Featured Articles

Financial Services

XL Capital: Short Interest Poised to Drop – Will the Stock Pop?

About: XL

XL Capital is a company that the market loves to hate. Its stock price has plummeted by 94% over the last twelve months, mainly over concerns about its investment portfolio. The stock could tick up a bit in connection with the unwinding of hedges related to forward share purchase contracts that settle on February 17th. The company’s fourth quarter earnings call on February 11th could also bring positive news that lifts share prices, perhaps accelerating the hedge unwinds, and potentially leading to further short covering….. View Full Article


Reinsurer Stocks: A Fear-Driven Market Creates Opportunity

About: ACE, AXS, PRE, VR, XL

Catastrophes both natural and man-made have been hitting reinsurance companies, but the outlook is good. Shares have recently retested their lows as the dysfunctional capital markets – especially for mortgage- and asset-backed securities – overshadow improving fundamentals for the group. This has created opportunity for the intrepid value investor…. View Full Article

(Skip to sections on ACE, AXS, PRE, VR or XL)


AIG’s Bond Sale is No Cause to Celebrate

About: AIG

The latest installment of the AIG “Bailout” is not the good news that one might imagine from reading AIG’s press release. It does not provide as much financing as originally anticipated. More importantly, it is a reminder that, so far, the U.S. government has done much more to minimize losses for AIG’s counterparties than to maximize value for AIG…. View Full Article


AIG’s Bailout Needs a Bailout:
A $150 Billion Problem

About: AIG

AIG could hardly support its pre-bailout debt, let alone an additional $115 billion of debt and dividend-bearing preferred stock. For AIG’s balance sheet to be healthy again, leverage needs to come down by approximately $150 billion. It appears unlikely that this can be achieved through asset sales. AIG needs more immediate attention, and the company’s franchise value erodes each day that a permanent fix is delayed…. View Full Article

Restaurants & Retail

Jamba Inc. – New CEO Gives Company a Boost

About: JMBA

The market’s valuation of Jamba Inc. (JMBA) seems to reflect a consensus view that this chain of 729 smoothie stores will not survive. After a review of JMBA’s fourth quarter and full-year 2008 results, and several calls with management, I disagree. I predict that this company will not only survive but thrive…. View Full Article

See prior articles on Jamba Inc.:

Private Equity Group Takes Stake in Jamba

Jamba Juice Should Bear Fruit by Mid-2009



Consumer Products

Cott Corp. to Lose Wal-Mart Exclusive

About: COT

Cott Corporation announced that Wal-Mart has decided to terminate its existing 10-year old exclusive supply agreement for carbonated soft drinks. While the ultimate outcome is unclear and discussions between Cott and Wal-Mart are reported to be ongoing, this is certainly not good news for Cott. Wal-Mart represents 35%-40% of Cott’s sales. If Wal-Mart were to move its business to other suppliers, Cott could have difficulty servicing its debt…. View Full Article

See prior articles on Cott:

Mysterious Silence from Cott Corporation

Cott Corp. – Could go Far, But Somebody Needs to Grab the Wheel



Technology

JDA Software: Outlook Improves as Pipeline Grows

About: JDAS

JDA Software Group, Inc. (JDAS) reported its first quarter earnings on April 20th. Particularly notable on the earnings call was management’s renewed confidence in the company’s sales pipeline. I am keeping my 12-month price target at $18.00, but I have more confidence in this figure now, and believe there is more upside than downside…. View Full Article

See prior articles on JDA:

JDA’s Retrade is Justified

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

Cott Corp. to Lose Wal-Mart Exclusive

Cott Corporation (COT) announced that Wal-Mart (WMT) has decided to terminate its existing 10-year old exclusive supply agreement for carbonated soft drinks.  This action gives Wal-Mart the option to transition to other suppliers over time: up to one third of its requirements can be moved this year and up to two thirds can be moved next year.

While the ultimate outcome is unclear and discussions between Cott and Wal-Mart are reported to be ongoing, this is certainly not good news for Cott.  Wal-Mart represents 35%-40% of Cott’s sales.  If Wal-Mart were to move its business to other suppliers, Cott could have difficulty servicing its debt.

This risk was highlighted in my previous articles on Cott.  The last article, entitled “Mysterious Silence from Cott Corporation,” argued that Cott’s silence was an indication that something was up.  It raised the potential that the company had received an acquisition offer, but also focused on the risks associated with Wal-Mart, saying, “Wal-Mart’s reduction of Cott’s shelf space last year may have been the first step toward reducing its exposure to Cott.  The next logical step would be to split the business, or maybe even go all the way and switch suppliers….”

It does not seem likely that Wal-Mart would transition all of its Cott business to other suppliers.  It is more plausible that this action will result in some split of the business, a reduction in pricing, or both. (The most likely beneficiaries are DPS and FIZZ.) This move by Wal-Mart enhances Wal-Mart’s bargaining leverage by introducing greater competition among suppliers.  It would not be in Wal-Mart’s best interest for Cott to go out of business.

This situation is complicated by Cott’s high leverage.  Debt plus other long-term liabilities totaled $430.6 million as of September 27, 2008, which was approximately 4.6x LTM adjusted EBITDA, and over 7x adjusted EBITDA less normalized capital expenditures.  Sales to Wal-Mart were 35.8% of Cott’s total sales for the nine months ended September 27th.  This implies that Wal-Mart represents approximately $600 million of Cott’s annual sales.  Products not covered by the exclusive supply agreement comprise some of this amount.  The annual sales covered by the agreement might be approximately $500 million.  If Cott were to lose 25% of this business, the impact on EBITDA would be $25 million, assuming a contribution margin of 20% (just a “swag”).  This would be nearly 50% of adjusted EBITDA less normalized capital expenditures.

I have previously estimated the fair value of the company’s stock to be in the range of $1.00 to $1.50 per share, based on EBITDA multiples and discounted cash flow analysis.  Until we have better visibility into the status of Cott’s relationship with Wal-Mart, it will be difficult to develop a revised cash flow forecast and fair value estimate.  As a placeholder, I have cut my previous range in half to $0.50 to $0.75 per share.

(Disclosure: The author has no positions in Cott Corp. stock as of this writing)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

Mysterious Silence from Cott Corporation

Cott Corp. (COT) should be in crisis-mode: it is overleveraged, underperforming, and lacking both a permanent CEO and a compelling growth strategy.  With an activist investor and some seasoned executives on the Board to shake things up, one would expect dramatic action, but it seems like little has been accomplished to date.  Have they really been that ineffective, or have they perhaps been distracted?  Shareholders need to know what is happening.  If there is any material news, we should not have to wait for the next earnings call.

Last year, things began to look encouraging when:

  • the company parted ways with its CEO and initiated a search for a successor;
  • activist investor Crescendo Partners purchased an 8% stake and installed four new directors; and
  • the company embarked on a turnaround plan targeting over $40 million of cash flow improvement (there was still no real growth strategy, but presumably that would come with a CEO).

With accomplished investors and executives on Cott’s board (although only one has beverage experience), one would have expected rapid change.  Instead, we have had more of the same:

  • revenue and EBITDA still trended downward as of September 27th, as Coke and Pepsi promoted aggressively, Wal-Mart cut-back shelf space, and initial savings from the turnaround plan were offset by other costs;
  • net debt was unchanged in September versus June;
  • the Interim CEO has discussed the need to invest in growth, but has not outlined a strategy; and
  • there is still no permanent CEO.

On the last earnings call on November 6th, the company’s Interim CEO, David Gibbons, said that he expected a decision on a new, permanent CEO by year-end. The end of the year has passed, yet there is no news.

COT 12 Mo. Stock PricesThis is frustrating, and begs the question of whether there is something else going on at Cott.  Crescendo’s CEO, Eric Rosenfeld, joined Cott’s board as Lead Independent Director, and I doubt that he would sit idle while things drag on.  Cott hired a respected search firm to help identify a CEO, and Crescendo also had at least one candidate lined up.  It is possible that the board has not been able to agree on a candidate.  It is also possible that they had a big fish on the line but that it got away at the last minute.  However, it is also possible that the board slowed down the process to deal with something else.  This is sheer speculation, but one reason to delay the process, and the only good reason I can think of, would be a potential sale of the company.

Has a Potential Buyer Heeded My Call?

Last October, I wrote an article entitled, “Cott Corp. – Could go Far, But Somebody Needs to Grab the Wheel.”  The article included this call to action directed at potential buyers: “Now is the time for action by an industry acquirer, or a private equity group with the ability to capitalize Cott properly.”  I said that the most likely strategic buyers are National Beverage (FIZZ), Dr Pepper Snapple Group (DPS), and Polar Beverages.

My article seemed to create a stir at Cott and in other beverage circles. The morning that the article was posted on Seeking Alpha, a Cott executive contacted me and asked about my background and affiliations, and how I came to know so much about the company.  But he also gave me positive feedback on the article.  I later learned from reliable sources that each of Cott’s directors had received the article.  I also heard from several industry executives who thought that my article was right on target.  I had assumed that the kudos had to do with my emphasis on getting back to basics and hiring an effective CEO, but perhaps there was more to the feedback….

If the Company Were Sold, What Would Be a Fair Price?

Absent an acquisition, my estimate of Cott’s fair value is $1.00-$1.50 per share.  I get to this figure by applying discounted market multiples to my estimates of 2008 and 2009 EBITDA.  I get to the same figure through a discounted cash flow analysis that factors in a turnaround over the next three years (but shows little top-line growth).  This value estimate is higher than price targets from some reputable sell-side analysts.  For example, an analyst at a well-known global bank (which also owned over 5% of Cott’s common shares as of the last proxy statement) had a price target of $1.00 per share as of this writing, which was lowered from $1.25 per share in November (he also used EBITDA multiples and a DCF analysis). In calculating my fair value estimate, I discount my EBITDA multiples, and add a risk premium to my DCF discount rate[1], because of two significant risks the company faces: high leverage and customer concentration.  Absent these risks, my valuation would be in the range of $2.00-$2.50 per share.

A strategic acquirer that could realize synergies might value the company in the range of about $2.50 to $3.50 per share.  I have done enough fairness opinions in my career to feel comfortable that Cott’s board would be advised that such a price was fair. The chart below shows the implied enterprise value and EBITDA multiples for various share prices.

The above fair value estimates and estimates of an acquisition price would all be much higher if Cott had better growth prospects.

The Board is Unlikely to Accept an Offer Today

While $2.50 to $3.50 per share may be a fair value, it is unlikely that Cott’s board members would agree.

Following its purchase of 5.9 million Cott common shares last year, Crescendo Partners had four new directors named to what is now an 11-person board.  These new directors and at least three others have a strong incentive to block a change of control.[2]  Thus, a firm that owns only 8% of the company’s common shares is effectively in a position to block Board approval of any transaction it does not like.

Crescendo purchased its shares at an average price of $2.84 per share (see 13D filing).  It is clear in hindsight that things at Cott were worse than they appeared last spring when these purchases were made, and that Crescendo overpaid.  While Crescendo might be happy just to get its investment back, it is much more likely that they would want to put in a new CEO and let that person attempt to build value for a few years before selling.

A Long and Bumpy Road Ahead

If an investor or competitor does not (or cannot) “grab the wheel” by purchasing Cott, and shareholders have to rely on a new CEO to navigate the company out of its current situation, we should be prepared for a difficult journey.  The problems faced by the company are not easily fixed.  Yes, retailers should now have a greater interest in building their private label programs, but Cott’s area of expertise – carbonated soft drinks – is going to be a tough place to find growth.  Cott knows this and is expanding into other areas, such as water and noncarbonated drinks, but these are markets in which Cott has numerous competitors with ample capabilities.

COT Leverage RatiosCott’s high leverage means that it cannot afford to make a mistake. The chart to the right shows Cott’s net debt as of September 27th, and how this compares to various measures of cash flow.

Given the difficulty of executing a turnaround, I would not expect lenders to have patience in the event of a default.  If things go South, I believe there will be little left for common shareholders.  A savvy investor would be able to purchase Cott’s 8% Senior Subordinated Notes for pennies on the dollar in that scenario and end up owning the company through a Chapter 11 reorganization.

Even if management executes well, it will take a long time to deleverage the business.  Subtracting interest and capital expenditures from EBITDA leaves only about $20-$30 million per year to pay down debt.  If management decides to try to grow its way to success instead of cutting costs to the bone – which is probably the best strategy for the long term – there will be even less cash flow available to repay debt until the growth starts to generate profits.

A risk that may never go away is the company’s dependence on Wal-Mart (WMT). Wal-Mart represents 36% of Cott’s sales, and I believe it has been Cott’s cash cow. I can say from experience as a private equity investor who has looked at thousands of companies, that when a customer represents nearly 40% of sales it often represents well over 50% of profits (sometimes over 100%), even if that customer is known for driving a hard bargain.  The substantial benefits of long and efficient production runs, along with freight efficiencies, typically more than offset lower unit prices.

I warned in my last article that Cott’s customers might be concerned about the company’s viability.  The customer I had in mind was Wal-Mart. Wal-Mart’s reduction of Cott’s shelf space last year may have been the first step toward reducing its exposure to Cott.  The next logical step would be to split the business, or maybe even go all the way and switch suppliers (an extreme event that I would like to think is improbable).  Analysts have asked Cott about its relationship with Wal-Mart on recent earnings calls, and management has responded with assurance that the relationship is fine.  I do not have reason to doubt management’s statements, but I remain concerned about this risk.

Given Wal-Mart’s share of U.S. beverage sales, Cott should not address this risk by reducing the percentage of its sales that go to Wal-Mart.  The better approach is to do what it takes to make sure that Wal-Mart is satisfied – not just with the terms of its relationship but also with Cott’s viability and stability as a long-term partner.  In a normal capital markets environment, I would recommend an equity infusion to fund growth and reduce debt.  In the current environment, meaningful deleveraging and growth capital would almost certainly require a change of control.

Time for Action

Cott is vulnerable, and one should not assume that customers and competitors are sitting still.  The Interim CEO seems capable but has no beverage experience.  This is no time for the company to drag its feet, and no time to keep shareholders in the dark.  Cott’s board should let us know what is going on, and, more importantly, DO something!

The company should also ensure that its board is structured to encourage decisions that are fair.  Putting an 8% shareholder in a position to call the shots on a change of control transaction does not strike me as consistent with board members’ fiduciary obligation to look out for all shareholders.  If Cott is ever presented with the opportunity to enter into discussions with a potential buyer, the board should form a special committee, made up of truly independent directors, to make key decisions.  And shareholders should be informed.

Financial Summary

A summary of the company’s historical financial performance and my projections for 2008 and 2009 follows below.  As previously discussed, I assume that it takes several years to achieve management’s turnaround objectives.  I assume that revenue growth is flat in 2009 (i.e., that price increases equally offset volume reductions), and that gross margin improvements from prices increases are offset next year by unfavorable variances from a stronger dollar.  I include $20 million of cost savings from the water project, but assume that G&A savings are offset by investments to maintain, and eventually grow, the business – mainly “market development funds.”

COT Projections (JGA)

Footnotes:

[1] This may offend CAPM purists, but it is a lot easier than calculating an unlevered beta.

[2] Cott Corp.’s Board of Directors is comprised of Chairman David Gibbons, George Burnett, Stephen Halperin, Betty Jane Hess, Philip Livingston, Andrew Prozes, Graham Savage, and four new directors appointed in connection with Cott’s agreement with Crescendo: Eric Rosenfeld, Mark Benadiba, Mario Pilozzi, and Greg Monahan.  Their bios are on Cott’s website.  Other than the Crescendo parties (Rosenfeld and Monahan), those with the least incentive to approve a change of control would appear to be:

  1. David Gibbons.  He makes $725,000 per year plus incentive awards as Cott’s Interim CEO, and approximately $100,000 more per year as a director.  He would lose this income upon a change of control.
  2. Stephen Halperin.  He is the brother of the company’s former chief legal counsel, Mark Halperin, and has been on the board since 1992.  Cott’s most recent Proxy Statement discloses that his firm provides services to Cott “on a regular basis,” which services would likely be discontinued after a change of control.
  3. Philip Livingston.  He earns over $100,000 per year as a Cott director.  His role on Cott’s Audit Committee is featured prominently on his personal website.
  4. Mario Pilozzi.  He was likely brought on because his former role as CEO of Wal-Mart Canada may leave him with important ties to Wal-Mart.  These same ties would create a bias toward Cott remaining an independent company, which would benefit Wal-Mart.
  5. Mark Benadiba.  Mark probably would like to be CEO of Cott himself.  As long as this remains a possibility, he will have a bias against a transaction that would take that possibility away.

(Disclosure: The author is long COT common stock)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

AIG’s Bond Sale is No Cause to Celebrate

The latest installment of the American International Group (AIG) “Bailout” is not the good news that one might imagine from reading AIG’s press release.   It does not provide as much financing as originally anticipated. More importantly, it is a reminder that, so far, the U.S. government has done much more to minimize losses for AIG’s counterparties than to maximize value for AIG.

AIG and the Federal Reserve Bank of New York announced on Tuesday that Maiden Lane II, an entity owned and controlled by the NY Fed, has purchased nearly $40 billion of mortgage-backed securities (RMBS) from AIG subsidiaries.  This was part of the revised U.S. government bailout announced on November 10th.  I described these arrangements in my article last week entitled, “AIG’s Bailout Needs a Bailout: A $150 Billion Problem.”

Edward M. Liddy, AIG Chairman and Chief Executive Officer, said: “AIG’s highest priority is the full repayment of the federal loan facility with interest. The creation and launch of this financing entity will eliminate the liquidity issues associated with AIG’s U.S. securities lending program, which will facilitate our repayment plan. Although we have more work ahead of us, this is an important step forward. We appreciate the support of the Federal Reserve Bank of New York in implementing this transaction.”  This seems to imply that this ‘financing entity’ is a new development that frees up AIG capital that otherwise would have gone to satisfy securities lending payables.

While the transaction is a means of financing AIG’s securities lending payables, it is part of the bailout plan and does not provide any capital beyond that anticipated in the bailout.  In fact, it provides somewhat less.  The illustration in AIG’s November 10th 10-Q1 filing shows a purchase price of $23.5 billion, based on fair market values on September 30th.  The actual transaction was based on lower values as of October 31st, and the purchase price was $19.8 billion instead of $23.5 billion.

In my previous analysis, I assumed, based on the 10-Q disclosure, that $23.5 billion would cover substantially all of the securities lending payables, and the financing would provide $22.5 billion, leaving $1 billion to be paid by AIG.  In the final deal, these payables required $24.9 billion – the $19.8 billion of sale proceeds plus a $5.1 billion capital contribution from AIG.  In other words, the final deal required an additional $4.1 billion from AIG.

The real bad news here is not that the value of these RMBS securities fell by $3.7 billion, or 15.7%, in one month; nor is it that AIG had to contribute $4.1 billion more to wind down its securities lending business.  The bad news is that until the deal was finalized, the NY Fed had the ability to make it a more effective tool for saving AIG, and now that chance is gone.

The NY Fed has purchased a portfolio of mortgage-backed securities for 50 cents on the dollar.  This price is more reflective of the lack of liquidity in the market than default rates.  It is likely that a price of around 80% of par would have more closely approximated the ultimate recovery if the securities were held to maturity.2 The NY Fed’s agreement to share a small portion3 of the gains with AIG after its loan to Maiden Lane II is repaid does little to help things today.  This should turn out to be a nice investment for taxpayers.

While some of the legal details have yet to be ironed out, it is clear that the U.S. government controls AIG.  The U.S. government can choose to maximize the long-term value of AIG’s most important assets – its reputation and its people – or it can focus on the salvage value of its financial assets.  Its actions to date indicate that it is focused more on the latter than the former.

So far, the U.S. government has made sure that banks, investment banks and other parties to AIG’s credit default swaps and securities lending agreements are made whole, even though these parties do not have the most senior rights as creditors.  Now that a partial list of the beneficiaries of these transactions has been made public, it is becoming clear that if these institutions had been forced to bear some loss as part of a negotiated deal outside of bankruptcy, the financial system would not have buckled.  The U.S. government made a policy decision to help certain members of the financial system that had transacted business with AIG, and has handed the bill to AIG.  Whether or not the policy decison is justified, forcing AIG to bear the entire cost is not.

Nearly all of the $170+ billion bailout has gone to fund losses on securities that are no longer on AIG’s balance sheet and have nothing to do with AIG’s go-forward business, so nearly all of the bailout funding arguably should have been funded off-balance sheet.  Instead, only about $50 billion is being funded off-balance sheet through Maiden Lanes II and III.

As a result, AIG is saddled with over $270 billion of debt and high dividend preferred stock, compared to under $150 billion in 2006.  As I explained in my analysis last week, the $270 billion needs to come down to around $120 billion before AIG’s balance sheet will truly be stabilized, and deserving of its ratings.  The plan is to achieve this through asset sales, but this is fallacy.  The current value of the assets targeted for sale is probably less than half of the amount needed.  Besides, the operating income from the targeted businesses4 may represent nearly half of AIG’s total normalized operating income, so if they were sold, the amount of debt that the remaining businesses could support would be far less than $120 billion.

AIG can limp along on “life support” for several years, since interest and dividends on $100 billion of the financing can just accrue instead of being paid in cash, but this just adds to the bill down the road.

The industry and AIG’s employees know that AIG’s current situation is not sustainable, and it is starting to show.  AIG disclosed in its 10-Q that its business is being negatively impacted by its financial instability.  And the company’s loss of senior executive Kevin Kelly to a competitor last week is just one example of what will happen to AIG’s executive ranks if things are not stabilized soon.

It is not clear if the U.S. Government cares about this, or if the intent is to break up the business, run-off the assets, and hope to recover at least the debt portion of the bailout funds.  It is not too late to choose the growth strategy over the wind-down strategy, but if growth is indeed the goal, the current course must change quickly.

Footnotes:

1 Please see the “Subsequent Events” section of AIG’s Q3 form 10-Q filed on November 10, 2008 (page 45).
2 As of September 30th, AIG’s RMBS included $14 billion each of Alt-A and subprime loans (the bulk of the rest was Agency and Prime). In October, 18.2% of all U.S. subprime loans were in foreclosure or REO, and another 10.4% were 90+ days past due (download data). Of all Alt-A loans, 9.3% were in foreclosure or REO and 4.8% were 90+ days past due (download data). Assuming that all of these end up in default and that the net recovery is zero, the total loss averages 21.3% between the Alt-A and subprime. The bulk of the RMBS were rated AAA, so they probably had about 10% subordination below them. Thus, assuming the securities sold to the NY Fed were evenly divided between Alt-A and subprime, the loss would be roughly (21.3%-10%)/90%, or 12.6%. This implies that a price of about 85% of par, or perhaps as low as 80% to allow a cushion, would have been a reasonable figure for the NY Fed to pay if the goal were to maximize the support of AIG while minimizing the loss to taxpayers. Instead, the NY Fed took advantage of the current dysfunction in the capital markets to buy the RMBS at a low price (for a scholarly article on how current market prices for mortgage-backed securities are below fundamental values, click here).
3 After the NY Fed loan is repaid, the first $1 billion (plus interest) of gains is paid to AIG subsidiaries, then the remainder is split 5/6 to the NY Fed and 1/6 to AIG subsidiaries.
4 Please see “Segment Information” on page 149 of AIG’s 2007 form 10-K for the operating income of AIG’s Life and Retirement Services businesses and aircraft leasing business.

(Disclosure: The author has no positions in AIG.)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

AIG’s Bailout Needs a Bailout: A $150 Billion Problem

AIG could hardly support its pre-bailout debt, let alone an additional $115 billion of debt and dividend-bearing preferred stock.  For AIG’s balance sheet to be healthy again, leverage needs to come down by approximately $150 billion.  It appears unlikely that this can be achieved through asset sales.  AIG needs more immediate attention, and the company’s franchise value erodes each day that a permanent fix is delayed.

The original “bailout” consisted of an $85 billion credit facility with the NY Fed, in connection with which a trust for the U.S. Treasury purchased a 79.9% equity stake in AIG for $0.5 million.  The deal has since been revised and now totals approximately $168 billion, comprised of:

  • $115 billion provided directly to AIG, including:
    • The Fed credit facility, which was reduced to $60 billion;
    • $40 billion of preferred stock; and
    • Access to the NY Fed commercial paper program, through which $15.2 billion had been borrowed as of November 5th; and
  • $52.5 billion of off-balance sheet loans, including:
    • $22.5 billion to facilitate the termination of AIG’s securities lending program, and
    • $30 billion to facilitate the termination of certain CDS contracts. 1

The analysis below shows that AIG’s balance sheet was over-leveraged before the bailout, so the additional debt and preferred stock just compounds the problem.  The leverage piled onto AIG’s balance sheet, primarily to satisfy parties to its CDS and securities lending agreements, needs to be restructured again.

Windfall for CDS Counterparties and CDO Holders

AIG’s liquidity crisis became critical when rating agencies lowered AIG’s ratings by several notches last September, which triggered collateral calls on certain CDS contracts.  If AIG did not post required collateral, counterparties to the CDS agreements could terminate them, requiring AIG to come up with the full “notional”2 amount of the CDSs.  Termination payments would have been nearly twice as large as the collateral requirements.  The Fed credit facility enabled AIG to meet its collateral calls and avoid terminations.  Through November 5th, AIG had posted or agreed to post collateral totaling $39.9 billion with respect to credit default swaps.

The problems stemmed primarily from the unique terms of a small segment of AIG’s CDS portfolio with a notional amount of $71.6 billion or 19% of the $377.3 billion total CDS portfolio as of 9/30/08.  This segment, CDS agreements written on the “super senior”3 tranches of multi-sector CDOs, is unique in that the “exposure” on these agreements is not calculated using default models.  Instead, it is based on the market value of the underlying securities.  This feature greatly magnified the volatility and mark-to-market losses for these CDSs.4

click to enlarge

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Prices of the underlying securities5 suddenly plummeted after the initial Fed/Treasury deal, as market spreads shot up, so something more had to be done.  With the revised Fed/Treasury deal came a plan to terminate the “super senior” CDS contracts after all, and purchase the underlying CDOs.  Of the $52.5 billion in off-balance sheet financing referenced above, $30 billion is a loan to Maiden Lane III LLC (ML III), an entity formed by the NY Fed and AIG to purchase (at market value) $64.7 billion face value of the “super senior” CDO tranches on which AIG had written CDS agreements (AIG invested $5 billion in ML III).  In connection with the purchase of the CDOs, the related CDS agreements are being terminated.6

This is a huge windfall for the holders of these CDOs,7 which go from owning extremely illiquid securities carried on their balance sheets at pennies on the dollar, to getting cashed out at or near par (through the combination of the market purchase of the CDOs and the CDS collateral and termination payments).  Prior to the initial Fed/Treasury bailout, these parties could have threatened to put AIG into bankruptcy if AIG did not post the required additional collateral, but in reality their negotiating leverage was limited.  The collateral they held was only a fraction of the amount owed to them if the CDS agreements were terminated, and their unique status in bankruptcy as parties to “financial transactions” only gave them the ability to keep the collateral they had.  Their additional claims would likely have been treated like any other prepetition unsecured claims.8 Despite their questionable seniority, they are being made whole.

There are probably some senior secured creditors of AIG that wish they got the same deal….

The $150 Billion Problem

While it is difficult to calculate precisely how much debt AIG’s operations can support, the analysis below provides an approximation.

One can get a sense of AIG’s potential normalized revenue and operating profits, and the debt that can be supported by those profits, by going back to 2006, when the performance of AIG’s Financial Products group had little impact on the business.  Below is a summary of relevant 2006 financial data.

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The table shows that 2006 was a banner year for AIG.  With low losses and high investment returns, earnings before interest, taxes and minority interest (EBITM) was 25% of revenue, and the company had a 15% return on adjusted equity.  Debt amounted to about 5x EBITM and interest coverage (EBITM/Interest) was about 4x.  Presumably this was the type of leverage multiple and interest coverage that was necessary to maintain its ratings.

The table below compares 2008 to 2006.  For 2008, the table shows actual results for the year-to-date ended 9/30/08, annualized YTD 2008 results, and pro forma normalized results with and without the bailout.  One can see in the third column that AIG was over-leveraged before the bailout, with debt of nearly 8x normalized EBITM.  More debt and preferred stock was the last thing AIG needed.  The bailout leaves AIG leveraged at over 13x normalized EBITM, with interest coverage of only 1.5x.  To bring its leverage and capital ratios back to 2006 levels, it appears that AIG needs to reduce its debt and preferred stock by $150 billion (the difference between what is shown in the fourth and fifth columns).

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Asset Sales – Too Little Too Late

AIG and the architects of the bailout knew that the structure was not a permanent fix, but anticipated that sufficient assets could be sold to repay the U.S. government funding and achieve the deleveraging needed to stabilize the balance sheet.  The main assets identified for sale are the aircraft leasing business (ILFC) and the life insurance operations.  I estimate the book value of ILFC at approximately $10 billion.9 With approximately $1 billion in operating income, ILFC would probably sell for about 1x book value in a normal economic environment, but in the current environment, I would not be surprised if the number is half this amount.  I estimate the unlevered book value of the Life Insurance and Retirement Services business at roughly $135 billion.10 Given that operating income for this segment is in the range of $8-10 billion, it is hard to imagine even the most strategic buyers paying 1x book.  A more realistic figure today might be closer to $80 billion (about 1.5x revenue and a high single-digit multiple of operating income).

Whether these assets are sold in the near term, for proceeds perhaps in the range of $80-90 billion, or a few years from now for something closer to $150 billion, it will not be enough to fix AIG’s balance sheet.  While debt would be reduced, operating cash flow to service debt would be reduced as well, so the remaining business would still be over-leveraged.

One Potential Solution

AIG attempted to raise capital in the private sector, enlisting the help of Blackstone, J.P. Morgan, and Goldman Sachs.  The company spoke to private equity funds, sovereign wealth funds and other potential investors.  J.P. Morgan and Goldman tried to syndicate a $75 billion lending facility – but all of these attempts failed.  AIG summarizes this whole saga here.

Given the state of AIG’s balance sheet, the unknown (and perhaps unknowable) risks in its investment portfolio, litigation risks from disgruntled shareholders and others, and many other factors, it is likely that the private sector would have required AIG to reorganize through Chapter 11.  The company’s total obligations were just too big to be met from present or foreseeable cash flows of the business.

If it is in the best interest of the global financial system for AIG not to go through Chapter 11, then the U.S. government should help engineer an alternate way to remediate AIG’s balance sheet permanently, not just plug a short-term liquidity gap by adding even more debt and dividend-bearing preferred stock.

There are many ways in which AIG and the U.S. government could address this.  One possible approach would be:

  • The Fed or Treasury purchase AIG’s investment in ML III for $42 billion in debt reduction (the Fed and/or Treasury would then own the “super senior” CDOs at par);
  • Instead of the Fed lending $22.5 billion to Maiden Lane II to buy RMBS securities from AIG (in connection with the wind-down of AIG’s securities lending program), the Fed buy the securities from AIG for $22.5 billion in cash plus $17.5 billion of debt reduction (the Fed and/or Treasury would then own the RMBS at par);
  • The Treasury exchange its Series D Preferred Stock for a new series of convertible preferred stock that converts at a price based on the price of the common stock at some future date, and sell its Series C Preferred Stock and warrants back to AIG at cost; and
  • AIG sell (at net book value) businesses with expected net asset values of over $50 billion to an entity jointly owned by AIG and the NY Fed or Treasury in return for a cash payment to AIG of $50 billion.

The sum of these actions would reduce AIG’s net debt and dividend-bearing preferred stock by an aggregate of $150 billion; increase book equity by perhaps $30 billion; and enable the complete pay-down and termination of the Fed credit facility.  AIG would have a healthy balance sheet immediately and could refocus on building its businesses and shareholder value.  Taxpayers would ultimately be paid back through the CDO and RMBS pools, the orderly sale of business assets, and the eventual conversion and sale of the new preferred stock.

There are many other approaches one could use to achieve similar results, but one way or another, the current Fed/Treasury deals need to be restructured.

(Disclosure: The author does not own any interests in American International Group, except indirectly as a United States taxpayer.)

Footnotes:

1 Below is a more detailed summary of the revised agreements with the Fed and Treasury. For an even more complete description, please see footnote 11 to AIG’s Q3 financial statements (“Subsequent Events” – beginning on page 43).

  1. Certain AIG subsidiaries entered into a securities lending agreement with the NY Fed, through which the NY Fed provided liquidity to AIG by borrowing, and posting cash collateral for, $19.9 billion of securities.  Since then, AIG and the NY Fed have formed a special purpose entity, Maiden Lane II LLC, to buy $40 billion face amount of RMBS from AIG subsidiaries for $23.5 billion in connection with the termination of AIG’s U.S. securities lending operations.  The NY Fed will be repaid the $19.9 billion of collateral with a portion of the proceeds.
  2. The NY Fed agreed to lend up to $30 billion to a special purpose entity, Maiden Lane III LLC, formed to purchase (on market terms) the CDOs underlying most of the credit default swaps written on “super senior” multi-sector CDOs.
  3. Affiliates of AIG were given access to the NY Fed commercial paper program, through which $15.2 billion had been borrowed as of November 5th to enable AIG to pay down borrowings under the Fed credit facility to $61 billion from $77 billion.
  4. The U.S. Treasury invested $40 billion in Series D preferred stock with a 10% dividend rate.
  5. The U.S. Treasury was given warrants for 2% of AIG’s common equity.
  6. Terms of the Series C convertible preferred stock provided to the Treasury in connection with the Fed credit facility were modified so that it is convertible into 77.9% of the common shares instead of 79.9%.
  7. The Fed credit facility was reduced from $85 billion to $60 billion, and the interest rate was reduced to LIBOR plus 3%.

2The “notional amount” is the face amount of reference securities on which the credit default swap is written.
3The super senior tranche is one that is not exposed to default risk until the less senior tranches, including the AAA-rated slice just below the super senior slice, have been wiped out. As of 9/30/08, multi-sector CDOs on which AIGFP wrote protection on the super senior tranche had a gross notional amount of $108.5 billion, of which the super senior tranche was $71.6 billion, with the difference being the subordinated layers that would need to be exhausted before the super senior tranche would experience a loss. Below is a graphical representation from AIG’s Q3 10-Q:

4 Most of these agreements also require physical settlement, meaning that instead of a cash settlement equal to the difference between the notional amount of the CDS and the “exposure” on the settlement date, the agreements require AIG to deliver the full notional amount of the CDS in return for delivery of the underlying securities.
5 The multi-sector CDOs were comprised of prime RMBS (11.3%), Alt-A RMBS (15.8%), subprime RMBS (37.1%), CMBS (21.5%), CDOs (9.4%), and other (4.9%) [Note: CDO percentage corrected 1-6-09].
6 As of November 25th, $46.1 billion of CDOs had been purchased and a corresponding notional amount of CDS agreements terminated, with the remaining $18.6 billion in process (See Form 8-K for more details).
7These CDO/CDS holders include Société Générale, Goldman Sachs, Deutsche Bank, Crédit Agricole, and Merrill Lynch (Source: WSJ).
8 Changes to the Bankruptcy Code in 2005 and 2006 expanded the rights of CDS counterparties in a bankruptcy, but the main effect was to enable these parties to enforce termination provisions and collect collateral. Any claims not satisfied by the collateral are still treated as prepetition claims (11 U.S.C. § 502(g)(2)).
9 $45 billion of identifiable assets as of 9/30/08 less $35 billion of ILFC debt leaves $10 billion of net assets. There are probably other operating liabilities of ILFC, so the actual book value is likely to be lower.
10 Identifiable assets of $615 billion as of 12/31/07 per 10-K, less $30 billion change in invested assets as of 9/30/08, less $450 billion reserves, contract deposits, DAC/VOBA & SIA leaves $135 billion of net assets excluding debt.  As with ILFC, the actual book value is likely to be lower.

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www.aptacapital.com John Appel

Cott Corp. – Could go Far, But Somebody Needs to Grab the Wheel

Cott Corp. is the world’s largest supplier of retailer brand soft drinks, and the fourth largest nonalcoholic beverage maker.  Given the recent growth trends in private label, Cott should be doing well.  Unfortunately, in 2006, when faced with slowing growth and shrinking margins, instead of striving to become a better and more efficient producer, the company abandoned its historical business plan and entered the uncharted territory of enhanced waters and energy drinks – with its own brands.  This plan failed miserably: Cott alienated its core retail customers; healthy profits turned to losses; and debt mounted to the point that the company can barely service it.

In May 2006, Cott’s board pushed out its CEO, John Sheppard, who had built EBITDA to roughly $200 million through acquisitions and a focus on efficient manufacturing, and brought in a new CEO, Brent Willis, to execute the new plan.  From then until March 2008 when Willis departed, Cott’s stock dropped from $15 to $2 per share, wiping out nearly $1 billion of equity value.  Today, it trades at around $1.00 per share, less than tangible book value.  As I explain below, this could be an $8.00 stock if the company successfully implements its plan to cut costs and return to its roots.  But it is a long, long way from here to there.  If the company does not get capable leadership soon, it may never get there.

Crescendo Shakes Things Up

Activist investor Crescendo Partners must have seen the upside opportunity when it purchased 8.7% of the company’s stock between March and May of this year.  Crescendo installed four new directors and proposed that the former VP of Canadian Operations and Global Sourcing for Cott, Csaba Reider, become CEO.  Crescendo then pushed the company to slash costs and get back to basics.  On June 19th, the company announced its plan to increase cash flow by $39-43 million by refocusing on its core business, cutting G&A expense, and improving the efficiency of its bottled water operations.  The cost cuts started with the elimination of several senior executives.

Unfortunately, the damage done by Cott’s management may have been worse than even Crescendo realized, and the path to profitability looks pretty long and bumpy.  It may take complete board control, not just the influence of an activist investor, to steer this company back into the clear.

Highly Leveraged – The Natives Must Be Restless

With debt approaching 5x run-rate EBITDA – and 8x run-rate EBITDA less normalized CapEx[1] – the company’s balance sheet may force some sort of recapitalization, or reorganization, before the company is able to execute this plan.  Cott’s $269 million of 8% Senior Subordinated Notes are due in just over three years.  Its new ABL facility ($131 million drawn as of 6/28/08 ) also comes due at that time if the 8% Notes are not refinanced before then. The 8% Notes, which were recently downgraded by both S&P and Moody’s and trade at a significant discount, will not be easy to refinance.

A patient lender, with confidence in management, would give the team the runway to execute a turnaround.  But who would trust this team?  The quality, consistency and transparency of its financial reporting, the reliability of its communications to investors, and the execution of its current turnaround plan have all been disappointing.

Crisis of Confidence

It’s hard to believe in a company when you can’t rely on its financial statements.  Cott’s auditors have sited significant internal control issues affecting the accuracy of its financial statements, and state that “management oversight… could not be relied on to mitigate [these issues].”[2]   Recent events indicate that despite management changes earlier this year, things have not gotten better.

In its second quarter earnings call on July 31st, management said that it expected “adjusted operating profit” for 2008 to be 50% to 70% above 2007’s figure of $36.3 million.  On the call, an analyst challenged this assertion, stating that given that adjusted operating profit for the first six months was approximately zero, “something fairly heroic has to happen in the next six months” to meet those projections.  Management defended its position.  However, less than a month later, on August 26th, the company said it would not hit these targets and revised its 2008 guidance downward dramatically, saying that adjusted operating profit would range from down 5% to up 28% versus 2007. I think this is still optimistic.[3]

On July 31, management said that the reduction in shelf space at Wal-Mart didn’t seem to be having a material negative impact on sales; that they were on track to deliver their cost savings plan; that their “water project,” which was to deliver over half[4] of the roughly $40 million in cash flow increase from the turnaround plan, was going smoothly; and that they and a commodity cost advantage over their competition this year.  By August 26th, they said that the sales decline was more severe than anticipated due to heavy promotional activity by competitors; their savings targets for this year would not be met; the water project was hampered by cost overruns and delays; and commodity costs were squeezing margins.

If management gives us positive news on the October 25th Q3 conference call, will they retract it a few weeks later? [Update – I have been told the call will now be in November]

The Clock is Ticking – With Lenders And Customers

Cott needs to move immediately to assure its customers that it is a capable, long-term partner, and assure its lenders and investors that it has a handle on its business.  This means hiring a CEO who will inspire confidence, and making the other management changes necessary to insure that the company can provide some reliable visibility into its future performance.  It is not clear that Crescendo’s CEO candidate is the right person for this situation.  Rather than somebody with no prior CEO experience, I would like to see a seasoned company leader with real turnaround experience at the helm.

If the company does not act quickly, its customers and lenders will lose confidence completely, taking the company into a downward spiral from which it may not be able to recover.  Its retailer customers need a manufacturer for their store brand beverages, but Cott is not their only choice for private label production.  Dr Pepper Snapple Group (NYSE: DPS) and National Beverage (Nasdaq: FIZZ)[5] also have meaningful private label operations and capacity.  It is not clear if they have enough capacity to service Wal-Mart and all of Cott’s other customers, but if Cott were to lose Wal-Mart, DPS and National Beverage could buy whatever additional capacity they needed from Cott’s lenders for pennies on the dollar.

Low Stock Price Does Not Mean Good Value

At $1.00 per share, Cott’s total equity value is about $72MM and the enterprise value is approximately $500MM, as shown below.  (This value assumes that any discount one could get on the company’s 8% subordinated notes is offset by non-debt liabilities not included in this enterprise value calculation.)

Enterprise Value at $1.00 Share based on 6/30/08 Balance Sheet ($MM):


At this price, the enterprise value is 5.4x my estimate of adjusted EBITDA for the twelve months ended 6/28/08, and 5.7x my estimate of run-rate adjusted EBITDA (see “Financial Summary” below for EBITDA calculations). If one believes in the turnaround, the price is low, because it is only about 4x pro forma adjusted EBITDA after turnaround savings.  If one has completely lost faith in management, the price is high and does not reflect negative sales trends and significant default risk.  The current market price seems to suggest that the turnaround upside and default risk downside roughly offset each other.

Current Stock Price Still has Big Downside Risk

If confidence is not restored soon, default risk may become the dominant issue, in which case the stock price should go below $0.50 per share.  At $0.50 per share, the company would be valued at about 5x adjusted EBITDA.  One could argue that even this multiple is high, and that the company is not worth more than its debt, but I won’t go that far.  The replacement value of its manufacturing assets and the value of its rights to the RC Cola brand internationally should put a floor on the equity value.

G&A Needs Further Cuts

Cott needs $40-$50 million of additional EBITDA right away just to get its leverage down to a comfortable level.  Thus, the maximum $40+MM of savings from the turnaround plan MUST be achieved ASAP.  To make success more certain, Cott should target deeper cuts in the primary controllable cost: G&A.  Instead of sizing G&A to where the company wants to be, it should size it to where it is headed today.  The planned G&A cuts should be $30MM, not $20MM.  This will provide more certainty that the total savings can be achieved soon even if the operational/COGS fixes take longer than planned.

The company needs to adjust not only head-count, but also salaries and board fees.  Last year, the board of directors paid itself a whopping $1.8 million in cash director’s fees.  The interim CEO, David Gibbons, is being paid at a rate of $850,000 per year (including directors fees), plus a grant of 720,000 shares of stock.  Their current CFO made $800,000 in total comp for 2007. How can this be justified?

Crescendo’s CEO candidate has agreed to work for a salary of $625,000 and a bonus of up to 100% of salary.  How about a salary of about $400,000 and a performance-based bonus plus stock options to make up the difference?  Cott needs a leader who will bet his paycheck on his performance.

The Upside – Possibility or Pipe Dream?

With $40-$50MM of additional cash flow – initially driven by G&A cuts and later by the “water project” and improvements in the company’s business model – EBITDA could get to $120-130MM and debt would be reduced to below 3.5x EBITDA (see “Financial Summary” below).  With a return to growth and profitability taking the EBITDA multiple up to 8x, the company’s stock could be worth $8.00.

But without new leadership, this seems like a pipe dream.  The way things are going, it seems more likely that weak revenues and cost overruns lead to a cash crunch, which could lead to a death spiral.

Great Meal for a Vulture

Now is the time for action by an industry acquirer, or a private equity group with the ability to capitalize Cott properly.  Several other firms have circled Cott in recent years, but now this deal may have gotten too small for them.  Likely strategic buyers are National Beverage and Dr Pepper Snapple Group.  DPS is still highly leveraged after its “demerger” with Cadbury and has a number its own issues to deal with, so FIZZ, which has no debt, is probably the better acquirer at the moment.  Cott would also be a great fit with Polar Beverages, which has a strong position in the Northeast.  Ralph Crowley, Polar’s CEO, has a good eye for a bargain.

The Numbers

Below is a summary of historical income statement data, along with my estimate of run rates as of 6/30/08, including adjusted operating profit, and my view on adjusted EBITDA.  I have added a pro forma run rate adjusted EBITDA figure, factoring in management’s expected savings from the turnaround plan. The market seems to be anticipating adjusted EBITDA in the mid-$80MM range, but an EBITDA of $125MM or more seems to be within reach.  If Cott had the right leader, it would be a lot easier to imagine that possibility.  At the moment, it seems easier to imagine a restructuring.

______________________

(a) Annualized by applying 6-month growth rate to 2007 full year figure.
(b) Annualized revenue multiplied by the ratio of LTM COGS to LTM revenue.
(c) Equal to LTM figure.

______________________

[1] In the Q2 earnings call, management said that capital expenditures should be $30-$35 million next year, excluding the “water project.”  I assume this is “normalized” capex.

[2] In its 10-K filing for 2007, the company states that it had “material weaknesses” in its internal controls, “… affecting the financial statement balances of cost of sales; selling, general and administrative expenses; accounts receivable; amortization; income tax (benefit) expense; accounts payable; intangible assets; deferred income tax assets and shareowners equity recorded in the financial statements as of December 29, 2007.”  It also said that, ”… management oversight within the financial close process … could not be relied on to mitigate the segregation of duties internal control deficiencies.”

[3] In my Financial Summary, I estimate the run-rate adjusted operating profit to be approximately zero as of 6/30 based on year-on-year trends.  Given the lack of progress on operational improvements and continued deterioration in revenue, I think that 2008 adjusted operating profit is more likely to be down 100% than down 5% as predicted by management.

[4] Cott management said that the “water project” would take their water business, equal to 17% of North American revenue, from a zero gross margin to a “fair” gross margin.

[5] If one wants to be long in this sector but does not have the stomach for Cott, National Beverage could be an interesting pick.  It has steady cash flow and no debt, and trades at about 7x EBITDA….

(Disclosure: the author is long COT stock)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.