Description

Exide’s $675mm of 2^nd Lien Bonds trade at less than 70 cents on the dollar.  After considering the $250mm of senior DIP claim, the 2^nd lien at 70 create Exide at $720mm EV. At this price one is creating a business with significant market share and strategic relevance at less than 4.2x Last 4 years EBITDA and less than 65% of current tangible assets.

Business Description:

Exide is a leading producer of lead acid batteries.  Exide has manufacturing operation around the world, roughly 60% of sales are in Europe and the rest of the world and 40% of sales are in the US.  The battery business is a highly concentrated industry with XIDE having the #1 or 2 position in each market and the top 4 players representing over 80% of sales in each market.  XIDE operates two business lines: Transportation and Industrial.  

Transportation (62% of company sales) manufactures and distributes auto batteries for cars, trucks off-road vehicles, motorcycles, RV’s, boats and construction vehicles.  67% of Transportation sales are to the aftermarket, primarily retailers and 33% of sales are to OEM’s.  Aftermarket sales tend to be less cyclical than OEM sales, major aftermarket customers include: NAPA, CSK Auto, Tractor Supply and Canadian Tire.  XIDE’s Transportation segment has a number 2 position (in both Europe and theUS) with a roughly 40% market share.  The number one player is JCI.

Industrial (38% of company sales) is composed of Motive Power (63% of Industrial sales) and Network Power (37% of Industrial sales).  Motive Power sells lead-acid batteries for forklifts, golf carts, wheelchairs, industrial electric vehicles, locomotives and submarines.  Network Power provides standby and backup batteries for communication and data networks, hospitals, air traffic controllers, security systems and utilities. 

Competitive Landscape by Segment:

North American Transportation Aftermarket:

1. Johnson      Controls (50%)
2. Exide (38%)

Others: East Penn

North American Transportation OEM:

1.   Johnson Controls

2. Exide

Johnson Controls and Exide

European Transportation:

1. JCI
2. Exide
3. Fiamm

European Motive Power:

1. Exide
2. Hawker      Battery Group (Enersys)
3. Fiamm

North AmericaMotive Power:

1. Enersys
2. Exide

Others: C&D Technologies, East Penn

AsiaMotive Power:

1. Yuasa      (formerly owned Enersys)

Others: JSB, Shinkobe,Hitachi

Worldwide Network Power:

1. Enersys      (after acquiring Hawker)
2. Exide

North AmericaNetwork Power:

Top 2: C&D Technologies and Enersys

3. Exide

EuropeNetwork Power:

1. Exide

Asian Network Power:

1. Yuasa

LEAD DYNAMICS

            Over 90% of lead used inNorth Americacomes from recycled sources.  In addition to operating manufacturing facilities, XIDE is the largest smelter/recycler of lead in theUS.  Lead accounts for nearly 50% of XIDE’s COGC.  Recently Exide has been hurt by a mismatch in contract pricing.  The company sells batteries based on the LME price of lead; while the company acquires core in the physical market which has prevented the company form immediate passing on the increased cost of cores.

Restructuring

            Exide filed for bankruptcy on June 10th.  The bankruptcy was caused by weak operating results, environmental issues leading to the closure of the company’s Vernon smelting facility, and a vendor driven liquidity squeeze.  Following the bankruptcy filing Exide entered into a $500mm DIP facility.  $250mm of which represents permanent funded debt.

The closure of the Vernon facility (a contributing factor to the bankruptcy) has been stayed by a Judge and should result in less disruption than anticipated at the time of the Exide filing.  

Exide’s US battery operations have deteriorated materially due to customer losses, smelter closures, and pricing mismatch and general mismanagement. Exide is not currently a viable competitor to JCI in the NA auto batteries due to poor performance at the company’s lead smelting operation and structurally higher manufacturing costs. 

It is entirely possible that the US batter business will never operate profitably. 

For the purpose of thinking about the value of Exide it is helpful to separate the company into “bad” (US Auto) and “good” (rest of business).

The rest of the businesses have average $138mm of EBITDA over the past 4 years ($118mm LTM).  These businesses do not face the same structural issues present at the US auto operation.

Based on the trading value of competitor Enersys.  The “good” businesses should support a 6.5-8.0x EBITDA multiple.

The value range of the good businesses suggests that Exide ex- US Auto is worth 76-126% on the 2^nd lien bonds – well above current trading levels.

US auto could be liquidated.  US represents 33% of the company’s sales, assuming Current assets is roughly in line with sales, US auto has 300-350mm of current assets.  The current assets are made up of receivables and inventory (each representing 50% of current assets).  Receivables are from NA auto OEM’s and leading retailers and likely fully recoverable.  Inventory is made up of lead and finished batteries, which should have a high liquidation value but much less than 100cents.

When combined with the value of the good businesses ($767-$1,104mm), Exide looks to be worth $986-$1,393.  Which should support recoveries to the 2^nd lien well above 70 cents.  See below.  (cost of bk is to account for professional fees and some recovery to jr. creditors)

Catalyst