Monday, 11 April 2016

Gluskin Sheff

A quick post on Gluskin Sheff traded on Toronto.

GS came to my attention recently because it's been weak, and upon further inspection, there's a story behind the weakness as follows, link here (copyright Globe and Mail):

Here's the most recent balance sheet:

So, the story goes, the two ex-founders are seeking $185M.  The company says $12M max.  No one knows what the heck the two ex-founders are going to end up with, but let's assume the worst case is a $185M settlement.

They have current liquidity of say, $23M (after netting current assets less total liabilities, a bit rough, but conservative), and I couldn't find much in the way of disclosure (quickly) in the 2014 audited financial statements regarding unused credit facilities, but if push came to shove, I'd hazard a guess that if the company absolutely needed to do another equity offering or a debt offering, they could.

So here's my thought process:

  • The company has an asset light business model, in return though, they are remuneration heavy (as is the norm for asset management firms)
  • The company's results are lumpy, they had about $8.5B of AUM as at June 30, 2015, which generate ongoing fees, and every few years, they make a lot of money in terms of performance fees.  
  • If they have to settle for $185M, the amount will outstrip shareholder's equity by 1.5x.  
  • I took the last 4 years of reported operating cash flows, deducted the fixed cost investment from the audited financials, and attempted to model out a range of theoretical firm values across a range of different WACC rates (in this case, WACC should be pretty close to Re b/c there's no debt, as capital structure is 100% equity).  I found that for discount rates up 10%, there seems to be a theoretical margin of safety relative to current enterprise value in the worst settlement case, as follows:

Worst case, they settle at $185M, and they need to tap the capital markets to fund the shortfall.  And after all is said and done, they continue to do what they do, generate FCF's of close to $70M per year (some years less, some years more), and they use these FCF's to either buy back shares issued in the case of shares, or service the debt in the case of debt.

$185M / $70M = 2 2/3yrds of FCF?

In any case, I thought it was an interesting idea.  Here's the monthly chart:

No comments:

Post a Comment