Shareholders in haulage operator Eddie Stobart Logistics (ESL:AIM) face significant losses when its shares open for trading again after the firm’s board agreed a ‘rescue bid’ from a private equity fund.
DBAY Advisors, Eddie Stobart’s former controlling shareholder, will acquire a 51% stake in the company and in return will provide £55m in funding through a payment-in-kind (PIK) loan.
A PIK loan is where the interest - in this case a whopping 25% initially which reduces 18% after the takeover bid is completed - isn’t paid each year but added back when the time comes to repay the loan, which in this case is no later than August 2021.
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The idea with these loans is that company will be able to use the money to sort out their balance sheet and then have more than enough to pay all the loan off when the time comes.
Luxury car maker Aston Martin Lagonda (AML) recently issued a PIK bond. Worryingly, payment in kind notes were very popular leading up to the 2008 financial crisis.
DBAY DEAL COULD BE CONTROVERSIAL
Eddie Stobart will remain on the stock market as DBAY doesn’t intend to make an offer for all the shares.
But the deal implies a valuation for the entire company of £107m, well below the £269m market cap the company had before trading in its shares was suspended in August at a price of 71p.
It could also be controversial given DBAY netted a significant windfall when it floated Eddie Stobart on AIM in April 2017 at 160p per share.
A source told Sky News that Eddie Stobart’s shares could be ‘virtually worthless’, with DBAY’s bid pitched as ‘a rescue proposal aimed at salvaging thousands of jobs’.
HALF YEAR RESULTS 'ONGOING'
As well as the offer from DBAY, Eddie Stobart also updated investors on the progress of its half year results, which were meant to be published in September but still haven’t materialised.
It comes after the company became embroiled in an accountancy scandal which led to the resignation of its chief executive.
The firm said preparation of the results remains 'ongoing', but that will make a loss of at least £12m, with its board warning shareholders that losses could be even higher.
That means its full year earnings before interest and taxes (EBIT) will now be no more than £2m.
As a result of the reduction, as well as poor cash flow and the company’s dividend policy, its full year net debt is expected to be £200m, a level which Eddie Stobart’s board said is ‘unsustainable’, leading it consider a sale of the company.
In a statement on its proposal DBAY said, 'Given the difficult circumstances, our proposal is a realistic chance to secure value for all shareholders and safeguard jobs for Eddie Stobart’s employees.
'This is a significant investment for DBAY, reflecting our belief in the company.
'Our team has delivered this sort of turnaround before and it is vital that significant action is taken to rescue the company before the busy Christmas trading period.'
