After the merger, what would preclude the company from just taking the combined available money
from non-cash charge of depreciation of 500 million, approx left over earnings 285 mill for SPMD and 150 mil for DEXO = 985 million and just start blasting the debt out. Using those numbers it would not take long to get rid of 3.5 billion in debt.
The bonds are trading around 42 - 44 cents on the dollar. This is well above the last buyback they did which was around 28 cents on the dollar if I recall correctly. They have been paying the bonds with the payment in kind option at 14% (7% cash / 7% more bonds).
Even with the bonds up, they are still very cheap and I agree with you that they will be making more offers to buy back bonds and other debt. I own some SPMD stock as well as some bonds. Why not collect some interest at 14% (which is more than 28% at the over 50% discount to par). Plus if things go well, the bonds tend to appreciate in price and you can keep them or sell them on the next tender offer (next one will probably will be at 50+ cents on the dollar I would guess)
For those interested in the Dex One 2017 bonds they were traded Friday between 42 and 43.6. Terms of the bonds not changing in the company's pre-pack plan. If you like speculative debt plays, this is a good one IMO.
you slightly misunderstand their cash formula, but the combined company, dex media, will have about $350M of free cash flow in 2013, and then about $450M of free cash flow each year 2014-2016. they will end up with around $1.8 billion in debt at the end of 2016 that will have to be addressed, and that's as low as they can possibly get it unless something miraculous happens. if you look at page 39 of the lender presentation from december 6, as well as the entire presentation, there some excellent information there that will agree with what am saying. you can find this lender presentation in the 8-k filed on december 6.
this is why the "non crisis pricing" valuation that glen from seeking alpha used to obtain the $150 valuation is flawed. the combined company will not fall into a scenario that would justify that rationale by the end of 2016. yet another round of refi/amendment/prepack/something will be necessary by the end of 2016. this current prepack merely takes the heat off for a while.
glen, without diving into some things such as your debt valuation (i believe $0.75 is a bit high), i don't think decreasing the debt/ebitda ratio from 2.4 to 2.2 will magically cause the debt to rise to par. you are correct that a debt free company isn't the optimal solution. optimal capital structure undoubtedly calls for a certain amount of debt. however, the issue that will be in play at the end of 2016 isn't the amount of debt as much as much as it is the maturity of the debt. you and i disagree on the certainty of the company to refi at that time.
time will tell. i would love to see dex media trade at $150. i just don't think dex media is going to reach a $2.5B market cap in the next 3 years. rather than your multiple of 6, i'm counting on a multiple much closer to 2, putting pps around $50ish....tops...and that assumes the economy continues to hold and gain strength.
Well put. What I am suggesting is that as the debt is paid down it will begin to trade at par when the debt markets think that the debt/ebitda multiple is "safer" and also the rate of revenue decline slows. At the point that the debt trades at par it can be refinanced.
The interesting thing about this situation is the dual ownership nature of it. A lot of the creditors have equity stakes due to the prior bankruptcies.
The answer is not a debt-free company. The company can obviously carry a certain portion of its enterprise value in debt and the question to be answered is, "What is the level of debt that is appropriate for Dex Media?" --- well, we are moving in the right direction. If you figure that right now the debt is trading at $0.75 on the dollar. That means the market value of the debt going into a bankruptcy is $3211*75%=$2408M. On a run rate basis this is a debt level of around 2.4x the Run Rate EBITDA.
Considering the model has us coming out the end of 2016 with a DEBT/EBITDA of 2.2x which is less than the crisis DEBT/EBITDA it is my opinion that the DEBT will be trading at par.
I'm not even taking into consideration the bonus of subpar repurchases that we will likely see along the way. Also I think that the EBITDA and cash flows will be more robust than the companys' joint forecasts.