Member Info for Deepvalue85

Hi dean01,

I think you may be amalgamating two different scenarios.

From my understanding, he can make a voluntary offer which would need 51% shareholder vote approval. From my understanding there are no constraints on offer price, I could be wrong though as I am not an expert at M&A, I just try to apply logic and reasoning.

The comment re CVA then becomes irrelevant if an offer is made and accepted. If you think about it logically, why would a major shareholder seek approval to explore options for buying the company if said person thought a CVA is: a) likely b) necessary or c) preferable?. This is just how I think about the situation and I could be wrong.

Hi sm66,

You can't liquidate a company you don't own. Yes, he is a majority share holder, but he doesn't own enough voting rights to determine this. Also, why would you want liquidate a company which don't own, and have requested permission from the board for a possible cash offer? Its illogical. Its a separate legal entity through which he has a percentage ownership of the business.

Yes it's market cap + debt - cash

Just to be clear, I am not saying the company is worth £78m, I am merely saying it seems interesting when you compare a dcf to the current market value, factoring in the probability of outcome. There are many ways a dcf can be wrong (assumptions in cf growth rates, incorrect discount rate build up). Small changes in dcf inputs can drastically affect NPV.

If you use a simple bit of arithmetic, and solve for X0.5 = £36,000,000 = £72,000,000. 0.5 is the probability as it is a binary bet. A dcf analysis using a 22% discount rate on normalised fcf and approx 2% growth rate in perpetuity comes to approx £78,000,000. This could be completely wrong.

Ah yes, understand where your coming from. However for me personally, these adjustments are just that... 'adjustments'. That's why I tend to focus most analysis on cash flows. You certainly will know that the balance sheet and income statement can be far more easily massaged than the cash flow statement.

It's interesting because the book value has shrunk since julian took over, and the business has maintained its strategy to reduce the level of aged inventory, even though the aftermath of the covid pandemic had a significant impact on the business (reduced revenue, increased debt etc.) That says alot julian as a person. From my perspective he is not as concerned about what the market thinks and dressing up the balance, quite the opposite actually.

I suspect that the business will return to profitability in 2025, once they have completed the aged inventory reduction. In theory, 2025 revenue should increase with full pricing. The caveat being the operating costs. If he can sort that out, which was made reference to in the H1 update, then business would be better appreciated by the market.

Or I am wrong.

Hi SaintNick,

From what I can see re tax, it looks like a deferred tax asset reverse charge of £66m due to uncertainty around the business.

Regarding lease provisions, I cannot find the numbers you reference on the balance sheet. Could you provide more detail? The ROU asset and leas liability changes due to IFRS16 are quite complex for me. From what I understand, ROU assets are depreciated linearly, whilst the lease liability use a discounting method at the rate of interest for the leases and the carrying value is the total nett of this. This is an interesting topic for how we factor these things in to valuation models. For me, these are secondary considerations, but important non the less. I basically used a very conservative dcf for valuation and take a rational view of the businesses liquity, solvency etc and quality of management. Rather be roughly right than precisely wrong.

That is correct. The recent IP sale isn't in the accounts yet. But I wouldn't read too much into that as they will have cash outflows post H1. I find looking at yearly movements in current assets and current liabilities more helpful as it strips out seasonality movements in cash, working capital etc. That's just my approach though.

It's no problem at all.

Hi Toffers,

I'm sorry but that is incorrect. If you take the cash and cash equivalents and minus total debt and it give you a negative number (in superdry's case, it is a negative number) that means the company has a net debt balance. Meaning it has more debt liabilities than cash assets. Hope that explains it. It is not unusual at all to see businesses with net debt positions.

I noticed that. That's what my reply was in reference to. When I was replying the screen went blank and malfunctioned.

Hi Toffers,

The net debt/cash position is calculated by taking the cash and cash equivalents and subtracting total long and short term debt. Therefore, superdry as of H1 has a net debt position.

Hi Toffers,

I tend to stick with facts, logic and reasoning. The other directors shareholdings do not factor into my analysis. Some individuals, even at director level do not feel comfortable holding securities. I do not see any reason why the other directors would leave the company should it be taken private or bought out by A.N.Other... this is not unusual. I just stick with working out what the company is worth. However, one of the factors did peak my interest originally was the large shareholding by the CEO. Logically, that suggest his incentive is aligned with other shareholders. Not much more I can say really. Sorry if this doesn't help.

Hi Toffers,

I suspect the leveraged buy out may be a route julian is considering. The leverage however will be the finance from partner. He will have a debt partner to assist with the offer. The reason he cannot use the existing revolving credit facility is because its the company's debt. In accounting terms, the business is considered a separate legal entity... the debts are the businesses.

That's the companys debt, he can't use that. It's a separate legal entity.

Does that change how you think about the company or change your investment thesis?

Can I ask question... why does the marginal difference matter?

This is insanity. To say the offer is not about the accounts is crazy. Of course the offer will be based off the accounts.

This is a difficult question. However, the company is free cash flow positive. The free cash is a bit skewed over the last couple of years due to the sale of IP,s, and they do have a few more levers to pull. CVA is plausible. However, the company has not defaulted on any of its debts. There is a qualitative factor ro consider... the reputation of the company and ceo. CVA is not a great situation as perception is of weakness. I do not place a high probability of CVA, that doesn't mean it will not happen. The market clearly doesn't place a high probability of CVA either, otherwise the market cap would have already been destroyed. If the company can get its balance in order, and reduce its cost of capital, and rightsize the business and be successful in branding strategy, the company in theory can execute its turnaround strategy. The counter to this probability is that statistically, turnarounds are rarely successful, but it is possible it can be completed successfully. The compa y really needs to sort out its leases and we need to see the evidence (that is, if the company is still floated), that they have pricing power. The way I see it currently, they are price takers, not price makers. It is a very interesting situation. The CEO does appear to be doing the right things for the business, but the market is brutal and punishes businesses that are struggling... they need to see evidence that the turnaround is working. Just my thoughts.

Valuations will be produced by cfa's using industry standard valuation methods (dcf, multiples, ev/ebit). I suspect multiple models will be produced which portray varying scenarios (capital structures, normalised inventory, changes in lease agreements, number of stores, changes in revenue mix relating to geographics etc.) The value of any investment is the present value of future cash flows, discounted back at the appropriate discount rate... that's the hard part, what is the correct discount rate? This is a risk arbitrage situation. The investment should ideally be made on the valuation appraisal and the probability of a successful outcome. The concerning part of the equation is the balance sheet. Currently, as I understand it, the business fails the asset solvency test (liabilities exceed assets) this should be taken into consideration. That is not to say this is a bad investment, just that it needs to be considered. For those interested in this type of investment, I would strongly recommend reading up on mergers and acquisitions. This particular situation will likely fall under cash merger arbitrage (risk arbitrage). Just my thoughts.