Wednesday, November 9, 2011

AG Trucano & Dilution At UWN.

I have received a several comments (both here on Ragnar and on Seeking Alpha) and a lot of emails asking for my thoughts on the AG Trucano deal. Generally, readers are asking how I view the dilution, right after they talk about how much they dislike the deal...

While I generally dislike dilution and am somewhat surprised that the company couldn't have negotiated better terms, we do need to be level headed and view this from a practical standpoint...

First and foremost, we can't forget that Nevada Gold is a super small company. It isn't on the investment radar of most. Additionally, big investors that have more money that God to allocate (and to some extent, end up making the markets pretty efficient) are not able to invest $4-$5 million in this company and have it move the needle on their results. This vacuum of funds makes it hard for Nevada Gold to grow... Given that the company has used a lot of sellers paper and other means of creative finance, this shouldn't have come as much of a surprise to anybody. On this note, if I had $5+ million bucks to throw the way of Nevada Gold in this deal, I would have been willing to pay $2 bucks a share for the stock and warrants... but alas, I don't.

At the announcement of the deal, AG Trucano was trading at a lower EBITDA multiple than UWN. Thus, while UWN stock is by no means expensive (and, I back this up implicitly as Nevada Gold is by far the largest allocation in my stock portfolio), the company seems to have given stock to a group of investors, so that they can continue to keep a generous amount of cash on their balance sheet to have at their disposal for a couple of things:

*Keeps well over $6 million in dry powder for bargaining in acquisitions...
*Makes funds via the S-3 available sooner, rather than later (a time value of money thing).
*Raised some cash to keep in AG Trucano, which, I assume will go to improving operations.
*Gives the potential for even greater leverage to be available for a future mega acquisition (relative to the company's present size)
*Will likely improve earnings on both an absolute basis (good for bankers who they will be needing to lend them money) and on a per share basis (good for me and my fellow owners of the company).
*Leaves a lot of money to lobby the legislature in Washington State... Which, due to the potential for UWN, is likely the most important thing that the company can be allocating limited amounts of capital towards.

I view this transaction as a whole, being one where while my cut of the pie that makes up UWN goes down on a percentage basis, the whole of the pie gets bigger. This in turn, gives me a more full dessert plate. along these lines, I feel richer today than I did a few weeks ago, despite that my holdings have taken a significant hit. If I thought that the shares were cheap at $2/share, I don't see why I should think any different now.

Sure, the price of the shares that were issued was significantly below what the company was trading at, but again, I think that it is a win for the company in the long run. It gets people talking about what the casino operator is doing; never a bad thing for a growing company that likes to do deals. The interest and subsequent investment in UWN also shows that the company is beginning to garner attention in the investment community- the warrants that were attached to the deal were a nice way to juice the deal up for the new investors. I think that they will make a lot of money in the next 5 years. In the event that ELSTs in Washington are allowed in card rooms, this will likely occur in the next year and the transaction will look stupid to have done in retrospect, but the company can't make allocation decisions based on the whims of a legislature that is in a far off state. After all, that would be crazy to do.

I don't like that the warrants probably won't be traded, but, that is sheerly from a selfish standpoint, as if I could get them at the right price, I would be willing to buy a whole lot of them.

I have been surprised that the price of UWN has fallen below what the shares were issued at... It seems rather a sensical to me that people were willing to invest a consequential amount of money in the company and that the market is all of a sudden unwilling to pay that price for a company that seems to be in much better shape than it was. Again, the new investors got what appears to be a sweet deal and I am surprised that UWN couldn't have negotiated something better. However, for the reasons that I have outlined, the terms of the deal seem to be such that present dissenters may be squawking over pennies, and as a result, may end up missing the forest for the trees.

Overall, the more that I think about this deal, the more that I think that it signals that the company is getting close to doing something big... Only time will tell.

Disclosure: Long UWN. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as think about. I may buy or sell shares of this security at any time.

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