Seahawk announced earlier this month that they had engaged Simmons & Company International to explore strategic alternatives. “These alternatives could include, but are not limited to, transactions involving a sale of assets, a recapitalization, or a sale or merger of Seahawk.” While there could be many options I want to lay out a proposed capital raising that would raise $54m, be fair to current holders that did not participate and provide current holders with the exclusive right to participate.
The scheme would allocate 5 options and 1 ordinary share for $10.19 to each subscription right. Current holders would be offered this on the basis of .45 subscription rights for each current share. The subscription rights would be tradeable as would the options once issued. The scheme would allow oversubscriptions from current holders in proportion to their subscription rights. If the maximum amount of $54m was not raised then the offer could be extended to non-current holders.
The options would have a strike price of current $20 which would be $17.21 after the capital raising and a 5 year expiry. The share price should not fluctuate immediately after the capital raising because the shares would have been issued at the current price. The new market cap would be 175M (current market cap plus new cash) and there would be 17.2M shares outstanding up from 11.9 today.
The returns from participation are shown below. Note that the “no participation” case does not reflect your ability to sell the rights which will increase your returns (potentially up to $4.50 per right). The participation case does not include the time value of the options which should also increase the participation returns (at-the-money with 3 years remaining would have a time value of $1.40 per option).
No Capital Raising
No Participation & no sale of rights
Participation & exercise of options (not sale)
$54M would provide about 7 quarters of liquidity at $7M burn per quarter or 5 quarters as $10m. It is quite unlikely that the Q3 experience is going to continue for the next 5 quarters.
Though it’s not very important now, the cash raised from exercising options could be restricted for: repurchasing stock at a discount to book value, repurchasing options at a discount to intrinsic value or a return of capital to shareholders.
Let’s work through the current $20 and current $25 cases.
The market cap indicated by $20 pre-raising is 241M. We add the 54m raised to get 296m. No options would be exercised so there are 17.2M shares outstanding for a share price of $17.21. That would be a 69% upside from current prices after the raising instead of the 96% you would have had in the absence of a raising. Bear in mind that those participants in the capital raising would have at-the-money options which should have some substantial time value (depending on when this occurs).
This case is more complicated because we assume that all options have been exercised (worst case) and the cash is held on the balance sheet. We start with a 356m market cap (current price * 2.5 + cash from raising) and add 459M from option exercise for a market cap of 815M. There are now 44M shares outstanding for a price per share of $18.59. That’s an 82% return for those who did not participate in the capital raising (and did not sell their rights). For those that participated they would make $8.40 from their original shares, $3.78 from their new shares and $3.10 from the options from a total investment of 10.19 (current price) plus 4.58 (.45 * 10.19) for a return of 129%.
So why would you want to participate at $10.19 for 1 ordinary unit and 5 options. Each option is worth around 90c (using an option pricing calculator that includes the impact of dilution) or $4.50 in total for a value of $14.50 per $10 subscription. If you sold the options after issue you would expect to have paid $5.50 for each ordinary share.
This model trades off upside (for those that don’t participate) for a much more certain, lower return; while providing an immediate return for the sold rights (potentially as much as $4.50 per right).
I don’t propose that this is the optimal model but it shows how a capital raising could be structured to be fair, provide substantial upside to those interested in an eventual return to normality and provide the liquidity that HAWK needs right now. Compared to a takeover which would truncate your upside, an underwritten share issue which would greatly dilute your upside or even a discounted rights issue which would reduce the returns to non-participants at all price points (old $20 would return only 30% instead of 69% under this model). It also provides a reasonable baseline to compare future proposals. I’m not suggesting the company should proceed with this model, simply that such a model exists and the challenge for HAWK should be to produce a superior one
Management have continued to innovatively cut costs, sell spare parts and broadly behave in a shareholder friendly manner. There are lots of potential upside surprises and not too many ways things could get worse than Q3.
I’m surprised at how much money they’ve spent on the Seahawk 3000 but from a liquidity point of view it makes sense.
The Mexican tax issues continue with no clarity as to the eventual outcome, though HAWK continues to insist that they don’t expect a payout.
The Strategic review was triggered by a deterioration in management expectations since July. There is going to be a liquidity problem in the first half of 2011 and they want to explore alternatives now. They had previously “hoped” to be cash flow neutral by the end of 2010. I never shared management’s optimism though the review creates additional potential upside surprises (albeit with the potential to lock in a smaller, definite, upside such as a sale in the mid-teens)
Below are my notes from the call organized by topic.
Costs & liquidity
Permits and overall industry
Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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