|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||8,500||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Mirant is a post-bankruptcy merchant power generator trading below its asset value, and at 5.3x EBITDA, well below its comps which trade at around 8x. The discount is unwarranted, but its various moving parts and short post-bankruptcy history are confusing the issue. It emerged from Chapter 11 in January with a very under-levered balance sheet and over $2.6 billion of NOLs. It’s recently announced some very favorable actions, including large asset sales and a large share buyback in the form of a Dutch auction tender. The tender should take place later this month. When the asset sales are completed within the next year or so, Mirant will have a huge net cash position, and management has publicly committed to return further capital to shareholders. The shares are worth $35-41, and with the proposed actions, the value gap should close relatively quickly.
Mirant started life as the unregulated utility division for Southern Company, and then became an independently traded firm in 2000 through an IPO and a subsequent spin-off. In the frenzied industry environment of the late 1990s and early 2000s, just about every IPP pursued reckless debt-financed expansion and questionable power trading tactics, and Mirant was no different. Its stock was a disaster during the short time it was public, and when the company couldn’t meet repayment deadlines in 2003, it was forced into Chapter 11. Lack of liquidity rather than insolvency was the primary trigger to the filing, since Mirant possessed good assets and strong underlying cash flow. The new MIR stock began trading in January, and the old equity holders were able to salvage a tiny amount of value for themselves, which speaks to the underlying asset value.
Mirant currently owns 17,575 MW of electricity generation capacity worldwide, with 14,230 across the
ASSET SALES AND RETURN OF CAPITAL
Mirant has put up for auction its
The auction process for the international assets has already begun, and indications are that there are many interested parties. The auction for the
Concurrent with the
To do an enterprise value calculation, first let me reconcile Mirant’s capital position at
Dutch auction 1.25
Free cash flow, NTM (0.77)
To calculate the share count, I take the 300 million basic shares outstanding, assume cashless exercise for the 53 million warrants outstanding, and then subtract the maximum buyback number from the Dutch auction. I ignore the 2-3 million options outstanding for the sake of simplicity, since the impact is minimal. The company reports 308 million fully diluted shares, so I’m more conservative here.
Shs outst: 300.0 million
Warrants dilution 11.6
Fully-diluted shs: 311.6
Dutch tender (43.0)
Shs outst, pro forma: 268.6 million
So the stock market is valuing the enterprise, pro forma of the asset sales and Dutch tender, as follows:
Aug 11 share price: $27.47
Shs outstanding: 268.6 million
Market Value: $7.38 billion
Net Cash (2.35)
Wkg Cap needs 0.50
Two items above need explanation, working capital needs and the NOLs. Management has disclosed that the businesses remaining after the divestitures will need about $500 million in liquidity for working capital, so I back it out of the net cash above. As for the NOLs, Mirant has $2.6 billion or $3.7 billion depending on an IRS election they need to make by next year (the $2.6 billion has no limits on usage, while the $3.7 billion has annual limitations). I tax-effect the $2.6 billion at 35%, and then haircut the result by one-third to assign it a $607 million value.
The stock is thus trading at an EV/EBITDA multiple of 5.3x based on management’s projection for $924 million in pro forma EBITDA in 2007. This is well below the three closest comps NRG, Reliant, and Dynegy, which trade between 7.6-8.2x EBITDA estimates for 2007. This makes absolutely no sense. Once the divestitures are done, Mirant will be a highly focused company left with its crown jewels: 10,726 MW of a mix of baseload, intermediate, and peaking capacity clustered in four urban areas: Mid-Atlantic (esp. D.C.),
There are always risks to any EBITDA forecast, but I think they’re mitigated here by a couple of factors that bias the 2007 EBITDA upward, and which could be considered in appraising the share value. First, Mirant reached a settlement in May with PEPCO over a disputed power purchase deal that was to run through 2021. If this settlement is approved by the courts, it would add $32 million to 2007 EBITDA. Second, Mirant has been embroiled in a property tax dispute in
Natural gas prices plummet. Mirant is largely hedged for 2006, and about two-thirds hedged for 2007. Management has estimated that every $1 move in gas prices will impact 2007 EBITDA by $62 million. There’s a small cushion, since prices have moved up a little since the 2007 EBITDA projection was made a few weeks ago.
Management does something stupid. Many thought that their recent hostile bid for NRG was stupid, and Mirant pulled the bid after several shareholders complained vociferously. I actually don’t think it was such a horrendous idea, but I think it’s close to moot now. They’ve reversed course magnificently with the asset sales and capital return proposals, and they’ve even recently hinted that being acquired may not be such an unlikely thing, either.
Environmental compliance costs rise.
Assets for sale fetch significantly less than I estimate.
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