There were two Australian headlines that I found interesting in the last two days
Tuesday (Alceon’s underwrite of Mosaic Brands fundraise)
Wednesday (creeping stake taken by Antony Catalano/Waisilitz in Prime Media)
These two events had a few similarities insofar as both involved well-known boutique funds/fund managers buying a majority stake in unloved companies.
Regardless of whether you think a boomer retail fashion brand (Mosaic) or regional newscasting (Prime Media) are dwindling businesses, it is a useful reminder of what a two-speed market we are where growth/tech companies are at all-time highs and old-world businesses are the prey of opportunistic bidding.
Alceon’s lifeline – the pricing reflects the level of confidence of Mosaic management
Mosaic owns brands such as Rivers, Millers, Noni-B etc. Despite every other online retailer having a strong 2020/21 (e.g. Universal, Cettire, Lovisa etc) Mosaic Brands which sells to an older demographic through bricks and mortar shops… continued to lag
In comes Alceon, which is run by ex- Babcock & Brown chief Phil Green, who has kindly offered funding via a redeemable preference share. For those unaware of this kind of funding, it is a type of pref/debt that has the right to convert to ordinary shares at a point in time (or 12 months in this instance).
In Mosaic's case the redeemable shares convert in 12 months at the lower of fixed level $0.51 or a 15% discount to the share price in 12 months (with a cap of $0.25)
If you are pricing your funding with a floor (aka a minimum) of a 50% discount to today's share price...it says a lot about your confidence in future prospects.
Now don't get me wrong, there is a lot of validity to Mosaic raising its cash levels to $88m to get customers back into their stores (especially lockdowns can go on for 3-6 months) but at what price should you offer this?
At a price of $0.25, the worst outcome for current holders, Alceon has the capacity to dilute the shares on issue from 97m to 225m. From this 63% holding; they could acquire the remainder of the company for very little.
Whilst Alceon, who is a pre-existing shareholder, will not be incentivised to sabotage the company… if there are any hiccups along the way Alceon is better protected than most. Either way, I am as confident about Mosaic’s future as management were when they priced this generous term sheet.
Creep on Prime Media - need to diversify but your shareholders prefer your cash flow
Unlike the Mosaic brands example, this was not through a fundraise… it was a purchase of 3% of the company without triggering takeover provisions
In short, Catalano (through WA Chess Investments) sits on 20% holding in the company and cannot keep acquiring more without lodging a takeover offer. Unless of course, you play the slow game of acquiring 3% every 6 months.
There are a few forces that are interesting about this deal
Prime Media has rallied from lows of $0.12 to $0.24 in the last 12 months
Thanks in part to better than expected trading, including big one-offs, and some management shake-ups) is not at all-time lows but still below book value
At this price point, Bruce Gordon's Birketu appears to be willing to offload more stock to Catalano and Seven West have failed to take out Prime Media before
Prime Media trades at NAV and indeed often below. It also trades at c.3x Operating cash flow... because people are rightly pessimistic about its ability to grow
One of the reasons the market has not re-rated the stock is that there is not a deep pool of buyers for regional TV networks (beyond the two that are already on your cap table) and neither company appears to be in a rush to buy Prime Media out)
Unfortunately given the business is not diversified beyond regional TV, it is highly likely that revenues will slowly fall. At which point - Catalano/SWM's ownership appears more appealing.
Moving into new-age media will almost certainly mean losses at first... and I envisage there would no appetite for this amongst the owner of 50% of the stock. I think this is certainly one to watch given Bruce Gordon appears to be willing to part with his ownership/14% stake.
It is more than likely Prime gets rolled up into Catalano/SWM however they are at an interesting junction where Prime can keep at old media & get bought out or chase real growth with new media.
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