Holders of Ram Power Corp. (TSX:RPG, OTC:RAMPF) on November 26 (the
“record date”) recieved valuable coupons as the result of the company’s
rights offering, announced November 18th. Just in time for the holidays,
these coupons, or “rights” can be used to buy additional shares of Ram
Power for 8¢ Canadian per share any time before 5:00 p.m. on December
23rd. (Disclosure: I am long Ram Power stock.)
Holiday shoppers looking for more traditional gifts will be able to
raise a little cash by selling the rights on the Toronto Stock
Exchange, where they are listed as RPG.RT. Since they began trading on
November 25th, they’ve traded between ½¢ and 1¢. Shareholders will have
received one right for every share of Ram they owned; each 4.5 rights
allows the purchase of one share of Ram at 8¢.
Why The Bargain
The reason for the extreme couponing at Ram Power is the company
needs cash. While its main project, San Jacinto-Tizate in Nicaragua, is
currently operating at reduced capacity while its contractors are
working on a remediation project expected to bring its production up to
somewhere between 59MW and 63MW of net electricity output. The
remediation is expected to be complete in mid December, with results
from testing in mid January, after which Ram will be eligible to receive
distributions from the project.
The low 59MW production estimate will easily be enough to keep Ram
from having to default on its project loans (they need at least 55MW,)
but as long as the net output is below 65MW, $2.95 million of Ram’s
Project equity must remain in a maintenance reserve account, and
maintenance contributions will be increased by $0.2 million per quarter
for every MW of capacity below 65 MW (net.) Ram will be eligible to
receive distributions if there are available funds from power sales
after the reserve increases and the original Project distribution
requirements are met.
Without any other operating projects, Ram did not have the cash to
meet an upcoming corporate debt payment at the end of December.
Unfortunately the offering was delayed until a few days after Ram’s
third quarter earnings announcement. When a company needs money
quickly, they usually have to raise it on very unfavorable terms to
existing shareholders, and that prospect led the stock to sell off
between the quarterly earnings report and the rights announcement.
As it was, a rights offering of this sort is about as
shareholder-friendly a way as possible to raise needed cash. Instead of
outside investors buying the stock at a discount and immediately
dumping it on the market, existing shareholders are given the
opportunity. As I mentioned before, if they are not willing or able to
come up with the additional cash, they can still monetize the
opportunity by selling their rights in Toronto.
A Guaranteed Successful Offering
Two provisions of the rights offering ensure that the company will be
able to raise the full C$5.3 million targeted by the deal First,
holders of rights will be able to exercise an “additional subscription”
privilege on a pro-rata basis to buy shares which would have been
available under any rights which are not exercised. Ram has also
arranged for standby purchase agreements with Dundee Securities,
Newberry Holdings International Ltd. and Exploration Capital Partners to
purchase any shares which are available but not issued subject to the
rights offering. The fact that these large, sophisticated investors,
including Ram’s investment bank and an affiliate of one of its largest
investors are willing to backstop the deal is one more piece of evidence
that it’s a good deal for investors to participate.
Company for Sale
Because it looks unlikely that the remediation program at San
Jacinto-Tizate will increase capacity enough to allow Ram to resume
distributions and fund its ongoing overhead and corporate debt payments
going forward, Ram has is also “Exploring strategic options,” which is
management speak for “the company is for sale, all or in part.” In
addition to making the December interest payment, the funds from the
offering should be sufficient for Ram to complete its remediation
project and find a bidder for the whole company, or just San
Jacinto-Tizate and its other projects.
With about C$50 million of Earnings before interest, tax, and
depreciation (EBITDA) increasing with inflation, Ram would be worth
about C$600 million if trading at the same (12x) multiple as mature
power power producers on the TSX. That number includes no value to its
development projects. Ram will of course not receive a 12x multiple,
but a 7x to 9x multiple, such as discussed in the recent earnings call does
not seem out of line. Adjusted for liabilities and the dilution from
the rights offering, a 7x multiple would result in a value for Ram at
24¢ a share. The 9x multiple would result in a value of 51¢ a share.
Note that Ram’s high debt makes this number very sensitive to the
selling price, and a sale at 6x EBITDA would leave only 10¢ per share
for equity holders.
A buyer would probably be able to achieve some cost savings by no
longer running Ram as a stand-alone business. Reducing management and
listing costs could amount to as much as $3.5 million annually, or
another penny a share at the 7x EBITDA multiple.
Because it looks unlikely that the remediation program at San
Jacinto-Tizate will increase capacity enough to allow Ram to resume
distributions and fund its ongoing overhead and corporate debt payments
going forward, Ram has is also “Exploring strategic options,” which is
management speak for “the company is for sale, all or in part.” In
addition to making the December interest payment, the funds from the
offering should be sufficient for Ram to complete its remediation
project and find a bidder for the whole company, or just San
Jacinto-Tizate and its other projects.
With about C$50 million of Earnings before interest, tax, and
depreciation (EBITDA) increasing with inflation, Ram would be worth
about C$600 million if trading at the same (12x) multiple as mature
power power producers on the TSX. That number includes no value to its
development projects. Ram will of course not receive a 12x multiple,
but a 7x to 9x multiple, such as discussed in the recent earnings call does
not seem out of line. Adjusted for liabilities and the dilution from
the rights offering, a 7x multiple would result in a value for Ram at
24¢ a share. The 9x multiple would result in a value of 51¢ a share.
Note that Ram’s high debt makes this number very sensitive to the
selling price, and a sale at 6x EBITDA would leave only 10¢ per share
for equity holders.
A buyer would probably be able to achieve some cost savings by no
longer running Ram as a stand-alone business. Reducing management and
listing costs could amount to as much as $3.5 million annually, or
another penny a share at the 7x EBITDA multiple.
In addition to the advantage of simply buying the shares at 8¢, there
are also significant benefits from the optionality inherent in the
rights. For example, a Canadian shareholder not planning to participate
in the offering can still take advantage of this opportunity to
maintain his or her position. Rather than selling the rights, he or
she could sell 1/4.5 (or 2/9) of his or her shares (as long as they sell
for more than 8¢), and then buy them back by participating in the
offering in three weeks. This reduces the risk of loss in the event the
stock declines, while maintaining the full benefit of any increase in
the share price.
Conclusion
The Ram Power rights offering is the most shareholder-friendly way
possible for this company to raise needed cash. Since Ram has also put
itself up for sale, and is worth between 25¢ and 50¢ per share,
investors who are able should participate in the rights offering and the
additional subscription privilege, unless the stock falls below 8¢
before December 23rd. If it does fall that far, they should buy the
stock instead.
Disclosure: Long RPG.
DISCLAIMER: Past performance is not a guarantee or a reliable
indicator of future results. This article contains the current opinions
of the author and such opinions are subject to change without notice.
This article has been distributed for informational purposes only.
Forecasts, estimates, and certain information contained herein should
not be considered as investment advice or a recommendation of any
particular security, strategy or investment product. Information
contained herein has been obtained from sources believed to be reliable,
but not guaranteed.
This article was first published on Forbes.com on November 30th and AltEnergy Stocks and was republished with permission.
http://www.renewableenergyworld.com/rea/news/article/2013/12/holiday-shopping-deal-on-ram-power-shares
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