|Shares Out. (in M):||176||P/E||0||0|
|Market Cap (in $M):||106||P/FCF||0||0|
|Net Debt (in $M):||170||EBIT||0||0|
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Tuckamore Capital Management Inc. (“Tuckamore” or “TX”), formerly Newport Partners Income Fund, is a self-described "fund that was developed to provide its investors with access to high-quality Canadian private equity". Its equity went public as a Canadian income fund in 2005 at $10.00 per unit and now trades for around $0.20. It was a failed public PE fund that went into the credit crisis overleveraged and had to divest assets to pay down debt.
It previously had two issues of unsecured subordinated convertible debentures. These were restructured in 2011 into the second lien bonds (TSX: TX.DB.B, CUSIP: 898644AB5, the “debentures”) which now represent the majority of TX’s capital structure. These $176.2mm second lien bonds carry an 8% coupon and mature in March 2016. They trade on the Toronto Stock Exchange.
Three recent proposals, including a fully-funded management buyout and two financing proposals from large hedge funds (one of which was completed), all represented a value for Tuckamore at 57% - 75% greater than its current enterprise value and more than fully covered the debentures.
Tuckamore holds interests in 7 businesses of which it invested $336mm:
ClearStream Energy Services: Provider of oil & gas maintenance, pipeline wear technology and construction to oil sands and conventional E&P. 100% owned. $128mm invested.
Quantum Murray: National provider of demolition remediation and scrap metal services. 100% owned. $94mm invested.
Gusgo Transport: Specializes in all aspects of marine containers, from transportation, loaded and empty storage, and container sales, leasing and repairs. 80% owned. $13mm invested.
Gemma Communications: Call center service. 100% owned. $32mm invested.
IC Holdings: Provider of loyalty programs and on-line promotions. 80% owned. $11mm invested.
Titan Supply: Manufacturer and distributor of rigging products and services for oil & gas and construction industries. 92% owned. $25mm invested.
Rlogistics: Discount reseller through 20 locations in Ontario and FactoryDirect.ca . 36% owned. $10mm invested.
With the stock trading at $0.20 and the debentures at $60.00, the current enterprise value is $191.6mm. With $53mm in LTM EBITDA, TX currently trades at only 3.6x EBITDA (market value of debt is 3.2x EBITDA).
|Name||8% Secured Debentures due Mar 2016|
|Coupon||8% payable on June 30 and Dec 31|
|TX CN Equity||$0.20|
|Cash & ST Investments||$21,620.0||Net of Brompton indemnification|
|Senior Credit Facility||$67,253.0||1.3x||Matures Dec 31 2015, Prime+1.5% (BMO lender)|
|Secured Debentures||$176,228.0||4.9x||2nd lien, matures March 23, 2016, 8% coupon|
|Total Debt (@FV)||$261,737.0||4.9x|
|Total Debt (@MV)||$191,245.8||3.6x|
|Net Debt (@FV)||$240,117.0||4.5x|
|Net Debt (@MV)||$169,625.8||3.2x|
|EV / EBITDA (LTM)||3.6x|
TX has performed very well over the past 5 years, displaying steady growth in revenue and EBITDA. ClearStream represents ~70% of revenue and roughly all of TX’s EBITDA. Quantum Murray accounts for ~20% of revenue.
|Quantum Murray EBITDA||$2,481||$13,781||($1,226)||($2,050)||($318)|
|IC Group EBITDA||$592||$923||$1,208||$935||($117)|
|Total Portfolio EBITDA||$39,175||$54,019||$45,305||$51,059||$56,721|
|Total Adjusted EBITDA||$26,632||$40,381||$38,423||$44,193||$52,974|
|Adj EBITDA Margin||5.7%||7.3%||5.6%||6.6%||7.5%|
|Ending Net Debt||$229,665||$228,722||$261,475||$231,865||$236,073|
|Ending Working Capital||$89,335||$117,645||$131,728||$125,002||$59,750|
The increase in revenue and EBITDA in 2011 is partially attributable to the acquisitions of a 20% interest in ClearStream and a 35.7% interest in Quantum Murray. No acquisitions have been done since.
March 2011, the convertible debentures, which were in default due to a breach of three covenants under the senior credit facility beginning December 31 2008(total leverage ratio, fixed charges coverage ratio and minimum EBITDA), were exchanged for second lien notes. The company sold assets, paid down debt, restructured the convertible debentures (extended term, increased coupon, granted security, implemented covenants, swapped portion of principal for equity) and closed a new senior credit facility with BMO. The debt restructuring completed on March 23 2011 and the company was no longer in default.
In January 2013, Canaccord ran a sale process for Tuckamore subsidiary ClearStream. It received two offers of $240mm and $249mm (representing multiples of 6.5x LTM EBITDA and 5.0x forecast EBITDA). One bidder withdrew its offer after completing due diligence and the other failed to finalize financing.
In February 20 2014, PE Firm Access Holdings (along with hedge fund West Face Capital) submitted a formal proposal for a $100mm backstopped rights offering (or private placement) at Tuckamore, which included new $175mm long-duration 1st lien ($120mm at BA + 400bps) / 2nd lien ($55mm at 8%) debt at attractive rates and terms, provided by RBC and Scotia. Their plan would reduce cash interest from $19.5mm to $10.7mm, reduce corporate expense from $6mm to $4mm, retire senior credit facility and redeem debentures at par, with pro-forma debt at 3.8x and pro-forma valuation at 5.9x ($50.8mm EBITDA, expected 5-year IRR on rights of 18.3% - 32.4%), with an estimated 2018 enterprise value of $804mm. Tuckamore turned down the proposal.
March 25 2014 Access and West Face approached the CEO of Newport, the largest shareholder of Tuckamore, to buy all of their TX shares at $0.60 per share. The proposal was turned down.
April 16 2014, Tuckamore received an unsolicited non-binding offer from PE firm Birch Hill Equity Partners at $0.60 per share. TX countered at $0.75. Birch Hill lifted this $0.75 per share offer and signed an arrangement agreement to acquire Tuckamore for a total enterprise value of $335.6mm on May 5 2014. This transaction was terminated in Q2 2014 due to shareholder opposition led by Access and including significant shareholders Canso and JC Clark. Access filed a dissident circular against the MBO, stating that the offer undervalued the company and the $0.61 - $0.80 per share valuation was flawed as it relied on projections provided by management trying to buy the company for less than fair value. The dissident group claimed a reduction of excessive corporate overhead could add over $20mm of value and the MBO assigned no value to the >$100mm in capital losses.
August 2014, hedge fund Orange Capital invested $13.3mm in Tuckamore at $0.80 per share for a 15% stake and board seat. Orange is entitled to receive a success fee up to $5.3mm if it assists in refinancing the debentures.
For the 2014 MBO, Tuckamore hired Canaccord and PWC as financial advisors. Due to the insider participation in the buyout, PWC was hired (and paid millions of dollars) to conduct a valuation of the company, which was included in the management information circular. Since Tuckamore’s disclosure of the performance of its subsidiaries is poor, we utilized PWC’s well-done valuation of Tuckamore’s seven subsidiaries to construct a sum-of-parts estimate of the value of Tuckamore. ClearStream represents the bulk of the value, so the analysis is focused on that subsidiary. PWC’s EBITDA estimates were estimates from management. Tuckamore management was unable to provide free cash flow forecasts to PWC.
ClearStream is a fully integrated and diversified service provider to the upstream, midstream and downstream sectors in western Canada. In business since 1970. Its three subdivisions include:
Industrial Services: Production and Maintenance including plant and field support, quality control, field operations, safety management systems personnel, plants turnarounds. Facility Construction including estimation, scheduling, inspection, procurement, project management, construction execution. Labor supply including supplying heavy equipment operators and mechanics. Competitors for the industrial segment include URS Flint, PCL Construction and Pyramid Corporation.
Fabrication & Wear technology: Pipe spooling, skid packages, vessel dressing, structural fabrication, module assembly, rebuilds, wear technology to increase life expectancy of steel pipe. Competitors for the fabrication segment include URS Flint, JV Driver and Ledcor. For wear services, competitors include Bradken, Willbros and Trimary.
Transportation and Logistics: pipe logistics, hauling, storage, camp moving, general transport.
ClearStream's business is primarily focused on providing operational and maintenance support to in-production facilities. Majority of revenues are from maintenance and operations of existing oil and gas facilities as opposed to construction and therefore less cyclical. Its maintenance contracts generally have terms of up to 5 years.
Revenues from ClearStream's top 3 customers accounted for 51.1% of revenue in 2014, with the top customer representing 26.8%. Clients include Canada’s largest integrated oil firms Suncor, Syncrude and CNRL.
ClearStream experienced increased business in most of its divisions in 2014, with the most favorable revenue gains in the fabrication and conventional oil and gas maintenance divisions. Revenue was up 7% in 2014 and 7.1% in Q4 YoY. EBITDA was up 19.8% in 2014 and up 41% in Q4 YoY. Increase in Q4 revenue was primarily from oilsands maintenance divisions. Wear revenues were stable and conventional maintenance and fabrication revenue were lower. Margins were slightly lower but savings in overhead costs resulted in stronger bottom line.
Outlook: Low activity in the fabrication division is expected due to deferrals on new capital projects. However, ClearStream continues to see strong demand and backlog for its pipe-coating wear product in early 2015. Some clients have been asking for price concessions; however ClearStream has kept margins consistent by cutting costs.
PWC estimates ClearStream's "maintainable EBITDA" at $50mm, vs $47.6mm in 2013 and $57mm in 2014.
We use a low case valuation of $200mm assuming a 5x multiple on a very conservative 30% EBITDA decline, with a high case of valuation $275mm assuming a 6x multiple on a 20% EBITDA decline.
Quantum Murray is an integrated provider of environmental services across Canada including demolition, remediation, hazardous materials, emergency response and training, facilities management, metals recycling and waste management.
Competitors to Quantum Murray include Augean, Newalta, Progressive Waste Solutions, Republic Services, US Ecology and Waste Connections.
Q4 revenues for the demolition and emergency response divisions were higher YoY, with increased margins.
PWC estimates Quantum's "maintainable EBITDA" at $3.5mm, vs losses the past 3 years and 5-year average of EBITDA of $2.5mm. Using a 7.5x – 9.0x multiple results in a valuation of $26mm - $32mm.
PWC's liquidation analysis was consistent with a $26mm - $32mm valuation.
Rlogistics is a discount reseller through 20 locations in Ontario and FactoryDirect.ca.
Competitors to Rlogistics include Big Lots, Overstock, Tuesday Morning, Dollar Tree, Family Dollar, Dollar General and Dollarama.
PWC estimates Rlogistics' "maintainable EBITDA" at $1.0mm. EBITDA was $0.769mm in 2012 and $1.772mm in 2013.
TX's 36% stake in Rlogistics valued at $1mm - $1.5mm at 3x - 4x EBITDA.
Gemma is a poorly performing call center service.
PWC estimates Gemma's "maintainable EBITDA" at $0.5mm, with a valuation of $1.5mm - $2mm. The business has been deteriorating and we ascribe no value to it.
Gusgo is a marine container transportation business founded in 1969.
One of TX's well-performing businesses, it has increased EBITDA steadily over past 5 years with Q4 results exhibiting higher revenues and increased margins.
PWC estimates Gusgo's "maintainable EBITDA" at $3.0mm and a valuation range for 80% of $9.6mm - $12mm. We value the stake at cost of $12.5mm, or 5.3x LTM EBITDA.
IC Group is a provider of loyalty programs and on-line promotions.
A letter of interest from a strategic buyer was received in May 2013 but a sale of the business did not close.
PWC estimates IC's "maintainable EBITDA" at $1.35mm, with a valuation range for 80% of $5.4mm - $6.5mm. The business has been deteriorating and we ascribe zero value to it.
Titan is a manufacturer and distributor of rigging products and services and ground engaging tools. Top 10 customers represent 18% of sales.
An LOI to acquire Titan was received in December 2013 from a PE firm at 5x - 6.5x LTM EBITDA. This offer did not proceed further as TX stopped the process (management went ahead with the MBO shortly thereafter).
PWC estimates Titan's "maintainable EBITDA" at $3.0mm. Assuming a 33% decline in normalized EBITDA for current market conditions, we get a $9.2mm - $12mm valuation for TX's stake at 5x - 6.5x EBITDA (in-line with oilfield service M&A precedents).
The sum-of-parts analysis results in a total valuation of $224mm - $320mm, with $161mm - $256mm of value remaining for the debentures (91% - 145% coverage).
|ClearStream||$199,836||$274,061||Low case: 5x assumes 30% decline in EBITDA. High case: 6x assumes 20% decline in EBITDA.|
|Quantum Murray||$26,250||$31,500||PWC's 7.5x - 9.0x "maintenable" EBITDA / PWC's liquidation scenario. Compares with $94mm invested.|
|Rlogistics||$1,100||$1,450||PWC's 3x-4x maintainable EBITDA.|
|Gusgo||$12,500||$12,500||Values stake at cost of $12.5mm, or 5.3x LTM EBITDA.|
|IC Group||$0||$0||Assumes zero.|
|Titan||$9,246||$12,020||Assumes a 33% decline in normalized EBITDA at 5x - 6.5x EBITDA|
|Corporate||($24,500)||($11,878)||Low case: $3.5mm G&A at 7x. High case: Change of control payments + $5mm advisory fees|
|Cash & ST Investments||$21,620||$21,620|
|Senior Credit Facility||($67,253)||($67,253)|
|Value to Debentures||$160,543||$255,764|
PWC’s valuation in June 2014 resulted in a valuation of $298mm - $344mm, which would leave the debentures well covered.
|C$000's||PWC - Low||PWC - High|
|Cash & ST Investments||$21,620||$21,620|
|Senior Credit Facility||($67,253)||($67,253)|
|Value to Debentures||$233,635||$280,054|
Recently proposed transactions (the MBO and the Access financing), along with a completed financing (the Orange financing) all supported values significantly higher than the debt of the company. These values were in line with historical cost of the businesses.
|C$000's||MBO||Access Financing||Orange Financing||Historical Cost|
|Cash & ST Investments||$21,620||$21,620||$21,620||$21,620|
|Senior Credit Facility||($67,253)||($67,253)||($67,253)||($67,253)|
|Value to Debentures||$271,711||$236,211||$264,181||$272,111|
Debentures / Credit Facility Covenants
We estimate that 75% of the debentures are held by investment funds Canso, Marret and K2. The latter two investors did a good job in the 2011 debenture restructuring to obtain advantageous terms and strong covenants.
If Priority Senior leverage ratio is >1.5x, 100% of net proceeds of asset sales and equity financings and 75% of excess cash flow must be used to permanently repay senior lenders. If Priority Senior leverage ratio is < 1.5x then secured debentures shall be redeemed using 100% of net proceeds of dispositions, 75% of excess cash flow, and 100% of equity financings. If Priority Senior debt ratio < 1.5x but total senior debt (including debentures) is > 3.5x, must redeem debentures if senior debt refinanced (and priority debt not repaid).
TX paid down $23mm of the credit facility in 2014 (using $17.5mm raised from new equity).
Priority senior leverage ratio limited to 2.5x EBITDA.
Currently at 1.6x EBITDA.
Minimum total interest coverage of 2.5x EBITDA.
Currently at 3.3x EBITDA.
Minimum EBITDA of $40.5mm.
Currently $53mm LTM.
Replacement Priority Senior debt limited to 1.5x EBITDA.
Capex capped at $7.5mm.
Capital leases capped at $20mm.
Any acquisitions require lender approval and distributions to equity holders are restricted.
Cash held by all subsidiaries in aggregate limited to $5mm.
The Tuckamore Capital second lien bonds at 60 cents on the dollar represent a compelling investment opportunity with a high probability of full recovery (through redemption or restructuring) and a substantial margin of safety. These debentures have traded down 40% to attractive levels even though the underlying business has performed relatively well. The principal of the debentures is well-supported by the valuation of its underlying businesses. In addition, two recent financing proposals (one completed) and one opposed MBO indicated enterprise values that more than covered the debt. Certainly the main business, ClearStream, faces some headwinds with the downturn in oil prices. However, recent results indicate that ClearStream’s maintenance-heavy business from Canada’s largest oil companies is relatively less-cyclical than other more exploration-focused oilfield services peers.
Restrictive covenants have forced Tuckamore to de-lever and pay down its credit facility. Their other six businesses (excluding ClearStream) may have sufficient value to cover the credit facility. In this scenario, Tuckamore’s $176mm of debentures, with a market value of $106mm, would be fully supported by ClearStream’s $57mm of LTM EBITDA (representing a multiple of just 1.9x EBITDA). There is additional value to be unlocked through significant G&A savings at the corporate level. For example, there are two CFOs and the Chief Investment Officer has not made an investment in five years and is not allowed to make any investments in the future.
We believe we’ll see full recovery (through redemption or restructuring) and have a substantial margin of safety. The 8% coupon pays you a 13.3% current yield while you wait for your 67% capital gain.
- Asset sales
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