DENALI INVESTORS, LLC

COLUMBIA BUSINESS SCHOOL FALL 2008

SPECIAL SITUATIONS INVESTING

Case Study #1
What happens when the following get together?
Hubris
Easy Capital
Ego
Peaking Fundamentals
Peaking Stock Prices
Big Deal Fees

Answer: FINL/GCO/UBS

UBS

GCO

FINL

3. Winter 2007

1. Summer 2007
2. Fall 2007

Deal Background
David (FINL) vs. Goliath (GCO)

In a David vs. Goliath scenario, FINL won the

bidding contest in June 2007 against FL (a much
larger competitor) to purchase GCO (a much larger
company by market cap).
The terms were for $1.5b in cash, or $54.50 per share,
with funding provided by UBS. A very overvalued
deal.
Tail end of the LBO mania.
By September 2007, in combination with the news
and the consumer and retail sector being hit hard,
FINL traded down from $11 - $15 per share to about
$5 per share. GCO was trading at $45 per share.

Be careful what you wish for

Valuation
SEPT 2007

FINL

GCO

JAN 2008

FINL

GCO

Price:

$5.30

$45.00

Price:

$1.80

$33.00

MC:

$258m

$1,040m

MC:

$86m

$760m

EV:

$216m

$1,180m

EV:

$48m

$900m

EV/S (ttm)

0.16x

0.76x

EV/S (ttm)

0.04x

0.6x

EV/EBITDA
(ttm)

2.5x

8.0x

EV/EBITDA
(ttm)

0.6x

6.1x

EV/EBIT
(ttm)

5.4x

10.9x

EV/EBIT
(ttm)

1.2x

8.7x

PE (ttm)

10.6x

22.2x

PE (ttm)

3.6x

19.5x

PB

0.55x

2.54x

PB

0.20x

1.8x

Possible Outcomes
Outcome Band includes:

The deal closes (FINL buys GCO)

The deal breaks (FINL does not buy

GCO)

Something in between
Embedded legal uncertainty (MAC, solvency
certificate, judge, jurisdiction)

Ways to Place an Investment

Common approaches

Long/Short FINL, or

Long/Short GCO
What is the risk*/reward?
FINL: appr. 1/5 to 1/10
GCO: appr. 1/1 to1/2
*Risk = permanent loss of capital, not beta

Ways to Place an Investment #1

A better approach #1
Long both FINL and GCO
Why both?
Counterintuitive...
Standard merger arb analysis on GCO alone is limited
Insurance/hedge cost
Transfer of value concept
Combination increases safety
The Ratio 1/5 risk/reward ratio or 0/4.5?
Or instead one can simply

Ways to Place an Investment #2

A better approach #2
Just Wait
Why?
Mr. Market gives little credit these days time to act
Always be able to walk away
All said, the thesis boils down to

Heads I Win, Tails I Dont Lose

By going long both FINL and GCO:
Investment boils down to heads I win (likely a
lot), tails I break even (pretty much).
There is a near-term catalyst that creates value
the M&A deal between FINL and GCO will
either close or break.
The outcome does not matter: in the former,
we lose nothing; in the latter, potential for 100%
to 400% upside.
Waiting for a possibly unencumbered FINL is
just as valid.

So What Happened?
- Comedy of errors
- FINL better lucky than good
- Linear thinking at the peak
- The deal fee monster

3
1

Events
Catalysts
Insurance at work

Review
Special situation
Optionality thats free
Valuation
Hedging (Insurance)
The Ratio
Disgruntled merger arb hedge funds suing

Amazing Facts (April 2008)

1) FINL CEO still has a job.
2) GCO CEO still has a job.
3) UBS bankers am curious myself.
The story is not over as FINL [is still cheap]

Live Situation #1
A Spinoff
Thesis:
Buy ParentCo, and get SpinCo for free.

Live Situation #1
Brinks (ticker BCO) Spinoff of Brinks Home
Security (ticker CFL)
BCO

CFL

Brinks Parent
BCO parent is a dominant industry leader with the strongest
balance sheet (net cash of $67m) and the best
margins.
Management has demonstrated discipline in their pricing.
The industry is characterized by many over-levered players are
the currently getting removed from the game by virtue
of their own balance sheets rather than competition.
The global secure logistics market was $14b in 2007. ( $11b in
CIT/ATM, $1.6b in outsourced cash logistics and
$1.4b in specialized high value transport (i.e. global
services).
2006 - 2011 CAGRs of 3% for CIT/ATM, and 10% - 15%
for cash logistics.
35% share of the overall US market (nearly double #2 Garda)

Brinks Home Security (CFL)

CFL is another industry leader (#2 after ADT) with a
solid balance sheet (net cash of $54m) and
leading metrics and margins.
BHS is considered the most disciplined player in the
industry.
The industry has a long runway and is very fragmented
and under penetrated.
The management has stated they are looking to maintain
their discipline on the residential side and
continue to grow organically.
CFL has the perennially lowest churn/attrition by a wide
margin. Churn is an important issue - currently
about 7%

Deal Background
BCO was and is a hedge fund stomping ground
for Pirate, MMI, and Steel.
Inadvertent beneficiary of activism with BAX
sale, net cash position and recap

Until mid September 2008, BCO was trading at $70 per share, much
closer to the intrinsic value based on the expectation of the spin.

Valuation - BCO
Comps trade around 6x 7x EBITDA (Garda,
G4S, Prosegur and Securitas)
Brinks commands a premium (pricing, margins,
customer base, etc.)
Private transactions take place above 8x
EBITDA.
BCO should kick out $350m in EBITDA 09.
At 6x, that's $45 per share.
The BCO-wi shares started trading on Oct 17th
at $23 per share, or only 3x EBITDA.

Valuation - CFL
CFL should kick out over $200m in proforma EBITDA 09.
Comps trade around 9x 12x EBITDA. At 6x, and that's $25 per share.
Monthly Recurring Revenue (MRR)
CFL's MRR is about $40m. The MRR multiple range is 20x - 60x. This
implies a value of $800m - $2.4b, or $16 - $50 per share.
Steady State Free Cash Flow (SSFCF)
SSFCF of about $150m. At 8x 12x SSFCF, the implied value is $1.2b $1.8b, or $25 - $38 per share.
As one of the industry leaders, CFL deserves a value at the higher end of the
ranges.
CFL-wi started trading on Oct 17th at $25 per share.
Now at $16 per share, or 3.5x EBITDA, 19x MRR, and 5.0x SSFCF.

Valuation BCO & CFL

OCT 2007

BCOwi

CFLwi

NOV 2008

BCO

CFL

Price:

$23

$25

Price:

$20

$16

MC:

$1,060m

$1,150m

MC:

$910m

$770m

EV:

$990m

$1,100m

EV:

$840m

$720m

EV/S (ttm)

0.32x

2.05x

EV/S (ttm)

0.27x

1.34x

EV/EBITDA
(ttm)

3.0x

5.6x

EV/EBITDA
(ttm)

2.5x

3.5x

PE (ttm)

11.0x

15.6x

PE (ttm)

9.5x

10.5

PB

1.5x

2.4x

PB

1.3x

1.6x

Pricing is holding better for BCO for a number of reasons

Spinoff Checklist
Valuation
Capital structure
Orphan business/stock
Institutional ownership/pressures
Management incentives/ownership
Fundamentals

Ways to Place an Investment

Pre-spin
Play the break up value
- Via equity or options
Post-spin
Buy BCO on the cheap
Buy CFL on the cheap
- Via equity or options (time arbitrage/LEAPs)
Options/Volatility create very attractive risk/reward

Other Factors/Forces
Cyclical characteristics (credit, churn)
Countercyclical characteristics (guns,
safety)
International exposure
Exchange rates
CFL rebranding
Royalties wind down benefit

Review
Spinoff
Inefficiency built into the system
Valuation
Options
The Ratio

Live Situation #2
A Tender Offer
HLTH HLTH Corp. ($8.10)

- Up to 80m shares (of 185m outstanding), no minimum

- $8.80 cash per share tender (funded via $1b net cash)
- 9% return in one week
- Expiration 11/25/08 (next Tuesday)
- Management on board and have tendered (think
motivations & busted merger)
- Unlikely to reach 80m share max
- Dont forget: post tender potential

Live Situation #3
A Merger Arb
OVEN TurboChef ($1.60)

- MIDD is a consolidator (know Selim Bassoul)

- $4.90 per share consideration: $3.67 cash (funded via
revolver), $1.22 stock (MIDD $25 x 0.0486)
- Planning to close Q4 2008
- Special meeting for OVEN vote (simple majority)
- Management on board (20% ownership)
- Synthetic via options (size, cash inflow, cost basis)

Denali Investors
H. Kevin Byun
kbyun@DenaliInvestors.com