Author Topic: EAF - GrafTech  (Read 31607 times)

aglittell

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Re: EAF - GrafTech
« Reply #90 on: May 24, 2019, 10:45:44 AM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.



valueinvestor

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Re: EAF - GrafTech
« Reply #91 on: May 24, 2019, 11:02:02 AM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.
« Last Edit: May 24, 2019, 11:05:52 AM by valueinvestor »

aglittell

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Re: EAF - GrafTech
« Reply #92 on: May 24, 2019, 11:10:47 AM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

valueinvestor

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Re: EAF - GrafTech
« Reply #93 on: May 24, 2019, 11:25:08 AM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

As you said, it's thinking of reasons why they may take it private. Typically I invest in companies with an upside of 100% or more, and the reason why I liked Graftech is because there's an optionality that prices will go up, but even if it goes down, I don't lose too. However, my upside is capped with Brookfield, as they may take it private if prices for Graphite goes sporatically up due to the rise in demand for EV vehicles or tightening of supply.

BG2008

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Re: EAF - GrafTech
« Reply #94 on: May 24, 2019, 12:14:49 PM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you.     

valueinvestor

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Re: EAF - GrafTech
« Reply #95 on: May 25, 2019, 09:24:48 AM »
Also, can we get back to talking about Graftech please? If you want to talk about BAM/TOO go to their respective threads.

I'll start:

EAF is really freaking cheap, 60% of FCF is contracted, and they trade today at a 20% levered FCF yield AFTER $300mn of debt repayment.

The valuation does not make sense, even if spot prices crater and approach the 2015 lows. Capital returns should still provide attractive returns.

Valuation does make sense, because as minority shareholders, we may not benefit from the cheapness of a stock.

How? Does a take under make sense from BAM's perspective? They made their money by buying EAF dirt cheap when it was bankrupt, right-sizing the business, and then benefiting from very favorable pricing dynamics in the GE market. By taking the company private today, they would be buying it back at a higher valuation (assuming the company doesn't get even cheaper)  with less room for improvement both operationally and in the market for GEs.

What would their incentives be in taking the company private again? Would they have an easier time selling EAF as a whole in the private markets? From my perspective, I think the easiest way for them to monetize this investment is to receive distributions and wait for public markets to realize the inefficiency and eventually liquidate their stake.

However, I like others have been on the wrong side of this thus far. Would appreciate additional viewpoints.

Taking a company doesn't always mean trying to sell it in the private markets, it also means taking control 100% of FCF.

I'm aware of that. They own 70% of the float, is the extra 30% of FCF worth the loss of liquidity in taking the company private?

Dude, BAM is trying to screw TOO shareholders on an $113mm of S/O not owned by BAM.  EAF is way bigger than that.  From my experience, once someone cheats, they will cheat again.  There is a very important distinction between EAF and TOO and that is EAF is a C Corp and if it is domiciled in Delaware, you have appraisal rights.  This is not a luxury afforded LPs in TOO.  Check this yourself.  I am not going to scrub through the corp structure for you.   

I know right? At the end of the day, if you need to look into the corporate structure is the investment really worth it? There are other investments with either "minority shareholder-friendly" majority holders or no majority holders that would provide the same upside with limited downside. If not, then I would wait until one comes into my radar.

Deepdive

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Re: EAF - GrafTech
« Reply #96 on: May 25, 2019, 10:51:51 AM »
Mark Leonard of Constellation Software has some weird take on buybacks.  He is very much against share buybacks as he feels like he is cheating his shareholders (many who are employees) if he bought back shares from them on the cheap.   I used to roll my eyes at that.  Given what BAM has done, I have grown to appreciate that guy with the weird beard. 

chrispy

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Re: EAF - GrafTech
« Reply #97 on: May 26, 2019, 07:05:47 AM »
Deep dive, yes I too thought it was an odd approach but view it in a much different light now

johnny

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Re: EAF - GrafTech
« Reply #98 on: May 26, 2019, 10:06:55 AM »
I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?

peterHK

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Re: EAF - GrafTech
« Reply #99 on: May 27, 2019, 07:08:17 AM »
I think I can guess the answer here, but is there a more bullish explanation for why they are so aggressively paying down debt even though they're under their leverage target?

If you assume electrode prices normalize, then they are over their leverage target. My read on it is that they're paying down debt because they expect pricing to fall and cash flows to weaken.