Post of the Day
February 27, 1998
From our AOL
American ECO Board
Subject:Analysis of ECO's convertible debt
Here's some good news, IMO...particularly as it relates to the DBCO acquisition.
This is straight from the horse's mouth--I spoke with Mike McGinnis around 1PM Texas time today regarding the following issues: 1) the convertible debt feature proposed in the potential acquisition of DBCO; and 2) the upcoming earnings release.
First, Mike apoligized for ECO taking so long to release the 4Q and year end earnings. It sounds like they will release earnings in the next day or two--just my opinion--followed by a confirmed conference call...maybe Friday...as Dave Norris is out of town until then. That's just my speculation regarding the release date and conference call. Per Mike, ECO hoped to post its earnings several weeks ago but the DBCO acquisition has been extremely time consuming for both Mike M. and Dave Norris which made it a bit difficult for the auditors to get all their questions answered. Furthermore, Mike stated that ECO has called upon their big six auditors to evaluate DBCO and help them prepare future strategic models for the Company. This potential acquisition has kept the big six partners, senior managers and managers very busy...and has essentially slowed down the sign off on ECO's audited numbers. In general, he expressed no concern about the delay and shrugged off the rumors of them not meeting estimates...or rumors that ECO's needed to fix some historical problems.
Now for the real meat--From the DBCO 10Q on 2/23/98--(iv) American Eco's purchase of all of the issued and outstanding shares of common stock of the Company [DBCO] in exchange for convertible promissory notes of American Eco in the principal amount of $3.00 per share of the Company which are convertible into American Eco common stock at $15.00 per share. The Letter of Intent provides that the parties shall negotiate and execute definitive agreements regarding the acquisition transaction by no later than April 6, 1998.
Here's my synopsis of the "convertible debt" conversation with Mike. Please note that a Please note that a definitive and signed agreement for the acquisition of DBCO does not exist, therefore everything below represents proposed terms and conditions regarding the convertible debt instrument...as outlined in a term sheet.
1) ECO is offering the DBCO shareholders $3.00 per share with a conversion into ECO stock when and if it trades above $15 for ten consecutive days. The exchange ratio for this transaction is 5:1. Upon conversion, the DBCO shareholders will hold ECO stock with a tax basis of $15/share...regardless of the stock price on the date of conversion.
2) There is no conversion into ECO stock for 6 months after the closing of the acquisition. It's a 6 month lock up period. I don't know whether it's 6 months from Board approval or Shareholder approval. But you get the idea.
3) ECO has "call" rights to repurchase the DBCO shares at any time before conversion at $3 / share plus accrued interest.
4) DBCO shareholders do not have any put rights to ECO to force repurchase.
5) ECO can force 100% conversion of the DBCO shares when the ECO stock trades above $15 / share...if it wants to...but probably if the stock price of ECO is above $15.
6) After the 6 month lock up period, DBCO shareholders have the right to convert no more than 1/3 of their shares every 180 day period...assuming that ECO's stock is above $15. This effectively spreads the dilution over a period of 2 years from Closing and reduces the potential flood of new shares into the market...particularly if those new shares want to sell their position in ECO. VERY SMART.
7) Seeing as DBCO shareholders are limited to 1/3 conversion of shares every 6 months after the lock up period expires, ECO still has the "call" right to buy back any remaining/unconverted shares if it wants to for $3 plus accrued interest. This would be a smart investment of ECO's debt capital if the ECO stock price is substantially above $15 at the time of conversion. This lock up period and delayed conversion feature will also give ECO the opportunity to float a long term bond deal (or other debt financing facility) to institutional parties and use the proceeds to repurchase the DBCO shares (under the convertible debt arrangement) and eliminate further dilution to ECO's stock. A few months back, there were some talks that ECO was pursuing a $100+ million bond underwriting for working capital and future acquisition needs. Perhaps ECO is still considering such financing...after the DBCO deal closes...and perhaps that's why there is no conversion of DBCO shares for 6 months...enough time to garner long term financing and buy back DBCO shares...at a 50% premium + interest. Not a bad arbitraging opportunity...and certainly a nice return for DBCO shareholders today.
Other points of interest
This transaction will not be treated as a reverse merger, but ECO will still have the opportunity to apply for listing on the NYSE. It didn't sound like that was an immediate interest, but certainly a strong reason for the stock swap arrangement vs. a straight cash buy out.
Management views this transaction as immediately ACCRETIVE! Per Mike, it should be "modestly accretive" in the first quarter following the transaction's close. In essence, DBCO's earnings are projected to exceed the interest expense accrued on the convertible debt for the DBCO shares.
Earnings will come from three main sources: !) Davie--backlog of $400+ currently, with a strong likelihood of seeing $600+ million in annualized revenues within 12 months. There is a current need for 450 drilling rigs on an international basis, and Davie believes it can build 3.5 per year at $150-$200 million per rig. 2) Steam Becker Pipeline--essentially work from the Sable Gas project and Terra Nova. And 3), MDC, which is DBCO's Australian sub, is charging full force ahead and is very profitable. There is some interest in privatizing MDC in the not too distant future.
I should also point out that these convertible promissory notes are in no way, shape or form "convertible debentures." ECO does not face the same risk assumed in the Chempower acquisition, where certain parties were shorting ECO's stock to drive down the conversion price...because the convertible debenture didn't have a "floor" This convertible debt instrument noted above is a very sound financing strategy that will spread out the dilutive effect of the transaction, minizimes shares being sold after conversion, give ECO the option to acquire non-converted shares with it's call rights, and at the same time, give DBCO shareholders substantial upside opportunities for appreciation---at least 50+%.