LON:JPR | Anyone For Roulette - Johnston Press

26th Jul '18 by Gromley

15 comments 3419 reads

In the twilight zone between Micro & Small-Cap today Johnston Press (LON:JPR) shares increased by 72%

(JPR has a market cap of c. £5m – definitely ‘micro’, but an Enterprise value of c. £225m largish ‘mid-cap’)

The company “knows of no operational or corporate or other reason for the price movement.” (Oh, I think they do really - the answer being ‘speculation’)

Synopsis.

Johnston Press is the publisher of the ‘I’ newspaper and a large number of regional titles.
In the last two years they have made adjusted operating profits of £37m & £33m (suggesting to me a rather ‘full’ Enterprise Value.)
In 2014 they issued £220m of bonds with a coupon of 8.625% repayable in Jun-19. (There is no clear plan to repay them) - You’ll note that the coupon on these bonds absorb c. 50% of the operating profit.
In October 2017 Christian Ager-Hanssen (via his investment vehicle Custos) took a 20% stake in Johnston Press.
He claimed (as far as I know without providing evidence) that he would be able to refinance the bonds at a lower rate. The bond market did not seem to share this optimism with the bonds continuing to trade at a substantial discount.
On 7-Nov-18 Ager-Hanssen requisitioned an EGM to have him elected to the board. The company rejected the requisition the next day (from memory it was either sent from or to the wrong entity). Inexplicably no corrected requisition was posted. At the time the shares were trading at c. 15p.
Over recent weeks and months, the share price had steadily fallen to sub 3p – I believe this to be due to a growing belief that shareholders would be largely “wiped out” by a debt for equity swap to settle the debts (current shareholders I believe would be left owing at best 2-3% of the company ).
On Friday however Ager-Hanssen wrote to the board, concerned by rumours (I hadn’t heard them) that the company was preparing for a pre-pack administration and threatening to sue the company in such an event.
I presume that to be successful in such a case he would have to demonstrate that the company had failed to take advantage of another option more advantageous to shareholders. (I am not aware what that is).
With a bit of a delayed reaction, the share price today rose to close at 6.1p (8.15p…

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shipoffrogs

26th Jul '18

It's very difficult to see how equity holders will emerge intact from this.

Reach seems a much more attractive play in this area.

One observation - not necessarily aimed at JPR, is just how awful regional paper websites are. Slow to load, slow to respond, overloaded with adverts and appalling design - a real mess.

mmarkkj777

27th Jul '18

Still, they are up another 20% today, so good for short term traders.

Gromley

Indeed mark and in fact up nearly 50% now, so well done those short term traders. Looks like Mrs Gromley will have to settle for a chip supper rather than posh nosh this weekend.

I still though cannot see any rationale for a share price above 2-3p, so quite happy to ride out this irrational spike with my small short - in fact considering increasing it slightly.

Still grateful though if anyone can see anything I have missed.

Gromley
well before the sudden spike up in the last couple of days you could have bought the company for £3m.

Were it to have a future someone going long could easily ten bag on it. Or they could lose the lot.

I suspect your short will eventually come good - but not sure how soundly you'll be sleeping whilst you wait.

JakNife

29th Jul '18

Option value in these instances is normally in the region of £3 to £6m, £10m seems a little high but is not bonkers. I looked at this as a potential short on Friday and concluded that it seems to risky to short at this level. Let's say that the bonds are extended, the interest rate marginally increased and a bunch of warrants issued to the bondholders at say 10p? There are plenty of similar "kick the can down the road" type of deals that would not be immediate good news for a short.

JakNife

30th Jul '18

Hi Jak - thanks for your input. I much appreciate your knowledge in these areas.

I do agree that for shareholders there very best option is for the bonds to be extended or some form of replacement debt achieved.

My thinking though was that this looks quite unlikely - the existing bonds (with only 10 months to redemption) currently trade at a 35% discount to par, which suggest to me that there is no appetite whatever to extend (or renew) credit.

If I am misreading the situation though, I would be really grateful for thoughts on that. (Why by the way would bondholders be interested in warrants at 10p? Surely they would be looking for a much lower price?)

It seemed to me that the rally is entirely because Ager-Hanssen has raised his head again and that some feel he has come to save shareholders. He did claim that he could cost effectively renew the credit, but provided no evidence whatsoever.

It still seems to me that some form of additional equity will be the answer here; whether it be a Debt for Equity swap with the bondholders, a fundraise to repay the bonds or a mix of the two. In any case this would leave existing shareholders with perhaps 1-2% of the company.

The two day rally that saw the share price double bag seems to have stalled today and my personal expectation is that common sense will begin to drip back in over the next few days as the momentum traders make their exit.

We shall see, in any case it is only a small position for me at this time.

Albertos

16th Aug '18

Dare I ask if Mrs Gromley now gets some posh nosh?

Phil

:-)

Good question Phil - as we're currently out in a "field" with a number of Scouts and Explorer scouts and Mrs Gromley is camp cook, that might present a bit of a challenge but hopefully next week.

As you've given a nod to, the "shine" has well and truly come of the false (imho) rally, but I don't think this is played out yet and even though I'm now nicely in profit I can look at this and think how much better I could have played this situation - I'll give my "reflections" early next week.

Gromley (enjoying the liquid sunshine)

22nd Aug '18

I closed out my short positions today for an effective profit of 29% [1] (even after the 20% spread), which was c. double my “posh nosh target”.

My reasons for commenting last week that I thought there was still more to come have effectively borne out (an still imply there may have been more to have had I been even more patient) :

Prior to the “excitement” caused by Mr Agger-Hansen’s latest uttering the share price was c. 3.5p. At the time of my last comment the price was still at c. 5p so I felt there was still a significant premium and even now with the price quoted at 3.65 there’s a little room for further falls.
On the two ‘up days’ (26/27 July) 11 million shares changed hands and even after today there have only been just over 7 million shares traded since. This may suggest that there are some people around having been drawn in by what I regard as the irrational exuberance.

That said, I’m very happy to have closed out now. Whilst I don’t think in this particular circumstance that there is much upside risk to the share price in the medium term, there could easily be another bout of irrational exuberance that might be tradeable.

Aside from the nice gains in short order here, there has also been a useful learning point for me (or perhaps a reminder of something I constantly fail to take heed of).

I opened the initial short as the price was rising on the 26th and took a small top up the next day as the increases were slowing. So, my overall 29% gain is a composite of an 23% on my initial position and a 43% gain on the top up.

Going short too soon was impatience coupled with ‘fear’ that the irrationality would dissipate quickly; that is akin to the type of mistake I have made in the past buying “falling knives” too soon. If I had sat back and waited for the short-term momentum to subside before entering a position, I could have made double the profits for a smaller real risk.

It could well be that this particular circumstance was so unique as to make that learning point virtually useless, although I do have some embryonic ideas as to how to reuse the learning here in other circumstances. I will keep that to myself for now though until I at least have some evidence that I’m not just kidding myself.

So, for now, I’ll draw this little experiment to a happy conclusion. Grateful for any thoughts or observations as always though. For now I’m thinking that I’ve been very smart and read this perfectly, but it is equally likely that I’ve been lucky and some risks that I failed to truly account for have just not played out in this case.

Note [1 ] – In the case of short positions, the maximum potential loss is unlimited, so it is a bit of a challenge to identify how much capital you have deployed. For the purposes of this exercise, my “notional” capital employed is equal to the share price x the number of shares – ie assuming that the positions would be closed for a 100% loss in the event that the share price doubled.

Spl183

23rd Aug '18

Good timing on closing out the short position ! So far up 45% today !

For info do not hold.

Spl183

JohnEustace

16th Nov '18

Game over for shareholders here. They are filing for administration and the lenders are acquiring the assets.
https://www.bbc.co.uk/news/business-46243622

17th Nov '18

Just glad Reach (LON:RCH) didn't buy it.

It's customary to express sympathy for shareholders in circumstances like this, but to be honest this has been virtually a foregone conclusion sometime, so I think any wounds are self inflicted here.

I'm just glad that the outcome protects the underlying businesses.

I can't imagine the bondholders will want to continue to own long term. It is rumoured that Daily Mail and General Trust P L C (LON:DMGT) are interested in acquiring the 'i' and the regionals might well be a good fit for Reach (LON:RCH) so it will be interesting to see how things pan out from here.

The largest shareholder is not happy
STATEMENT BY CUSTOS ON LATEST EVENTS REGARDING JOHNSTON PRESS
Late yesterday evening we learned that the Board of Directors of Johnston Press Plc in collusion with the majority bondholders, US hedge fund GoldenTree Asset Management, filed for administration of Johnston Press for the purpose of effecting an immediate sale and transfer of its business to a new company, to be run by the current Johnston Press CEO Mr King, and controlled by the bondholders, in a so-called pre-pack. We understand the Johnston Press pension scheme will not transfer to the new company resulting in the pensions of the hardworking and loyal staff of Johnston Press being severely reduced.

Custos Group is the largest shareholders in Johnston Press and we have worked tirelessly as an activist shareholder to change the composition of the board so we could implement the necessary changes in direction which would provide a better and brighter future for the company itself, its staff and members of the pension scheme.

At every stage we have been thwarted by a self-serving board which, in clear breach of its fiduciary duties, has only been interested in protecting itself and the bondholders.

When issuing the bond, the Board included a “poison pill” in its terms, the first of its kind in the UK, which meant that the overall control of the Board was safe guarded as if that were to be changed, then that would trigger the repayment of the £225 million bond debt.

We have consistently accused the Board of not having fresh ideas or a clear and effective strategy for the way forward. They have done nothing more than re-arranging the deckchairs on the Titanic. When Custos attempted to appoint a director to the Board to inject some much-needed direction and oversight, the Board ensured that this was blocked by deliberately misrepresenting to all shareholders that such a move would trigger repayment of the bond, when in fact it would have done no such thing, as we did not seek to change the control of the board.

This Board is purely self-interested, with a toxic mix of incompetence, arrogance and entitlement added. Their actions today, ensuring their own jobs are safe, but sacrificing the pensions of their loyal staff, many of whom will no doubt also lose their jobs under the new ownership of a US hedge fund, is simply a disgrace and a vulgar display of the worst elements of capitalism.

The Board of Johnston Press, had they been willing to cooperate with their largest shareholder, could have ensured a bright future forthecompany. According to all the public statements of the Board,Johnston Press has a reasonable cashflow and was not insolvent. Indeed, the bond debt is not due and payable until June 2019 – another 7 months away! We believe, this is plenty of time for us to have managed to put in place a financing had we only been given the chance. However,instead of having a sensible dialogue with us and working with us to achieve a genuine rescue for the benefit of all stakeholders as well as JP’s staff and their pensions, the Board has instead done what they could to hinder us whilst paying lip service to the notion of saving the company. The strategic review and the formal sale process were nothing more than a complete sham. However, it is now clear for all to see that the Board of Johnston Press has instead only been pre-occupied with one thing, namely the sacrifice of the company’s staff and their hard-earned pensions in order to save the Board’s own jobs by colluding with Bondholders. Such actions are simply shameful and disgusting and Custos will now fight to hold this despicable Board accountable for their contemptible actions.

As a public declaration and vote of confidence in the staff and business of Johnston Press and its proud 250 years long history, Custos recently increased its stake in Johnston Press from 20% to 25%. That the Board, in which we had absolutely no confidence, can honestly think that turning the business over to a greedy New York hedge fund is the only viable solution for Johnston Press, simply beggars belief. Moreover, it simply proves our point that the Board is totally incompetent and bereft of ideas and, in colluding with GoldenTree, is acting out of pure personal self-interest and personal self-preservation. Custos is a tireless activist and fighter and, on behalf of all stakeholders in, and staff of, Johnston Press we will do everything in our power to overturn and unwind this abominable deal.

https://custosgroup.com/news/statement-by-custos-on-latest-events-regarding-johnston-press/

Thanks for flagging that John,

In my opinion it is pure showboating on the part of Mr Ager-Hanssen.

He talks about the need to change the Board in order to change direction of the business.

In truth the business itself had been performing quite well under the circumstances, but there was no way that it could be valued at the £220m needed to cover the bonds, let alone leave anything left for the shareholders.

He had argued that he had contacts through whom it would be possible to refinance these bonds at a lower rate of interest. If there was any substance whatsoever in these claims, then he did not need to be able to engage with the board of directors of the company.

He and/or his contacts could have simply started buying up the bonds in the open market at 65 pence in the pound until such time as the remaining bondholders got in touch to request an offer to buy the rest at or near par.

This to the best of my knowledge did not happen (certainly the bond price never recovered)

The fact that he highlights that there were still SEVEN months to go until the bonds maturity suggest to me that , unless he is totally delusional (which is possible), he had some plan fora "dieing breath" "rescue plan" for the company - however it is hard to see what this could have been.

It will certainly be interesting to see what he does / says next. The finale to today's statement is "we will do everything in our power to overturn and unwind this abominable deal."

So may be there is more interesting news to come, but imho it is implausible that there is any chance of a change to the outcome for shareholders.

Anyone for Roulette - Johnston Press

Synopsis.

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Gromley

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