Description

Differential Brands

DFBG

I think DFBG represents a very strong risk/reward today while acknowledging the higher than normal amount of risk in the situation. I've tried to piece together the puzzle using various disclosures in the 8-K filed on 7/3/2018 but the disclosure is very sparse.

This transaction reminds me in some respects of the Amaya/Pokerstars/GSO deal in 2014.

I also have placed importance on the $8.00 purchase price in the $150mm equity raise (with $25mm of that being invested personally by the new CEO and $80mm total from management) and the conversion of the Series A preferred (which appear to convert at $11.16) as being important signals of value.

I think there is a high probability the shares trade >$8.00 by the end of August.

I also know very little about the actual business here so this is a bet based on the numbers and actions of the participants.

Feel free to tell me if you think I am wrong about these numbers or the correct multiple of EBITDA for this business.

Here is my estimate of the capitalization of the company post transactions:

Price                                         $5.25

Shares                                      57 million

Market Cap                                $299 million

Debt                                         $1.46 billion

Cash                                         $40 million

Net Debt                                   $1.42 billion

EV                                            $1.719 billion

PF EBITDA                                 $252 million

EV/EBITDA                                6.8x

Here are the various assumptions that go into these numbers:

Share Count:

DFBG shares                              13.97 million

RSU and options                         .90 million

Series A pref conversion              50mm/ $11.16 is 4.48 million (1Q18 10-Q pg 22)

Series A-1 conversion                  4.59 million

New money                               $150mm/$8.00 is 18.75mm (Item 1.01)

Total shares pre GSO                  42.69

Add 25% FD to GSO                             14.23 (8-k B-7)

FD shares                                  57mm

Sources and Uses:

Purchase of GBG                        $1.38 billion (8-k Item 1.01)

Refi of existing DFBG debt           $81mm (1Q18 10-Q)

Fees and expenses                      $100mm (guess)

Cash to balance sheet                 $40mm (min of $35mm on 8-K A-3)

Total uses                                  $1.601 billion

DFBG Cash                                $4mm (1Q18 10-Q)

RCF                                           $88mm (backed into)

First lien term loan                     $685mm (8-k Item 1.01)

Second lien term loan                 $674mm (8-k Item 1.01)

New equity                                $150mm (8-k Item 1.01)

Total sources                             $1.601 billion

What is the PF EBITDA?

According to the 8-K the Second lien has a covenant for total leverage ratio at 5.75x. The above analysis assumes $1.447 billion in debt. This implies at least $252mm in EBITDA.

If those are the numbers, why is it interesting?

1.    Insiders are buying at $8.00

2.    $8.00 is only 7.4x EBITDA

3.    Every turn of EBITDA is $4.42 per share!

4.    Why can’t this trade too 8x EBITDA or > $10?

What are the potential catalysts?

They need to raise more money from co-investors at $8.00. They may pitch the story to do so.

They need file an information statement. This could highlight the value.

I think closure of the deal would be a positive catalyst. The documents seem to indicate a target date of August 31, 2018. (Purchase agreement pg 23)

Risks

1.    The deal breaks

2.    The $8.00 number reflects some type of reverse split

Catalyst

They need to raise more money from co-investors at $8.00. They may pitch the story to do so.

They need file an information statement. This could highlight the value.

I think closure of the deal would be a positive catalyst. The documents seem to indicate a target date of August 31, 2018. (Purchase agreement pg 23)