GTX - Garrett Motion

[hasilp89]

i've got my popcorn out. thanks for sharing!

[wabuffo]

I think the EC was mostly successful in yesterday's hearing.  Good news for the stock.

 

BBG Headline:  Garrett Judge Questions Stock Deal, Promoting Shareholders Talks

 

wabuffo

[hasilp89]

Cheers I saw a headline that they’d be mediating/negotiating. Feels a long way from the ~$1.30 low!

[hasilp89]

saw wabuffos post on another thread on this but tracked down and read the bloomberg article that said the equity committee and centerbridge/oaktree have come to an agreement. more details still to come but looks like existing shareholders will get greater allocation in the rights offering - positive news (let me know if I'm missing something).

[wabuffo]

some folks who were in the stock might have been hoping for a higher cash-out price offer (I don't think the $6.25 price has changed under this new agreement).  I think there is some disappointment among those folks and they are probably selling today.

 

wabuffo

[hasilp89]

thanks for clarifying. I'm hopeful for more pref A. and am keeping enough cash on hand accordingly.

[ugadawg_98]

Reorg Podcast with more detail of deal:

 

https://player.fm/series/reorg-ruminations/americas-core-credit-brazos-chapter-11-filing-and-hertz-chapter-11-plan-mar-5-2021

[hasilp89]

8-k filed today. let me give it a shot and wabuffo can correct all my errors :)

 

-cash out option remains at $6.25.

-Pref A sized at $1.3B - 50% new money, 50% rights offering to existing shareholders. Existing holders allocated 3x what they were previously allocated.

-Strike of $5.25 = 248m new shares. Down from $3.50 previously new shares 357 in prior offer if I'm reading it right

-Previously existing shareholders got rights to .75 Pref A for every common they held, now it is ~1.6 Pref A for every common they hold

- Ultimately less dilution and higher implied value for existing holders

attempted to layout along side prior COH offer from wabuffo's post.

 

[writser]

I don't understand your implied value of pre-reorganization shares. I think something goes wrong there. Also, the pref available to common holders is $580m, you forget to subtract the 8% backstop fee.

 

Fully diluted shares outstanding are ~324m indeed. How many of those shares would be owned by current shareholders assuming they all exercise their rights? They already own 75.7m shares and get 580 / 5.25 = 110m extra shares. So, after the reorg they own how much of the total share count outstanding? How much is that stake worth? Work back from there.

 

 

[wabuffo]

hasilp89 - you have a number of small errors in your spreadsheet.

 

- I get implied equity value of $2,482 vs your $2,271.  There's $142m in restricted cash that goes back to the balance sheet.  But the whole enterprise value is based on a forecast, so who knows what run rate adj. EBITDA and multiples will be.  But FWIW, I get $7.67 post-conversion equity value per share (after all preferred shares are converted).

- the bigger issue is, as writser pointed out, the rights pool is not $632, its $578.6 because 8.4% of the pool goes straight to the backstop party right off the top.

- $578.6/$5.25 conversion price per right = 110.2 new common shares from the rights exercise.  That makes your "new shares available per each existing share owned" = 1.45 and not 1.58

- that, in turn, makes your "cost of subscription right" = 1.45 x $5.25 = ($7.61) not ($8.28).

 

So putting it together =  (1+1.45) x $7.67 = $18.79 less cost of exercising subscription right at $7.61 = $18.79 - $7.61 = $11.18 implied value of pre-petition, pre-rights exercised common shares.

Hope that helps.

wabuffo

[hasilp89]

hasilp89 - you have a number of small errors in your spreadsheet.

 

- I get implied equity value of $2,482 vs your $2,271.  There's $142m in restricted cash that goes back to the balance sheet.  But the whole enterprise value is based on a forecast, so who knows what run rate adj. EBITDA and multiples will be.  But FWIW, I get $7.67 post-conversion equity value per share (after all preferred shares are converted).

- the bigger issue is, as writser pointed out, the rights pool is not $632, its $578.6 because 8.4% of the pool goes straight to the backstop party right off the top.

- $578.6/$5.25 conversion price per right = 110.2 new common shares from the rights exercise.  That makes your "new shares available per each existing share owned" = 1.45 and not 1.58

- that, in turn, makes your "cost of subscription right" = 1.45 x $5.25 = ($7.61) not ($8.28).

 

So putting it together =  (1+1.45) x $7.67 = $18.79 less cost of exercising subscription right at $7.61 = $18.79 - $7.61 = $11.18 implied value of pre-petition, pre-rights exercised common shares.

Hope that helps.

wabuffo

 

that does - thank you both for spotting that - i see where i missed the backstop party take in calculating the rights pool. I get to similar numbers as you when i adjust for that.

[writser]

I think you are still making a tiny mistake: in the final plan the series A raises $50m more than the original plan. Now, in your calculations you convert the series A into equity, i.e. you convert the liability into extra shares. Upsized pref offering results in more shares outstanding, fully diluted.

 

However, if you raise more cash, that cash ends up on the balance sheet. So if you had $120m in cash remaining in the old plan and your liabilities stay the same (because you convert the prefs), the cash on the balance sheet in the new plan should be $170m. That adds a tiny bit extra value.

 

Of course it's not that significant in the big picture, lots of moving parts. The massive question is of course what the EV of the operating business should be. Is a 6.5x multiple on 2017-2019 numbers fair? Where is BWA trading? Is that a better business or not? What EBITDA numbers can we expect in the near future? The numbers we are now using have been given to us by the consortium themselves (document #273 in the docket). You could argue that they have some reasons to lowball enterprise value: that makes their offer look fair and makes the cash-out option look attractive.

 

I'm not very comfortable making any predictions about the enterprise value, I'm not a super good business analyst and I know next to nothing about the turbocharger business. But it seems pretty clear to me that if you play around with some numbers that the cash-out option is inferior. It protects your downside though. So the fact that you could pick up shares for ~$6.30 today seems really strange to me. Not a single consortium member cashes out. They are backstopping the rights agreement. They have been fighting with the equity committee to keep all the prefs for themselves. They still get to buy a shitload of prefs on top of their backstop and their allocation for the common shares they are holding. Some basic calculations show that this optionality could be worth $10 - $20 per _current_ share. Yet the market values this optionality at $0.05? I don't get that.

 

Maybe I am completely wrong, of course. Maybe there is a significant risk that the deal collapses, maybe Garrett is a shit business, etc.

 

Finally, hat tip to Wabuffo for being the grand master of sifting through situations like these.

[hasilp89]

I think you are still making a tiny mistake: in the final plan the series A raises $50m more than the original plan. Now, in your calculations you convert the series A into equity, i.e. you convert the liability into extra shares. Upsized pref offering results in more shares outstanding, fully diluted.

 

However, if you raise more cash, that cash ends up on the balance sheet. So if you had $120m in cash remaining in the old plan and your liabilities stay the same (because you convert the prefs), the cash on the balance sheet in the new plan should be $170m. That adds a tiny bit extra value.

 

Of course it's not that significant in the big picture, lots of moving parts. The massive question is of course what the EV of the operating business should be. Is a 6.5x multiple on 2017-2019 numbers fair? Where is BWA trading? Is that a better business or not? What EBITDA numbers can we expect in the near future? The numbers we are now using have been given to us by the consortium themselves (document #273 in the docket). You could argue that they have some reasons to lowball enterprise value: that makes their offer look fair and makes the cash-out option look attractive.

 

I'm not very comfortable making any predictions about the enterprise value, I'm not a super good business analyst and I know next to nothing about the turbocharger business. But it seems pretty clear to me that if you play around with some numbers that the cash-out option is inferior. It protects your downside though. So the fact that you could pick up shares for ~$6.30 today seems really strange to me. Not a single consortium member cashes out. They are backstopping the rights agreement. They have been fighting with the equity committee to keep all the prefs for themselves. They still get to buy a shitload of prefs on top of their backstop and their allocation for the common shares they are holding. Some basic calculations show that this optionality could be worth $10 - $20 per _current_ share. Yet the market values this optionality at $0.05? I don't get that.

 

Maybe I am completely wrong, of course. Maybe there is a significant risk that the deal collapses, maybe Garrett is a shit business, etc.

 

yes that extra $50m on the Balance sheet makes sense, appreciate the explanation. But yes the massive question is on EV. I just saw their lend presentation from Feb 23rd (don't believe i saw it posted here or discussed). Should we not be using those numbers? Based on the old plan they are showing a $322 cash balance at emergence which would be $372 with the additional $50m

FWIW they are projecting $520m of EBITDA in 2021 and $596 in 2022. ($580 in 2019 and $440 in 2020).

As you can tell by my limitations here I'm not necessarily a great analyst but the diligence I did on the industry/company/turbochargers pre-pandemic pre-bankruptcy left me positive on the LT trend in turbocharger volumes and GTX's market position. At that point auto CEO's were touting the need for turbochargers to improve engine efficiency and meet standards, GTX was integrated with all global auto OEM's which were growing the number of platforms that used turbochargers, their turbos had a good reputation in the secondary/performance markets and it was just them and BWA. Maybe I'm simplifying things but it always appeared to me that it was at least a good business with some tailwinds - not a great one but definitely not a shit one. Now what maybe keeping people away is the belief that there is much faster than projected EV adoption, GTX's volumes are heavily dependent on automakers needing able to hit certain mileage targets through 2025, 2030 etc - that demand goes away if everyone is driving a lucidmobile.

 

On your point of the consortium not cashing out / attempting to get as much of the pie as possible - wouldn't that indicate that they are indeed very bullish on the business (Centerbridge/Oaktree taking 4 of 7 board seats and wanting to drive the outcome here)? Is there anything technical here at play where a majority of the market isn't even looking at it given is current state hence the optionality being valued at 5 cents?

 

 

 

http://d18rn0p25nwr6d.cloudfront.net/CIK-0001735707/49a7d453-321b-489c-a657-071a10b556d3.pdf

[writser]

I can't make sense of the market price either. But yeah, by far the weakest link in my story is the valuation of the operating business. The good thing is, at $6.30 you can always change your mind for free! New financial projections were filed today: http://www.kccllc.net/garrettmotion/document/2012212210310000000000003

 

 

On top of that guidance for Q1 is now $165m in adjusted EBITDA. What multiple to slap on this? Is this guidance conservative or not? These are difficult questions for me. I'm probably a decent stock analyst but not really a sharp business analyst. But if this forecast is ballpark correct and we slap the historical GTX multiple on this (which is quite a bit below where BWA is currently trading, which is up significantly this year, mind you), I don't know, that doesn't seem overly crazy to me.

[writser]

There is some confusion about the record date. If you look at, for example, document 995, page 126 - 128. Holders on the Voting Record Date (March, 9) already have to choose whether to cash out or not.

 

So, what happens if you are buying / selling shares today? Can you still opt-in to the voluntary release? What if you do and quote? Who will get the rights? Is this why the common isn't trading higher? Ughhh, these questions, not again ..

 

[hasilp89]

I have no clue on the dates. Hopefully wabuffo has something for us.

 

Taking a stab at your question on them delivering on projections/ebitda. ( the table shows $166 for Jan-apr but then footnote 2 says $165 For q1. Lender preso  shows $129 for q1 (footnote must be wrong)).

 

-haven’t done extensive research on the pick up in global lv and commercial vehicle production - know two headwinds this year will be semi conductors and steel prices. Either way they do quote Jan as doing $50m of Ebitda at an 18% margin which is a good start to the year.

 

-Maybe naïve but thinking of it from mgmts perspective 1) these are the same numbers lenders are seeing, what covenants will be set off of, what conversion is set off of etc, I’d assume mgmt would err on the conservative side, 2) they are now answering to centerbridge, oaktree and Honeywell on the board, again assume they wouldn’t overpromise - the board is not full of unaligned yes men, be careful what you wish for Olivier.

 

-On the business side I don’t believe I’ve seen volume numbers in public filings below. Flat volumes vs. 2019 which is a mix shift with growth in Gas LVs and declines in commercial and diesel lvs.  Or hard to imagine lv production slightly down from 2019 but turbo/gtx penetration rising. Interesting that they’ve shown  contingencies, conservativ.. Lender pres also shows 100% of 2021 Lv volumes have been awarded (~50% of revenues), barring oems unable to produce (shutdown 2.0, semi conductor shortage) that revenue is fairly certain.

 

-Fwiw in March 2020 they guided to $440-$480m based on a 5-7% decline in LV production and 7-10% in commercial production. Bbg has good data but I don’t have access, quick google searches show 15%+ declines so would say they outperformed there.

 

When you put it in terms of a 5 cent option, I might be talking myself into buying more here…assuming March 9th wasn’t some sort of cut off date.

 

[hasilp89]

Saw the comment on Twitter claiming the record date was the 15th per the judge. Have you seen any evidence of that.

[wabuffo]

Saw the comment on Twitter claiming the record date was the 15th per the judge. Have you seen any evidence of that.

 

Yes - there is a BBG report also saying that at the hearing today, the BK Judge pushed the record date to March 15th.  Probably explains why the stock reversed its drop in the morning and started climbing in price in the afternoon (hearing was at 11am).

 

wabuffo

[hasilp89]

Saw the comment on Twitter claiming the record date was the 15th per the judge. Have you seen any evidence of that.

 

Yes - there is a BBG report also saying that at the hearing today, the BK Judge pushed the record date to March 15th.  Probably explains why the stock reversed its drop in the morning and started climbing in price in the afternoon (hearing was at 11am).

 

wabuffo

 

Thank you for clarifying (as always)

[Lupo Lupus]

Apparently, one has to be an accredited investor to participate in the rights offering:

 

https://yetanothervalueblog.com/2021/03/gtxmq-a-word-on-the-record-date.html

[BG2008]

Apparently, one has to be an accredited investor to participate in the rights offering:

 

https://yetanothervalueblog.com/2021/03/gtxmq-a-word-on-the-record-date.html

 

You can buy all the options that you want on Robinhood but needs to be accredited to participate in rights offerings, hmm.

[wabuffo]

That article is incorrect.  There are two tiers of rights eligibility.  One everyone gets (1 right per common share) and an added amount (additional .45 rights per share) that gets added for Accredited investors.  So retail investors get ~70% of the rights that Accredited Investors get.

 

wabuffo

[hasilp89]

Want to make sure I’m thinking about the 3/15 record date accurately. My assumption is it’s similar to an ex-div date. As of close 3/15 any owners will be eligible to subscribe (taking into account the whole accredited investor split). Ie if you went and sold 3/16 you’d still be eligible to subscribe.

 

 

[writser]

Just to be sure: the record date is not equal to the ex-date. Stocks in the US settle on a T+2 basis. You buy on Monday, you are a holder of record on Wednesday. So March, 11 was the last day you could buy and still be eligible to participate in the rights offering.

 

If things stay the way they are (no amendments, judge doesn’t change his mind) the common is now trading post-reorg. I.e. buy today and you can neither cash out nor buy prefs.

[hasilp89]

Thanks writser