supporter

JDA's Retrade Is Justified

It's also worth noting that Q Investments, which holds the 2.5% Convertible Preferred with a conversion price of around $24 is likely heavily incented to get this transaction completed. Currently, they are sitting on a broken convert that is junior in the capital structure, paying them a lousy 2.5% and a mandatory convert into ITWO shares in 2014. If this deal goes through, they get taken out at 110% plus a fee, so the total payment to Q at close will be $118m. Q pushed hard to get this deal done and if it doesn't they will be toiling away in the bottom piece of the capital structure for quite a while longer - which is not in the best interests of Q. Given that the ITWO BOD rejected JDAS request to postpone the shareholder meeting, it would be cumbersome process to get back to this stage of transaction (ie. renegotiate the purchase price, new proxy, recirculated, 60-90 days, etc.) It makes sense for Q to roll their $118m payout into the senior first-out traunche of JDAS that is supposedly being shopped at L+600 with a progressive amortization schedule. Q could move up in the capital structure, increase its coupon payment and get certainty as to when it will be out of the investment. It would be interesting to know if JDAS/ITWO was pursuing discussions with Q regarding this option.


On Nov 10 08:13 PM supporter wrote:

> The book/tax differences do have value to an acquiror because there
> are no limitations on those assets under a change in control. ITWO's
> strategic review committee called this fact out on their May 2008
> update call. The NOL usage has an annual limitation of the Treasury
> rate multiplied by the purchase price of the company. So in this
> case, if JDAS purchased ITWO for $345m and the treasury rate is 5%,
> then it could use $17m a year, which would save JDAS about $6m in
> cash taxes per year. The JDAS CFO even called the annual cash value
> of the NOL's on the acquistion cal. So if you are going to continue
> publishing valuation cases on the internet, please get your facts
> straight before doing so.

JDA's Retrade Is Justified

The book/tax differences do have value to an acquiror because there are no limitations on those assets under a change in control. ITWO's strategic review committee called this fact out on their May 2008 update call. The NOL usage has an annual limitation of the Treasury rate multiplied by the purchase price of the company. So in this case, if JDAS purchased ITWO for $345m and the treasury rate is 5%, then it could use $17m a year, which would save JDAS about $6m in cash taxes per year. The JDAS CFO even called the annual cash value of the NOL's on the acquistion cal. So if you are going to continue publishing valuation cases on the internet, please get your facts straight before doing so.


On Nov 10 04:17 PM John Appel wrote:

> - No acquirer would pay for book/tax differences or NOLs because
> they can't use them post-acquisition in a stock purchase deal.
>
> - The market values each of ITWO and JDAS at about 4x EBITDA. IF
> JDAS were willing to pay $11.50/shr for ITWO, it would be a significant
> premium to what ITWO is worth today. I have no idea if JDAS still
> wants to do the deal, or what price they would pay.
> -The 4x EBITDA for ITWO is probably understated because it is based
> on results for the 12 mos ended 6/30. As of that time, sales and
> earnings were trending down, so it would not be surprising if Q3
> is more of the same. Surely JDAS knows what ITWO's Q3 looks like.
> The recent downward revision of the minimum EBITDA covenant on the
> acquisition debt is probably a directional indication. Since JDAS
> had a great Q3 and also reaffirmed its guidance for the full year,
> it seems unlikely that it was the JDAS side of the pro forma EBITDA
> that triggered the need to revise the covenant....

JDA's Retrade Is Justified

I agree with contrahour. Pro forma for at least $15m in synergies that JDAS would achieve, ITWO's ebitda would have been $60m. Also, ITWO has a significant book/tax difference asset that amounts to approximately $170m and a $1.8B NOL. Together, these tax assets probably have a NPV of about $100m. So, adjusting ITWO's purchase price of $345m for the $100m of value in the tax assets and dividing the new number of $240m by $60m of PF EBITDA, then JDAS really only paid 4.0x for ITWO. If people think $11.50 is a reasonable price for ITWO, then that multiple works out to be 2.7x.... which is obviously ridiculous.


On Nov 10 08:38 AM Contrahour wrote:

> Your analyis gives ITWO no credit for the $80 million payment ITWO
> will recieve from SAP in regards to its out of court settlement.
> ITWO should receive this payment in the current quarter.
>
> If you include this amount, it seems JDAS is clearly trying to steal
> ITWO. The original deal was already at the low end of the valuation
> range and to lower it any more would not be acceptable. If JDAS
> wants to lower the price, ITWO should take the $20 million and move
> on. It can survive just fine without JDAS.