Thanks for the write-up, very interesting situation.
I assume the $360m pro forma valuation quoted in the article is the $150m BC Partners cash investment divided by the 41.6% stake on a fully converted basis? From what I understand though the conversion of the BC Partners pref into common is at their election, so how are you thinking about the asymmetry between the two return profiles (pref vs. common)? When thinking about the outcome of the potential investment to be carried out by the venture, it appears BC partners have a significant margin of safety to make at least their money back plus an 8% pref, even if the underlying investment produces a negative return.
I guess what the company get in return is BC Partner's deal sourcing and execution capabilities. I'm not sure its worth the very significant asymmetry in returns though - while upside is shared equally, most of the downside is borne by the common shareholders.
Separately (and assuming $360m is the right way of thinking about the pro forma valuation, for argument's sake), why do you deduct only the $150m cash investment to get to the implied value of the NOLs? Following the BC partners investment, the company will have approx. $300m of cash, so that would mean $60m for the value ascribed to the NOLs?
Yes that is the calculation. Shareholders get a deal maker and additional capital for a deal. I don't think BC is looking to waste their time for an 8% return. Keep in mind the initial interest is 4% until a deal gets done. 75 million is available now. 75 million on close of acquisition. I'm assuming that if a deal is closed that it would increase the stock price more than the cash value. If you did the math the way you describe, that is correct absent a deal although I think its a bit more complicated than that in actuality. To really understand this situation, WMIH is a good case study. It was a similar setup with KKR. WMIH was the shell leftover from Washington Mutual.
Not suggesting BC Partners would be targeting an 8% return. But even a 20% underwritten IRR can be a low single digit or negative IRR when the investment is realised after 4-5 years. In which case BC Partners would still be making their 8% while common shareholders are losing a significant amount of their $150m investment. So just thinking about spectrum of potential outcomes and asymmetry.
I note BTW that in the appendix to the SEC filing the company have omitted the document that describes the exact mechanics of the pref. So I've assumed that it's conversion at the election of BC Partners at a time of their choosing, and a 1x liquidation preference, which seems to me is the most likely absent any other info.
Thanks for the interesting write up. I’m confused about one aspect of the piece re: the covered call strategy. The price is currently right around $7. I’m wondering where the upside in the stock is if you’re selling the July $7c minus the $1.10-$1.30 premium you’re getting for the call. Is this a play just for the premium?
Its a play on that a deal will take longer than 4 months. If your call is taken out, you make 18 percent. If it doesn't, you keep your shares at a lower cost basis and can sell another call. Its sort of a win win in my book. The biggest downside risk is they do a stupid deal but this isn't a spac so hopefully that gets avoided.
Are there precedents where NOLs successfully survived after a cash shell made an acquisition? It feels like this situation revolves around a tax dodge, which perhaps isn’t a solid investment thesis. And without the NOLs, isn’t it more like any old reverse merger situation where investors don’t know what business they are going to get and the cash shell might overpay, too?
Thanks, good example, indeed. I see that $LOGC also has a tax ‘poison pill’ to avoid triggering s.382, although that convertible pref deal seems to be cutting it close.
Interesting write-up. I've always found the federal corporate NOL rules and associated limitation rules (e.g., Section 382) confusing in practice but agree that BC Partners and their tax advisors should be capable of structuring future deals in such a way to preserve use of some portion of the NOLs for any acquired or merged businesses. Though it may limit structuring possibilities.
Quick question: do we know what years the NOLs were earned? I believe that corporate NOLs arising in tax years beginning after 12/31/2017 (i.e., after TCJA) do not expire (See IRC Section 172 (b)(1)(A)(ii)). However, as a baseline they can't be carrybacked and no more than 80% of NOLs can be used in an individual future tax year.
Thanks for the write-up, very interesting situation.
I assume the $360m pro forma valuation quoted in the article is the $150m BC Partners cash investment divided by the 41.6% stake on a fully converted basis? From what I understand though the conversion of the BC Partners pref into common is at their election, so how are you thinking about the asymmetry between the two return profiles (pref vs. common)? When thinking about the outcome of the potential investment to be carried out by the venture, it appears BC partners have a significant margin of safety to make at least their money back plus an 8% pref, even if the underlying investment produces a negative return.
I guess what the company get in return is BC Partner's deal sourcing and execution capabilities. I'm not sure its worth the very significant asymmetry in returns though - while upside is shared equally, most of the downside is borne by the common shareholders.
Separately (and assuming $360m is the right way of thinking about the pro forma valuation, for argument's sake), why do you deduct only the $150m cash investment to get to the implied value of the NOLs? Following the BC partners investment, the company will have approx. $300m of cash, so that would mean $60m for the value ascribed to the NOLs?
Thanks!
Yes that is the calculation. Shareholders get a deal maker and additional capital for a deal. I don't think BC is looking to waste their time for an 8% return. Keep in mind the initial interest is 4% until a deal gets done. 75 million is available now. 75 million on close of acquisition. I'm assuming that if a deal is closed that it would increase the stock price more than the cash value. If you did the math the way you describe, that is correct absent a deal although I think its a bit more complicated than that in actuality. To really understand this situation, WMIH is a good case study. It was a similar setup with KKR. WMIH was the shell leftover from Washington Mutual.
Thanks, appreciate the additional colour!
Not suggesting BC Partners would be targeting an 8% return. But even a 20% underwritten IRR can be a low single digit or negative IRR when the investment is realised after 4-5 years. In which case BC Partners would still be making their 8% while common shareholders are losing a significant amount of their $150m investment. So just thinking about spectrum of potential outcomes and asymmetry.
I note BTW that in the appendix to the SEC filing the company have omitted the document that describes the exact mechanics of the pref. So I've assumed that it's conversion at the election of BC Partners at a time of their choosing, and a 1x liquidation preference, which seems to me is the most likely absent any other info.
Thanks for the interesting write up. I’m confused about one aspect of the piece re: the covered call strategy. The price is currently right around $7. I’m wondering where the upside in the stock is if you’re selling the July $7c minus the $1.10-$1.30 premium you’re getting for the call. Is this a play just for the premium?
Thanks for any clarification.
Its a play on that a deal will take longer than 4 months. If your call is taken out, you make 18 percent. If it doesn't, you keep your shares at a lower cost basis and can sell another call. Its sort of a win win in my book. The biggest downside risk is they do a stupid deal but this isn't a spac so hopefully that gets avoided.
Appreciate the added color. Thanks very much you have great pieces and really unearth some cool stuff.
Are there precedents where NOLs successfully survived after a cash shell made an acquisition? It feels like this situation revolves around a tax dodge, which perhaps isn’t a solid investment thesis. And without the NOLs, isn’t it more like any old reverse merger situation where investors don’t know what business they are going to get and the cash shell might overpay, too?
Yes i was involved in one. https://www.housingwire.com/articles/42516-nationstar-aka-mr-cooper-merging-with-wmih-corp-in-38-billion-deal/
Thanks, good example, indeed. I see that $LOGC also has a tax ‘poison pill’ to avoid triggering s.382, although that convertible pref deal seems to be cutting it close.
Interesting write-up. I've always found the federal corporate NOL rules and associated limitation rules (e.g., Section 382) confusing in practice but agree that BC Partners and their tax advisors should be capable of structuring future deals in such a way to preserve use of some portion of the NOLs for any acquired or merged businesses. Though it may limit structuring possibilities.
Quick question: do we know what years the NOLs were earned? I believe that corporate NOLs arising in tax years beginning after 12/31/2017 (i.e., after TCJA) do not expire (See IRC Section 172 (b)(1)(A)(ii)). However, as a baseline they can't be carrybacked and no more than 80% of NOLs can be used in an individual future tax year.
Most of them are post 2017