Debt is only a problem if it cant be serviced. If the return is greater than the cost of debt, as in good investments, the sp should rise.
Anyway there isnt a straight line correlation between the two, as everyone knows. Lots of companies with debt and no revenue/profit have a high sp. Likewise many out of favour companies that can service their debt have a low sp.
Obviously anyone, by NBs analysis, with a mortgage and only a salary to pay for it is bankrupt!!
One day you will all learn. When Melrose publishes its next full year accounts is my guess. On 15 Decemcer 2017 I posted a 'strong sell' for Luceco, when their shares were trading at 128p. The post is still there, so please read it to find out the reasons for the recommendation. Today the shares trade at 61p.
Nick2name, You are being totally stupid. If a company has over £99 million in cash and only £100,000 in debt, then that definitely meets my definition of 'a little or no debt'. So Savills plc meets my criteria. If you listened to me, rather than being a pompous xss, you would make some money. On 6 May (look down only a few messages) I said Paddy Power (note another company with net cash) was a good bet as the price had fallen below £70. Today it is £76. You won't get a return like that (8.5% in less than a month) with Melrose.
NB, May I also say that accounts are backward looking and at least 3 months out of date and share prices forward looking.
In the case of GKN the sp was languishing because the market didnt think the management could turn the company around. On the Melrose offer the sp rose dramatically because the market thinks the new management can. That is why so many investors originally sold the shares that hedge funds picked up.
Having looked in depth at the potential, I believe the GKN board that GKN was worth about £10 billion and hence my assertion that it was bought at a discount.
The next accounts will be distorted by the cash that GKN wasted in its defence and paying Dana acquisition fees. One offs.
Looking forward, all three GKN divisions have great futures, particularly Driveline and Metallurgy. If you bother to look at all the news coming out of them you should see that. Growing markets, GKN technology and better operating profit margins.
In addition, the divisions of Nortek are improving greatly.
You cannot treat Melrose as a bulk standard engineering company. It is not.
NB, had Melrose bought a start-up with no sales and only hope there may be some merit in your argument. The start-up might not get off the ground and fail. Then Melrose investors would suffer. This happened a lot high tech in 2000.
In the present case Melrose have bought GKN, to my mind at a discounted price based on its potential for improving operating profit margin and turnover on, a good business.
Now, unless you are saying GKN is worthless I really dont see where your argument and dilution come into the argument.
I think your approach is the well known one of knowing the price of everything and the value of nothing.
For the benefit of Sound and Pike, I will try to explain in simple language. Melrose's 2017 accounts show Shareholders' Equity of £1,885 million of which £2,238 million is intangible assets. So tangible assets are negative to the tune of £353 million. Net debt stood at £558 million, which is greater than the negative Balance Sheet. What this means is that the investment in intangible assets is not generating sufficient cash to get the Balance Sheet positive.
We can accept that Melrose generates free cash flow; what I am saying is that they are not generating sufficient cash to justify the investment. Put another way, they are paying too much for the businesses they are taking over, GKN being a prime example. As you know, the purchase price was 25% above what the shares were worth, based on the market price before the take over.
Now because the GKN offer only included a small amount of cash, it is the Melrose shareholders who are picking up the tab because their share of the company has been diluted. Melrose's share price will not collapse until the latest consolidated accounts (including GKN) are published. In the meantime, I read the four main Melrose directors are trousering £170 million in bonuses for winning the bid.
Melrose shsreholders are being treated as prize mugs, but based in the comments on this board, they just cannot see it, To work it all out, you only have to research what happened to the Hanson Trust as the end of the day. The only winners were Lord Hanson and his mates.
Well Nickname, they say ignorance is bliss and so it proves in your case. Paddy Power
bought Betfair not long ago and took on debt of £1 billion in the process. It's Balance Sheet went negative, but this company is highly cash generative and quickly wiped out the debt. The high figure of intangibles relates to the Betfair takeover, BUT, and this is the key, shareholders' equity exceeds intangible assets.
So to reiterate for you:
Intangible assets only exceed shareholders' equity when the company has a high level of debt, which means they are not generating sufficient cash to justify the investment in intangibles.
There is absolutely no way that Melrose will clear their debt in two years. They paid too much for GKN; it will turn out to be a noose round their neck.
Happy to, Paddy Power plc has no current debt and cash in the Balance Sheet exceeds long term debt. Ok, if you are being pedantic I should have said 'net debt' rather than debt. If you look hard enough, there are quite a few companies with no net debt or little net debt.
Taking about Paddy Power, they are a good investment at the current price of below £70. They are down because they had a relatively poor 1st Qu 2018, following a record 4th Qu 2017. In addition, investors are worried that the maximum stake on FOBT's will be reduced from £100 to £2. But these betting terminals only account for 6% of their profits while the percentage for many of their UK competitors is close to 50%. When the competition is forced to close hundreds of betting shops, PP will be the beneficiary. The good thing is that being so profitable and so big they are immune from asset strippers.
72, if you have read my previous posts you would know that I NEVER short shares because as far as I am concerned it is impossible (for me anyway!) to get the timing right. For example, having read Carillon's accounts three years ago it was obvious to me they would go bust. But when, I didn't know.
Now, it is obvious to me that the Melrose directors have taken on too much debt and it will all end in tears (for Melrose shareholders, not for them). But, when, I just don't know.
As I said earlier, I don't expect Melrose's share price to come under pressure until the next consolidated (including GKN) Balance Sheet comes out. Once it does I expect the share price to fall and the shorting to start. But not by me, because it may be several years down the line before Melrose Industries collapses. But collapse it will, just like the Hanson Trust before it. As in all types of investment, timing is the most important thing. This share is like buying tulips a few centuries ago. Many people made money, but those who hung on lost everything.
Thanks all, particularly Sound Money and his/her advice. Let me explain. I bought into FKI after the millennium. Just a few hundred quid. They became Melrose who bunged money at me several times and I reinvested. Melrose are about to pay for a very swish kitchen so who is the mug? Melrose was a happy accident and has made a decent wad of cash for me.
My brother's hobby if the horses in a low key way. A fiver here and a fiver there. That sort of gambling is not for me. Can't be bothered doing the research. My "hobby" is shares. And I have learned from my mistakes. Usually I go for Blue Chip-ish companies and re-invest the divis in an ISA. I have turned a few quid into a nifty pile (ie a kitchen) and perhaps an en-suite in the house refurb. I rest my case.
There is room and profits for all in this game... from Red Braces to enthusiastic "amateurs". Thanks to all who contributed to the debate. Must dash. Got to get the Jaguar serviced!!
No doubt you've taken out a massive short then numberbiter...
Perhaps you account for the whole 1.43% short interest.
I await a re-hashing of Lupo's share price calculation, which pre-GKN was, I believe, 70p (or 150p if he was feeling generous). Strangely the Lupo Constant of Generosity didn't feature in my investment management exams - but then CAPM isn't as popular as it once was and DDM doesn't really work with MRO's business model - so perhaps I'm just out of the loop (or Lupo).
Sound money; if you were such an expert you would know that the correct English for 'the knowledge gap is to large' should read 'the knowledge gap is too large'.
I would have hoped that someone with the name 'sound money' would have some knowledge of accounting. For the benefit of those asking the question re 'being puzzled' this is the answer. In the past Melrose has raised equity, bought a business and then sold it at a higher price. It has then passed these profits onto shareholders. But there is a catch. Having distributed the profits from its last sale it left itself in a very weak position. Its latest acquisitions have not performed very well, so it was highly indebted before it bought GKN. Now, it has taken over GKN's assets and liabilities (including a massive pension deficit) at a significant premium, meaning that goodwill on its Balance Sheet will significantly increase. Its debt will also increase as the company will have to borrow more money to pay GKN shareholders 81p per share.
In my view the Melrose directors have bitten off more than they can chew. What damage has been done will only become clear when the next accounts, which include the GKN consolidation, are published.
Melrose's share price is currently holding up on its previous reputation, not on financial reality. I suspect its share price will collapse when the accounts (as per the previous paragraph) are published.
I agree with Sound Money on one thing - those who don't understand what is going on should sell Melrose shares while they can and buy into companies that are making profits and have either no debt or little debt.
I drink real ale but don't have red braces, so I consider that makes me about sufficiently qualified to say:
What's in it for us MRO holders? We get ownership of GKN. We do this by giving GKN shareholders a bit of cash and some newly-minted MRO shares.
In previous deals where you have had cash back it is because MRO have sold a previously acquired business e.g Elster. The share price falls because MRO, having sold a business, gives the cash received back to shareholders, thus the remaining part of MRO is smaller.
Previously MRO has raised money from shareholders to buy businesses, rather than issue shares directly. It has done this via a method called a discounted rights issue and the share price will often fall to what is known as 'TERP' - theoretical ex-rights price.
We are not getting any new shares - see above.
Nortek has not yet been sold but if you see the latest report from MRO it is mostly performing better than expected and ahead of schedule.
Patience is required but I see no reason why returns from both Nortek and GKN should be anything other than handsome.
We, well I, own Melrose shares because we believe in the buy, improve, sell message - backed by empirical evidence of the companies performance. Right now we have no tangible benefit - the asset base has increase, so has the number of shares in issue. We own a smaller slice of a bigger pizza. Some would argue that's a step backwards - except the slice I owned was so tiny that halving its size (or so) really doesn't make a difference.
In the future, if our belief in Melrose' method is borne out, we will benefit because the pizza will grow even more. My slice will be the same proportion of the whole, but the whole will be bigger. Melrose will then sell a chunk of the enlarged pizza and give us the money (most of it at least) from the sale. The pizza will shrink. My slice of the pizza also shrink, but be proportionately the same - and I will have the dosh to do what I want with. Including buying more Melrose shares, so my slice gets bigger again.
Sound money, I expected a better riposte from such a learned wolf of wall street. The discussion board is for all, not just red brace wearing over-hanging bellied real ale drinkers. You must have a lot on your mind, you'll forgive the overstatement.
Look at it this way, Melrose (a car with a tow hitch) has bought a mobile chippy. (GKN) Unfortunately, the mobility of said chippy depends on the car to move it to the best places to continuously get the best prices. If the car is broken down, the chippy fails and without the chippy the car can't be fixed because there's no money coming in for repairs.
So, if you were the owner of the car, what would you expect from the purchase of the chippy, apart from an occasional fish supper?
Give it time, the rewards will be great (and I'm not talking about Cod 'n' chips!!).
Hi wonxheath, I've been thinking the exact same thing for a while, I've done a bit of research but can't find anything definitive. I assumed we might get a statement giving us some info, but I've received nothing.
As I understand it, and I could be wrong, additional Melrose shares were issued to the old GKN shareholders but the GKN assets were added to Melrose's holdings to balance it out. The asset value of the group has increased, but so has the number of shares. That's why the Melrose price hasn't changed by much.
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