Amaranth LPs caught a break on Cinram

How long ago was it that defunct hedge fund Amaranth was the big player at Cinram (CRW:TSX)? Once things seized up at the once powerful hedge fund, and the limited partners switched into liquidation mode, a variety of market players were waiting for Amaranth’s 15-18% block of Cinram to shake loose. By late November, with Cinram’s units trading just over $20, Amaranth’s caretaker team announced that the fund was outta there.

Although it is a bit of a pyrrhic victory, Amaranth’s hard done by pension funds and Life Cos caught a break on that position. The units are now trading around $12 and going lower: pre-market looks like an $8 open this morning. Genuity Research just put out a sell rating in the wake of Cinram’s announcement that it was suspending distributions in January.:

“Distributions suspended effective January 2008.

As expected, Cinram announced a distribution cut along with its Q3/07 results; however, the magnitude of the cut was beyond our expectations and we believe the expectations of the market. A distribution of C$1.95 per unit will be paid for November and December to all unitholders.

New guidance for 2007 and 2008 provided.

For 2007, the company is now expecting revenue in the range of $1,900 million to $1,950 million, and EBITA in the range of $275 million to $285 million. The new guidance implies an expected EBITA margin of approximately 14.5% in 2007. For 2008, the company is now forecasting flat revenue in 2008, but did not provide guidance for EBITA. Of note, the potential negative impact of the Writers Guild of America (WGA) strike has not been factored into Cinram’s 2008 guidance.

Valuation – How far could the units fall?

We are forecasting that tangible net book value will rise to $3.40 per unit by the end of Q4/08 as cash is conserved within the company and intangible assets are amortized down. Since the acquisition of the Time Warner assets in October 2003, the forward EV/EBITA multiple reached a trough of approximately 2.5x in late 2004. The average EV/EBITA multiple since that time has been 4.5x.

Downgrading to SELL from HOLD and lowering target price to C$7.75 from C$18.50.

Our C$7.75 target price is based on a multiple of 4.0x 2008E EV/EBITA, and represents a 0.5x discount to the average multiple since the Time Warner acquisition to reflect the increased lack of visibility into the operations of the company and the risk of more downside from the WGA strike. We would only be interested in buying the units if they were to sink to levels that are supported by recent historic trough multiples and our forecast of tangible book value for a sustained period of time – below C$5.00 per unit.

Last September, the former Amaranth head lobbied Cinram’s Trustees to sell the business. A couple of months later, Credit Suisse was engaged to “review Cinram’s strategic alternatives”. Does anyone know how that process turned out?

MRM