Description

Garrett Motion (GTXMQ; quick disclaimer: this is in bankruptcy and there's tons of risk to that. Do your own work / not investing advice / etc.) has been written up once before on VIC; since then, the company has gone bankrupt and the comment thread on that post has evolved into a discussion of one of the more interesting and potentially lucrative bankruptcies I've ever seen. I wanted to put this post together for three reasons:

1. A lot has happened during the bankruptcy, and reading through ~200 comments on the old thread is pretty ineffecient. I will (with some bias) note that there was a good piece posted last week that covers a lot of the background for GTX leading up to the court hearing last Friday that is probably worth reading.
2. A lot has happened in the past week that I think increases the likelihood of a really successful outcome here, and the comment thread hasn't really touched on it yet!
3. I think this is a super profitable idea, and it's worth mentioning and highlighting on it's own.

That out the way, let's talk GTX.

Section 1- background

I'll start with a quick background summary (if you're looking for more background, the comment section of the prior VIC post or the piece I linked to early cover it in more depth; I only want to provide enough background for this piece to stand on it's own here). GTX was spun out from Honeywell a few years ago; as part of the spin, GTX was saddled with the obligation to reimburse Honeywell for some legacy asbestos liabilties. GTX filed for bankruptcy in large part to zero these legacy liabilties out.

GTX filed for bankruptcy with a stalking horse bid to sell most of their assets to KPS for $2.1B. Obviously, this is a bankruptcy, so there were lots of complications to the bid, but the most important piece of that bid can probably be found in docket 15 of the case (the CFO's statement). That important piece is the statement that, if the KPS bid went through, GTX anticipated that they would "be in a position to make a distribution to stockholders after the consumation of the sale."

A big part of making a distribution to GTX shareholders involved the assumption that the KPS bid would allow GTX to strand the Honeywell liabilities and effectively zero them out.

That's a big zero out! Honeywell carried those obligations at ~$1.4B of value on their financial statements; obviously, they wouldn't let that liability go without a fight.

Last week, Honeywell partnered with a group of shareholders lead by Centerbridge and Oaktree to make a competing proposal for GTX. The proposal called for:

• All creditors except for Honeywell would be paid in full.
• Honeywell, as the lone impaired creditor, would get some cash upfront and convert the rest of their liabilties into a preferred stock to be paid out over ~12 years.
• Centerbridge and Oaktree would inject $1.1B of convertible preferred into GTX
• All current shareholders would see their shares reinstated.

The upside to this plan was pretty simple: every creditor except Honeywell is paid in full. Honeywell, the lone impaired creditor, was agreeing to the plan. And Centerbridge / Oaktree controlled ~50% of shares, so the majority of shareholders supported the plan. This group could credible go to a judge and say "hey, everyone is either paid in full by this plan, or agrees to an impairment. The majority of shareholders support this plan. Approve this plan and this is the quickest / least costly / most consenual bankruptcy in history!" The slide below (from docket 273) summarizes the upsides of the plan nicely.

The downside to this plan was that the plan clearly favored a select group of shareholders: the Centerbridge / Oaktree shareholders would get to make a very faborable preferred investment into the company while shutting out other shareholders. 

The two parties fought over the two competing plans at a hearing on Weds, October 21. The judge ordered the two to continue negotiating and postponed the hearing until the afternoon of Friday, October 23.

Alright, that covers the background. Again, most of that has been covered by the previous VIC post's comments (the last comment was made the mornign of October 23) and the other post I linked to (published the morning of October 23). Now, let's shift into the new stuff and why I'm so bullish the idea from here

Section 2- new stuff

The hearing October 23rd was quite eventful. It ended with the judge approving KPS as the stalking horse bidder for GTX. However, perhaps lost in that process was the Honeywell / Oaktree / Centerbridge group's updated bid (contained in docket 273). 

The headliner here was that the bid threw an additional $84m to common shareholders. In exchange for not approving the KPS bid (which contained an $84m breakup fee), the Centerbridge group would take that cash and simply distribute it to shareholders at emergence. GTX has ~76m shares outstanding, so that was a significant give; overnight, the Centerbridge group had bumped the equity value of their bid by >$1/share. Not bad for a stock trading <$4/share!

However, there were some other interesting pieces of the bid. In particular, the slide below was interesting, which shows how the Centerbridge group valued their bid versus the KPS bid. Centerbridge thought, all in, their proposal would be worth >$6/share to GTX shareholders, versus a projected value of <$2/share for the KPS bid. I've pasted the slide below (I'll call this the "GTX value slide" going forward).

What's notable here is that the Centerbridge group's base case for the KPS bid included Honeywell assuming a 75% haircut. For a group associated with Honeywell to give a basecase where Honeywell takes a huge haircut is a pretty big admission.

Despite the upsides of the Centerbridge group plan, the judge ultimately decided to go the KPS route and chose them as a stalking horse. Why? The judge worried that the Centerbridge group's plan would chill competing bids for GTX and unneccassirly favored the Centerbridge shareholders versus minority shareholders.

There's one other piece of interesting news on the heels of the judge chosing the KPS bid that's worth mentioning. This week, Honeywell filed a 13-d on GTX that showed they started buying shares of GTX on the open market and have been buying all the way into the high $3s.

Alright, so that brings us to today. GTX is trading for ~$3.70/share. The KPS bid has been approved, and we're heading to an auction in December. Why do I tihnk this is such an interesting opportunity today? The opportunity comes down to two things: the chances for a competitive auction, and the haircut the honeywell liabilities take.

Let's start with the later: the Honeywell discount. I think it's very reasonably to assume that Honeywell expects to take a huge haircut here. Their group effectively admitted it in the right hand side of GTX value slide (if the group is assuming the Honeywell claims are worth 25% of par when trying to paint a negative light on a competing bid; I would guess internally they believe the claims are worth significantly less!), and Honeywell seems to be confirming that by buying GTX shares in the open market currently. Remember, those shares would be effectively worthless under the current bid if Honeywell's claim was worth close to par; by buying shares, either Honeywell is admitting that their claim is awful or Honeywell is saying they think the auction will be super competitive and cover the current equity price even if Honeywell's claims are kept. Either way, shareholders win.

Ok, let's now think about the chance for a competitive auction. Look again at the Centerbridge plan. They thought GTX was worth $3.9B using average 2017-2019 earnings and BorgWarner's multiple. The KPS bid is currently for $2.6B. KPS has a reputation as a very disciplined, value buyer, and Centerbridge and Oaktree have already shown interest in the auction by their competing plan. Borgwarner also currently trades for a multiple well in excess of the "average multiple" that Centerbridge used to support their plan. Put that all together with Honeywell buying GTX shares in the open market, and I think there's a lot of evidence to suggest that GTX's auction is going to yield a price well in excess of the KPS bid.

Putting an exact number on either the honeywell discount or where the auction ends up price GTX is difficult. My gut says GTX goes for ~$3.2B in an auction (a bit over 5x average EBITDA; well below the Centerbridge's implied value but roughly in line with how they valued their total plan), and that Honeywell ultimately takes a haircut of ~80% on their claims (they settle their >$1.2B in claims for ~$250m). After deducting ~$85m for the KPS breakup fee and assuming all of the other liabilities from the right hand side of the GTX value slide are good (I actually think they're a little overstated, but not worth splitting hairs!), that would get a distribution to GTX shareholders of ~$9.50 share. I've included the math in a table below, as well as a data table that shows the shareholder distribution assuming different levels of Honeywell discount and GTX's value in the auction. 

My bottom line: I think GTX shares are dramatically mispriced. Multiple parties are indicating how valuable they think this asset is through their actions, and Honeywell is basically admitting how bad they think their claim is through their actions and their buying of shares on the open market. I expect shareholders to recieve a distribution significantly in excess of today's share price in the near future.

Catalyst

Auction of GTX in december