How much cash does Metall Zug AG has to spend (on acquisitions)?
http://www.reuters.com/finance/stocks/financialHighlights?symbol=METN.S
Just seeking some feedback as the number I heard yesterday from a member of the company seemed a bit off. He stated the number in swiss francs and I thought the exchange rate must be very different. I got home last night, checked the exchange rate before going to sleep, and its like 1:1 … his number just seems really off - either he misspoke or the financing for acquisitions is not what he said it was (he said it was all cash). The number wasn’t in the slides he presented and the slides only had recent transactions and analysis of acquisition targets.
Well an all cash transaction also includes transactions funded through issuance of debt (to pay target company ownership in cash versus a debt swap). This would depend on management’s rating targets and willingness to undertake aggressive transactions.
This company has no real debt and no rating as a result, but in the past has taken up to USD$300M in debt which is a very conservative number for their size to fund transactions. It’s not unusual for investment grade companies to take up to 4-5x EBITDA in debt to fund a transformative transaction. So lets figure 4X FY14 EBITDA would be USD$526M + excess cash & marketable securities of about USD$200M would be about USD$726M in an agressive case where the firm remained the controlling entity as the purchaser. If they issued equity as well, they could potentially absorb a much larger firm than that in a PE like transaction, however the burden of proof to shareholders would be significant.
All of this, however, would be largely dependend on mangement’s willingness to even go that route. I know nothing about the firm itself, however it’s conservative positioning doesn’t seem aligned with an agressive mentality.
As an asterix, I don’t know what debt is held through the firm’s private subsidiaries that i can’t see. That could potentially make a big difference, I just don’t have a reason to care enough to look it up.
Wow that is some good feedback. It definitely helps and the number the guy quoted to me was so far off. I was literally looking at the numbers and things were not lining up. Thanks Black Swan.
Check into the subsidiaries first. I just glanced on Bloomberg at the hold co. I can look closer tomorrow at the 10k if this is more than a casual question. In fact, just let me double check and make sure I’m understanding the company right.
Ok, so I just looked again.
Another way of looking at it is to just compare capital structure. L-3 Holdings is a holdco as well that has several businesses beneath it. The market cap is $9.2B with about $3.6B in debt on a very weak Baa3 rating (edge of investment grade). At 38% of market cap, METN would be allowed about $450M in debt, although I think the EBITDA based number is a better proxy.
As a final sanity check, total assets on the consolidated balance sheet are $1.2B, by this metric, they would typically hold about 30% debt or $470M of a post acquisition capital structure. In the end, this is a really small company with 3,600 employees.
So the TL;DR: is that my initial estimate holds up.
Oh ok yeah thats close to what he said. he said they could afford $500 million in swiss francs in acquisition spending … I asked what type of financing for the $500 million and he said straight cash. I asked about the debt and he said that was their budget in cash. It looks like he meant that they could afford to spend half a billion but most likely did not know the financing. Thanks for the detailed analysis. He was the CEO of a subsidary and his CFO was in the room. The CFO didn’t speak up when I asked the question. He said he was involved in ten strategic acquisitions in the medical industry and I was interested in forming a spinoff company focused on acquiring companies in the industry that are undervalued/growth prospects (I sent a brief proposal in an email). He said when we met that he would be interested in further talks, but as you stated earlier it is a pretty conservative company and creating a spinoff M&A group might be a little aggressive. You’re pretty knowledgeable forreal - I have much to learn.
My view is the following:
First, it may not be wise to reveal the contents of (presumably) confidential business discussions with a conservative Swiss-owned firm in an online forum.
Second, it may better be in the future to simply ask during the meeting what the USD and CHF numbers are and use the opportunity with management to clarify any misunderstandings.
Third, I would suggest the CHF500m number may not be so mysterious - this is simply the sum total of their cash and securities balance, and with a steady CHF100m+ of operating cash flow net of capex per annum, plus the talk of many ongoing acquisition projects,no debt and regular dividends, you can easily deduce they are generating more cash than they know what to do with. The question of whether they can raise up to 2x or 4x EBITDA additional debt will come down, in my limited experience, not to the actual debt burden capacity of the company or the group, but rather to project quality and capital allocation/dividend issues at the top level.
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It’s not a private discussion, it was him speaking publically to a class. It’s also a public firm, so most of this would have been covered in public investor calls already. In any case, you should never feel the need to hide comments made by a public company publically to individuals.
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Who cares.
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You can’t simply use your cash balance. Firms have to carry a minimum level of operating cash even if they are cash flow positive. This number is not insignificant although it could be displaced by a revolver which they don’t have. Ability to get debt at a public company is a factor of EBITDA and overall credit quality, not project worthiness or whatever. That’s silly. Public companies leverage themselves up regularly simply to do share repurchases or pay special dividends. I’ve seen companies raise debt and go from IG to high yield this way. What was the value of that “project”? You lend to companies, not projects. Lastly, noone raises more cash than they know what to do with, because you can always initiate share repurchases. As an example, the average analyst forecast for FCF next year is $45M, that is not nearly a large number and given that long run average cash and marketable securities balance has always been around $400M, you could clearly argue that this company feels that is the minimum cash balance required to ensure their portfolio of companies can operate.