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Seahawk's (HAWK) value is around $6

|Includes:PDE
Asset Sale and Chapter 11 Details
 
The following links are the press releases from HAWK and HERO.
 
Highlights of the transaction
 
·          HAWK sells all operational assets to HERO (all 20 rigs and related assets)
·          HERO takes over not only the assets but also cash, receivables, payables and contractual rights related to the rigs.
·          HAWK gets 22.3 million shares of HERO and $25 million is cash. The cash part which is to pay back the DIP loan can be increased upto $45 million if needed. In that case, the number of shares paid will be reduced based on a fixed share price of $3.36.
·          Every $10 million is additional cash means 2.976 mio HERO shares less for HAWK
·          HAWK has obtained a DIP loan of $35 million from DE Shaw Group
·          DIP credit facility is to support its business and liquidity needs when in Chapter 11
·          Transaction is expected to be closed in second quarter 2011
 
A Look at Liabilities

HAWK submitted a list of 30 largest unsecured creditors as part of the Charpter 11 documents in the court. The entire list can be found below in Annexure.
 
·          The largest claim is from Pride for $15.62 million (contingent and disputed). As per the agreement, all Pride claims and assets are retained by HAWK and will not be taken over by HERO.
·          HAWK also has a claim due from Pride for $1.44 million. Hence the net liability works out to $14.18 million.
·          All other claims in the top 30 list are trade payables which as per the asset sale agreement will be taken over by HERO
·          As per the 3Q numbers, HAWK has a differed tax liability of $16.4 million, which as per the agreement stays with HAWK.

For more details on items included and excluded in the asset sale agreement, please refer to the HAWK’s 8-K filling. It contains the full asset purchase and DIP credit agreement. Therefore the retained liability post transaction which HAWK might have is $30.58 million; everything else is taken over by HERO.

I am not going beyond the top 30 claims which were filled with the court as the size would be insignificant. The last claim in the top 30 list is for just $28,438. Again I highlight HAWK settlement with pride could be lower as they are disputed.
 
A Look at DIP Loan
 
The DIP loan obtained from DE Shaw needs to be paid back from the cash part of the consideration paid by HERO. The facility secured from DE Shaw is USD 35 million. The initial cash part of the asset sale agreement is $25 million. This DIP loan is to support business activities and liquidity till the transaction is closed in Q2. Though the secured facility is USD 35 mio, it might not be fully utilized.

To estimate the DIP loan outstanding when the transaction is completed in Q2, I looked at the operational cash flow of HAWK.
 
Operation cash flow of HAWK
Q3 2010 – Negative $ 14.23 million
Q2 2010 – Negative $ 21.15 million
Q1 2010 – Negative $ 15.49 million
Q4 2009 – Negative $ 9.65 million
 
Assuming the transaction will be closed within one quarter from the date of announcement, it’s unlikely that the cash part of the consideration needs to be increased from $25 million. Even in the worst quarter (Q2 2010) the operation burnt only $21.15 million. So I assume the cash part of the sale consideration will remain at $25 million.
 
Actually there might be some cash left with HAWK after paying for DIP loan from the $25 million. But again being conservative, I am assuming that the full $25 million will used to pay back the DIP loan.
 
HAWK Valuation
When the transaction gets completed, I expect the following scenario (on a conservative note)

·          HAWK will be left with 22.3 million share of HERO
·          HAWK will have a liability to Pride of $14.18 million
·          HAWK will have some Differed Tax Liability (DTL)
·          HAWK would have used USD 25 million cash from the sale to pay back the DIP loan in full
·          No other assets and liabilities as all operational asset and liabilities taken over by HERO

To value HAWK in this scenario is quiet simple which is (assuming DTL at $16.4 million)

HAWK = ((22,300,000 * HERO) – 14,180,390 – 16,401,000) / 11,993,305

Without considering differ tax liability (DTL)

HAWK = ((22,300,000 * HERO) – 14,180,390) / 11,993,305

Where
HAWK and HERO are stock prices of each
11,993,305 is no of outstanding shares of HAWK

Based on HERO’s closing price of $4.27, the implied value of HWAK based on the above formulas is $5.39 and $6.76 (with and without considering DTL).
DTL has been coming down consistently quarter over quarter and I expect it to be much lower than $16.4 million when the transaction is completed.

This gives HAWK a value range of $5.39 to $6.76 based on HERO price of $4.27. Mid of this range is $6.075. If HERO moves higher, HAWK should follow as well.


Annexure: Top 30 Creditor Details



Disclosure: I am long HAWK.

Additional disclosure: Bought HAWK at open yesterday.
Stocks: HAWKQQ, PDE