While we believe our estimate of SEK 50 per share is conservative, you can see through the sensitivities that it is difficult to argue that the fair value of the shares is much less than SEK 40 per share based on this analysis.
Leveraged Buyout Analysis
We have also valued the Company by determining what a financial buyer could pay for the Company under the following assumptions:
i) Operating Case: Same as in the discounted cash flow analysis above.
ii) Leverage: SEK 5.5 billion, equivalent to the financing package the
Offeror has secured (we have used a 7.5% blended rate of interest
which we believe is reasonable).
iii) Fees: 3% financing fees (calculated on debt levels) and 1% advisory
fees (calculated on total deal value).
iv) Holding Period and Exit Multiple: We have assumed a five-year
holding period and an 11x Adjusted EBIT exit multiple, which
we think is a conservative exit valuation either through the public
markets or a strategic sale (please note our discounted cash flow
analysis indicates the fair value of the business is 13x Adjusted
EBIT in five years, so we believe this is a quite conservative exit
valuation).
Based on these assumptions, we believe the Offeror will earn a greater than 30% annually-compounded rate of return at the current offer price of SEK 26 per share. We believe a fair leveraged return for a financial buyer should be around 15-18% over a five-year holding period, which would indicate a fair price per share of SEK 35 to SEK 38. To give you an idea of the sensitivities, if the exit multiple falls to 10x Adjusted EBIT, a buyer can still earn a 15% five-year return at a price per share of SEK 35. Furthermore, if the exit multiple is 12x Adjusted EBIT (which we believe is a more reasonable estimate of value at that time), a buyer can earn 15% returns by paying SEK 40 per share today. Finally, even if our Adjusted EBIT estimate in five years is too high by 10%, we still believe a buyer can earn 15% returns at a price of SEK 35 per share.
In summary, our leveraged buyout analysis indicates a buyer can pay SEK 35 to SEK 40 per share and still generate an attractive return under what we believe are quite conservative assumptions.
LEVERAGED RECAPITALIZATION
If a deal cannot be consummated at an attractive price to shareholders, we believe Securitas Direct's future as a public company is bright. Many shareholders have expressed the view that the Company is overcapitalized and can support significant debt levels. We had assumed that the only reason the Company was not more appropriately leveraged was due to what we figured was an aversion to debt by the Company's two largest shareholders. However, this offer makes it plainly clear that these shareholders are quite comfortable with meaningful leverage on the business. We now can definitively say that they are in agreement with us and many other shareholders with regard to the appropriate capital structure, and if Securitas Direct continues as a public company, we urge you and the Board to immediately pursue a significant leveraging of the balance sheet which can finance sizeable share repurchases and/or a special dividend.
We believe the amount of debt secured by the Offeror is a comfortable level of leverage for the business with Adjusted EBIT / interest expense levels of 2.6x in 2008 and 2.9x in 2009 by our estimate (with the ratios steadily improving thereafter). This transaction would maximize public company value by lowering the Company's cost of capital and providing public shareholders with the opportunity to either reap the types of returns that I described in the leveraged buyout analysis above and/or receive cash from their investment.
CONCLUSION
While we are not opposed to the concept of a sale transaction, we believe the current offer dramatically understates the value of the Company. We are supportive, long-term shareholders and we believe the potential upside in the shares is considerable. If a fair transaction cannot be consummated, we are particularly excited about the future for Securitas Direct as a more appropriately capitalized public company.
I would be happy to discuss this with you further by phone at +1-212-584-2211 or in person.
Sincerely,
Anthony T. Bozza
Managing Partner
Lakewood Capital Management, LP
ABOUT LAKEWOOD CAPITAL MANAGEMENT
Lakewood Capital Management, LP is a private investment firm based in New York. The firm employs a long-term fundamental approach to investing with a strict emphasis on capital preservation.
Michael Antonacci, Chief Financial Officer, Lakewood Capital Management, LP, +1-212-584-2213, mantonacci@lakewoodlp.com
