oklavalue Posted January 7, 2010 Share Posted January 7, 2010 an informal poll...we all know the WEST stub, soon to be SNS debenture, is $8.05ish principal w/ a 14%/annual coupon. Will Sardar pay it off after one year? My thinking is beginning to change after reading the SNS shareholder letter. Initially i thought they would for sure pay it off in full after one year. But now, after reading how they think about debt, I am beginning to believe they may leave it outstanding. Link to comment Share on other sites More sharing options...
cheapguy Posted January 8, 2010 Share Posted January 8, 2010 What is the symbol to buy this WEST stub ? how to buy this debt as it yields 14% yield Link to comment Share on other sites More sharing options...
falconof880 Posted January 11, 2010 Share Posted January 11, 2010 The stub hasn't been created yet. From what I read from the Western Sizzlin press-release, the stub will be created once the merger is complete. Not sure if the stub will be tradeable. The document says: At closing, each share of Western’s common stock would be converted into the right to receive an amount equal to approximately $8.11 in the principal amount of debentures issued by SNS. It is anticipated that the SNS debentures will have a term of five (5) years, will bear interest at the rate of 14 percent per annum and will be prepayable without penalty at the option of SNS after one (1) year from the date of issuance. So you can participate by purchasing WEST shares, which currently trade at $8.71 / sh If I do my calculations correct, if you were able to buy at 8.11, you would have the following values at the end of each year. Year Value 0 8.11 1 9.25 2 10.54 3 12.02 4 13.70 5 15.62 If you were to buy at today's value of 8.71, then I compute returns to be: Year Value Annual Gain Total APR 0 8.71 1 9.25 6.1% 6.1% 2 10.54 14.0% 10.0% 3 12.02 14.0% 11.3% 4 13.70 14.0% 12.0% 5 15.62 14.0% 12.4% I own some WEST shares now, and am considering buying more just to get the stub. Seemingly low-risk bond-like security paying 10% loan after year 2. Anyone's thoughts on my crude analysis? Link to comment Share on other sites More sharing options...
Packer16 Posted January 14, 2010 Share Posted January 14, 2010 Is there any possibility that the merger will not be approved? If so, then what will happen to WEST? Packer Link to comment Share on other sites More sharing options...
Redskin212 Posted January 14, 2010 Share Posted January 14, 2010 Falcon, 14% per annum on the initial principal only. I don't think you should assume that you can reinvest the interest at 14% each year. Link to comment Share on other sites More sharing options...
scimonoce Posted January 15, 2010 Share Posted January 15, 2010 If $8.11 principal yields 14% than the coupon is $1.1354. That means - without talking about reinvesting - possible returns would look like this on a $8.71/share purchase price: Year 1: $8.11 + ($1.1354*1) = $9.2454 Year 2: $8.11 + ($1.1354*2) = $10.3808 Year 3: $8.11 + ($1.1354*3) = $11.5162 Year 4: $8.11 + ($1.1354*4) = $12.6516 Year 5: $8.11 + ($1.1354*5) = $13.787 That's something like 6.2% over 1 year to 9.62% over 5 years plus the time value. But that's before tax. Questions 1. Can you really get the stubs at $8.71/share - is the last trade near the ask? And: How many share can you get at that price? 2. How different is this from comparable bonds? I don't know much about bonds - and I'm just looking at the stubs based on what's been posted in this forum - but it looks like the possible returns aren't way out of line with where similar bonds would trade considering the risk of it being repaid. It doesn't look like a bad deal. But it doesn't look like a clearly great deal either. Just good for a bond. Am I missing something? Link to comment Share on other sites More sharing options...
falconof880 Posted January 15, 2010 Share Posted January 15, 2010 thanks for the correction, Redskin212. Link to comment Share on other sites More sharing options...
beerbaron Posted January 15, 2010 Share Posted January 15, 2010 Are these debentures redeemable? Why would Sadar keep a 14% interest rate in the books for a long time? Whatever the capital allocation skills of Sadar I doubt that he thinks he will do more then 14% (or around 10% after taxes deducted) in any type of market. Link to comment Share on other sites More sharing options...
ragnarisapirate Posted January 15, 2010 Share Posted January 15, 2010 Whatever the capital allocation skills of Sadar I doubt that he thinks he will do more then 14% (or around 10% after taxes deducted) in any type of market. I seem to remember Robert Moore's contract with WEST Franchise Corp, paying him a bonus based on c/f above 20% ROIC, or at least something along those lines (this was within a few months of Lehman)... Based on that, one could make an assumption that Biglari does think he can do better than 15%. But then again, we all know what happens when we assume. ;D In all seriousness, while my investment in, and thesis behind SNS isn't banking on ~15% ROIC for the holding company, I certainly don't dismiss the possibility that he could do significantly better for a decent period of time. In fact, that type of high ROIC it wouldn't shock me at all. Link to comment Share on other sites More sharing options...
oklavalue Posted January 15, 2010 Author Share Posted January 15, 2010 Exactly my point ragnar...and though it is a 14% headline number, the tax effect yield to the holding company will be lower than that. i.e. at a 30% tax rate, it will cost less than 10% year. Link to comment Share on other sites More sharing options...
Guest Bronco Posted March 16, 2010 Share Posted March 16, 2010 Not sure I like this. If I buy today at $9.00, and the company can redeem 1 year from issuance, then in theory I can lose the difference between the $9.00 I am paying versus the $8.11 par value. Am I missing something? Haven't done a lot of homework on this, but I wouldn't do this deal if the above is true. Link to comment Share on other sites More sharing options...
Junto Posted March 17, 2010 Share Posted March 17, 2010 Not sure I like this. If I buy today at $9.00, and the company can redeem 1 year from issuance, then in theory I can lose the difference between the $9.00 I am paying versus the $8.11 par value. Am I missing something? Haven't done a lot of homework on this, but I wouldn't do this deal if the above is true. You are correct. You would be paying a premium on the par value of the West Debenture. At 14%, and with SNS having marginal debt with significant liquidity at the consummation of the merger, this is expected from my standpoint. Link to comment Share on other sites More sharing options...
dowfin1 Posted March 17, 2010 Share Posted March 17, 2010 The negotiations over the WEST merger set out in the proxy statement are very revealing and indicate that Sardar wanted the call feature on the notes. With SNS cost of funds much lower than 14%, my bet is that the bonds are called after 1 year. Link to comment Share on other sites More sharing options...
link01 Posted March 17, 2010 Share Posted March 17, 2010 Not sure I like this. If I buy today at $9.00, and the company can redeem 1 year from issuance, then in theory I can lose the difference between the $9.00 I am paying versus the $8.11 par value. Am I missing something? arent u missing the 14% coupon? in any case, i'm keeping mine for now so i can defer the cap gains for at least 1 year... and more if luck has its way. cap gains are deferrable until redemption of the debentures, arent they? i could be wrong. i think the call feature will be exercised only if sardar finds himself with a scarcity of 20% plus investment opportunities going forward. Link to comment Share on other sites More sharing options...
Guest Bronco Posted March 17, 2010 Share Posted March 17, 2010 No, not missing the 14%. My point was that If I buy at $9 and get redeemed after 1 year at $8.11 (assuming that is the proper potential fact pattern, which I am still not clear on), then any interest income I would receive would be offset greatly by a capital loss. So anyone that bought at $8.11 or lower would be in good shape, but not me as a potential new owner (of which I will not be) at $9. Link to comment Share on other sites More sharing options...
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