Not sure if anyone has read the proxy statement, but it's infuriating.
First off, BDO provided a fairness opinion, and in my opinion, a poor analysis. The comps they use are weak and do not include the one best comparable available, Bisalloy, which trades at a 5.0x trailing EBITDA multiple. Or how about SSAB, which trades at 6.0x trailing EBITDA.
Second, they use this concept of "normalized EBITDA" to apply multiples to. Then, they are applying a 3.5x to 4.5x multiple??? How in the world can you support that multiple? Even the comparable companies they use all trade above those levels... And are they "normalizing" the comparable company EBITDA's to determine comparable multiples? Doubtful
What is the normalized level of EBITDA, you ask? $6.4 million.
What is the average level of EBITDA the company has generated over the last 10 years? $8 million (This adds back the royalty expense they had prior to January 1, 2020).
How do you get a "normalized" EBITDA that is 20% LOWER than the average EBITDA over the last 10 years??? A 10-year period that incorporated industry cycles.
Plus, the 5.0x multiple of Bisalloy and 6.0x multiple of SSAB are incorporating what the market expects going forward, taking into account that we're at a high point in the cycle. Why in the world would you use anything less than a 5.0x multiple to value this business applied to actual trailing EBITDA???
A 5.0x multiple of trailing EBITDA is a $4.25 share price, a 66% premium to the current price!!!
So you may ask, how can you get to $2.55 per share being fair? I have no idea...
But one possible way is to put forth an incredibly bearish and unrealistically low projection of financial performance.
An in one last dig to shareholders, that is exactly what they did. So what does this forecast look like? How about a 29% drop in revenue for their 2022 projection to $23 million! What do analysts expect for others in the industry? SSAB has a ~13% drop from current levels over the next 2 years. Oh, and 10-year average revenue is $26 million.
Then they apply a 27.5% EBITDA margin to cap it all off. What is the 10-year average EBITDA margin? 30% adjusting for the removal of the royalty expense.
Oh and that's not all... How about we forecast capital expenditure of $2.5 million for Q4 2021 and $6.5 million for 2022. Yep, that should do it. $9.0 million of capex over the next 15 months where they have spent a cumulative $9.0 million over the last 8 YEARS!!!
BDO of course relied on management's projections in their analysis, but honestly, how the **** could anyone reasonably get comfortable with that. I'm sure this analysis had to go through a review committee at BDO. How in the world could they be ok with this analysis? How in the world could they get comfortable with what management provided them? Did they review the historical performance? Did they do these comparisons versus the long-term averages?
In my opinion and experience, this would never pass muster at a top investment bank that provides fairness opinions.
