This is not a takeover bid (Tender Offer) it’s new debt at +13%, which overpays the shares at $2.50, while Drahi sits in the protected bracket (Preferred) + MOIC (1.50x)
I've been tracking this one and agree with your thoughts.
The tricky thing is sometimes lenders just give up value to the equity. And sometimes they give up way more than you would ever think is reasonable.
Recent examples are RGS, WW, NFE, BBGI. The lenders sometimes willingly take significant haircuts, but still allow the equity to survive in order to accelerate the restructuring process.
I think everyone realizes how insanely expensive the bankruptcy process has become, so the equity can use that as a source of bargaining leverage.
The MC would still be $250m at 50c, so maybe all this is not relevant in the OPTU case as that still implies a lot of value capture for the equity.
There would be a way to restructure such that the common equity is zeroed and Drahi still comes out with $200m in ownership. There’s always some provision for management equity packages. You could include Drahi comp there.
Another tricky thing - isn’t cable on the whole facing real structural headwinds? Their resi broadband subs are still declining. I thought at an accelerated rate. So I don’t know how financial engineering can save the situation with this much leverage and this poor of operating trends.
I mean, maybe? He already has majority voting power, so if it was as easy as comping himself $200MM cash, I’m sure he would have done it already. Maybe he wakes up one day and decides to burn the creditors AND the common for his own benefit. But if the past is any guide to the future, I imagine it will probably look something like how Altice France is playing out. I do genuinely believe that he wants to “beat” the creditors.
These cable businesses are no longer the local monopolies they once were. They are still valuable, but you sure as hell can’t lever them like you used to. At the pre-tender implied stub price of ~$0.20-0.40 a share, this was an insanely cheap call option. Idk if it’s a no-brainer anymore, but I also don’t think it’s a straightforward short either…
I just mean that a normal part of the restructuring process is creating a management incentive pool for post reorganization.
From ChatGPT "In a creditor-led Chapter 11 / distressed equitization, the typical management incentive pool is ~5–10% of the reorganized company on a fully diluted basis, with 10% very common."
Drahi could negotiate for a particularly generous management incentive pool, which would preserve value for him while zero'ing the equity.
I guess I'm just shocked the equity still has value here. It's not exactly a small stub. It is a >$600m market cap.
Charter, Comcast, and Cable One trade ~5x EV/EBITDA. Optimum's ND/EBITDA was 7.5x before this recent financial engineering. Optimum also has the worst broadband trends. How the equity survives is a bit of a mystery unless they pull off a dramatic operational turnaround or somehow figure out ways to truly and epicly screw creditors and shift that value to the equity.
I agree with your comment and I am here to learn. Just so you know, the shorts were short-lived. Otherwise, I did some research on Drahi and he seems to be a person who uses every conceivable way to extract the most value for him.
He doesn’t give the impression of being an honest person, especially with his LBOs in recent years. He uses every conceivable way of financial engineering. (I studied what happened in France.)
For the tax loss of about 4 billion, its value is almost zero for the common shareholders. Except in scenarios: a merge or a pre-chapter 11 with a debt to equity flip… (This would mean that the shares are no longer trading for several months, with the risk of being delisted (OTC). Then, a forced sale for several investors.), but it seems that this blocks use for 2 years, if I understand correctly?
By applying a 27% tax rate, a use from now (impossible) over 10 years with a 15% discount-rate, this gives us a maximum of $2 in value per share. However, there are scenarios that do not yield more than $0.30 per valuable share.
Then, at current prices, the EV/NOPAT seems to me to be more than 16x and a CAPEX cycle behind schedule. In France, Drahi achieved the same thing by underinvesting for several years to “successfully” repay his debt… (and artificially increase his FCF). It is very likely that a buyer will pay a multiple of EV/EBITDA at the bottom of comparable range, am I right?
I will focus here on the risks and the reasons why the price could still fall in the medium term. Whether we are long or short, this case is very risky for both sides. On my end, I closed my shorts.
I think the point on the taxes isn’t that NOLs have value. I think it’s that if the creditors claim value from the unrestricted subsidiaries, it will trigger deconsolidation, and that will trigger a very large claim for taxes. So the creditors will then have worse recoveries because they will have a new $4bn claim competing with their claims. So basically the bulls are saying Drahi will get away with stripping all this value from creditors because creditors don’t want a $4bn competitive claim.
The embedded $4Bn+ de-consolidation tax liability and 2.5x preferred return that is structurally senior to the CSC Holdings creditors point to some sort of consensual restructuring.
Since Drahi’s pref gets paid out $300MM in a consensual restructuring, and $500MM in a forced bankruptcy, creditors have to leave him $200MM in equity value for him to not prefer just blowing the whole thing up. Seems to be significant room for some sort of negotiated settlement, but who knows for certain what the ultimate outcome will be.
I’m surprised the tender went through as promised, but I’m more surprised by the solid stock price. It’s basically at the same price from when the tender was first announced.
In your opinion, what are the chances of the tender falling through? Interestingly, you can buy 99 shares and tender the whole lot through the odd lot provision. Decent beer money.
It’s too hard to give a number, but the chances are greater than 10%. The odd lot is too small for me. I believe that there is also a chance of an extension of the offer (delayed) caused by lawsuits from the group of lenders.
I've been tracking this one and agree with your thoughts.
The tricky thing is sometimes lenders just give up value to the equity. And sometimes they give up way more than you would ever think is reasonable.
Recent examples are RGS, WW, NFE, BBGI. The lenders sometimes willingly take significant haircuts, but still allow the equity to survive in order to accelerate the restructuring process.
I think everyone realizes how insanely expensive the bankruptcy process has become, so the equity can use that as a source of bargaining leverage.
The MC would still be $250m at 50c, so maybe all this is not relevant in the OPTU case as that still implies a lot of value capture for the equity.
There would be a way to restructure such that the common equity is zeroed and Drahi still comes out with $200m in ownership. There’s always some provision for management equity packages. You could include Drahi comp there.
Another tricky thing - isn’t cable on the whole facing real structural headwinds? Their resi broadband subs are still declining. I thought at an accelerated rate. So I don’t know how financial engineering can save the situation with this much leverage and this poor of operating trends.
I mean, maybe? He already has majority voting power, so if it was as easy as comping himself $200MM cash, I’m sure he would have done it already. Maybe he wakes up one day and decides to burn the creditors AND the common for his own benefit. But if the past is any guide to the future, I imagine it will probably look something like how Altice France is playing out. I do genuinely believe that he wants to “beat” the creditors.
These cable businesses are no longer the local monopolies they once were. They are still valuable, but you sure as hell can’t lever them like you used to. At the pre-tender implied stub price of ~$0.20-0.40 a share, this was an insanely cheap call option. Idk if it’s a no-brainer anymore, but I also don’t think it’s a straightforward short either…
I just mean that a normal part of the restructuring process is creating a management incentive pool for post reorganization.
From ChatGPT "In a creditor-led Chapter 11 / distressed equitization, the typical management incentive pool is ~5–10% of the reorganized company on a fully diluted basis, with 10% very common."
Drahi could negotiate for a particularly generous management incentive pool, which would preserve value for him while zero'ing the equity.
I guess I'm just shocked the equity still has value here. It's not exactly a small stub. It is a >$600m market cap.
Charter, Comcast, and Cable One trade ~5x EV/EBITDA. Optimum's ND/EBITDA was 7.5x before this recent financial engineering. Optimum also has the worst broadband trends. How the equity survives is a bit of a mystery unless they pull off a dramatic operational turnaround or somehow figure out ways to truly and epicly screw creditors and shift that value to the equity.
Good conversion here, I will add my recent reply https://x.com/calgaryleveen/status/2071689831856689386?s=61&t=a9nMLF1px9YPR8WWJeZTIw on twitter here :
I agree with your comment and I am here to learn. Just so you know, the shorts were short-lived. Otherwise, I did some research on Drahi and he seems to be a person who uses every conceivable way to extract the most value for him.
He doesn’t give the impression of being an honest person, especially with his LBOs in recent years. He uses every conceivable way of financial engineering. (I studied what happened in France.)
For the tax loss of about 4 billion, its value is almost zero for the common shareholders. Except in scenarios: a merge or a pre-chapter 11 with a debt to equity flip… (This would mean that the shares are no longer trading for several months, with the risk of being delisted (OTC). Then, a forced sale for several investors.), but it seems that this blocks use for 2 years, if I understand correctly?
By applying a 27% tax rate, a use from now (impossible) over 10 years with a 15% discount-rate, this gives us a maximum of $2 in value per share. However, there are scenarios that do not yield more than $0.30 per valuable share.
Then, at current prices, the EV/NOPAT seems to me to be more than 16x and a CAPEX cycle behind schedule. In France, Drahi achieved the same thing by underinvesting for several years to “successfully” repay his debt… (and artificially increase his FCF). It is very likely that a buyer will pay a multiple of EV/EBITDA at the bottom of comparable range, am I right?
I will focus here on the risks and the reasons why the price could still fall in the medium term. Whether we are long or short, this case is very risky for both sides. On my end, I closed my shorts.
I think the point on the taxes isn’t that NOLs have value. I think it’s that if the creditors claim value from the unrestricted subsidiaries, it will trigger deconsolidation, and that will trigger a very large claim for taxes. So the creditors will then have worse recoveries because they will have a new $4bn claim competing with their claims. So basically the bulls are saying Drahi will get away with stripping all this value from creditors because creditors don’t want a $4bn competitive claim.
The embedded $4Bn+ de-consolidation tax liability and 2.5x preferred return that is structurally senior to the CSC Holdings creditors point to some sort of consensual restructuring.
Since Drahi’s pref gets paid out $300MM in a consensual restructuring, and $500MM in a forced bankruptcy, creditors have to leave him $200MM in equity value for him to not prefer just blowing the whole thing up. Seems to be significant room for some sort of negotiated settlement, but who knows for certain what the ultimate outcome will be.
I’m surprised the tender went through as promised, but I’m more surprised by the solid stock price. It’s basically at the same price from when the tender was first announced.
In your opinion, what are the chances of the tender falling through? Interestingly, you can buy 99 shares and tender the whole lot through the odd lot provision. Decent beer money.
It’s too hard to give a number, but the chances are greater than 10%. The odd lot is too small for me. I believe that there is also a chance of an extension of the offer (delayed) caused by lawsuits from the group of lenders.