Shares in BWX Ltd (ASX: BWX) could hit volatility today after Fairfax Media reported some shock allegations against the business and its management duo that are seeking to buyout the group with financial support from private equity backers Bain Capital.
BWX is being sued in the U.S. by Waterloo Capital Management who are financial advisory specialist in M&A, transaction structuring, restructures and general capital markets deal making.
According to Fairfax the group was hired by BWX in 2017 to provide advice to its then CEO and CFO John Humble and Aaron Finlay as to how to get maximum value from the business including over potential acquisition targets.
The court claim reportedly alleges that Waterloo's idea of a management backed private equity buyout together with Bain has now been put to shareholders, without Waterloo receiving the arrangement fees they should have been entitled too in first suggesting the deal.
As such things have turned sour with a left at the altar Waterloo now hurling sordid allegations against BWX that includes the idea that management were seeking to sell the company for much of 2017, while at the same time raising capital from investors without disclosing this.
In October 2017 the group raised $100 million at $5.92 per share to fund the acquisition of Andalou Naturals in a deal Waterloo Capital alleges it first mooted to BWX's management duo.
According to Fairfax Waterloo also allegedly suggested to BWX that the best way to structure such deals was to pay with debt for a company in the U.S. on say 10x earnings which could then be effectively arbitraged by raising capital from BWX investors at 20x earnings.
This kind of multiple arbitrage is perfectly legal, although it does throw light on BWX's non-stop acquisition strategy of 2017 and why its management duo and Bain Capital now believe they can extract value from the business even at a $6.60 per share takeover offer.
Other allegations made by Waterloo Capital include that Mr Humble and Mr Finlay stand to benefit financially from a "management incentive pool" if a buyout such as that currently proposed goes through. According to Fairfax the the legal writ alleges the two could benefit to the tune of "$200 million over five years by taking the company private".
Foolish takeaway
Anyone who bought BWX shares on the basis that its Sukin skincare brand had good growth prospects is likely be getting cold feet, while the allegations also raise doubt as to whether the recent acquisitions were all about building a US operating platform and cost savings, or private-equity style value creation via financial engineering that took advantage of BWX's high valuation on public markets.
Waterloo Capital reportedly even advised BWX's management to take advantage of the fact that "ASX consumer companies with any China angle" (e.g. Bellamy's Australia Ltd (ASX: BAL)) trade at large multiples of EBITDA. As such if it were to consider re-listing the bought out company as it now proposes it could do so at a large multiple of earnings.
I'm kicking myself for not having sold all my BWX shares recently, as I expect the share price will come under pressure this week given the allegations against the avaricious nature of its CEO and CFO.
The key consideration being that selling today could be a costly blunder if the $6.60 per share takeover offer does find the support of the BWX board and shareholders. Given the increasing mess the company is becoming many investors are likely to cash out now rather than risk the deal falling through in an outcome that is likely to see the stock fall significantly below its last closing price of $5.45.
