Two "cheap" old world deals in two days

There were two Australian headlines that I found interesting in the last two days

1. Tuesday (Alceon’s underwrite of Mosaic Brands fundraise)

2. 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.