Wednesday, 25 February 2015

Tungsten (TUNG) ... thoughts on conversion

Tuesday 25th February 2015

Monday's post seemed to draw some focus. I thought it might be worthwhile expanding on how I draw my bearish view with some numerical examples. 

But first ...

An observer has drawn attention to the fact that while OB10 has historically been loss-making, that this is not unusual as a great deal of start-up companies tend to be. And that growth in the past year may have been stymied due to unforeseen operational challenges. Further, that due to the investment which has gone into the business, losses will continue to accrue but that this is only likely for the short term. 

Let's take a closer look at OB10. 

Firstly, yes, a great deal of start-up companies tend to be loss making. However, OB10 has been rocking along for over 14 years now and is still not looking like approaching a profit any time soon. Let's not forget that according to its auditor it was practically insolvent in 2013. Not to matter. 

From its recent interims (released 14 Jan 2015), Tungsten highlights that:
  • It transacted 14.4 million invoices or £117 billion in invoice value in the 12 months to 31 December 2014.
  • 14.4 million invoices for 2014 is up from a reported 13.3 million invoices for 2013. This is 8% growth.
  • 2013 invoice growth was 14% from 11.6 million invoices in 2012.
  • £117 billion invoice value for 2014 is up from a reported £109.2 billion in invoice value for 2013. This is 7% growth.
  • 2013 invoice value growth was 12% from £97.5 billion in 2012.
  • The interim statement to 31 October 2014 indicates that suppliers grew to 171,000 from 168,000 in April 2014. This is 1.7% half on half growth.
  • However, this differs with the accompanying interim presentation, which highlights 174,000 suppliers (up from 168,000). I can only presume that the discrepancy lies with this figure representing growth in the period 31 October 2014 to the release of the interims. That growth is a bit better, but still less than a 2% increase over several months.   

The group claims that the global e-procurement market is expected to grow by 7 to 10 per cent, between 2013 and 2015. This comprises e-invoicing growth at 8 to 10 per cent and supplier network growth at 17 to 20 percent. 

Based on the above, and despite the significant investment put into the loss making business, clearly OB10/Tungsten Network is failing to keep pace with the wider market. 

Maybe, this under-performance will all change and is down to clients being unhappy with the former OB10 masters and a brighter outlook will emerge under the new Tungsten stewardship? If the former, then the price paid for OB10 appears even more ludicrous. 

In two to three years time, Tungsten may well have gone from single digit growth and losing market share to say $400 billion in invoice value (implying growth of 30 to 40% per annum), but when I bear in mind that it is just one of at least 50 other providers, each with a market share of 1 to 20 million invoices per year, I find that scenario a bit of a stretch. 

Incidentally, it would seem that OB10's condition in 2013 may have been so precarious, that Tungsten had to lend it £4.8 million prior to its acquisition. Of course this remained outstanding and was then consolidated from the point of acquisition. Further, the timing of this loan is somewhat odd. Gold star to whoever can work out when the loan was granted.  

Now for some numbers

Fundinvoice.co.uk is a pretty informative website, unsurprisingly on matters of invoice discounting and factoring. Here you will find some examples of the cost of invoice discounting amongst a range of companies from start-ups to medium to large. 

For example, Fundinvoice.co.uk reckons that a small sized business with £250,000 in revenue per annum and looking to release £35,417 through invoice discounting finance, is looking at:
  • An administration charge of 1.70% of turnover = £4,250 + VAT per annum.
  • A discount charge of 2.5% over bank base rate = £1,062 +VAT per annum.
This would come to a total cost of £5,312, and represent a cost of 15.0% of funds received; but it assumes of course that funds are drawn on one occasion and drawn for the entire year. I would imagine this could be beaten. But let's assume that the facility is available at this cost.

In reality, I reckon a small sized business is more likely to utilise a facility maybe once or twice a year. Say for 60 days in the year. 

Then the numbers break down as follows:
  • An administration charge of 1.70% of turnover = £4,250 + VAT per annum.
  • A discount charge of 2.5% over bank base rate = c. £175 for 60 days + VAT.
This would come to a total cost of £4,424, and represent 12.5% of funds received.  

Tungsten's cost of capital is reportedly close to 3.0%. 

So in order for Tungsten to extend this £35,417 in finance, it would be looking at a cost to itself of £1,062 per annum, or c. £175 for the 60 days. 

It's net fee would therefore be £4,250 for the 60 days advance. A net interest margin of 12% (which is basically all admin charge). Of course this is before any costs Tungsten have been incurred for data processing, due diligence, other overheads, etc. 

Market forecasts are for Tungsten Bank to achieve £50,900,000 in revenue for FY 2017. 

In order to arrive at this, using an average small sized business as above, the group is required to extend that order of finance, at least 11,979 times. 

This may well be no issue. The 174,000 suppliers may be lining up.

However, if of those 174,000 suppliers, it is actually 9 to 10 per cent that are using invoice discounting (as per reported market penetration) then 15,660 suppliers are in the market. 

So Tungsten needs to convert 11,979 of them to ditch their current provider (and they will have a current provider, probably their own bank) and switch over in order to achieve £50,900,000 in revenue. That's converting 76% of them. I reckon this is also a stretch by a long way. 

Here's an illustrative example to demonstrate required supplier conversion rates.

Conversion rate model
Source: Lordshipstrading
I reckon Tungsten will do well to achieve a 15% conversion rate of its supplier base that uses invoice discounting to use its product. And so that's 15% of 9% of 174,000 suppliers. If the average request of funds is say, £37,500 (as in the table above), then that means 2,349 suppliers requesting £37,500 in finance, at £4,250 net fees, then that equates to c. £10,000,000 in net fee income. 

Given that market forecasts for OB10 see it as remaining loss making to the tune of £5-6 million per year, for the foreseeable future, what with other costs in the business, I reckon profits will be pretty slim.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Monday, 23 February 2015

Tungsten (TUNG) ... it's a small world part II

Monday 23rd February 2015

A principal reason why I have a bearish stance on Tungsten is down to the the forward curve for Bank of England (or for that matter that the FED or ECB) policy rate expectations.

Bank of England - policy rate expectations
Source: Bloomberg
I will expand upon this further below.

But first ... 

As highlighted in my prior post (it's a small world), Tungsten was floated on AIM in October 2013. It raised £160 million (£149 million net of costs) and acquired the e-Invoicing platform, OB10, also in October 2013. 

This was a large float for AIM. Indeed the largest since 2008, excluding investment companies.

OB10

At the time of acquisition, OB10 had been loss making for the three years prior. In fact, it had been loss making throughout its 14 year history, but the AIM Admission document only provides three years of financials of granular information. 
  • Revenue had been growing at a relatively pedestrian pace of 7-9% per annum, to £17.8 million in 2013. This was hardly indicative of OB10 gaining market share.
  • Pre-tax losses had increased from £3 million in 2011 to £3.5 million in 2013.
  • Approximately £50 million had already been invested in OB10 since it was formed in 2000 through to 2013.
  • Its share premium balance stood at £44.7 million as at April 2013.
  • Its accumulated losses totalled £52.3 million by that point also.
  • Net liabilities had risen from £2.3 million in 2011, to £7.5 million in 2013. 

Surprisingly for a company centred on the invoicing market, its own record of receivables management had deteriorated sharply. Trade receivables past due or impaired as a percentage of net trade receivables had risen from 33% in 2010, to 62% by 2013. 

It would appear to me that OB10 was showing few signs of becoming profitable any time soon. Rather, OB10's auditor seemed to believe that without the acquisition proceeds from Tungsten, that OB10 would not have been a going concern:
(b) Going concern 
This historical financial information relating to the Group has been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as they fall due for the foreseeable future. The use of the going concern basis relies on the receipt of the net proceeds from the offer of shares of Tungsten Corporation plc, the owner of the Group following the admission of Tungsten Corporation plc’s ordinary shares to AIM.
OB10 was acquired by Tungsten for £73 million in cash and £28 million in equity. 

Disruptive Capital

While OB10 had been plodding along but racking up losses for over a decade, Tungsten's development began a little more recently. Tungsten was founded in February 2012 by Edmund Truell and Danny Truell. Up until the date of IPO in October 2013, the well regarded founders had invested £9.6 million in the company. 

According to Tungsten's Admission Document, the company was also advised by Disruptive Capital. Disruptive Capital was exclusively engaged by the Tungsten Board to identify and recommend investment opportunities to Tungsten. 

As well as being the CEO of Tungsten, Edmund Truell is also the Chairman of Disruptive Capital. 

It's a small world. 

In the 14 or so months since Tungsten was founded in early February 2012 to its reporting period 30 April 2013, Tungsten's administrative expenses racked up as below: 
5. ADMINISTRATIVE EXPENSES  
Directors’ salaries and social security ____________  £591,866 
Transaction costs  __________________________   £3,340,065 
Advisory fees ________________________________ £333,358 
Office accommodation ________________________  £209,333 
Irrecoverable VAT ___________________________  £133,952
Post and stationery ____________________________  £67,414
Advertising __________________________________  £69,057
Auditors remuneration _________________________  £25,000
Other expenses ______________________________  £135,010 
Administrative expenses _____________________ £4,905,055
The transaction costs relate to the aborted IPO in 2012. Other Administrative costs are £5,040,000 in relation to the fair value benefit of the LTIP Incentives.
Although the founders had put an impressive £9.6 million into Tungsten, £591,866 had been taken out in salary related costs, and a further £333,358 had been paid in advisory fees. Given that Tungsten was being exclusively advised by Disruptive Capital, it's probably fair to assume that the bulk of the advisory fees winged their way to Edmund Truell's advisory firm.

And then there's that £3,340,065 cost related to an aborted IPO. It's not altogether clear why a first stab at IPO was aborted in 2012; although the markets did have a wobble mid way through the year so perhaps the answer lies there? Nonetheless, the aborted IPO carried a hefty cost.

Ex-ante to the aborted IPO, Disruptive Capital had seemingly expected to charge the company fees following flotation. However, as the IPO was cancelled, and ex-post there was no immediate prospect of Disruptive Capital getting paid on this part of the arrangement, a new mechanism was formed in order for this to be remedied.
17.2 Arrangements with Disruptive Capital 
A number of agreements between Company and the Subsidiary on the one hand and Disruptive Capital on the other which were entered into in May 2012 in the expectation of an admission to the main market of the London Stock Exchange. These included the ability to charge fees from the point of admission to the main market. As the admission did not take place, the Directors of the Company agreed with Disruptive Capital to engage them to provide origination, recommendation, negotiation and execution of potential investments on the basis of a charge of cost to Disruptive Capital. These arrangements were reviewed regularly by the Board and the costs approved before invoices settled. 
The Company will not continue these arrangements after the Admission and will only engage with Disruptive Capital if there are services the Board consider are appropriate to obtain from them. 
An aggregate of £1,293,666 has been paid to Disruptive Capital by the Company in the 12 month period to 9 October 2013, the latest practicable date prior to the publication of this document. An additional fee of £2 million (exclusive of VAT) is payable to Disruptive Capital on Admission. 
Fortunately for Disruptive Capital, it would seem that while Tungsten paid its advisors £333,358 in the period 2 February 2012 to 30 April 2013, and absorbed £3,340,065 in (aborted) transaction fees, it paid Disruptive Capital a total £1,293,666 in the period 10 October 2012 to 9 October 2013. Then Tungsten paid out an additional £2 million to Disruptive Capital after the second (and this time successful) go at IPO.

To be fair to the management, they put their hands in their pockets for the £12 million placing in September last. Rather oddly however, while most of the board members which took part in the placing received allocations of around 97% of their prior day indications of interest, poor old Michael Spencer got cut back to 50%. Perhaps he'd had a bad night? Or perhaps he'd already dipped his quill to begin his letter of resignation? He gave notice in late December last.   

The bank

The AIM Admission Document also outlined Tungsten's ambition to acquire a bank. And it bought the UK branch of First International Bank of Israel (FIBI Bank) on 10 June 2014.

Tungsten paid £29.5 million for FIBI Bank.

As highlighted below, FIBI's banking licence was valued at £3.3 million. It had £21.4 million in current assets (mainly composed of debt instruments and other investments), and had £1.9 million in liabilities (largely customer deposits).

Goodwill of £6.8 million was attributable to the expertise of FIBI's staff, customer service capability and future opportunities. Whether FIBI's staff were - prior to acquisition - fully versed in invoice discounting, I do not know. The structure of the asset base and details in the AIM Admission Document suggests that they weren't doing much of it, if any, and that the asset base comprised mainly short term UK gilts and certificates of deposit. Further, valuing future opportunities is a fairly subjective exercise. But there you have it.

Final fair values at the acquisition date of FIBI Bank
Source: Tungsten Plc
A subsequent £7.5 million was dolled out following the acquisition of FIBI Bank, as "investment in operations."

Tungsten's original aim for the bank was seemingly to deploy its own capital through invoice discounting. This capital was targeted to stem from corporate and institutional bank deposits, this allowing Tungsten a relatively low cost of capital.

While Tungsten viewed a banking licence as bringing a range of benefits, it would appear that it also acknowledged (in its AIM Admission Document), that a full UK banking licence is not necessary for invoice discounting and that a non-bank finance company structure could be used in its place.

I would reckon that there is no serious prospect of meaningful deposits until the company can demonstrate it can monetise its asset base in order to fund its liabilities, be they operational or deposit related. But I may be over cynical in this regard.

In the event, this appears to be ringing true, as Tungsten has been largely unsuccessful in raising either debt or bank deposits and has resorted to a third party provider of capital in the form of its arrangement with Insight.

And so it looks to me, that as well as seemingly overpaying for a loss making, cash absorbing, insolvent (according to its auditor) business, that Tungsten has also likely squandered - in the short term at least - a good £37 million in purchasing and brushing up a banking licence. Although it did get c. £20 million in short term gilts and other stuff.

But all this is very much in the rear view mirror. Bulls are focused on the big bucks ready to roll in.

And so with the bank in place and all set to go on invoice discounting, this brings us back to the beginning of this post and policy rate expectations ...

Rates

According to Tungsten, their cost of funding from Insight is similar to the cost of funding its own bank is presented with. That being somewhere in the order of 3%.

A 3% cost of capital is worth bearing in mind when observing the Royal Bank of Scotland's invoice finance pricing outline:
Royal Bank of Scotland - Invoice Financing Pricing Schedule
Source: Royal Bank of Scotland
A new client is probably looking at an average cost for invoice discounting of:

  • + 1% arrangement (one off) 
  • + 1% service charge
  • + 0.9% (12 month LIBOR) +2.75% (mid-point)
This comes to 5.65%. 

Further ongoing invoice discount requests may see this drop to 4.65% as due diligence on the underlying client has already been performed/charged.

Tungsten's cost of capital is indicated to be in the order of 3%. I suspect it's a little higher than that and has been rounded down, but let's assume it's 3%.

I reckon Tungsten's average net interest margin is therefore likely to be something like:

5.65%
less 3%
= 2.65% on new clients.

And that Tungsten's average net interest margin is therefore likely to be:

4.65%
less 3%
= 1.65% on recurring clients.

Let's assume an average of 2.15%. I suspect this is generous but let's assume it.

That would suggest in order to obtain a cool £10 million in net invoicing fees to Tungsten, it needs to provide invoice discount finance to £465 million of invoices.  

Is that likely?

Bibby Financial Services claims to be the UK's leading independent invoice finance specialist. It reckons it has advanced approximately £388 million in invoice finance (both discounting and factoring) last year.
Bibby Financial Services is the UK's leading independent invoice finance specialist and a trusted provider of cashflow funding solutions to 7,000 businesses, handling annual client turnover of £4.9 billion and advancing in the region of £388 million. 

Or another way

In the AIM Admission Document, Tungsten highlights:
Euro Banking Association and Bank of England figures suggest that invoice discounting penetration rates in the UK are between 9 per cent. and 10 per cent. Suppliers to buyers on the OB10 network would typically experience an invoicing period of 45 to 60 days. On this basis, the Company has assumed that the book of discounted invoices would turn over five to six times a year. Assuming discount rates at the lower end of current market levels, this would give an average annualised discount rate of the order of between 8 and 10 per cent. per annum. As an illustrative example, assuming the UK average invoice discounting penetration rate of between 9 per cent. and 10 per cent. applied to OB10’s £19 billion UK invoice value for the financial year ended April 2013, this would equate to £1.8 billion of invoice financing being advanced over a year, with approximately £325 million advanced at any one time.
I reckon this is somewhat misleading.

Firstly, although invoice discounting penetration rates may well be 9-10% in the UK (Bibby's data above suggests 8%), it is unlikely that those 9-10% of the suppliers are seeking invoice discounting five to six times a year.

Rather, they may be doing it just once or maybe twice a year, when cash is tight. Otherwise, if utilising invoice discounting every 45 to 50 days, then as highlighted by the RBS fee structure above, this is costing them around 6% of revenue. A lot of suppliers are lucky to make 6% margins!

It might also lead some to think that as penetration is 9-10%, that Tungsten will automatically scoop this rate up on invoicing that passes across its network. Yet there are many, many invoice discount providers to choose from. In fact there are loads. The likely choice will be the invoice discount provider the supplier is already tied to/signed up/banking with (saving on any sign up cost, such as that 1% for due diligence).

I reckon it's going to take Tungsten a long time to even come close to convincing as much as 25% of those OB10 UK based suppliers that use invoice discounting to switch to Tungsten. Especially the likes of FTSE 350 suppliers which will draw the big bucks, but may use it relatively infrequently anyway and when they do prefer to use their trusted, lower cost bank.  

And applying this to Tungsten's UK example means 2.5% penetration of OB10's £19 billion UK invoice value, or £475 million of invoice financing being advanced over a year. I.e. probably £10 million in net fees.

Of course, Tungsten has already advanced £10 million in financing for the two months ended 31 December 2014, so there's £215,000 towards the haul.

Modest rate rises

I reckon Tungsten's original strategy centred on low fixed capital costs drawn from institutional and corporate deposits and/or debt. And that they would make considerable returns against the backdrop of a rising interest rate environment, seeing the capital cost rise but their invoice discount rates rise rapidly higher.

And so this picture of modest rate rises over the next few years and protracted low rates thereafter probably presents a dilemma to what looks to me like pie in the sky market forecasts.

Bank of England - policy rate expectations
Source: Bloomberg
I remain short Tungsten.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Tuesday, 17 February 2015

Tungsten (TUNG) ... it's a small world

Tuesday 17th February 2015

I've sold short in Tungsten (TUNG LN) at 208p/shr. 


Tungsten - share price
Source: Bloomberg
Tungsten provides an e-Invoicing network, allowing for automated invoice to payment services across a range of markets, legal and tax jurisdictions. It describes its Tungsten Network as connecting ... 
"... many of the World's largest companies and government agencies to their suppliers around the globe."
It also indicates that it: 
"... serves 55% of the Fortune 500 and 67% of the FTSE 100, enabling customers to send and receive compliant invoices."
Big numbers are highlighted in its 2014 annual report:
"The global market for receivables financing in the form of factoring was over €2.2tr in 2013, an increase of 4.6% from 2012. Of this, €1.2tr was in the EU, including €300bn in the UK. Factoring excludes other forms of receivables financing therefore the total addressable market for supply chain financing globally is in excess of €2.2tr."
Tungsten 2014 Annual Report - "The global opportunity"
Source: Tungsten Plc
Six months or so later, by the time of the group's 2015 interims (to 31 October 2014), Tungsten's investors must have been positively purring. Its total addressable market was now just 12% of a wider invoice market of $23.3 trillion.

Tungsten addressable market
Source: Tungsten Plc Interim statement to 31 October 2014 
Assuming this is all correct, the receivables financing market is big. And so any investor would no doubt reckon that as Tungsten is involved in it, that Tungsten shares are a Buy. Indeed, Tungsten Network has lofty ambitions which centre upon:
"We believe we can grow volumes to our $1,000 billion [in annual invoice flow] goal just by rolling out e-Invoicing to our current buyers globally and fully penetrating their supply base."
And so it would seem that Tungsten is targeting a 40% share of the global e-Invoicing market. One day this may well happen, but I do not see it as a serious prospect any time soon. 

Indeed, consensus sales projections were cut following the release of the interims on 14 January 2015, by c. 37% and c. 21% for 2016 and 2017 respectively. 

Tungsten - Consensus revenue projections
Source: Bloomberg
Downgrades to EBITDA forecasts were greater still; by c. 91% and c. 43% for 2016 and 2017 respectively. 
Tungsten - Consensus EBITDA projections
Source: Bloomberg
I reckon there could well be further downgrades to come. At the very least, this does not strike me as a company about to soak up 40% of the global e-Invoicing market any time soon. 

Tungsten arrived on the AIM market in October 2013, raising £160 million or £149 million net of costs. Pursuant to this it used £73 million in cash and an additional £28 million of equity (£101 million total) to purchase OB10 (now Tungsten Network), also in October 2013. 

On 10 June 2014, the group acquired FIBI Bank (renamed to Tungsten Bank plc) for £29.5 million. It subsequently spent a further £7.5 million as investment in operations. 

On 3 September 2014, the group raised a further £12 million at a price of 340p per share via a placing. 

In the 18 months to 31 October 2014, I estimate that Tungsten has reported: 
  • £24.2 million in operating cash outflows; 
  • £27.2 million in free cash outflows;
  • £106.6 million in investing cash outflows; 
and received 
  • £156 million in financing cash inflows.
Its net cash position declined from £62.6 million as at 30 April 2014, to £27.7 million as at 31 October 2014. Whilst it is investing heavily, it is also burning through considerable operating related cash. Consensus forecasts project that net cash will have declined to £4.3 million by 30 April 2015. On that basis, this would imply a further £23.4 million cash burn in H2 2015. 

As far as I can tell, the group has no formal debt facilities. A potential debt structure was alluded to on 14 July 2014; Tungsten explores debt funding opportunities. At that time Tungsten suggested that:
"Tungsten Network Finance has progressed discussions with a range of third parties (including Blackstone Tactical Opportunities) to explore additional sources of capital across geographies and jurisdiction that Tungsten operates in. This includes considering the options open to the Company to add debt to the structure as the Company creates a more mature and conventional balance sheet for Tungsten's business as Tungsten Network Finance grows."
A month later, further detail emerged on 15 August 2014; Update on debt financing. At this time, discussions with Blackstone Tactical Opportunities were seemingly no longer ongoing, but talks had opened up with the British Business Bank no less:
"Today, Tungsten is announcing that it made an application to the British Business Bank for a potential investment of up to £50 million in matched funding in support of a debt placement by Tungsten Corporation plc."
As highlighted further up, a quick £12 million was raised via equity a few weeks after this announcement. 

As far as I can tell, there has been no mention of either Blackstone Tactical Opportunities or the British Investment Bank in the six or so months since they were highlighted as talking to them. 

However, Tungsten announced on 22 December 2014, that it had struck a deal with Insight Investment Management Ltd; Tungsten agrees financing arrangement with Insight. By this stage, debt was seemingly no longer required:
"The funding to be provided under this multi-year agreement [with Insight] is expected to total several billion pounds. This financing, together with the existing capital within Tungsten Bank, will provide the Company with all the required funding at this stage for its invoice finance proposition, so the Company no longer needs to pursue alternative financing options, such as a bond issue." 
This is all very well and good, but the immediate outlook for Tungsten is that its financial projections have been downgraded, it's burning through a lot of cash, PwC has to sign off its books during the next four months or so, and therefore be certain that it has sufficient resources to meet its obligations. My reckoning is that a sizeable cash call is needed to persuade them to do the signing. 

So I shorted at 208p/shr.

And another thing ...

The group's interims to 31 October 2014 highlighted a £719,000 cash outflow as "loans to employees." I can find no mention to explain this further in the notes. If anyone can shed any light on what these loans were for, then I'm all ears.

And one other thing ...

That Tungsten is targeting c. 40% of the global e-Invoicing market is admirable, but seemingly there are quite a few others also targeting this market. Direct Insite is one such other (DIRI US).

By all accounts, Direct Insite, also has sizeable partners such as IBM, HP, Siemens, Royal Dutch Shell.

In fact whereas Tungsten suggests that it serves "55% of the Fortune 500 and 67% of the FTSE 100" ... 

... this compares to, Direct Insite, which claims to provide "electronic invoices to 75 percent of the Fortune 1000 and 100 percent of the Financial Times 100 corporations representing over $80 billion in invoice value each year."

It's a small world.  

Further, Direct Insite facilitates "$160 billion worth of transactions annually between more than 375,000 companies worldwide."

Direct Insite's $160 billion of transactions and 375,000 partners compares to Tungsten's £94 billion of e-Invoices in the 12 months to 31 December 2014, and 174,000 suppliers. 

The principal area where I found Direct Insite differed is in its valuation. Direct Insite is capitalised at just $9.8 million as compared to Tungsten's £217 million capitalisation. 

Direct Insite (DIRI US) - share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Monday, 9 February 2015

Ashtead (AHT) ... United Rentals (URI) downgrades appear ominous

9th February 2015

Pursuant to a series of downgrades over recent months to United Rentals (URI US, mkt cap $8.7 billion), I shorted a little Ashtead (AHT LN, mkt cap £5.5 billion). After all, one would imagine that those closer to home know the score.

United Rentals and Ashtead consensus 2016 sales forecast
Source: Bloomberg
United Rentals and Ashtead consensus 2016 EBITDA forecast
Source: Bloomberg
United Rentals and Ashtead consensus 2016 EPS forecast
Source: Bloomberg
United Rentals and Ashtead consensus forward P/E
Source: Bloomberg
United Rentals and Ashtead longer term share price performance,
currency adjusted to Sterling

Source: Bloomberg
United Rentals and Ashtead shorter term share price performance,
currency adjusted to Sterling

Source: Bloomberg
Ashtead six month share price performance
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Wednesday, 4 February 2015

Swift Transportation (SWFT) ... a touch of the chocolate orange?

Wednesday 4th February 2015

London’s AIM has witnessed its share of odd dealings over the past year. Senior controllers of a few AIM quoted companies have dabbled in somewhat esoteric and certainly slightly crafty, sale and repurchase arrangements. The arch practitioner of this scheme was, Mr Rob Terry, former Chairman of Quindell Plc (QPP LN). He initially led market participants to believe that he’d pledged some of his Quindell stock as collateral to an outfit called Equities First Holdings (EFH) in exchange for a wodge of cash that he intended to use to buy further Quindell shares. 

In the event, Mr Terry bought a few shares but nowhere near as much in value as the cash amount which was realised in the lending of collateral bit. Mr Terry then withdrew on any further dealings with EFH and as soon as he stepped down from QPP’s board, dumped sold a load more of his stock into the market.

By all accounts, Optimal Payments (OPAY LN), IGAS Energy (IGAS LN), IQE (IQE LN) and Cloudbuy (CBUY LN) have also reported board members as having had dealings with Equities First Holdings during 2014.

Dealings of this nature are not exactly straightforward and their unorthodoxy may be employed for a reason; you may like two guesses as to what that reason may be. So I looked further afield for other practitioners of the EFH arrangement. This search threw out Swift Transportation (SWFT US), which is currently capitalised at $3.7 billion. 


Swift Transportation (SWFT US) share price, $
Source: Bloomberg

Swift Transportation

I have sold short Swift. 

Swift is a North American trucking company and describes itself in the opening of its overview section from its 2013 10-K as below:
Overview 
We are a multi-faceted transportation services company and operate the largest fleet of truckload equipment in North America. As of December 31, 2013, we operated a tractor fleet of approximately 18,000 units comprised of 12,800 tractors driven by company drivers and 5,200 owner-operator tractors, a fleet of 57,300 trailers, and 8,700 intermodal containers from 40 major terminals positioned near major freight centers and traffic lanes in the United States and Mexico. During 2013, our tractors covered 2.1 billion miles for shippers throughout North America. 2013 was our most profitable year with record operating revenue of $4.1 billion and operating income of $357.0 million. We use sophisticated technologies and systems that contribute to asset productivity, operating efficiency, customer satisfaction, and safety. We believe the depth of our fleet capacity, the breadth of our terminal network, our commitment to customer service, and our extensive suite of services provide us and our customers with significant advantages.
Swift was founded by Mr Jerry Moyes and his family in 1966. The company went public in 1990 and back to being private in May 2007, through a management buyout, reportedly for $2,137 million. Its private life didn't last long. It came back to the public market in 2010. Mr Jerry Moyes remains Swift's long standing CEO. 

At the time of the 2010 float, Mr Moyes and the Moyes Affiliates, entered into a private placement of $262.3 million of mandatory common exchange securities (METS), by way of a newly set-up and unaffiliated trust, usefully called the "Trust". This is highlighted from Swift's S1A form ahead of its 2010 IPO below: 
Stockholder Offering 
Concurrently with our initial public offering, Jerry Moyes and the Moyes Affiliates (as defined herein) will be involved in a private placement by a newly formed, unaffiliated trust, or the Trust, of $300 million of its mandatory common exchange securities (or $345 million of its mandatory common exchange securities if the initial purchasers exercise their option to purchase additional securities in full), herein referred to as the “Stockholder Offering.” Subject to certain exceptions, the Trust’s securities will be exchangeable into shares of our Class A common stock or alternatively settled in cash equal to the value of those shares of Class A common stock three years following the closing date of the Stockholder Offering. We will not receive any proceeds from the Stockholder Offering, and this offering of Class A common stock by us is not conditioned upon the completion of the Stockholder Offering, although the completion of the Stockholder Offering is conditioned on the satisfaction of all conditions to closing this offering. Nothing in this prospectus should be construed as an offer to sell or a solicitation of an offer to buy any of the Trust’s securities in the Stockholder Offering.
What became of this arrangement is further elaborated upon towards the back of Swift's 2013 10 K within Note 22. Related party transactions section: 
Concurrently with the Company’s IPO in December 2010, Mr. Moyes and certain Moyes Affiliates completed a private placement by an unaffiliated special purpose trust (the “2010 Trust”) of $262.3 million of Trust Issued Mandatory Common Exchange Securities (“2010 METS”) which was required to be settled with up to 23,846,364 shares of the Company’s Class A common stock, or cash, on December 31, 2013. 
On December 31, 2013, Mr. Moyes and his Affiliates chose to deliver 19.5 million shares of Class A common stock to settle the 2010 METS facility which were obtained by entering into a variable prepaid forward (“VPF”) contract on October 29, 2013 with Citibank, N.A. (“Citibank”). 
To fulfill the VPF contract, Citibank borrowed 19.5 million shares of Class A common stock from the public market. These shares were sold to Mr. Moyes and certain of his affiliates, through their ownership of M Capital II, and were held as collateral by Citibank for a new loan that facilitated the purchase of the shares. On December 31, 2013, Citibank delivered the 19.5 million Class A shares to the 2010 Trust in exchange for the 23.8 million shares of Class B common stock held by the 2010 Trust as collateral. The holders of the 2010 METS received their respective portion of 19.5 million shares of Class A common stock as settlement of the facility. Citibank now holds the 23.8 million shares of Class B common stock transferred from the 2010 Trust and an additional 2.15 million shares of Class B common stock contributed directly by Mr. Moyes and his Affiliates as collateral for VPF contract. 
Under the VPF contract, M Capital II is obligated to deliver to Citibank a variable amount of stock or cash during two twenty trading day periods beginning on January 4, 2016, and July 5, 2016, respectively. Although M Capital II may settle its obligations to Citibank in cash, any or all of the collateralized shares could be converted into Class A common stock and delivered on such dates to settle such obligations. If settled in cash, we believe Citibank would likely purchase Class A shares on the open market to settle its short position. If settled in shares, we believe Citibank would likely use the shares to settle its position. The 2013 VPF contract allows Mr. Moyes and his Affiliates to retain the same number of shares and voting percentage as they had prior to the inception of the 2013 VPF contract and the settlement of the 2010 METS facility. In addition, Mr. Moyesand his Affiliates are able to participate in future price appreciation of the Company’s common stock.
Rather than a straightforward private placement, whereby the Trust purchased its securities in exchange for cash, this appears to me to have been closer to some sort of sale and repurchase agreement. The terms appear to indicate that cash was received by Mr Moyes and his affiliates and in return, Class B common stock was pledged as collateral. Three years later, the cash was not returned but instead Class A common stock was delivered in settlement.   

As of December 2013, Swift had 88,402,991 shares of Class A common stock and 52,441,938 shares of Class B common stock outstanding, of which the Moyes Affiliates held 3,069,699 shares of Class A and all the shares of Class B common stock. Further, the holders of the Class A common stock are entitled to one vote per share, while the holders of the Class B common stock are entitled to two votes per share. The Class B common stock may be converted into Class A common stock on a one-for-one basis at the election of the holders or automatically upon transfer to another party. 

Following the private placement with the Trust, the Class B common stock was then used as collateral again, this time within a variable prepaid forward (VFP) contract in 2013 (see below). 

A VPF is traditionally an agreement whereby the owner of shares pledges transfer of title at a future date, and in return receives a high proportion of the value (typically 75% to 90%) of the shares in cash at the time of entering the VPF. The VPF is usually entered into with a brokerage firm or investment bank, in this case Citibank. If the stock has risen in value by the time the ownership of the stock is due to be officially transferred from the former owner (in this case M Capital II) to the new owner (in this case Citibank), then the former owner receives a portion of the gains. If the stock declines, then the brokerage firm or investment bank wears the loss. However, one would presume that the counterparty has sold short the stock to offset any risk of loss.    
In addition to the shares that are allowed to be pledged on margin pursuant to our second amended and restated securities trading policy, on October 29, 2013, an affiliate of Mr. Moyes (“M Capital II”) entered into a variable prepaid forward contract (the “VPF Contract”) with Citibank, N.A. (“Citibank”) that was intended to facilitate settlement of the mandatory common exchange securities (“2010 METS”) issued in 2010 by an unaffiliated trust concurrently with the Company’s IPO, which was required to be settled with shares of the Company’s Class A common stock, or cash, on December 31, 2013. This transaction (the “VPF Transaction”) effectively replaced the 2010 METS with the VPF Contract and allowed the parties to the 2010 METS transaction to satisfy their obligations under the 2010 METS (as contemplated by their terms) without reducing the number of shares owned by these parties. The VPF Transaction will also allow Mr. Moyes and certain of his affiliates, through their ownership of M Capital II, to participate in future price appreciation of the Company’s Common Stock, and retain the voting power of the shares collateralized to secure the VPF Contract as described below.
Under the VPF Contract, M Capital II is obligated to deliver to Citibank a variable amount of stock or cash during two twenty trading day periods beginning on January 4, 2016, and July 5, 2016, respectively. In connection with the VPF Transaction, 25,994,016 shares of Class B Common Stock are collateralized by Citibank to secure M Capital II’s obligations under the VPF Contract. As these shares are not pledged to secure a loan on margin, they are not subject to the current 20% limitation discussed above. Although M Capital II may settle its obligations to Citibank in cash, any or all of the collateralized shares could be converted into Class A common stock and delivered on such dates to settle such obligations. Such transfers of our common stock, or the perception that they may occur, may have an adverse effect on the trading price of our Class A common stock and may create conflicts of interests for Mr. Moyes.   
So thus far, it would seem that Mr Moyes and his affiliates have pledged 25,994,016 shares of his Class B common stock, or 49.6% of his holding, as collateral as at 31 December 2013. 

And then there appears to be more. 

Swift also highlights (see below) that Mr Moyes had already pledged a portion of his Class B common stock, seemingly having borrowed against and pledged 12,023,343 shares of Class B common stock in 2011, as collateral for a personal loan. 

This represented 22.9% of the Class B common stock outstanding (all reportedly held by Moyes Affiliates) or 21.7% of Mr Moyes and Affiliates total holding (Class A and B) as at 31 December 2013. 

Presumably this then means that 72.5% of Mr Moyes and Affiliates holdings of Class B common stock had been pledged as collateral; 49.6% from above and 22.9%? 

Then during 2012, Moyes Affiliates converted an additional 1,068,224 (or 2.0% of outstanding at the time) Class B common stock into Class A common stock and sold this, along with 3,763,654 of existing Class A common stock (an additional 4,831,878 in total), to a counter-party pursuant to a Sale and Repurchase agreement.
Mr. Moyes has borrowed against and pledged a portion of his Class B common stock, which may cause his interests to conflict with the interests of our other stockholders and may adversely affect the trading price of our Class A Common Stock.Pursuant to our second amended and restated securities trading policy, our board of directors have limited the right of employees or directors, including Mr. Moyes and the Moyes Affiliates, to pledge more than 20% of their family holdings to secure margin loans through June 30, 2014. Effective July 1, 2014, the limitation on margin pledging is reduced to 15% of their family holdings and effective July 1, 2015, the limitation on margin pledging is reduced to 10% of holdings. In July 2011 and December 2011, Cactus Holding Company II, LLC, an entity controlled by Mr. Moyes, pledged on margin 12,023,343 shares of Class B common stock as collateral for personal loan arrangements entered into by Cactus Holding Company II, LLC and relating to Mr. Moyes. In connection with the December 2011 loan and margin pledge of Class B shares as collateral, Cactus Holding Company II, LLC converted 6,553,253 of the 12,023,343 pledged shares of Class B common stock into shares of Class A common stock on a one-for-one basis. Throughout 2012, the Moyes Affiliates converted an additional 1,068,224 shares of Class B common stock to Class A common stock and sold 4,831,878 of these pledged Class A shares to a counter-party pursuant to a Sale and Repurchase Agreement with a full recourse obligation to repurchase the securities at the same price on the fourth
anniversary of sale.
 These margin pledges could cause Mr. Moyes’ interest to conflict with the interests of our other stockholders and could result in the future sale of such shares. Such sales could adversely affect the trading price or otherwise disrupt the market for our Class A common stock.
A few years later in May 2014, Cactus Holding II (which is reportedly a business for "aiding in Mr and Mrs Moyes' asset management needs"), advised the counterparty to the 2012 Sale and Repurchase agreement, that it wished to exercise its right to repurchase the 4,831,878 shares of Class A common stock, as detailed in Swift's schedule 13D notice from May 2013. Concurrently a new Sale and Repurchase agreement was seemingly entered with Citigroup:
On May 30, 2014, Cactus Holding II delivered irrevocable notice to the counterparty in the Sale and Repurchase Agreement that Cactus Holding II was exercising its right to repurchase the 4,831,878 shares of Class A Common Stock sold pursuant to such agreement. Cactus Holding II simultaneously delivered $34,076,274.63 to the counterparty in satisfaction of the repurchase price (the “Repurchase Amount”). Cactus Holding II obtained the Repurchase Amount by entering into the New Sale and Repurchase Agreement with Citigroup Global Markets Limited (“CGML”), represented by Citigroup Global Markets Inc. as its agent (“CGMI”), pursuant to which Cactus Holding II sold 5,311,400 shares of Class A Common Stock and 1,450,000 shares of Class B Common Stock to CGML (the “Sold Shares”). The Repurchase Amount was paid in partial satisfaction of the purchase price under the New Sale and Repurchase Agreement. The balance of the purchase price, which is $50,407,418.37 (together, with the Repurchase Amount, the “Purchase Price”), will be delivered to Cactus Holding II following the delivery of the 4,831,878 shares of Class A Common Stock from the counterparty in the Sale and Repurchase Agreement to CGML. Cactus Holding II has an obligation to repurchase the Sold Shares for an amount equal to the Purchase Price on the second anniversary of the transaction. Cactus Holding II is further obligated to pay an annual interest-equivalent of 3.4% for the first year of the transaction’s term and 3.0% thereafter. Cactus Holding II has the option to repurchase the Sold Shares at any time during the two year term for an amount equal to the Purchase Price. This transaction is intended to be treated as a loan for tax purposes pursuant to Section 1058 of the Internal Revenue Code.    
The purposes given in Swift's schedule 13D notice from May 2014 for - on the face of it, what appears to me to be a lot of jiggery pokery Sale and Repurchase type agreements, range from estate planning, to financial planning, to achieving greater liquidity and to secure the VPF contract. 

One would imagine that greater liquidity would come about only if the shares which were pledged had been sold on, or the anticipated receipt were sold short, into the market by the counterparty in the VPF or Sale and Repurchase agreements. 

So by now, assuming you have managed to keep up with all this, it would seem that a large portion of Mr Moyes and his affiliates holdings in Swift have been pledged as collateral. 


Equities First Holdings (EFH)

And Equities First Holdings (EFH) seems to crop up amongst all this, as a counterparty.  


Exhibit 9 to May 2014's Schedule 13D notice indicates that the underlying counterparty to the 2012 Sale and Repurchase agreement would appear to be Equities First Holdings. I say appears when, it is actually quite clear to me that it is the underlying counterparty as it says "FBO: Equities First Holdings", i.e. For Benefit Of: Equities First Holdings.    
Page 4 of Exhibit 9 Securities and Repurchase Agreement dated May 30, 2014
between Cactus Holding Company II, LLC, and Citigroup Global Markets Limited,
represented by Citigroup Global Markets Inc. as its agent
Source: Swift Transportation
Who the underlying counterparty to the new Sale and Repurchase agreement from May 2014 was, is as far as I can tell unknown. Citigroup just states "Account to be provided". Perhaps it was EFH again?   
Page 5 of Exhibit 9 Securities and Repurchase Agreement dated May 30, 2014
between Cactus Holding Company II, LLC, and Citigroup Global Markets Limited,
represented by Citigroup Global Markets Inc. as its agent
Source: Swift Transportation
Whether any of these Sale and Repurchase agreements or Variable Prepaid Forward Contracts matter in the grand scheme of things I do not know. I reckon the use of them shows a remarkably cavalier attitude to one's shareholding, especially for one in a position of control. And while the practice of Sale and Repurchase has been frowned upon on London's AIM, it may well be de rigueur over in the US.  


Ownership, control, but no formal contract?

What is somewhat odd, is that despite Mr Moyes, bearing the title of CEO, retaining c. 54.4% of the voting power of outstanding stock as at 30 May 2014, and entering into VPF and Sale and Repurchase agreements, is that he does not actually appear to be formerly employed by Swift. Indeed, none of the senior management appear to be: 
We are dependent on certain personnel that are of key importance to the management of our business and operations. 
Our success depends on the continuing services of our founder, and Chief Executive Officer, Mr. Moyes. We currently do not have an employment agreement with Mr. Moyes. We believe that Mr. Moyes possesses valuable knowledge about the trucking industry and that his knowledge and relationships with our key customers and vendors would be very difficult to replicate.  
In addition, many of our other executive officers are of key importance to the management of our business and operations, including our President, Richard Stocking, and our Chief Financial Officer, Virginia Henkels. We currently do not have employment agreements with any of our management. Our future success depends on our ability to retain our executive officers and other capable managers. Any unplanned turnover or our failure to develop an adequate succession plan for our leadership positions could deplete our institutional knowledge base and erode our competitive advantage. Although we believe we could replace key personnel given adequate prior notice, the unexpected departure of key executive officers could cause substantial disruption to our business and operations. In addition, even if we are able to continue to retain and recruit talented personnel, we may not be able to do so without incurring substantial costs.

Past events

All that aside, a bit more digging and it turns out there's history to Swift and Mr Jerry Moyes.

It would appear that the United Food and Commercial Workers (UFCW) Local 1262 Pension Fund, as an investor in Swift Transportation in Q4 2003 to Q3 2004, brought a "Consolidated Amended Class Action Complaint" against Mr Jerry Moyes, Swift's Chairman and CEO in 2004. I should stress that this complaint was dismissed in 2006. Nonetheless, in my mind, the complaint (although it was more complaints than complaint) is still noteworthy.

2004 Class Action Complaint by
United Food and Commercial Workers Local 1262 Pension Fund
against Mr Jerry Moyes
Source: Stanford Law School Securities Class Action Clearinghouse
The plaintiff complains about all sorts, such as:
Unbeknownst to investors, Swift's results had primarily been achieved by employing under-qualified drivers without sufficient training and by allowing the Company's drivers to violate applicable federal regulations regarding the maximum hours that could be spent driving. 
Swift under-reported its accident rates and engaged in a widespread campaign of instructing its drivers to falsify their log books (these books contained the information regarding hours driven by the drivers each day).
It also alleged:
False Financial Statements Issued During The Class Period 
During the Class Period, Swift and the Individual Defendants represented that the Company's quarterly and year-end financial statements were prepared in accordance with generally accepted accounting principles ("GAAP"), which are recognized by the accounting profession and the SEC as the uniform rules, conventions and procedures necessary to define accepted accounting practice at a pa rticular time. In fact, the Company used improper accounting practices in violation of GAAP and SEC reporting requirements to falsely inflate its assets, stockholders' equity and earnings during the Class Period. 
Swift's materially false and misleading statements resulted from a series of deliberate senior management decisions designed to conceal the truth regarding the Company's actual operating results. Specifically, as discussed in 72-85 below, defendants caused the Company to violate GAAP by understating its insurance and claims expense and improperly depreciating its service equipment.
And further:
While Moyes could have liquidated his stock holdings in Swift to cover his obligations to the Westgate complex and the Coyotes, any diminution in his control over the Company would have greatly impacted his financial position, as many of his other companies did a great deal of business with Swift. According to Swift's proxy statement filed April 13, 2004, "[t]he largest single fleet operator with whom Swift does business is Interstate Equipment Leasing, Inc . ("IEL") a corporation wholly-owned by Jerry Moyes." 
Swift's proxy statement also describes Swift's relationships with Central Freight Lines, Inc ., a company 40% owned by Moyes, and with Central Refrigerated Services Inc ., SME Industries, Inc ., Swift Aviation Services, Inc ., and Swift Air, Inc ., all private companies in which Moyes was the principal stockholder. Swift's dealings with Moyes's companies were so pervasive that on May 22, 2003, the International Brotherhood of Teamsters published a report that listed all of the companies owned by Moyes and asked whether Swift was "run for the benefit of the shareholders or related outside parties. " 
There was more, that also included a complaint that Swift's Board of Directors instructed its management to buy back stock and the allegation that this was to protect Mr Jerry Moyes from facing margin calls on pledged shares. 

I would remind the reader again that this complaint was entirely dismissed in 2006. And that was the end of that. 

However, any rest from the axe grinders appears short lived. A new complaint seemingly began again in September 2005, this time raised by no less than the SEC. Although this was subsequently settled. 

Indeed Swift's 2010 S1A notice highlights in its Management section on page 121 that: 
In September 2005, the SEC filed a complaint in federal court in Arizona alleging that Mr. Moyes purchased an aggregate of 187,000 shares of Swift Transportation stock in May 2004 while he was aware of material non-public information. Mr. Moyes timely filed the required reports of such trades with the SEC, and voluntarily escrowed funds equal to his putative profits into a trust established by the company. After conducting an independent investigation of such purchases and certain other repurchases made by Swift Transportation that year at Mr. Moyes’ direction under its repurchase program, Swift instituted a stricter insider trading policy and a pre-clearance process for all trades made by insiders. Mr. Moyes stepped down as President in November 2004 and as Chief Executive Officer in October 2005. Mr. Moyes agreed, without admitting or denying any claims, to settle the SEC investigation and to the entry of a decree permanently enjoining him from violating securities laws, and paid approximately $1.5 million in disgorgement, prejudgment interest, and penalties.   
And so again, that was that. 

All the jiggery pokery of VPF and Sale and Repurchase agreements, and past complaints aside, what has been going on with the business in recent times?

More recent events

Yours for $225 million ...
In August 2013, Swift acquired a refrigerated transport company called, Central Refrigerated Transportation, or Central. Central was purchased in a cash transaction valued at $225.0 million. Of this, Swift paid approximately $189.0 million in cash to the stockholders of Central and assumed approximately $36.0 million in capital lease obligations:
Acquisition of Central Refrigerated
On August 6, 2013, we entered into a Stock Purchase Agreement, or SPA, with the stockholders of Central Refrigerated Transportation, Inc., or Central, pursuant to which we acquired all of the outstanding capital stock of Central, or the Acquisition, in a cash transaction valued at $225.0 million. We paid approximately $189.0 million in cash to the stockholders of Central and assumed approximately $36.0 million of capital lease obligations and other debt. Cash consideration was primarily funded from borrowings under our existing credit facilities. As of December 31, 2013, we have repaid approximately $68.0 million of these borrowings. Pursuant to the SPA, within 90 days after the closing date, the Company prepared a final closing statement setting forth the finalestimate of the purchase price. As a result of this process and calculation, the purchase price was increased by $2.4 million.
Central is a premium service truckload carrier specializing in temperature-controlled freight transportation and was the fifth-largest provider of temperature-controlled truckload services in the U.S. With the addition of Central to our dedicated temperature- controlled business, Swift is now the second largest temperature-controlled truckload provider in the U.S.
Jerry Moyes, our Chief Executive Officer and controlling stockholder, was the principal owner of Central. Given Mr. Moyes’ interests in the temperature-controlled truckload industry, our board of directors established a Special Committee comprised solely of independent and disinterested directors in May of 2011 to evaluate Swift’s expansion of its temperature-controlled operations. The Special Committee evaluated alternative business opportunities, including organic growth and various acquisition targets, and negotiated the transaction contemplated by the SPA, with the assistance of its independent financial advisors. Upon the unanimous recommendation of the Special Committee, the Acquisition was approved by our board of directors (with Mr. Moyes not participating in the vote).
Given Mr. Moyes' controlling interest in both Swift and Central, the Acquisition was accounted for using the guidance for transactions between entities under common control as described in Accounting Standard Codification, or ASC, Topic 805 - "Business Combinations", in which we recognized the assets and liabilities of Central at their carrying amounts at the date of acquisition. Additionally, as a result of the common control accounting, the historical results of Central have been combined with our historical results and our financial statements have been recast to reflect the accounts of Central as if it had been consolidated for all previous periods presented.
What you may also notice is that Mr Moyes, the Chief Executive and controlling stockholder of Swift, was also the principal owner of Central; hence no doubt the main recipient of the $189.0 million in cash.     

As one would expect, the transaction was not approved by Mr Moyes himself, but instead a “Special Committee” was established comprised solely of independent and disinterested directors. This Special Committee unanimously recommended the transaction and so Swift’s board (ex Mr Moyes) approved it.

Of course, while through the sale of Central, Mr Moyes, took receipt of a cheque in the tens of millions, by default, he as the controlling shareholder of Swift, ex-post remained also that of Central. 

As highlighted above, Central is a trucking company. I would imagine that trucking companies are relatively capital intensive. And so outlays on capex are probably reasonably large. In any given year, you probably sell a few trucks for a residual value, but you buy a few more to replace those sold. And if you're growing, then you probably buy more than you sold. This would appear to be the case for Swift. 

As highlighted below, in 2013, Swift spent $318 million on capex, and received $119 million in proceeds from the sale of property, plant and equipment. 

Its net expenditure on these two lines was $199 million. 

This was up from $171 million in 2012, and $172 million in 2011.  


Swift Transportation Statement of operating and investing cash flows
Source: Swift 2013 10K
Further down in Swift's 2013 10K we see that by contrast, Central Refrigerated had net positive cash inflows from investing activities in 2012. 

Central's cash flows are only provided at a headline number, but nonetheless, while Swift reported net investing cash outflows of $172 million in 2012 and $150 million in 2011, Central achieved a net investing cash inflow of $3 million in 2012 and broadly flat in 2011. 

I find that to be a peculiar out turn for a capital intensive business, especially one where operating income grew by 86% in the year.    
Headline P&L and cash flow figures for 2011-12 by Swift and Central Refrigerated
Source: Swift 2013K
In the run up to Central's acquisition its revenue was rocking along, growing at high single to low double digit rates. More recently, not so much. 

Central Refrigerated Segment (CRS) reported a 12.8% YOY decline in revenue x fuel surcharge revenue (FSR) in Q4 2014, when Swift updated the market with its Q4 2014 performance last week.

Central's revenue drop was attributed in part to:
Despite these many accomplishments, we did experience some disappointments in 2014, including severe winter weather throughout the first quarter, a challenging driver market and our slow reaction to address driver pay, underestimating the cultural and operational differences between Swift and Central Refrigerated and the disruption caused by the systems integration, growing pains and start-up costs in our Dedicated segment, and discouraging claims trends. As discussed previously, we are not sitting idly by and letting these disappointments continue without action. We have implemented plans to improve these situations and will continue to do so in 2015.
However, one would have imagined that as Central's former owner and subsequent controller had such intimate knowledge of both Swift and Central, that cultural and operational differences would have been relatively well understood.  

That unravelled quicker than expected ...

In early 2012, Swift purchased an equity stake in Swift Power Services (SPS) for $500,000 and loaned SPS $7.5 million. Seemingly, SPS didn't even manage to make it through a year before it defaulted on its loan. 
Note 6. Equity Investment and Note Receivable – Swift Power Services, LLC 
In February 2012, the Company contributed approximately $500 thousand to Swift Power Services, LLC (“SPS”) in return for 49.95% ownership interest. SPS was formed in 2012 for the purpose of acquiring the assets and business of three trucking companies engaged in bulk transporting of water, oil, liquids and pipe to various oil companies drilling in the Bakken shale in northwestern North Dakota. The Company accounts for its interest in SPS using the equity method. 
Additionally, in February 2012, the Company loaned $7.5 million to SPS pursuant to a secured promissory note, which is secured by substantially all of the assets of SPS. SPS failed to make its first scheduled principal payment and quarterly interest payment to the Company on December 31, 2012, which resulted in a $6.0 million pre-tax impairment charge in the fourth quarter of 2012. As a result, this note had been placed on nonaccrual status since December 31, 2012. During the years ended December 31, 2013 and 2012, the Company recorded equity losses of $277 thousand and $1.0 million, respectively, in other expense in the Company’s consolidated statements of operations related to its note receivable and investment in SPS, respectively. As a result of the accumulated equity losses and the impairment recorded during the year ended December 31, 2012, the net carrying value of the investment in SPS is zero as of December 31, 2013 and 2012, and the net carrying value of the note receivable is zero and $1.0 million as of December 31, 2013 and 2012, respectively.   
SPS was subsequently disclosed to have defaulted due to: 
Swift Power Services, LLC ("SPS"), an entity in which we own a minority interest and hold a secured promissory note, failed to make its first scheduled principal payment and quarterly interest payment to us on December 31, 2012 due to a decline in its financial performance resulting from a legal dispute with the former owners and its primary customer. This caused us to evaluate the secured promissory note due from SPS for impairment, which resulted in a $6.0 million pre-tax adjustment that was recorded in Impairments of non-operational assets in the fourth quarter of 2012.
This is by no means a huge loss but does seem somewhat odd that the loss occurred in such a short order. 

And another thing ...

Swift utilises a facility whereby it securitizes a portion of its accounts receivables. While this practice is not altogether unusual, I couldn't help notice that the amount securitized has been rising over recent years as a percentage of the outright net accounts receivable balance. 

In 2013, the group appeared to have securitized $264,000 of its net accounts receivable balance of $481,436; or 63.1%. 

In 2014, the group appears to have securitized $334,000 of its net accounts receivable balance of $478,999; or 69.7%. 

I would mind your eye on that. 


Note 10. Accounts Receivable Securitization
Source: Swift 2013 10 K




Swift Transportation - Net accounts receivable balance and balance securitized, $m, %
Source: Swift Transportation 10 K's and Q4 2014 letter to shareholders
Swift Transportation - Net accounts receivable balance and balance securitized, $m, %
Source: Swift Transportation 10 K's and Q4 2014 letter to shareholders

I have sold short Swift.

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