Ensco Rowan: Strange Investor Proposal At Times Of Panic

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Summary

Ensco Rowan shareholder Luminus Management proposes raising additional debt and paying a special dividend.

The proposal has zero chances to be realized and comes at inopportune times, signaling panic rather than attempt to unlock value.

That said, Ensco Rowan’s major downside move in the last month and a half is fundamentally unjustified.

When the market is in a panic mode, strange things happen. The recent proposal by Ensco Rowan (ESV) shareholder Luminus Management has good chances to win the title of “weirdest shareholder proposal of the year”. In all likelihood, many investors and traders who are reading these words have already seen it: Luminus proposes to borrow $2.5 billion to pay a special dividend to shareholders (the proposal itself and the accompanying presentation can be found at thisĀ website).

The proposal – theory

Luminus Management is disappointed with the stock’s recent performance and has the following idea (a full quote follows):

  • Raise $2.5 billion of priority guaranteed debt and safeguard the company’s ability to issue additional structurally senior debt.
  • Safeguard future financial flexibility (on both a junior and senior priority guaranteed basis).
  • Fund a $2.5 billion special dividend.
  • Better incentivize management to continue to pursue this value creation plan and at the very least re-value employee equity and option grants.

Current Ensco Rowan market capitalization is roughly $1.5 billion. If we assume that it can raise $2.5 billion of debt and then distribute it as a special dividend, anyone who purchased the shares below $12.5 is bailed out plus will retain the shares as a free option on the company’s survival with a capital structure that includes an additional $2.5 billion of debt. In practice, the stock will surely rise much higher under such a scenario due to short covering and the fact that Ensco Rowan’s equity won’t be immediately priced at zero after the company has paid the dividend.

The proposal – practice

Luminus Management believes that Ensco Rowan can raise up to $4.5 billion of debt

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