Tuesday, 11 November 2008

Brainhunter - It's Time To Read The Tea Leaves

Brainhunter (TSX: BH)
Basic Shares Issued: 43.958 million

This is what's happened just in the past week.

1) The Board of Directors removes a restriction from the inside group so it can now buy but not sell stock during blackout periods.

2) Subject to final due diligence, management announces it's secured a new $30 million revolving line of credit from two institutions. The new facility will let BH take care of convertible debentures coming due as of this month through next February as well as a high interest loan coming to term.

3) Brainhunter announces it will actively pursue privatization with "a view to providing a liquidity event for public shareholders. The objective is to provide public shareholders with an option to sell their shares at a better valuation than the current market."
As of this writing (Nov. 11th) the stock was trading in the $0.15 to $0.20 range. Chairman & CEO John McKimm was pointed in the news release saying that "being a public company is providing no benefit." One should read the entire news release (click here) but management has set a target of early spring 2009 to "present shareholders with a liquidity proposal."

Obviously, people will now try to figure out what the company may be worth in a go private transaction and whether or not management can pull this off when a giant question mark hangs over the global credit market.

There are a number of variables that have to go into the equation beyond the question of finding a group willing to make a bid that is acceptable to everyone:

1) What is normalized operating cash flow going forward? Fiscal 2008 wrapped up at September 30th and while management has used a $240 million revenue number for the fiscal year there's been no discussion of cash flow, earnings or EBITDA.

2) Eliminating public company costs would add what to cash flow?

3) What sort of earnings or cash flow multiples have been paid to acquire professional staffing firms, which are in Brainhunter's peer group?

4) Could Brainhunter be a vehicle to acquire other firms with the right type of private equity group providing the backing?

5) What does total debt do to the net value of a deal?

It appears this could unfold fairly quickly over the next half dozen months. The Brainhunter story has been frustrating for shareholders and management. These announcements are the culmination of that frustration over the past three years in particular.

A point of interest is that professional staffing firms have proven that growth remains strong during times of economic stress as organizations look to outsource rather than be encumbered with the costs of employees.

This could be very interesting and BH deserves to be watched closely.