|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||900||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
We believe there is an extraordinary dislocation in the value of Brink’s Inc (BCO). The company is spinning off its Brink’s Home Security subsidiary on October 31, 2008. Both the parent and the spin are trading on a “when-issued basis”: Brink’s Inc. under the BCO* ticker at a closing price of $19.75; and the home security business under the CFL* ticker at a closing price of $19.60. The combined, pre-spin company trades “regular way” under the BCO ticker at a current price of $39.60.
BCO will distribute one share of CFL common to the holder of each share of BCO’s common outstanding as of October 21, 2008. Each company will have about 46.6 million fully diluted shares outstanding following the spin.
We believe the opportunity in this transaction is in the stub BCO* (when-issued) shares and offers the potential for a double within a year. For purposes of this write-up, I’ll provide a brief description of the business, valuation, and the catalyst.
Customers include banks and financial institutions, retailers, government agencies, mints, jewelers and other commercial operators. The company operates in more than 50 countries and supported by about 800 facilities and 9,100 vehicles. For convenience, I have hijacked the charts below from the company’s 10-K to show results over the past five years.
BCO* competes with large multinational, regional and smaller companies throughout the world including Group 4 Securicor plc (UK), Securitas AB (Sweden), Prosegur, Compania de Seguridad, S.A. (Spain) and Garda World Security Corporation (Canada).
Since the stub is already trading on a when-issued basis, so we have an ascertainable “post-spin” value which is $19.75 per share. The table below illustrates the current valuation:
Current Price: $19.60
FD Shares: 46.6M
Market Capitalization: $913.4M
LESS Cash: $196.0M
PLUS Debt: $179.4M
Enterprise Value: $896.8
Using the most recent consensus 2009 EBITDA estimate of $390 million, the company has a forward EV/EBITDA multiple of 2.3x. Of course Wall Street can be wildly optimistic with its estimates, particularly during difficult economic periods. So to factor this in, I’ll provide a range of discounts to EBITDA and the resulting multiples below.
Discount EBITDA EV/EBITDA
10% $351M 2.55x
20% $312M 2.87x
30% $273M 3.28x
40% $234M 3.83x
50% $195M 4.60x
Over time, we believe a very reasonable multiple on this type of business is 7x, even in a difficult economic environment. In any case, that is a number that would attract private equity (should the debt markets ever return). Here’s how the potential upside works out using the EBITDA discounts and 7x:
Discount Equity Value Share Price Upside
10% $2,473M $53.08 171%
20% $2,200M $47.22 141%
30% $1,927M $41.36 111%
40% $1,638M $35.51 81%
50% $1,382M $29.65 51%
The Company has funded a VEBA trust to cover obligations related to its former coal business. The Company may have to make additional contributions to fund the obligations. In addition, the company is not completely immune to a deep global recession. However, the BCO business held up very well during the 2000-2002 period.
|Entry||10/25/2008 09:03 PM|
In the 10-k, it is disclosed that the company has a $142M legacy liability net of the $460m VEBA asset that has been pre-funded. However, the VEBA is invested 70% in equities, so i think you have to assume this is down with the market which would create another $130m of liability or $270m total or EV of $1,160 using your calcs. Management also estimates $175m of capex this year, so EBITDA-capex would be $215m using your calcs or a EV/EBITDA-capex of 5.4x, still pretty cheap, but perhaps marginally less so than you indicate - is there any reason you wouldn't think about it this way?
Can you also explain why EBITDA has grown so much in this business the last few years and what you think a reasonable downcase would be for this sort of a business in a recession. It seems there may have been some one time bumps related to new int'l currencies being distributed. Thanks.
|Entry||10/28/2008 11:38 AM|
|I apologize for the delayed response as I'm on the road. I'll give the short answers below and follow up when I get more time.|
As a point of reference, below are the Brinks Inc. numbers through the 2001-2003 period.
Rev. Op. Inc. Change
2000 $1,463 $108.5 + 4.8%
2001 $1,536 $92.0 -15.2%
2002 $1,580 $96.1 + 4.5%
2003 $1,689 $112.5 +17.2%
Clearly 2001 was a sizeable hit in OI despite revenue growth. But 2002 was arguable a worse environment than 2001 yet the company managed to grown both revenues and operating income. I can't say this current environment won't be much worse but I think that the provided range of discounts will cover the actual outcomes over the next few years.
I do believe the 09 consensus estimates are too high. For our own base case projections, we are using a 30% discount (double the 2001 fall-off year). We heard the roadshow presentation for the spin about a month ago. Management indicated little concern about the current financial turmoil as security services in such environments are often more in demand. The caveat from management was the potential for widespread failure of small financial institutions which tend to more fully utilize outsourced security services. Based on this possibility, we thought 30% should be plenty to cover.
With Brinks Inc., the large majority of CAPEX is for growth. According the the IR folks, maintenance CAPEX generally runs in the 15-20% range.
A will try to get to the VEBA questions shortly.
|Entry||10/30/2008 05:31 PM|
|The dramatic rise of the dollar in the past 3 months is going to impact a lot of companies. With over 75% of operating profit coming from International operations, if you assume the current rates hold, the company's operating profit is going to be 10-15% lower going forward. Have you looked at this? Also, have you looked at how much of their historical growth was driven by currency, as the $ was falling over the past several years until July?|