They have the following options:
1. They can sit on the money (feel safe and enjoy next 3-4 years)
2. They can buy back stock
3. The can close 2016 debt. They have to refinance/close 2016 loan by the end of Q3 2014.
4. They may want to get better terms on term loan for 2018
5. Just for the sake of completeness ... they will acquire something.
My biggest fear is (1) and (5). (5) would be very strange, but 1 is very possible.
If they in fact are trying to "increase shareholder value", the best next step is a combination of (2) and (3).
As a result of sale in Q3, they are going to have around 280 million more at the end of Q3 than at the end of Q1.
About (2): the cannot start buyback before transaction in Q3 closed: too risky, something can fall through, and the money are not going to be there. Now, they can declare buybacks in Q2 conf call, but they are not going to spend a penny until the deal is closed in Q3.
About (3): they stressed on several occasions that 2016 bonds are callable in 2013. If history is any indication,
they would usually deal with that in Q3 2014. Now if they want to close that loan in 2014, it is almost stupid to
sit on the money now and pay 8.75% interest. The will not need money between now and Q3 2014. A little hint was during Q1 call when they mentioned that they are going to have 360-370 mill/year of interest expense.
Currently they are paying $95/quarter which translates into 380m/year. Those 10-20 mill may come from reduced interest payments on 600Mill loan in Q4 2013. ... Or they just added to the interest their interest income of 2.8m/quarter :)
But, they may want to play it safe and just do (1) ... in this case, I do not see how this helps shareholders other that ensure that bankruptcy, if happen, will be delayed by one year and prove that they have some assets that they can sell above book value and therefore book should not be ignored (just like West But, but they do not have such assets, Illinois maybe).
Paying down debt would make the most sense business wise, and also would have a great psychological message that ACI has real tangible assets to balance their debt structure, and despite the idiots in this administration, they ain't dead yet.
I think there is a better than even chance that the 2016 bonds are called--perhaps as early as this month. Note that there is a premium attached to the bonds being called: 8/1/13 at 104.375; 8/1/14 at 102.188; 8/1/15 at 100. If the the bonds are called between 8/1/13 and 8/1/14 the premium would cost the company about an extra 26 million dollars. There is $600,000,000 in par debt on the notes. So it would cost the company 626 million dollars plus the accrued 8.75% interest. I am very confident that the debt will be called at premium--so much, in fact, that while I have little confidence in the stock, I previously have traded the 8.75% bonds and done very well. I just scooped up a few bonds this morning because they are selling under par. I got them at 99.5.
Basically, if they are trying to increase shareholder value, the next step will follow that sale. I expect between now and Q3 conf call, we will hear that they are going to spend that cash.
Excellent thoughts, as usual , Red. I think we also should keep in mind just how fluid the situation is in the whole sector.Being such a globalized marketplace,these guys are constantly having to hit a moving target,if you will.I believe there is growing interest by global entities in acquiring sector assets,particularly at these depressed levels..I think one would be wise to allow some time to see how this plays out,as world energy needs ain't goin' anywhere anytime soon. :-) All things considered,ACI appears to currently be WAY undervalued in my opinion..Best regards,HOG