|Shares Out. (in M):||63||P/E||0.0x||0.0x|
|Market Cap (in M):||293||P/FCF||0.0x||0.0x|
|Net Debt (in M):||1,270||EBIT||132||144|
Cenveo (NYSE:CVO) is one of the US’ largest commercial printers, with annual revenues of ~$1.9bn. The Stamford-based Company, a product of many acquisitions (e.g. roll-up), is run by Rob Burton Sr, a former commercial printing executive who took control of CVO in 2005 via proxy fight. While I have relatively strong views on (i) the quality of CVO’s operations relative to other commercial printers (they are better, but not ‘that much’ better), (ii) the longer-term trends in every one of CVO’s business lines (they are not great, despite management’s assertions and claims of ‘organic growth’) and (iii) the Company’s equity value (how is this business worth >6.5x again?), this write-up focuses entirely on the capital structure.
Specifically, Cenveo’s recently announced tender offer presents asymmetric capital structure arbitrage opportunities. See below for the Company’s current capital structure (everything, outside of the bank debt, has traded up 15 points over the last few months).
|$mm||12/31/11A||Net Leverage||Int Rate||Maturity||Rating||Price||Simple YTM||Market Value||Mkt / LTM EBITDA|
|Term Loan B||353||6.25%||Dec-16||BB- / NA||100.0||6.2%||353|
|Second Lien Notes||400||8.88%||Feb-18||B3 / B-||98.0||9.3%||392|
|Total Secured Debt||753||3.3x||745||3.3x|
|Senior Notes||170||10.50%||Aug-16||Caa1 / CCC+||101.0||10.2%||170|
|Senior Sub Notes||285||7.88%||Dec-13||Caa1 / CCC+||98.0||9.1%||279|
|Senior Sub Notes||25||8.38%||Jun-14||Caa1 / CCC+||98.0||9.3%||25|
|Cap Leases & Eqp Loans||13||5.00%||NM||Caa1 / CCC+||100.0||NM||13|
|Plus Pension & OPEB||82|
|2011A PF EBITDA||235|
As you can see, Cenveo is certainly levered, but unlike peers RR Donnelly (NYSE:RRD) and Quad Graphics (NYSE:QUAD), Cenveo’s capital structure is quite complex. More specifically, I offer brief descriptions of each tranche of debt below.
Cenveo’s proposed tender offer looks to refinance all of the Company’s senior ($170mm) and subordinated ($310mm) notes. This is a necessary step, given the looming 2013 maturity, and, in my view, questionable earnings growth prospects (or at the very least, limited capital structure flexibility). Incremental secured debt (recall they took down bank exposure meaningfully in 2010, they have 3.75x permitted liens covenant on seconds) capacity is minimal. The Company must find a way to refinance the subordinated notes, however, investors are unlikely to buy a subordinated financing so long as the senior notes remain outstanding. Importantly, so long as the senior notes remain outstanding, the Company must finance subordinated debt with ‘like-for-like’ (e.g. additional sub debt) securities. If you have the 10.5% indenture, the relevant section I’m referencing is Permitted Refinancing Indebtedness (iii).
The Company’s capital structure would be much improved via a refinancing of the senior (2016) and sub (2013 & 2014) notes. I believe a deal can and will get done here, but that the proposed financing makes little sense. The senior notes, which are call-protected through August of 2012 @ 105.25 (equivalent call price of 110), have meaningful blocking value here.
Put another way, holders of the senior notes are getting hosed in the proposed tender. I believe the Company decided (or received advice) to throw out a low-ball offer (10 points below the call price) just to see if it worked. They need 50.1% of holders ($85.2mm) in order to strip the senior notes’ restrictive language. While I have no great color as to how the tender is going (just announced last Wednesday – Fidelity is a major player, with 23% of senior notes and 13% of the 2013 sub notes), I believe the proposed trade offers true asymmetric returns. Consider the following set-up at 1.00x ratio:
|Trade||Entry Price||Ratio||Net Capital|
|Scen One - Amend Tender||Price||Ratio||Net Capital||G / (L)||commentary|
|Long Seniors||110.0||1.00x||110.0||9.0||seniors are non-call through August 2012 (@ 105.25)|
|Short Subs||100.3||-1.00x||(100.3)||(2.3)||seniors contain governor on CVO's ability to refinance sub debt 'like for like'|
|Scen Two - As Proposed||Price||Ratio||Net Capital||G / (L)|
|Long Seniors||101.0||1.00x||101.0||-||CVO can strip covenants with majority (50.1%) of holders|
|Short Subs||100.3||-1.00x||(100.3)||(2.3)||cross-holdings may drive consent / tender actions|
|Scen Three - Deal Falls Apart||Price||Ratio||Net Capital||G / (L)|
|Long Seniors||95.0||1.00x||95.0||(6.0)||will trade at meaningful premiums (need to address sub deb maturities very soon)|
This is not the sexiest idea in the world but, but I see little to no downside here, and very high returns on net capital in a short period of time (they are extremely focused on getting a deal done this spring, after they waited way too long last year (and markets fell apart)). Probability weightings, of course, are subjective – but I think the Company is very likely to revise the tender offer. A sub-for-sub deal is likely to come at a 300-350bps premium (relative to an all senior deal), meaning the Company’s payback period (on the 10 points of call premium) is less than two years. More importantly, an all senior deal would greatly simplify the capital structure and maturity cadence.
Any and all pushback is encouraged. Happy, of course to delve into details as to the Company’s history, pro forma business mix or the management team, but for the purposes of this write-up I’ve focused purely on the capital structure. I’ve given direct feedback to the management team and BofA (dealer manager), and would encourage other like-minded holders to do so (if you agree).