SGGH - Signature Group Holdings

[Laxputs]

Signature Group Holdings.

 

Holding company with 900mm NOLs.

Acquiring aluminum recycler "GRSA" (low-cost producer, global market leader in aluminum recycling).

Expected industry tailwinds in aluminum recycling.

Talented CEO.

 

I have them around 6.3x pro forma EV/EBITDA or about 7x FCF. The acquisition should close early 2015 (January perhaps). I highly recommend reading the LTS and the last conference call. MGMT is very explicit on what the plans are for the biz and gives specific details on debt, shares, acquisitions. etc.

 

What price would you be willing to pay for them? (please state your IRR hurdle as well).

 

I think they are cheap and the long-term prospects excellent--it just takes a lot to make it into my top 10 holdings now given the potential IRRs on other companies.

 

Inv Pres: http://signature.q4cdn.com/4f069766-3d0f-4d58-bcde-4f0622822b10.pdf?noexit=true

LTS: http://www.signaturegroupholdings.com/ceo-letter/default.aspx

Conference call: http://www.signaturegroupholdings.com/resources/Investor-Calls/default.aspx

 

TIA

[Tim Eriksen]

What rate do you expect them to pay on the $370 million of new debt?

What rate do you expect them to pay on the $30 million of new preferred?

 

 

[Laxputs]

I had used 5% on the 300m and 7% on the 30m of preferred. I believe the second one was mentioned and I guessed on the first. Also, I should have reduced the EV by the value of the NOL at a certain discount rate (which I did not do). So it should be somewhat cheaper than I originally stated based on EV/EBITDA. 

 

I'll get back to this in a couple days and see if I can be more specific on the interest on the debt.

[Tim Eriksen]

I had used 5% on the 300m and 7% on the 30m of preferred. I believe the second one was mentioned and I guessed on the first. Also, I should have reduced the EV by the value of the NOL at a certain discount rate (which I did not do). So it should be somewhat cheaper than I originally stated based on EV/EBITDA. 

 

I'll get back to this in a couple days and see if I can be more specific on the interest on the debt.

 

The biggest concern that jumps out at me is that they are paying $525 million for a business with a net income of $23 million.  Adding back taxes of $5 million brings it to $28 million (18.75 x).  There was $22 million of depreciation, which means the prior owner was showing $50 million of EBITDA (paying 10.5x).  SGGH adjusts the EBITDA figure by adding $4 million of other and $20 million of SG&A that they will presumably eliminate to get adjusted EBITDA.  That brings up two issues.  1) If I were a lender I would only assume the $50 million figure not the $80 million.  So they need to borrow 6x EBITDA.  Is 5% a realistic rate in this market?  2) Without having listened to the conference call the $30 million adjustment seems incredibly optimistic.

 

How did you derive the 6.3x EV/EBITDA.  They need to use up all their cash, raise $125 million of common equity, $30 million of preferred, and borrow $370 million.  That is $525 plus existing debt of $15 million and equity of $80 million.  That is an EV of $620 million versus an optimistic EBITDA of $80 million which is 7.75x.  The actual business did EBITDA of $50 million, which would be 12.4x.