Amit Chokshi

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  • Topps Shareholders Should Reject Eisner's Offer
    The valuation some people say is fair is $11 per share, it's based on a break up where some people think the confectionary business goes for 2.0x sales and the cards/entertainment go for 0.4x sales. The confectionary business has a higher contribution margin (~30%) vs the entertainment business (~20%). I don't see that valuation happening just because the market didn't take to the confectionary business. Topps tried selling it in 2005 for 7 months and nobody bought it so I don't see that break up value as realistic. Eisner and MDP may be able to sell it but I'd be surprised if they got 2.0x sales for that business. If you assume Eisner/MDP just want to buy the entire business without plans to divest then this really looks like an overpriced deal.

    Price to sales is not used primarily to value LBOs unless you're looking at distressed retailers, and even then it's just a second check against the main metric which is EV/EBITDA. The cash you're talking about is already factored into the enterprise value and the Eisner/Madison Dearborn bid. I don't own shares and think your write ups on the background are great but Madison Dearborn and Eisner's group can't pay a stupid price because they'd have to put in more equity and dampen their returns. I just did a quick look at the company's historical figures and it looks like margins have been steadily declining. Looking at their latest 10-Q, I just annualized their operating income + D&A for an annualized figure of $19MM in EBITDA. They have minimal annual capex, prob around $3MM or so.

    So based on that EBITDA figure, which is basically how every LBO is valued, the current $300MM enterprise value of TOPP values the deal at 15.7x EV/EBITDA. Looking at their latest 10-K, these guys seem to be treading water at around $295MM in annual sales every year, gross profit margins seem erratic, and SG&A costs have been rising. So being more than fair, these guys did poorly in 2006 but just going to 2005 and 2004, they've been at best a $20MM EBITDA business with CapEx of about $3MM.

    So even assuming Eisner and MDP have some great plan to enhance margins, assume EBITDA is $25MM or so, they're paying 12.0x EV/EBITDA for TOPP on a forward basis. And in today's leveraged loan and high yield markets, you can get 5-6.0x leverage for strong cash flow generating businesses (which I don't consider with TOPP but I'll say the bankers do this deal at that financing range) so assuming they get 6.0x EBITDA for debt that's $150MM in debt they raise and $150MM in equity Eisner/MDP have to put in. A 50/50 split in LBOs is pretty unheard of unless there are some serious growth prospects, even then going less than 65% debt to capital is pushing it in terms of reducing your overall returns. So $150MM in debt, assume these guys have an average interest cost of 9% which is probably being generous, and that's $13.5MM in interest a year.

    So assuming Eisner/MDP have some operational wizard or insight on some secular trend that will drive sales to leverage that overheard or they have some operational wizard that can bring EBITDA up to say $25MM, that's a shaky deal out of the box. $25-$3mm capex-$13.5MM = $8.5mm left over, that's some pretty low interest coverage. On the surface this looks like a fair if not overpriced deal to me, I'd have to imagine Eisner/MDP have some thing already lined up to significantly improve this business because if they don't I don't see how they really generate an impressive IRR.
    Mar 15 18:04 pm |Rating: 0 0 |Link to Comment |View article

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