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DryShips, Inc. Message Board

  • jebdareb1 jebdareb1 Aug 27, 2008 4:56 PM Flag

    Book Value of OR spinoff explained. $18/share!

    I think I have finally figured out what the Shareholder Equity will be for the dividend spin off of the Drill Rig segment. In the last latest balance sheet, GE shows the value of the Drill Vessels as an asset worth $1393. He also shows a new addition of Good Will at $694M. The total of those two numbers equals $2087. He also shows restricted cash as having increased by $80M. I think that has to do with cash which is restricted while refinancing the debt. That adds up to $2167M. The reason that Good Will is $694M, is that the numbers have to add up to the total Enterprise Value of the company at the time of purchase. GE states that EV to paid was be $2170 in a presentation he gave April 24th. So, per the last balance sheet, the assets in total at the time of purchase cost GE about $2170. That number will likely be depreciated a wee bit prior to the spin out of the dividend, but hardly enough to worry about. So, at the time of the spin off, the assets will be shown at a minimu as $2170.

    Now for the debt side of this. During a presentation provided by GE on April 24th, in which he is modeling the EBITDA production for the Drill Ships going forward, he portrays “net debt” at $1385M. So the shareholder equity at a minimum will be $2170 minus $1385 = $785M which, at 43.5M shares, is $18.04/share.

    Now, GE may add in something extra to account for the appreciation of the drill rigs since he acquired them and for the appreciation of the other rigs on order. However, as a minimum, Book Value should be about $18/share.

    When thinking about the value stated for the Good Will portion of the purchase, realize that GE bought the entire company when he bought OR. Included in that purchase is the value of the accounts receivable, cash on hand, contracts in place which are currently producing $360M in revenue, and highly trained personnel. The value of the personnel is very significant item because GE does not know this business and could not run it without the current staff.

    If the spin off dividend is valued based on 3 times BV the stock Drilling Segment would be worth about $54.

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    • This is the formula for a constant growth perpetual annuity (our original formula was just a special case of this same formula with g=0). Again, using this reduction, we can calculate the present value of our example cash flows of $1000 growing at 5% a year discounted at 10% as $1050/(.1-.05) or $21000. Notice that in this case, the coupon input to the formula was $1050 instead of $1000. This is because the perpetual annuity formula expects the year one coupon as its input. Since our coupon is growing at 5% a year, it will be $1000*1.05 or $1050 at the end of a year. The calculator takes care of this first year growth for you - it takes as input the current or year zero cash flow.

      The solution to these problems is to use what is known as a multi-stage discounted cash flow valuation. Each 'stage' is a period of years at a certain growth rate which can be different for each stage. These explicit growth rates are accompanied by a terminal growth rate that specifies the perpetual growth going forward after the specified growth periods. For example, we might specify that the growth will be 15% annually for 5 years, 10% for the next 7 years, and 5% after that into the future (this would be specified as 15|5:10|7:5 in the calculators growth input). Since the growth rates and timeframes can be different for each stage, there is no easy formula to lead us to the final result. This is where the calculator comes in.

      The calculator calculates the present value of each years cash flows by stepping through the growth definitions. This is just like we did in our earlier examples above except that the calculator has to keep track of what growth rate it is currently using from year to year. When it is through calculating the cash flows for each year of the specific growth, the calculator takes the final cash flow from that process and grows it by the terminal growth rate. The perpetual annuity formula can then be used with this as its coupon to value the terminal value. Since the result of the perpetual annuity calculation is some distance into the future (remember that this process starts at the end of the specific growth periods), the result must be discounted to the present by dividing by (1+k)^N where k is the discount rate and N is the total number of years of the specific growth definition. Finally, the total present value is calculated by adding the present value of the terminal growth to the sum of the present values of all of the years of specific growth.

    • One need to be an idiot to believe that the estimates for 2011 are near correct. Yes, one must be careful and take in consideration some figures, but it should look with a grain of salt about anything beyond 2009. The world could well be in a huge depression or it could be in the fast recovery of this economic slowdown. It is just too far to predict. Could you predict in 2004 that the BDI would reach current levels ? no way.

    • What a stupid argument. You are both saying the same or similar things in different words!

      jebdareb1 gives a value (based on 3 x book value, which he doesn't claim it will necessarily be, but is a possible point) of $54. wallstreetcovers is giving a value of $65. That is pretty close to the same figure!

      Yes of course it depends on a million factors. When, what shape the market is in at the time, how high oil is (maybe that shouldn't affect an oil services company much, but it does), how many rigs, the order book for UDW rigs at the time, appreciation/depreciation of the upcoming rigs, etc. Trying to estimate all those things at this point is silly, and the most important factor, investor psychology, is the hardest thing of all to predict.

      The short answer to how much it's worth is: it's worth more than the market is currently giving it credit for based on the value of DRYS.

    • My point is that there are many unknowns. The issue about 4-6 is NOT known and if you want my opinion, I think he spins it with FOUR and brings in the other two in 2010, he made reference to this possibility in the CC transcript if you read it.

      The other issue and it is a big one, is the contract terms, maybe even more important is the 2009 contract which effects EBITDA directly and has a large value on earnings and thus spin valuation. George mentioned it wont come until 6 months prior to the end of contract, so like March.

      George said ASAP but I would assume before April and I would prefer to be sooner.

      My valuation as commented in other threads (we discuss this a TON on this forum) is what Doug mentioned..even with only FOUR rigs I still get EBITDA numbers to justify 65 or so with no stretch.

      Will the market do what I think? It never does, and depending on how WRONG they get it, the more I buy or the more I hold off.

      I am not retiring in 5 years and I can wait it out, this spin wont be sold by me unless I see short term potential with a re-entry in mind.

    • If you had answers to all of your questions, how would you value the spin off. What valuation measures would you use?

    • -Time frame, when will it be spun?
      GE says ASAP, possibly by end of year.

      >>>Contract annoucements on the three unknown rigs?<<<

      Well, I guess you will have no idea what the value of the spin off is until late in 2009. That's helpful...

      >>>-4 or 6 rigs? (that is not as material since the market might not assign value till closer to operation)<<<<

      The June 24th presentation, pg 13, clearly shows that GE expects there to be 6 rigs by 2012. This same presentation models the debt in 2009 at $1395.. This information is cut and pasted from that presentation

      >>>Preliminary Draft Estimates for Spun-Off Entity
      􀂙2012 EV/EBITDA public company peer group multiples of 5.3
      6 rig UDW listed entity including the two Cardiff Marine
      Year 2008 2009 2010 2011 2012
      NB Capex 875 263 1,002 930 0
      Net Debt (1) 1,314 1,385 2,167 2,636 1,967
      EBITDA (2) 212 277 294 591 852
      EBITDA Growth Rate NA 30.3% 6.4% 100.9% 44.1%

      >>>One thing for sure it sure will not be at 15 per share<<<

      If you are not using and valuation measures, how would you have any idea what the value of the spin off is???

    • jeb,

      A few missing pieces to the equation make it tough to value the entity.

      But if you had to pin me down I would say 40 or higher.

      The missing pieces is some of the following-

      -Time frame, when will it be spun?

      -Contract annoucements on the three unknown rigs?

      -4 or 6 rigs? (that is not as material since the market might not assign value till closer to operation)

      -Exact debt carried over- I know we have a ballpark from the last CC but we dont know the exact ammt for sure until it gets closer.

      The longer we go to spin the more the spin value, the more we know the more the value.

      One thing for sure it sure will not be at 15 per share, and if so then I suggest we wait until late 2009 to spin it and have some contracts worked out.

      I credit George for NOT jumping the gun and signing a contract so early in the game. There is a shortage and I think he is playing it very smartly.

    • There need not be a price at the spinoff. GE could simply give each shareholder shares in the new company. The market would than value those shares after it starts to trade. However, GE does have to provide pro forma earnings information and balance sheet information. This is what the market will use to value the spun shares.

    • Wallstreet, I'm still waiting for an answer. How do you value a company. What valuation measures do you use. Please enlighten me!

    • It would be nice if GE could pick the price of the spin off and set it @ $67/sh. I wonder what would happen to DRYS price.

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