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Online Resources Corp. Message Board

  • boratnumber1 boratnumber1 Feb 3, 2011 1:32 PM Flag

    Make sure you understand the balance sheet

    I have been a semi-regular poster on this board and follower of ORCC. As I have stated previously, I think this company made a huge mistake by paying way too much for Princeton eCom. Without even discussing the merits of the combination, due to their size ORCC had to take on too much debt / preferred stock to acquire Princeton.

    With that said, I have always believed that ORCC would be acquired. The space has seen consolidation (CheckFree, Digital Insight, Metavante, etc.) and this makes sense. Their announcement seems unusual as companies are usually silent until a deal is finalized. My guess is the unsolicited bid they received was substantially lower than they want so they are putting the word out that they are up for sale in an effort to generate more interest.

    When considering what price ORCC will eventually be sold, you have to consider its balance sheet. Tennebaum (provided the financing for the Princeton deal) will get the first big chunk of the enterprise value. Their debt + preferred stock (original amount + accrued dividends) is a big chunk of the value. You may see their interests diverge from the average common stockholder. Their main concern at this point will be making sure they are made whole. That could happen at a much lower price then the common stockholders are willing to accept.

    I would love to hear thoughts from some of the regular posters who have followed the company for some time (topline, grandad, etc.).

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    • topline1 Feb 4, 2011 4:38 PM Flag

      I just wrote a long response and Yahoo dumped it. - No time to repeat it now but the net net was
      Yes they paid too much for Princeston

      Cash flow is still good and they can cover debt

      They need a strategic buyer who can get synergies from combining/reducing sales and programing.
      A strategic buyer IMO would be willing to pay between $9 and $11 now with a combination of stock and cash-depending on the synergies they think they can bring and the amount /value of their stock. The more cash offer-the lower end of the range - The more stock - the higher end of the range. The difficulty with banking deals now is that all US banks are still at depressed levels - but who says it has to be a US comapny? Canadian financials have been doing very well.
      For ORCC to get a higher price they need to quickly demonstrate that they can land some large profitable accounts-something they have not done well on recently.
      Orcc has an number of features/products that would make nice additions (and revenue generators) to other platforms.
      I would like to see a higher price but more demonstration of profitable growth will be required for that. Good luck to all longs!

      • 1 Reply to topline1
      • Can someone check my math on this? I believe one analysts stated the acquisition value could be a low double digit multiple of EBITDA. I get a TTM EBITDA of around $30M, but Yahoo has it around $25M. If we assume a multiple of anywhere from 10x-12x, that would imply an enterprise value of $250M to $370M. The company has net debt (debt less cash) of $13M and the preferred stock is around $110M. That means that Tennenbaum will get the first $123M of the proceeds. If memory serves, they have a conversion option to exchange the preferred for common, but the conversion price is so high that I cannot see that impacting the economics.

        If this is correct, we need to realize that although Tennenbaum will not solely make the decision, they will have a major say. Since they ousted Lawlor, I believe they have significant influence on this decision. Between the value of their preferred stock and the conversion price (I think around $16 / share), Tennenbaum has no financial incentive to drive for a higher price as their amount will be the same. Also, I believe that their debt has a significant amount due in 2011, which could strain their cash position and that might be impacting their decision to sell. Certainly the Board has a fiduciary duty to maximize value, but that range may be pretty wide considering where the stock has been trading.

        If the total amount offered is in the $300M range and Tennenbaum gets $120M, that leaves $170M for the common shareholders. Using $31M shares outstanding, that would imply a share price of $5.70. The market seems to think the purchase price will be at least $334M based on the current share price and that may be reasonable.

        With all that said, I struggle to see upside from the current level. That would be implying a multiple considerably higher than the what would seem reasonable. For every dollar increase in share price, the EBITDA multiple goes up around 1x. If the acquiring company can really get some synergies, they may be able to pay more. There may be more upside to the current price, but I am not sure it is worth to risk of no deal happening and the stock returning to previous levels.