Reddy Ice Bankruptcy and $AGUNF

Today, Reddy Ice (RDDY or  "the Company") filed for bankruptcy in the Northern District of Texas (Dallas).  It was revealed in the press release that the company had secured a $70M DIP and $50M in exit financing with a plan supported by "the majority of the principal amount of First Lien Notes, Second Lien Notes, and Discount Notes."  The docket can be found here: Reddy Ice Docket.  For reference, at the close, Reddy Ice's 11.25% were trading 91-92 (with accrued) and the 13.25% were trading at 15-17 (flat).

The company has filed its Plan of Reorg and Disclosure Statement.  But first, let's take a peak at the Declaration of Steve Janusek, CFO of Reddy Ice, in support of bankruptcy petition and first day motions (Docket #27).  Reddy Ice is the largest manufacturer and distributor of packaged ice in the United States.  They are the ones that make and sell the bags of ice at super markets and convenience stores.  In 2011, the Company sold 1.7 million tons of ice with a particular geographic focus in the southern United States (this is important for reasons to come later).

The filings lays out the company's capital structure, as of 3/31/2012, which I've laid out below:

Please note: That according to Docket 21: "As of the Petition Date, the Company owed approximately $50 million plus interest, fees and expenses, and had no availability, under the Prepetition Credit Agreement."

The Company, according to the filing, began discussions in 2011 to explore alternatives to address its capital structure with an informal group of First and Second Lien note holders including Centerbridge. This is where things get interesting:
In addition to addressing the Company’s declining EBITDA and current debt, the Restructuring is also intended to provide the Company with the opportunity to pursue a strategic acquisition (the “Strategic Acquisition”) of all or substantially all of the businesses and assets of Arctic Glacier Income Fund and its subsidiaries (“Arctic”). As is the case with the Company’s business, Arctic has encountered financial difficulties due to adverse trends in our industry in recent years. On February 22, 2012, Arctic filed for protection under the Companies’ Creditors Arrangement Act in Canada and Chapter 15 of the Bankruptcy Code in the United States. Arctic has initiated a Sale and Investor Solicitation Process (“SISP”). The purpose of the SISP is to seek sale proposals and investment proposals from qualified bidders and to implement one or a combination of them in respect of Arctic’s property and business.
On March 28, 2012, the Company submitted a non-binding letter of intent to Arctic regarding participation in the SISP. The letter of intent contemplates the Company’s acquisition of substantially all of Arctic’s business and assets. On April 5, 2012, the Company was advised by the financial adviser to Arctic that the Company has been approved to move to phase 2 of the SISP. The successful bidder will be selected at the end of phase 2 of the SISP. The Company’s interest in Arctic remains subject to, among other things, completion of due diligence, negotiation of acceptable transaction documents, and receipt of sufficient
commitments for debt and equity financing for the acquisition. Centerbridge has indicated its interest in providing the entire amount of the equity financing for the Arctic acquisition.
Arctic Glacier (symbol: AGUNF) bankruptcy proceedings in Canada can be found here: Arctic Glacier CCAA Proceedings.  For full disclosure, I am long AGUNF and I will explain why shortly.

The rest of the support filing goes on to talk about the proposed restructuring which is highly dependent on whether Arctic Glacier is purchased. For example, if AGUNF is acquired, Reddy can issue pari first lien debt to finance the acquisition.  If it isn't Centerbridge will convert $68.2M of First Lien notes into preferred stock of Reddy Holdings with a liquidation preference of $75M.  In addition, Reddy stock holders are getting a 12 cent distribution with an additional 5 cents if AGUNF is acquired.

According to the concurrently 4Q financial release, FY 2011 Adjusted EBITDA was $45M down from $51.8M last year.  Further, in a Reg FD filing, the Company notes they did $103M of EBITDA in 2006:

Assuming a fully drawn revolver, the Second Liens at 16 cents on the dollar is creating Reddy Ice at somewhere around $375M of value ($372 - cash on BS + rights offering).  At $45M of EBITDA, this translates into a multiple of 8.5x.  Projections show 2012E EBITDA at $57.2M or 6.5x.  In the valuation analysis in the Disclosure Statement: 

"Reddy Holdings and Reddy Corp have been advised by Jefferies & Company, Inc. (“Jefferies”) with respect to the estimated value of Reddy Corp’s operations on a going-concern basis (the “Enterprise Value”). Jefferies has concluded that the Enterprise Value of Reddy Holdings and Reddy Corp, as of the assumed effective date of March 31, 2012 (as used in this Appendix E, the “Effective Date”), will range from approximately $382 million to approximately $434 million, with a midpoint of approximately $408 million."

So we are definitely close here and if anything are being conservative.  What does this mean for the value of AGUNF?  Assuming they pay 8.5x, or similar comp to what Reddy is trading for, the value is 19 cents per unit:

But, what I think people are missing here is two fold:
  1. Reddy can pay a VERY high multiple for this business for the mere fact of  the amount of synergies combining the two entities would entail.  The amount of coverage the combined entity would have would be unparalleled.  And we know that when AGUNF was marketed a few years ago, there were MANY bidders for the asset.
  2. The forecasted DIP draw of $42M: This business burns a ton of cash in the 1st and 2nd quarter of the year and generates a ton of cash in the 2nd half of the year.  Just by cutting the DIP draw down to $20M gets your recovery at 8.5x to 26 cents a unit.  Further the company has been WAY under budget in terms of DIP draws since the filing.
So I am long (and have been since the filing).  To me the biggest risk here is the presence of West Face as senior secured lenders.  For those not in the distressed world, West Face are amazing investors that I frankly am afraid just want this thing for themselves.  If they were not involved, I would make this a much larger position.

I'll keep everyone updated on both the Reddy Ice and AGUNF bankruptcy proceedings as they play out.


Anonymous,  4/13/2012  

Sometimes I do wish you wouldn't have to work overtime to post so soon..


Hunter 4/13/2012  

I have no idea what this comment means.

Anonymous,  4/13/2012  

I think you are going to get a donut for your equity on this trade. It is possible that you are right, but I think the probability is very slim and not worth betting on.

Jefferies valuation overvalues Reddy and it is very unlikely Reddy/Centerbridge pay more than face value of West Face's debt + ligitation. Despite what you assert, there aren't many people excited to own Arctic aside from Reddy/Centerbridge. $300 mm would be a GREAT outcome. West Face/CPP would be delighted to get out at par and there isn't a loan to own scheme.

Anonymous,  4/13/2012  

Thanks for covering this one. I've been loosely following it, and I noticed an interesting quote from AG a couple weeks ago:

"Over the last several months, the company has received proposals from a number of parties that indicated value for all company stakeholders, including unitholders," said Gary Filmon, Chairman of the special committee of the board of trustees. "We believe a court supervised solicitation process would maximize value by allowing all interested parties to fully evaluate the opportunity presented by Arctic Glacier while setting a reliable timetable for the ultimate sale or recapitalization."

Seems to me like directors would guiding to some recovery for unitholders.

Anonymous,  4/13/2012  

That was probably in reference to the Coliseum proposal that failed. If you understand the track record of this board, you are making a mistake if you take that comment seriously.

Anonymous,  4/13/2012  

The comment from Filmon was from Feb 22 when they initiated the sale process. Didn't Coliseum throw in the towel long before that?

Anonymous,  4/13/2012  

In your valuation you mention the number of units. What does that reference?

Thanks for the right up and the link to the reorg. Always enjoy looking at liquidation analysis.

Andy,  4/13/2012  

Two thoughts . .
1) I wonder if the DOJ will take a look at this potential combination in the wake of the anti-trust issues both companies have already faced.
2)I am not convinced that acquiring Arctic Glacier at anything other than a absolutely fire sale price is a good idea. Reddy has not shown an ability to squeeze a lot of synergies out of acquisitions. Since they went on their acquisition binge starting in 2006 both their gross profit and operating margins have declined.

Anonymous,  4/16/2012  

This message is for Hunter. Can anyone please post the link to the Jefferies valuation report for Reddy?


Underemployed,  4/17/2012  

Two observations:

1) I think this will be successful for Centerbridge, but not incredibly so. The possible AG acquisition aside, this deal cuts leverage (net dt/EBITDA) to 4x this year from nearly 11x last year, per my estimates. And with the reduced leverage, the company now has equity value. Mission accomplished. I haven’t seen in the docket exactly how many of the First Liens Centerbridge holds, but I imagine it’s ~$68m, which is the amount they offer to convert to $75m of new Preferred if the AG acquisition doesn’t go through. If Trace is to be believed, it's unlikely they ever bought them at less than 90, so that's at least $61m they’ve put in. Plus they have obligated themselves to backstopping the rights issue: “The Investment Agreement includes commitments of Centerbridge to (a) backstop the Rights Offering” [$17.5m], and, “(b) directly purchase New Preferred Stock in an amount not less than $7.5 million.” So Centerbridge may be in for up to $86m (they could put up less if the acquisition of AG goes through and are therefore no longer obligated to convert their $68m of First Liens, but I imagine they contemplate the AG acquisition will cost a similar amount). But at any rate, worst case, the thing they acquire likely has equity value exceeding the $86m they may have to put in.

But if Centerbridge is using anything like the assumptions that Reddy (and possibly Jefferies?) used on page 739 of the Disclosure Statement , [and by the way, last commenter, the Jefferies Valuation is on page 754] they won’t have nearly the value they believe, in my opinion.

The assumptions include capex at a rate of about 4% of sales. The company has historically done ~9%, and lately much less. The company is likely massively underinvested at this point. The margins they’re looking for (20%) seem pretty high too. I think they should aim for 18%. Ultimately, I only get an EV the level that Jefferies (and I suspect Centerbridge?) implies with the most undemanding and optimistic of assumptions.

In addition, many people (Reddy management, sell side shops and apparently Centerbridge as well) seem to believe that the addition of AG will result in lots of synergies, and will have an otherwise significantly positive impact on the consolidated company. I’m sure people have done their homework. But AG as well as Reddy have been under investigation for, paid fines to dismiss charges of, or outright been found guilty of anticompetitive practices. Has a Reddy/AG merger already been given the orange light to proceed by the relevant regulatory authorities, here and in Canada? I gather their markets don’t overlap much (which may alleviate regulatory concerns) but if so, where will the synergies come from? It's tough to realize bulk discounts on water and diesel. Quite simply, Centerbridge got positive equity value in their transaction (i.e., more than the $86m they’re putting in), but this isn’t a screaming deal for them.

Underemployed,  4/17/2012  

2) However, the distribution of risk and loss shows why folks at Centerbridge are where they are. The transaction really takes it out on the Second Lien note holders. Granted, eliminating the Second Liens alone wasn’t sufficient to create equity value, in my estimation. The company needed additional capital, some reduction of First Lien debt, or a combination thereof, to de-risk the enterprise. So one could argue that the Second Lien note holders had little (or no) fundamental value to start with. But ultimately, for scrapping their investment, they received 6m shares, or 5.25%, of the 116m total shares possible on a fully converted basis (Preferreds and Class A to Common). At least the old common shareholders got $4m of cash to go away. This plan was accepted by 58% of Second Lien note holders? I don’t think they asserted themselves very well. I would have thought they might have realized more just leveraging their nuisance value. And PLEASE LET ME KNOW IF I'M WRONG IN ANY OF MY FACTS OR ASSUMPTIONS HERE.

Anonymous,  4/17/2012  

I think the math is off because you are using authorized shares not what will actually be issued.

There is about 20mm shares outstanding in the stand alone case including common and preferred. The second liens are getting around 6mm common and rights for 2.5mm preferred. Centerbridge is getting around 1.3mm shares for the direct investment and another 10.5mm shares in the equitization of the first lien. (which is about 1/2 their 1st lien position according to 2019 filing they own 120mm 1st lien and 29mm 2nd lien) That totals to about 20mm shares outstanding in the stand alone case.

In an Arctic case it is not clear how many shares will be issued to fund purchase vs acquisition debt. Assume they use 30-40% equity and the rest debt that implies 15-17mm preferred shares, however you need to adjust for the fact that in that case Centerbridge does not equitize its 1st lien and that saves you 10.5mm shares so the net effect is 5-7mm additional shares.

Underemployed,  4/17/2012  

In the stand alone case, Centerbridge would convert their $68m of first liens to $75m of preferreds. That's 81m fully converted shares right there, no? Plus the original 6.1 issued to Second Lien holders are subject to dilution, whereas the preferreds are not.

But the real leap I made (and am wondering if it's correct) is the Class A share. It's zero economic interest, but has 10m votes. It's not nominally convertible. But Centerbridge controls the board, so can they not later just decide to make it convertible? Thanks.

Anonymous,  4/20/2012  

I think your conversion ratio is off. The conversion price is $7.13 dollars per share so on $75mm you get about 10.5mm shares.

The Class A is a common share not convertible and it is a temporary share that goes away post reorg, it is simply there for CB to exercise in the interim and is eliminated after the Arctic bid whether is successful or not. CB is in control as the plan states they will own no less than 70% of the combined company.

There are about 6mm common shares being issued, 1.3mm in CBs direct investment. 2.4 to the prefes and 10.5 for the equitization if it occurs. If it does not occur then CB will get prefs to fund the Reddy acquisition. I estimate they will get 15-17mm shares depending on the cash debt mix of the aquisition. Since there will be no 1st lien equitization shares the net effect is an additional 5-6mm shares. In that case probably around 25mm shares excluding any shares to management.

Anonymous,  4/30/2012  

Are you leaving out some other Arctic claims that come ahead of unit holders? First, I think secured debt claims are 253.9M not $250.6 you show. In addition to the Direct Purchaser Settlement, there is another $1.5 payment from DOJ settlment that was missed in March, also A Canadaian rail $2m Settlement - these might be claims ahead of stock. Also, in U.S. Ch. 11, secured debt gets Post Petition interest before equity gets any distribution, so that woudl be another $10M (assuming 5 month process). Finally, while I agree Reddy could pay a big price, that will only happen if there are other bidders who show up with decent bids. Reddy will only pay what they have to, and if nobody else has a bid even close, they will try to pay only enough to cover the debt. It all depends on how many other bidders show up. I dont see another strategic who is big enough, and a financial buyer will not pay for synergies...so it might be only Reddy. Thoughts?

Anonymous,  5/01/2012  

Any thoughts on the optimistic valuation from one unhappy shareholder/founding partner of a smaller PE firm?

Anonymous,  5/01/2012  

Any thoughts on the optimistic valuation from one very unhappy shareholder/founding partner of a smaller PE firm?


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.