A regular commenter, Sean, asked for a view on Headline Group Limited, HLD.AX. I decided to take a look and post my process as I go. As you know this site hosts my ramblings and not recommendations. As Sean said in his comment this is a highly speculative stock.

Headline Group Overview

First Stop ASX Site HLD.AX and from there on to their website.

“Headline Group Limited has exclusive rights and is currently launching the world’s leading retail parenting centre into Australia under the international brands of Mothercare and Early Learning Centre Toys.”

Hummm, it’s at this point I wonder if Sean secretly knows me and is teasing me. When we returned from the UK with two tiny tots in tow my gorgeous partner and I lamented the lack of both Mothercare and ELC stores in Australia. We even talked about getting the franchise for them, but decided that as we didn’t have any expertise in retail that we’d make do with whatever we could find at the disparate childcare retailers in Australia. In the UK we bought absolutely everything for our two kids from Mothercare and ELC. So I guess that is my bias going forward in this review, I love the stores and think they’ll be a hit in Australia. Whether HLD will make their shareholders better of is an entirely different question.

Financials

Next stop is HLD’s most recent financials, 1H 2010 and any market updates since then.

Market Update: $14M of tax losses can be utilised.

Financials: At the current price of $0.33 HLD has a market cap of $39.5M and an EV of $34.7M (EV adjusted for recent $1.9M sale, note they are planning on spending $3M within 3 months).

While Headline Group’s past financials are of interest they aren’t much use for predicting their future. HLD are emerging from their chrysalis and may have transformed into a beautiful butterfly.

I don’t have time to dig more and even less time to articulate the story here, but for those interested a half hour digging through the linked documents will quickly get you up to speed. In short they’ve bought 61-64% of Australia’s franchise for ELC and Mothercare and starting the Mothercare roll-out at pace.

More

AGM Presentation

2009 Full Year Roger Montgomery was a shareholder and director.

Merger Transaction Rationale EBITDA/Sales aim in year 2 of 10%

Merger Closure with details

How much of the New Venture do HLD holders own?

HLD receives $4.5M in Skansen KCG, vendors/management of Kids Central receive $1.65M and $2.5M convertible note (redeemable, 10% coupon quarterly in arrears, conversion on one for basis at a liquidity event) Plus earnout of $0.35M based on EBIT of KC’s 2010 store contribution to EBIT.

So KC could own $1.65M + $2.5M + $0.35M = $4.5M i.e. 50% of Skansen KCG.

However, HLD invests $4M for launch of Mothercare and get $4M convertible note with 10% coupon and settled on termination in 50% equity, 50% cash.

HLD received an option to invest further $3M, which they have now said they’ll take up within 3 months, on the same terms. Vendor received an option to invest further $1M on same terms.

So it looks like HLD ($4.5M+$2M+$1.5M = $8M) to KC vendors ($4.5M + possible $0.5M = $4.5 to $5M) SO HLD should won 61.5% to 64% of the KC, ELC, Mothercare business called Skansen KCG.

Five year projection of EBIT of $10M on $159M sales.

Disclosure: Wish I had more time to dig deeper in HLD, it looks like it could be a opportunity.

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