I badly sprained my ankle (and quite possibly tore a ligament, as yet undetermined) playing some after work sports and, stupid me, limped back to work to finish off a couple of things and pick up my stuff. This is obviously the exact opposite of the RICE principle used to treat sprains. The brave front I put on at work ("it's just a sprain, I'm not infectious") was quickly shut down by my doctor the next day, saying it was quite silly I'm still walking around on it and making it worse than it already was (it had bloated to the size of a melon overnight and cause some serious pain, and therefore cursing in between microsleeps). So I had to take the last couple of days off to keep my leg elevated every hour or so and undo my self-inflicted damage.
Being stuck at home on a work day is really crap. For one, I can't play office soccer because all the breakables are at my expense. Another is the fact that I missed out on Friday night drinks, which is particularly important tonight as I was scheduled to catch up with various friends I have not seen for a little while (apparently my fault, but whatever). I did have the option of going to drinks supported by my crutch, but somehow I don't think it qualified as "acceptable accessory" in the pretentious bar scene that this stupid city is so desperate to cultivate. Not worth the trouble.
Anyway, the one good thing is that I can do a link dump of all the fun things that recently happened:
- ABC Learning (ASX: ABS) continues its trading halt. I once had some money invested in this company, and fundamentally speaking the business idea is great, the capital structure just really sucks in the current market. Whoever is trying to buy it at current prices will pick up a great bargain... if it has a healthy balance sheet itself.
- Every company that says anything spooky becomes a takeover target; IAG is the latest in a recent line that includes MFS, Allco, and ABC Learning. Interestingly, not the Macquarie Group.
- With this much money disappearing, why aren't any hitting my pockets? Are my pants not baggy enough?
- Rockett Girlfriend has a certain affinity for this firm at the moment. And I know that one day, calling this firm "Allen's Ovaries" will get me in trouble with an actual lawyer working there.
- By the way, Rockett Girlfriend totally missed out on proposing to me on Feb 29, so her loss. I better get a decent present from London to compensate.
Friday 29 February 2008
Monday 25 February 2008
EA, Take-Two, and why I love games
Electronic Arts, the biggest video game maker in the world, offers $26/share of Take-Two, a 49.8% premium. This comes a pretty good second on my list of "Dream Deals To Work On", after a potential takeover of Limited Brands. Sometimes (relatively OK capital markets aside) I absolutely hate working in this backwater colony of a city.
Take-Two board and management will be hard-pressed to justify rejecting this deal, given current markets and the relatively high premium on the table. Other thoughts on the matter:
- it will be interesting to see what the "crucial initiatives" are, and how certain these are to create value for shareholders.
- at the heart of it, video game creation has common characteristics with other R&D businesses. It is a capital-intensive enterprise, even more so for Take-Two, who have specialised in creation of large, complex and immersive 3D worlds. It has a bit of a "hit or miss" nature, and missing is very costly. Eventually, franchises will have to be revamped or replaced with new ones, and the result may or may not appeal to players.
- The very nature of Take-Two's most popular franchises (M-rated or higher) means a fair portion of the gaming population (kids under 15, females) are unable to get into the games, and a fair few others who can play it, won't, because of the large time investment involved in some of these games (a general criticism for most game makers, but still applicable).
- On the other hand, having a successful stable of franchises is half the battle, both as sources of relatively dependable revenue (from sequels), and as a legitimising factor when launching new franchises ("these guys created Grand Theft Auto; they know what they're doing"). Success breeds success, and all that.
- What exactly does EA see that the market didn't? Do they really think the franchises, the game brains, and the marketing team are worth 50% more under EA management than on their own? Is there alot of fat in this business? Is it just to take out one of its serious competitors? And is that really good for gamers?
On a somewhat related note, given the current development in video game technology (both computing power and the ability to create highly complex worlds with realistic and causal parts), why is there such an utter lack of good business simulation games? I think we are well beyond the "Tycoon" and "Sim" simulators that keep getting churned out, which tend to focus on closed systems (zoo, theme park, etc) rather than a full-scale corporate environment with many industries all interacting, competing, cooperating, and co-depending. If I build a theme park, I want to be able to sell the damn thing to Disney! While of course remaining as owner of the plot of land, charging exorbitant rent, and using this cash cow to fund the growing army of politicians I employ.
Imagine playing as a private equity barbarian, a hedge fund activist, or the CEO of a Fortune 500 (or a startup!). Imagine getting calls and emails through your Blackberry, which causes you to rush out of some inane meeting, just so you can send instructions to your "executives" about that hostile takeover! Imagine being Greenspan or Bernanke, overreacting in a dizzy panic and unwittingly setting off the start of a new bust several years in the future!
I love games.
Take-Two board and management will be hard-pressed to justify rejecting this deal, given current markets and the relatively high premium on the table. Other thoughts on the matter:
- it will be interesting to see what the "crucial initiatives" are, and how certain these are to create value for shareholders.
- at the heart of it, video game creation has common characteristics with other R&D businesses. It is a capital-intensive enterprise, even more so for Take-Two, who have specialised in creation of large, complex and immersive 3D worlds. It has a bit of a "hit or miss" nature, and missing is very costly. Eventually, franchises will have to be revamped or replaced with new ones, and the result may or may not appeal to players.
- The very nature of Take-Two's most popular franchises (M-rated or higher) means a fair portion of the gaming population (kids under 15, females) are unable to get into the games, and a fair few others who can play it, won't, because of the large time investment involved in some of these games (a general criticism for most game makers, but still applicable).
- On the other hand, having a successful stable of franchises is half the battle, both as sources of relatively dependable revenue (from sequels), and as a legitimising factor when launching new franchises ("these guys created Grand Theft Auto; they know what they're doing"). Success breeds success, and all that.
- What exactly does EA see that the market didn't? Do they really think the franchises, the game brains, and the marketing team are worth 50% more under EA management than on their own? Is there alot of fat in this business? Is it just to take out one of its serious competitors? And is that really good for gamers?
On a somewhat related note, given the current development in video game technology (both computing power and the ability to create highly complex worlds with realistic and causal parts), why is there such an utter lack of good business simulation games? I think we are well beyond the "Tycoon" and "Sim" simulators that keep getting churned out, which tend to focus on closed systems (zoo, theme park, etc) rather than a full-scale corporate environment with many industries all interacting, competing, cooperating, and co-depending. If I build a theme park, I want to be able to sell the damn thing to Disney! While of course remaining as owner of the plot of land, charging exorbitant rent, and using this cash cow to fund the growing army of politicians I employ.
Imagine playing as a private equity barbarian, a hedge fund activist, or the CEO of a Fortune 500 (or a startup!). Imagine getting calls and emails through your Blackberry, which causes you to rush out of some inane meeting, just so you can send instructions to your "executives" about that hostile takeover! Imagine being Greenspan or Bernanke, overreacting in a dizzy panic and unwittingly setting off the start of a new bust several years in the future!
I love games.
Tuesday 12 February 2008
Intelsat
Thanks to Going Private for writing about this interesting deal.
Intelsat key stats:
Initial equity investment = $128M
Investment period = 37 months
Current (last sale) equity value = $1.2B
Estimated IRR = 106.65% pa (go on, lick that IRR, you know you want to)
Current EV = $16.5B
Total Debt = $15.4B ($10.4B of existing debt to roll over + $5B bridge loan, arranged by Credit Suisse, Morgan Stanley and Bank of America)
Total Leverage = ~9.8x EBITDA (after annualising YTD published Sep 07 results)
Even if we assume that this is a high-margin, high-growth, limited competition business (which a cursory glance at the company information and financials seem to indicate, but I must dig further), 9.8x is a very high leverage multiple. Quite rightly, a few comments point out that this leverage would never have happened had the lead banks worked on the assumption that they would have to hold a significant chunk of the debt on their books (and all its related risks). The bridge loan will be problematic - it is basically a bet by the lead banks that by the time it matures, things will be considerably closer to normal and that it can be refinanced in the debt market.
Also it seems that this is a HoldCo lend (i.e. the debt is borrowed by the holding company that owns the actual operating companies), which raises an extra level of risk. HoldCos rely on dividend streams from the OpCos to pay the expenses and repay debt. Often, OpCos have their own debt to service (which appears to be the case with Intelsat), and there are (or should be) severe restrictions on the dividends it can pay to HoldCo. Should things go slightly askew at OpCo level, the dividend stream might get dammed up by the banks lending to the OpCos - which means less cash to HoldCo, putting HoldCo principal and interest repayments at risk.
The interesting part is that BC Partners (the new owners) and the banks chose to roll over the existing loans rather than have the existing loans refinanced by new debt as part of the transaction (which is how these are typically done). The reason? The current leveraged loans market is not conducive to issuing new debt. So instead of having to sell a fresh new $15B batch of debt to a group of banks suffering indigestion, why not just let the existing bankers (who presumably still like their debtor) stick around? Sure, this means lower fees for the lead arrangers, but given the option to forgo some fees to significantly reduce your headache and the hit to your capital provisions, it's worth it.
Other tidbits
- Our new graduate started last Monday. The second thing I did (after I said hello) was rescue him from the fiery exchange between our Executive Assistant and some back office guy in Bangalore. The next day he brought his iPod with noise-cancelling earphones.
- Overheard:
[Person 1 gets flicked in a certain protruding area of the thorax region]
Person 1: "I don't know if I should feel good or bad about that."
Person 2: "It's because you feel guilty about how good it feels."
- Interesting analysis of the BHP Billiton-Rio Tinto deal from Deal Professor.
Intelsat key stats:
Initial equity investment = $128M
Investment period = 37 months
Current (last sale) equity value = $1.2B
Estimated IRR = 106.65% pa (go on, lick that IRR, you know you want to)
Current EV = $16.5B
Total Debt = $15.4B ($10.4B of existing debt to roll over + $5B bridge loan, arranged by Credit Suisse, Morgan Stanley and Bank of America)
Total Leverage = ~9.8x EBITDA (after annualising YTD published Sep 07 results)
Even if we assume that this is a high-margin, high-growth, limited competition business (which a cursory glance at the company information and financials seem to indicate, but I must dig further), 9.8x is a very high leverage multiple. Quite rightly, a few comments point out that this leverage would never have happened had the lead banks worked on the assumption that they would have to hold a significant chunk of the debt on their books (and all its related risks). The bridge loan will be problematic - it is basically a bet by the lead banks that by the time it matures, things will be considerably closer to normal and that it can be refinanced in the debt market.
Also it seems that this is a HoldCo lend (i.e. the debt is borrowed by the holding company that owns the actual operating companies), which raises an extra level of risk. HoldCos rely on dividend streams from the OpCos to pay the expenses and repay debt. Often, OpCos have their own debt to service (which appears to be the case with Intelsat), and there are (or should be) severe restrictions on the dividends it can pay to HoldCo. Should things go slightly askew at OpCo level, the dividend stream might get dammed up by the banks lending to the OpCos - which means less cash to HoldCo, putting HoldCo principal and interest repayments at risk.
The interesting part is that BC Partners (the new owners) and the banks chose to roll over the existing loans rather than have the existing loans refinanced by new debt as part of the transaction (which is how these are typically done). The reason? The current leveraged loans market is not conducive to issuing new debt. So instead of having to sell a fresh new $15B batch of debt to a group of banks suffering indigestion, why not just let the existing bankers (who presumably still like their debtor) stick around? Sure, this means lower fees for the lead arrangers, but given the option to forgo some fees to significantly reduce your headache and the hit to your capital provisions, it's worth it.
Other tidbits
- Our new graduate started last Monday. The second thing I did (after I said hello) was rescue him from the fiery exchange between our Executive Assistant and some back office guy in Bangalore. The next day he brought his iPod with noise-cancelling earphones.
- Overheard:
[Person 1 gets flicked in a certain protruding area of the thorax region]
Person 1: "I don't know if I should feel good or bad about that."
Person 2: "It's because you feel guilty about how good it feels."
- Interesting analysis of the BHP Billiton-Rio Tinto deal from Deal Professor.
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