Distressed debt Praktiker AG – Why not sell Max Bahr ?

After writing yesterdays post about the Praktiker bond, I wanted to summarize my current thoughts about Praktiker in a more structured way.

My current take aways are:

1. The exercise of looking at Praktiker from a control distressed investor shows, that the plan from the CEO to invest an additional 300 mn EUR into Praktiker does not leave a lot of upside to investors due to the already high amount of net debt (~300 mn EUR).

2. I guess that many analysts figured this out after updating their models which resulted in accelerated sales, both in the stocj and in the bond

3. If Managment continues to pursue this scenario and tries to raise 300 mn EUR, the chances of “survival” is below 50% in my opinion.

4. I am not sure why they “desperately” want to integrate Max Bahr and Praktiker. One alternative would be to sell Max Bahr and use the proceeds to turn around Praktiker. I would assume thath Max Bahr could be worth something like 150 mn EUR, which could provide the funds to turn around Praktiker. As far as I understand, both groups have operated relatively autonomously, so a sale should be relatively easy.

If we come back to our example from yesterday, how would a investment case look like if we assume a sale of Max Bahr ?

Yesterday I wrote the following:

If we assume that Praktiker after a turn around can earn 100 mn EUR EBITDA per annum and the final sale will happen at 6xEBITDA or an EV of 600 mn EUR, we can now calculate a hypothetical return for an activist investor over a 3 year holding period:

Investment: (-40-95-300) =-435
Payback with exit at 6x EV/EBITDA (600-50) = 550

This would result at current prices in an IRR of only 8% p.a. over a 3 year holding period. Compared to the risk, this is way to low, a typical distressed activist invetsor would want to see an IRR of 30% for such an investment.

How would one adjust for a potential sale of Max Bahr ? i would do it the following way:

The controlling investor would have to invest:

-40 for the equity majority and -95 for the bonds, makes -135 mn in total

He would sell Max Bahr immediately and use the proceeds to turn around Praktiker.

If we then assume that Praktiker without Max Bahr could be sold at an EV of 300 mn EUR (net debt remains constant at 300 mn EUR, 250 mn Bond, 50 mn bank debt), the investor would net the following amount:

300 mn Ev – 50 mn constant bank debt = 250 mn EUR proceeds for the investor, or put it another way, the control investor will loose his equity investment but get back par on the bond.

250/135 would be ~23% p.a. which is already a nice yield plus some potential for further payouts through working capital optimization etc.

Summary: In my opinion, Praktiker as a distressed debt investment would be much more interesting if Max Bahr could be sold quickly and the proceeds would be used to turn around Praktiker. As long as the management pursues the “full integration” scenario with the announced capital raising of 300 mn EUR, the bond is only a speculation on a short term rebound. However if the management would change its strategy and announce a sale of MAx Bahr, the bond would be a buy.

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