Interesting spin-off

**littlebird** Fri Nov 17, 2006 2:44 pm

Interesting spin-off
Blast, I have a question about SBH, a spinoff from ACV. In the process, SBH incurred 1.8 billion debt to finance $25/sh dividend for old ACV holder.
I am intrested in taking a position, an I remain uncertain if this is a deleverage play. Below is my post on Yahoo Finance messageboard, but I haven't got any reply yet.

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_A/threadview?m=tm&bn=311&tid=680&mid=681&tof=2&rt=2&frt=2&off=1
"New SBH has 1.8 billion debt, the term is 7 year, say the interest rate is 6%, then each year interest plus capital repayment is about 300 million, according to the management, the new SBH has annual revenue 2.4 billion and earning 220 million.
So I think deleveraging is possible, but it is hard way: requiring some hardwork and time, and even then the equity appreciation still won't be very spectacular due to the huge debt.
If I am in charge of CD&R, I will take a easy way: Bankruptcy the new SBH, then buy the debt, denounce the old shares, and issue new shares. Remember, a debt-free SBH shall be trading at P/E 20, that given your 4.6 Billion market capitalization.
The cost? 575 million plus 1.8 billion debt, 2.3 billion, the gains? 100% in 1 year without doing real work.
The risk? S.E.C investigation.
As a foreinger, I am not familiar with US law system, could somebody enlighten me the feasibility of this scheme? "

Do you think it is doable? I am very worried CD&TR could take this route.

**blast_investor** Fri Nov 17, 2006 5:40 pm

Hi littlebird:

So what is your take on SBH? Are you trying to consider to short SBH because it is highly leveraged and it has bankruptcy risk?

I am confused by your statement in your msg.

**littlebird** Fri Nov 17, 2006 7:32 pm

It is difficult to predict where CD&R is heading, it is also not easy to predict market's reponse. So the best action is no action at all, I think.

I am actually more interested in a general question : if some private equity firm can grab a public company by bankruptcy, is there some US laws forbiding them from doing so?

If you are chinese, I guess you have heard concerns about management buyout being abused to grab state assets cheaply. My concern is not much different.

ps. Original ACV holders are already being raped, if there is no special dividend, they could get $60 value of stocks. ( new SBH has 2 times of new ACV's annual revenue and earning, so a debt-free SBH shall be traded at $40). Instead, they only got $27 value of stocks plus $25 dividend,which will be taxed. And everybody seems happy. :shock:

**blast_investor** Fri Nov 17, 2006 8:41 pm

Bankcruptcy investment is one of key method that private equity firm uses. Yes, it is allowed. Management buy out is also allowed legally.

The issue is the fair value buy out, not buy on the cheap. US market is a lot more difficult for management who tries to buy on the cheap. Laws in CHina and many other places do not protect shareholder that much, US does, at least best in the world so far. But you bet it, lots of management are trying to buy on cheap, as much as they can.

However, usually shareholders will not like management buy out on the cheap. Therefore, the board and shareholders are looking out for their own interest. They usually would demand Wall Street street review and put on aution before management can buy the firm out.

littlebird wrote: I am actually more interested in a general question : if some private equity firm can grab a public company by bankruptcy, is there some US laws forbiding them from doing so?

If you are chinese, I guess you have heard concerns about management buyout being abused to grab state assets cheaply. My concern is not much different.

**littlebird** Fri Nov 17, 2006 9:44 pm

Thank you very much for the explanation, so CD&R must be very confident about SBH financial future, probably they know something I did not find out yet. :D