General Finance Corp. (NASDAQ:GFN) could almost double in the next few months as investors observe the effects of a corporate transaction whose financial benefits have yet to be reported. The AMEX-listed shares offer tremendous potential for stock price appreciation along with strong downside protection.
At $3.40 per share, and with roughly 22m shares outstanding, GFN has a market capitalization of $75.0m. The Company is comprised of two distinct businesses? each with its own capitalization, ie there is no holding company cash or debt to speak of. There are also 2m warrants outstanding, which strike at $4.00 per share.
For the admission price of $3.40 per share, investors receive what we believe to be around $6.00 in value today, based on the sum of GFNs parts, for a total upside potential of almost 100%. This $6.00 is comprised of over $5.00 in value from GFN's listed Australian subsidiary, and almost $1.00 in value from its U.S. operations. Potential value could rise well north of $10.00 within several years based on a resumption of business growth in the U.S., and trading multiples that are more in line with industry peers. A key catalyst could also prevent GFN shares from dropping substantially below $2.50 per share, thus providing a good margin of safety.
GFN is a player in the portable storage industry. The portable storage industry entails the leasing (and sometimes sale) of storage container products, modular buildings and mobile offices. Portable storage pundits like to highlight the cost, security, and feature advantages of portable storage units over warehouse or permanent office space. End markets include retail, construction, industrial, commercial, governmental, and homeowner usage. Storage container rental is a tremendous free cash flow generator characterized by high noneconomic depreciation resulting in little or no cash taxes and lease rates that typically entail rapid payback periods (2 - 3 years) on equipment purchases. The recurring revenue from the lease stream is predictable and the assets themselves tend to have long useful lives.
GFN went public in April 2006 as a Special Purpose Acquisition Company (SPAC) by selling 8.6m units at $8.00, thus raising $69m. The SPAC was sponsored by Ron Valenta (the founder of Mobile Storage Group and a renowned leader in the portable storage industry). Valenta is considered a "legend" in the portable storage industry with a significant track record of building value for himself and investors alike. From 1985 to 1989, Mr. Valenta was a Senior Vice President of publicly traded Public Storage, Inc. ($18b market cap). From 2003 to 2006 he was a director of the National Portable Storage Association and from 1988 to 2003, Valenta served as the President and Chief Executive Officer of Mobile Storage, Inc., a portable storage company he founded with a lease fleet of over 103,000 units and 78 branch locations throughout the United States and the United Kingdom.
We estimate Mr. Valenta has invested ~$35m of his own capital in GFN in addition to personally guaranteeing $10m of the GFN's US credit facility including a personal backstop of GFN through some of the recent difficulties it encountered during the financial crisis. Valenta's motivation for doing the SPAC in the first place seemed to stem from his suffering of "sellers remorse" after having sold the company he founded in the 1980s to a private equity fund. Mobile Storage is now owned by Mobile Mini ("MINI") and Valenta desperately wanted to "get back in the portable storage business".
In September 2007, GFN consummated its SPAC business combination by acquiring an 86% interest in Royal Wolf, a leading portable storage company based in Australia for ~$84 million. Valenta and his affiliates (Olowalu and Kaiser in SEC filings) bought around $12mm of GFN stock at $8.00 in conjunction with the transaction. In addition, when the SEC caused an unexpected delay in its review of GFN's proxy statement which resulted in the seller of Royal Wolf threatening to cancel the transaction, Mr. Valenta personally backstopped the entire transaction in the event that it was not completed by a certain date or it did not receive shareholder approval. The transaction closed in September 2007 and GFN stock subsequently traded in excess of $10 per share.
In October 2008, GFN entered the US market through its acquisition of PacVan, a 26 branch portable storage, modular buildings and mobile office company based in Indianapolis (but with offices in 17 states) for ~$20m cash, 4m shares and the assumption of debt which, all in, totaled $158m in consideration. Boasting more than 7,000 customers, PacVan had achieved a 26% CAGR in EBITDA from 2003 until the time of its purchase. PacVan was particularly hard hit post Lehman with EBITDA declining from in excess of $20m to roughly $10m. However, the business today is stabilizing and is well positioned to grow and acquire weakened smaller competitors.
The Current Opportunity
GFN is effectively a holding company with two separate businesses (each with its own capital structure) both operating in the portable storage industry. These businesses are:
- Royal Wolf based in Australia (RWH)
- PacVan based in the U.S. (PAC)
GFN conducted an IPO of its Australian subsidiary, Royal Wolf Holding on May 26th of this year and raised A$91.5mm which substantially delivered and derisked the entire company while positioning it to capitalize on substantial future growth opportunities.
Reuters called the offering "one of the few floats this year for the country's lackluster initial public offer market." GFN retained a 51% interest in RWH post the offering. Credit Suisse (NYSE:CS) led the offering.
For SEC reporting purposes, GFN consolidates the results of RWH and PAC, which makes the business a little tricky to follow given the volatile A$/US$ exchange rate over the last several years. GFN's fiscal year ends on June 30 so it will report its year end and Q4 results in early September. Given that the RWH IPO occurred in June, its revised and substantially delivered financials have yet to be reported.
GFN's Australian business has been very strong due to a robust Australian economy and mining sector. Royal Wolf has 21,000 customers and a 35% EBITDA CAGR since 2006. It recently went public on the ASX and has a current equity market cap of A$184m with around A$65m in net debt, for a total enterprise value of A$265m. Following the IPO, GFN owns 51% of this business (currently worth A$100m or around $5.00 per GFN share). EBITDA is projected to be A$35m for the year ending June 30, 2012 resulting in a multiple of around 7.5x. More importantly, free cash flow should be around A$34m resulting in a FCF yield of 17%. The IPO of RWH allowed GFN to:
- completely refinance its Australian senior facility with room to drawdown for future acquisitions,
- pay off an expensive ~$22m piece of mezz debt held by Bison Capital,
- payoff a put option held by Bison Capital regarding its 14% equity ownership in RWH (~$22m), and
- dividend roughly $20m to PacVan to pay down its senior debt.
If we use a A$35m EBITDA number for RWH and give it a 8.0x multiple, we arrive at ~A$280m in Enterprise Value. Stripping out the A$64m in debt leaves A$216m in equity value for the business. GFN's 51% stake would be worth A$110m or $119m USD which is equal to ~$5.41 per GFN share. I am ignoring taxes here as I think that the 8.0x multiple and the EBITDA should grow. If you want to take taxes off to be conservative, you can take off 25% and get to $4.05 per GFN share, which is still 52% higher that GFN's price today, not including PAC's value.
The only pure publicly traded competitor, Mobile Mini (NASDAQ:MINI), trades for 11x 2011e EBITDA. Public Storage (NYSE:PSA) is not directly comparable, as it is a self storage REIT which tends to trade on the basis of its yield and NAV.
PacVan, GFN's US business, has struggled due to a sluggish U.S. economy. In the summer of 2010, PacVan refinanced its credit facility (Mr. Valenta guaranteed $10 million of the facility). Following the RWH IPO, we estimate that its senior facility was reduced to around $40m. It also has a mezzanine loan with an affiliate of DE Shaw for $15m. EBITDA is currently around $10m.
While it is possible that the US business may not have hit bottom, we are not paying a lot for PacVan here, given GFN's valuation. Should smaller mom and pops continue to struggle or lose access to capital amidst a credit crunch, PacVan could take share and EBITDA could slowly creep back to the $20m+ it used to generate over time. In addition, PacVan is ideally suited to make strategic tuck-in acquisitions of its smaller weakened competitors.
Putting It All Together
The following analysis shows what we think are some of the potential values for GFN shares. We use debt figured based on what we think the capital structure will look like after the Company applies the IPO proceeds. Again, these proceeds will go to:
- Pay off a portion of RWH debt (will go from A$114m to A$63.7m).
- Pay off a portion of PAC debt (will go from $83.5m to $59.3m) (*note the total $61.4m PAC debt below includes a $2.0m preferred).
- Remove the Bison put (will go from a $22m obligation to $0.0m).
|SUM OF PARTS|
|RWH||Current Valuation||Potential Future Valuation|
|Per Share - A$||$1.81||$2.16||$2.51||$2.96||$3.41||$3.86|
|Per Share - US$||$1.96||$2.34||$2.71||$3.20||$3.69||$4.17|
|GFN shares held of RWH||51,000||51,000|
|Value per GFN share||$4.54||$5.41||$6.29||$7.41||$8.54||$9.66|
|Value per GFN share||$0.39||$0.84||$1.30||$1.98||$2.66||$3.34|
|Total value per GFN share||$4.92||$6.25||$7.58||$9.39||$11.20||$13.00|
note: we use a 1.08 AUD/USD rate in the analysis above and would expect this rate to be volatile.
Key Catalyst Sets a Floor...
Since Valenta is a shrewd dealmaker with tons of experience in the space and deep knowledge as to what the various assets are really worth over the long term, it is not inconceivable that he could strike a deal with Royal Wolf to buy out GFN in its entirety should GFN fall much below the $2.50 per share levels where the stock currently trades.
To illustrate, if Royal Wolf were to pay ~$3.00 for GFN ($66m USD) by issuing 1.5 RWH shares for each GFN share, Royal Wolf could make a deal that is massively accretive to its own share price. RWH would issue 33 million shares in this hypothetical transaction but upon consolidation it would in effect buy back 51 million of its own shares (GFN already owns them). As a result, its outstanding share count would drop from 100 million to 82 million. In addition, it would pick up a substantial amount of cost savings in the process. This transaction is unlikely to occur (at least in the near term), but nevertheless presents a compelling illustration of one possible value creation opportunity and the reasoning behind why there is a 'floor' of sorts on how low GFN can trade (external events to Royal Wolf's business notwithstanding).
all in AUD
- Royal Wolf EBITDA: 35
- Acquired PacVan EBITDA: 10
- Synergies/Savings: 4
- Total EBITDA: 49
- Multiple: 8x
- Total Value: 392
- Less Royal Wolf Debt: 64
- Less GFN (Pac Van) Debt: 61
- Equity Value: 267
- Royal Wolf Shares(100+33-51): 82
- Value Per Share: 3.26
- Current Royal Wolf vps: 1.83
- Upside: 1.43
- Upside %: 78%
Again, this 'floor' provides good downside protection should the market continue to neglect GFN shares.
We realize that this idea is not for everybody, as many may be put off by either the lack of volume in GFN shares (average is ~5k per day), the idea of owning a piece of an Australian company via a U.S.-listed 'stub', or playing for a turnaround in the EBITDA of a U.S. storage company. We don't disagree that there may be better businesses to own at this point in the cycle. What we will say, however, is that the market is clearly missing the effects of Royal Wolf's IPO and the subsequent Company deleveraging given the deep discount built into GFN shares. GFN's holder base is comprised of Valenta and some other very seasoned investors such as Jack Silver, Neil Gagnon, and Ron Havner (ViceChairman, Chief Executive Officer and a member of the Board of Public Storage since November 2002) with large stakes. While they are not activists, per se, we think that a transaction like the one described above, or even a dividend out of the Royal Wolf shares that GFN owns could be consummated to unlock the tremendous value here. In a market marked by newfound risk and volatility, we feel comfortable buying something that is truly at a discount to the sum of its parts.
- Management gets too aggressive and overpays for a large acquisition.
- Pac Van's recovery is less than stellar.
- Australian commodity boom activity dies down, and Royal Wolf's earnings suffer.
- Increased investor awareness after GFN files financials that account for RWH's IPO.
- Valenta takes GFN private.
- Possibility that Royal Wolf buys GFN outright given the large discount.
Disclosure: I am long GFN. I may buy or sell shares of GFN at any time. Investors are encouraged to do their own analysis before investing.