority of its business was derived from slower growth, lower margin U.S. and Western European markets. But that was then and this is now and as of today (i.e., post bankruptcy) the company is a very different animal as it possesses (we don’t think it ever hurts to reiterate it one more time) a lower “lean and mean” cost structure, a net cash position, a stronger, more diversified client base and best of all, the majority of the company’s business is now derived from rapidly growing, higher margin Asian markets.

The bottom line here is that the company is cheap, its fundamentals have clearly stabilized and it’s growing, margins are improving, and barring any worldwide catastrophe we think these trends will in all likelihood continue for at least the next couple of years. If not, the sizable margin of safety embedded in Visteon’s current price will likely ensure investors do okay regardless. The way we look at it is that if things get better, the upside from here should be spectacular. If they’re okay i.e., both economic conditions and global vehicle sales purely stabilize, we will likely still do very, very well. If they get worse, we will probably at least get our money back (or maybe even lose a little). All in all we like the risk/reward here.


We agree with MWhitman that the most appropriate way to value Visteon is on a Sum of the Parts basis, given the majority of Visteon’s current EV consists of a 70% interest in Halla Climate control (a publicy traded company in Korea) and a 50% interest in Chinese JV Yanfeng Visteon. In order to do that, one needs to separate the cash flows between the company’s Asian interests from the rest of the company and then apply an appropriate multiple to each piece. That way we can add up the pieces and adjust the balance sheet for the sources and uses of cash associated with the reorganization and hence, get an idea of what the consolidated company’s total value is at our base case multiple of 3.75x EBITDA (i.e., the low end multiple of Visteon’s comps).

Let’s begin with the value of the non-Asian segment. With consolidated 2011 EBITDA of roughly $675m, we need to subtract the 92.2m & 26.2m in net income from the Yanfeng and other JV’s. After that, we will need to add back 100m associated with the minority interest deduction and then last but not least, subtract Halla’s 325m in expected 2011 EBITDA. If we do the associated math, we find that our adjusted non-Asian 2011 EBITDA comes to 331m, which, if we then apply our chosen multiple of 3.75x 2011 EBITDA we will get a TEV of $1,243.7 for Visteon’s non-Asian assets.

As far as the values of the Asian assets are concerned, we think it makes sense to value Visteon’s 70% stake in Halla Climate at market, or roughly $1.1B. Probably due to the stigma associated with having a bankrupt parent, Halla trades at only 10x its 2010 after-tax earnings which is cheap from an absolute standpoint but especially so given Halla’s competitive position, above average growth prospects and improving profitability. Keep in mind that the health of Halla is a function of the health of Hyundai, which notably has a long history of steady growth and market share gains (which we expect to continue).

We take a similar tact with Visteon’s 50% stake in Chinese JV Yanfeng Visteon. With Yanfeng, we apply a multiple of only 9x after tax earnings or $829.7m – which again we feel is almost unjustifiably conservative given the qualitative and quantitative characteristics of this business (after all, JCI didn’t try and steal it in bankruptcy for nothing). On a relative basis, Yanfeng is also very cheap as all of its Shanghai, Japanese, and Hong Kong traded comps currently trade hands between roughly 10 and 15x after tax earnings.  Anyhow, if you are not as of yet sufficiently convinced with the conservatism of our valuation, did we mention that Yanfeng is a global industrial powerhouse with a diversified client base and 70 production facilities in China and elsewhere around the world (which explains why the company is currently ranked #4th out of 100 of China’s automotive component businesses)? How about the fact that it has been growing at over 60%? Now no business can grow that fast over the long term, but given the absolutely gigantic runway still ahead of it and the structural tailwinds firmly at its back, 15x after tax earnings certainly seems like a more rational multiple all things considered – but for conservatism’s sake, we will stick with or original 9x estimate. The only other piece of the puzzle in this regard is adding in Visteon’s 50% interest(s) in their other JV’s – and again, for conservatism’s sake we valued these additional JV’s at a conservative 5.5x after tax earnings (or $143.9m).

Last but not least we want to point out that the valuation below (again for conservatism’s sake) assumes 1) the billion plus NOL’s the company has are worthless, and 2) that the company doesn’t benefit from any future working capital releases associated with the restoration of trade terms. Obviously both should generate considerable amounts of value for shareholders.

Sum of the Parts

Non Asian Visteon EV = $1,243.7

70% Stake in Halla Climate = $1,122.1

50% stake in Yanfeng = $829.7

Other JV Interests = $143.8

TEV = 3,339.3

Exit Cash(1)= 785

Less: Cash at Halla = (100)

Warrant exercise Proceeds = 114.2

NOL (2) = 0

W/C Source of Cash (3) = 0

Exit Debt = (500)

Other Debt = (143)

Equity Value = $3,495.8

Shares Outstanding (mm) = 54.2

Value Per Share = $64.45

(1) See sources and Uses of Cash

(2) Book value of NOL’s were $1.6B as of 12/39/09

(3) There will be a material amount of cash from restoration of trade terms

Sources & Uses of Cash


Equity Right’s Offering  = $1250

Cash 6/30/2010 = $1160

New Term Loan Proceeds = $500

Additional Cash Generated since 6/30 = $60

Total Sources = $2,970


Prepetition Term Loan = $1659

Cash on B/S on Exit = $785.3

Administrative Claims = $105

ABL Claims = $ 127.2

DIP Facility = $75

Priority Tax Claims = $5.3

Other Claims = $5.4

Cash to other UnSec. Claims $83.4

Backstop Fee’s @3.50% = $43.8

Other Fee’s and Expenses = $80.5

Total Uses = $2,970

Thoughts on the Rearview & the Road Ahead:

We think that one of the silver linings of the turmoil of ’08 and early ’09 – and the restructuring’s and bankruptcy’s that followed – was that it caused many of the biggest OEM’s to fix their balance sheets, wring out unnecessary costs and rationalize their excess capacity, all of which have set the stage for a period of significantly improved profitability (for both the OEM’s and indirectly, the auto supplier group as a whole).  This is important as this new reality should make OEM’s considerably less likely to try and squeeze their suppliers (and hence depress their profitability), at least over the next few years or so.

Additionally (as odd as it may sound), the secondary effects of the great recession turned out to be even more positive for Visteon, as bankruptcy forced it to lower its cost structure, right size its capital structure (post reorg the company has zero net financial leverage) and revamp and transform its operational footprint, all of which should result in permanently improved operating performance and significantly better long-term growth prospects. We don’t think it’s a stretch to say that for all intents and purposes old Visteon and new Visteon are essentially completely different companies. We want to also quickly mention that it’ likely no small thing that for the first time since its arrival as a public company nearly a decade ago, the company as well as a significant amount of its customer’s/end markets are simultaneously healthy (or at least healthier).

So in sum, given the above in conjunction with the fact that global auto production has stabilized and that – at least for the moment – appears to be solidly growing again, it may be that Visteon’s next few years will actually be quite bright. In fact, we think the next few years likely will be, barring of course any sort of scorched earth scenario where global growth in vehicle production falls of a cliff. Again, Visteon is a materially better business today than it has ever been (and should trade at a materially higher valuation than an examination of its history would suggest), as the company should not only generate higher margin cash flows, but it should actually be able to grow those cash flows at a much faster clip given the large and faster growing runway ahead of it.


JCI Bid/Potential Asset Sale’s – Given that Johnson Controls has publicly stated that it is essentially chomping at the bit to make an offer for the company’s interior’s and electronics businesses (JCI recently mentioned that they are simply waiting until after the Visteon’s emergence from bankruptcy to re-start talks), we wouldn’t be at all surprised to see a significant amount of the company sold in the near-term.

Difficult Industry/Global Sales Decline – At the moment the rebound in global SAAR is a tailwind, but obviously if there was any significant decline in global vehicle sales from where we are at it, Visteon’s OEM’s would suffer and hence so would Visteon. Investors who intend to own the company for the long-term should always keep in mind that Visteon operates in a difficult industry. The auto parts industry is a cyclical, brutally competitive industry that is both labor and capital intensive. That said, given their position in the industry, any uptick or unexpected strength in global vehicle production should quickly benefit the company’s bottom line.

Management Incentives/Recent Sandbagging – As with all reorganizations, it’s helpful to have a solid understanding of the incentives of insiders/management when analyzing the opportunity. So given their options and the current global economic uncertainty, we don’t think it’s at all surprising that they have been grossly low-balling estimates over the course of the reorganization and will likely continue to do so at least for the near future (fwiw, this reality provides us with further confidence in the conservatism of our valuation).

When Issued Eligibility – In our opinion, given the cleaner arbitrage associated with the when issued shares, we think they are the ideal way to exploit the current mis-pricing. The problem though – at least for funds with less than 100m in AUM – is that smaller funds can’t effectively take advantage of it. For those of you without the requisite size and who are also attracted to the opportunity on a longer-term basis, one can always purchase the old equity (VSTNQ.PK). Interestingly the old equity will receive 1m shares and 1.57m warrants with a $58.80 strike price upon the newco’s relisting, so although not as cheap as the “when-issued” shares, at the current $0.52 they are still attractive. It’s important to know though that the trading dynamics of the old equity will likely be a lot different (i.e., less efficient, more volatile, etc.) than the new equity. Below is a sensitivity table regarding the trade-offs between the new and old equity.

28% 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x
HALLA P/E 8.0x 5.5% 11.8% 18.0% 24.2% 30.5% 36.7%
10.0x 15.4% 21.6% 27.9% 34.1% 40.3% 46.6%
12.0x 25.3% 31.5% 37.8% 44.0% 50.2% 56.5%
14.0x 35.2% 41.4% 47.6% 53.9% 60.1% 66.3%
16.0x 45.1% 51.3% 57.5% 63.8% 70.0% 76.2%
0.026393 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x
HALLA P/E 8.0x -22.8% -18.2% -13.6% -4.2% 7.5% 19.2%
10.0x -15.5% -9.1% 2.6% 14.4% 26.1% 37.8%
12.0x -2.2% 9.5% 21.2% 33.0% 44.7% 56.4%
14.0x 16.4% 28.1% 39.8% 51.5% 63.3% 75.0%
16.0x 35.0% 46.7% 58.4% 70.1% 81.9% 93.6%

Via Morgan Stanley/Arnaud Mares

DNA/Vivek Kaul Interview

H/T to Corner of Berkshire and Fairfax