Yesterday, we talked about getting rich, or at least rich-ish. Today, as promised:
Here’s a snippet from an interesting story on our ever widening income inequality (thanks, Alan):
Here’s what Richistan looks like:
- Lower Richistan. About 7.5 million households worth between $1 million to $10 million. However, “many Richistanis say that Lower Richistanis don’t even belong in their country. They refer to the Lowers as ‘affluent,’ the ultimate Richistani insult,” Frank writes.
- Middle Richistan. More than two million Americans have a net worth between $10 million and $100 million. This may also include many in Thomas Stanley’s “The Millionaire Mind” published in 2000. Their average net worth was $9.2 million, but inflation may protect them from that snarky “affluent” insult.
- Upper Richistan. Frank says there are “thousands” with $100 million to $1 billion. Sadly, the Uppers recently increased with the firings of several greedy CEOs from Citi, Bear, Merrill and Countrywide.
- Billionaireville. Forbes listed only 13 in 1985. By 2007, more than 400. Since 1995 their wealth has more than doubled to over a trillion. Another source says there are more than 1,000 American billionaires, many under the radar.
☞ It’s great to be rich, if earned honestly, as it generally is. (And thin, if you’re not anorexic, as you’re generally not.) But tell me again why we have skewed the tax code ever so much more favorably, these last seven years, toward the very, very wealthy?
DON’T SELL YOUR AII WARRANTS
They are speculative, to be sure – and I much prefer having bought them at $1.47 and $1.18 this summer than at $2.45 yesterday. But, having sold a few at $3.20 several weeks ago (well, they were in a tax-sheltered account and I couldn’t resist) – I yesterday bought them back. Because the real goal here, if things work out, is not $3.20, but $7-and-change sometime between now and early 2011. Nearly a triple from here.
The warrants give us the right to buy the stock at $7.50 a share through early 2011. If the underlying stock is $7.50 or lower when the warrants expire, they will expire worthless. But the stock closed last night at $9.59, and a recent research report by Ladenburg Thalmann suggested a fairer price might be $13.50. At that price, the warrants would have an intrinsic value of $6 ($13.50 minus $7.50). And if at sometime in the next three years the stock goes even higher, then the company would likely “force conversion” of the warrants, as it is allowed to do once the stock stays above $14.50 for 20 days, limiting our selling price to a little more than $7 (however much above $14.50 minus $7.50).
The warrants will also expire worthless if the underlying company, Aldabra 2, is unable to conclude a successful acquisition. But it seems on the verge of closing its deal to acquire the paper products division of Boise Cascade.
So could Ladenburg be on target in its assessment? Haven’t they heard of the looming global recession?
While anything is possible, one knowledgeable observer (with a strong vested interest, so beware wishful thinking) suggests the Ladenburg $13.50 valuation may actually be low:
* For 2008, Ladenburg has assumed an EBITDA of $336 million which was based on RISI’s May 2007 price projections for various paper grades. Subsequently, in December, RISI updated these price projections. If these hold true, Aldabra’s 2008 EBITDA would be meaningfully higher. It’s important to note that all the UFS (uncoated free sheet paper) producers just announced a $60/ton price increase which (if fully implemented) will result in prices being even higher than RISI’s most recent forecast. This company has the potential to be a monster free cash flow generator.
* On a 2008 EV/EBITDA basis and assuming the old 2008 EBITDA projection of $336 million, Aldabra is trading with a multiple of just 5.6x compared to the mean of Ladenburg’s comparables at 8.6x. And Aldabra’s multiple should be further reduced by an additional $150 million in net present value of future tax savings due to the step-up in asset values as a result of the acquisition. This should reduce the multiple by an additional 0.4-0.5x (i.e., to 5.2x or so) compared to comparable paper companies.
* One of the primary risks highlighted in the report is deal financing. However, Aldabra has already received a commitment from Goldman and Lehman to underwrite $908 million of bank financing required to close the Boise paper acquisition.
* The report mentions the OfficeMax contract as a material risk, but misses two major points: 1) the contract runs through 2012 (and then, if not renewed, peters out over 4 years); 2) OfficeMax isn’t an end-user, which means that Boise would simply sell to those who are in some other way. The industry is running at 95+% of capacity, so end-users will get Boise paper one way or another.
* Finally, Ladenburg writes quite a bit about Boise’s newsprint exposure. But newsprint is approximately 8% of Boise’s business and contributed approximately 1% to trailing EBITDA. With the recently announced price increases by Abitibi Paper, it’s actually a business with upside.
All this said, a monster recession could obviously weaken the demand for paper, pricing, earnings, capacity utilization, and all the rest. So this is truly a speculation, and you could truly lose every penny.
Keith Larson: “That HEMA page is a cute, fast-paced version of a very slow-paced art film by two Swiss artists. It’s called The Way Things Go (Der Lauf der Dinge), and there’s a Wikipedia page for the film here.”
THE FLORIDA PRIMARY
Oh, please, PLEASE let it be a tie (or close to a tie), so it won’t actually matter that Florida’s delegates don’t count.
Quote of the Day
The only thing that hurts more than paying an income tax, is not having to pay an income tax.~Lord Thomas Dunwar
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