Transcript of David Einhorn’s Phone Call with Punch CEO: Insider Trading

David Einhorn’s insider trading case provides an opportunity to get to know him better. You don’t get to eavesdrop on a conversation between a top hedge fund manager and a CEO of a company (two bankers were also eavesdropping while David Einhorn was talking to Andrew Osborne). Here is the transcript of David Einhorn’s phone call with Punch CEO:

David Einhorn Greenlight Capital

GREENLIGHT ANALYST: All right. How do you dial a…?
DAVID EINHORN: Oh no, no. I said I wouldn’t [overspeaking] do it.
GREENLIGHT ANALYST: We might have to call Ten Holter to have him conference in. He’s really smart dialling.
OPERATOR: Thank you for calling Merrill Lynch conferencing. Please enter your passcode followed by the “#” sign.
[Dialling]
OPERATOR: After the tone, please record your name.
[Beep]
DAVID EINHORN: Greenlight…Greenlight…
OPERATOR: Has joined the conference.
PUNCH CEO: Hi.

GREENLIGHT ANALYST: All right. How do you dial a…?

DAVID EINHORN: Oh no, no. I said I wouldn’t [overspeaking] do it.

GREENLIGHT ANALYST: We might have to call Ten Holter to have him conference in. He’s really smart dialling.

OPERATOR: Thank you for calling Merrill Lynch conferencing. Please enter your passcode followed by the “#” sign.[Dialling]OPERATOR: After the tone, please record your name.[Beep]

DAVID EINHORN: Greenlight…Greenlight…

OPERATOR: Has joined the conference.

PUNCH CEO: Hi.

DAVID EINHORN: Hello, good morning.

PUNCH CEO: [Reference to Greenlight Analyst].

GREENLIGHT ANALYST: Yes, good morning.

PUNCH CEO: Good morning! Well, afternoon our time, morning your time. How are you?

GREENLIGHT ANALYST: Good. David’s here with me.

PUNCH CEO: Good.

DAVID EINHORN: Hello. I’m sorry I didn’t get to see you.

PUNCH CEO: Hi David.

DAVID EINHORN: Hi, I’m sorry I didn’t get to see you when you were in New York.

PUNCH CEO: No, no, we — well, we’ve — we’ve only had the chance to speak once, although we have seen [reference to Greenlight Analyst] a few times since then.

DAVID EINHORN: Oh, you’re — you’re — you’re getting more than — than I could help with anyway. So, this is good.

PUNCH CEO: Okay. That’s fair enough. Well, one day we’ll get you around on a pub crawl around some English pubs.

DAVID EINHORN: Oh, that sounds fun.

PUNCH CEO: It is. You’re right. This — we thought we could just take the opportunity to have a chat with you following I think the conversation you had with our broker at Merrill Lynch just about, you know, sort of where we are in terms of our position in the market, etc. You’ll have noticed today that we now have sold 11 pubs to Greene King as well so, you know, we’re making good progress on our strategy. But we think that, you know, it’s worth at least discussing in principle the — you know, where that takes us, and what other options we might have.

DAVID EINHORN: Okay.

GREENLIGHT ANALYST: [whispering - inaudible].

PUNCH CEO: So, you know, what we — what we said at the time of the prelims, and we reiterated it for the interim, is that we still expect to upstream cash from the Punch A and Punch B securitisations in this fiscal year together with the money that we’re generating from selling assets from the parent company down into the group. You know, there is a fair chance that we will be able to achieve the repayment of the convertible that’s due in December 2010. However, we’ve always said that there are very large moving parts in this and there is a, you know — there is a potential so that that isn’t achieved. And although the potential and the size of the — of any shortfall is small, we have to keep that in — we have to keep monitoring that situation. And moreover, as we — you know, as we do this process, obviously we’ve got to keep one eye on the securitisations as well, because it’s all very well up streaming cash to the parent company to meet the convertible, but it would be frankly pointless if we paid the convertible off only to breach either technically or otherwise the covenants in Punch A or – or Punch B. So it’s – it’s finite. The – there some specific advantages that we’ve taken — some — some specific things that we’ve taken advantage of in the last year which we can’t guarantee going forward, and — and so we really sort of — sort of, you know, think about what other things we can consider. I’m gonna give you some examples. So we’ve been very proactive on the buy back of debt. We bought back over 400 million pounds worth of debt. In fact, that’s up almost 100 million since the last time we — we were — we spoke, and we continue to buy pubs and, you know, excluding the announcement today — the announcement that we’ve made thus far, we’ve increased the number of pubs bought from 170 to over 300.

DAVID EINHORN: Sold.

PUNCH CEO: Sold, sorry, sorry. It’s already sold, yeah. So, I mean, I think that’s where we are. Having said that with all of the — the moving parts, you know, we are — we are seriously thinking about, you know, how we could actually better it. There’s one other thing which is probably important is whilst we’ve been buying back debt at a – at a substantial discount and we continue to believe that’s readily available in the marketplace, we’ve been able to take advantage of tax structuring to ensure that that discount is tax free. That tax structuring will have to change in October to maintain that. And whilst we’re confident that we can maintain that, we’re not 100 percent sure, and that would obviously make any — any — any buy back to debt in the short — in due course, more expensive.

So, that’s where we stand, and then we think in the circumstances therefore that, you know, it’s — it’s only right that we consider what other things we could do. And, you know, given the market — given the reaction of the market to the interim results, there are a number of alternatives that we — we — we think we can consider, and we just wanted to gauge your opinion.

DAVID EINHORN: Great. I’m not sure whether you’re asking what opinion you’re asking about though. Is it that — that you’re asking about issuing equity or you’re asking about something else?

PUNCH CEO: Well, we’re just talking about in general terms, about where we are at the moment in terms of what we’ve achieved so far.

DAVID EINHORN: Yeah.

PUNCH CEO: And, you know, where you are in terms of your position as — as shareholders.

DAVID EINHORN: Right.

ANDREW OSBORNE: I think it’s fair to say, David, that following the road show, there’s been a degree of [inaudible] in bound queries from both shareholders and non-holders [overspeaking] who believe that it would be appropriate for the company to consider issuing equity at this moment in time, which is the conversation I had with [reference to Greenlight Analyst] yesterday –.

DAVID EINHORN: All right.

ANDREW OSBORNE: — and so, you know, we wanted to — to follow up on that.

DAVID EINHORN: Right. You know, it seems to me that — that much of the potential attractiveness of coming and selling equity at this point stems from probably the fact that a few months ago the equity was at 40 pence, and now it’s at a £1.60 or something like this. And so, it’s up from the bottom. On the other hand, if you look back a couple of years ago, it’s — the equity is really down a lot. It trades at a very low multiple of the book value and, you know, the comp – the company — the equity continues to trade as if it’s really an option on the debt side of the capital structure. That’s — that’s the way that we look at it. And we think it’s a very cheap option because of the types of things that you’ve been — already been able to execute on, and I think that you’re going to be likely to be able to execute on, uh, going forward. I think that in — if the equity was — was overpriced and you had an opportunity to reduce the financial risk of the company, I think it would make some sense to considering equity at that point. But I think, if you just looked in a slightly different world and thought “Jeez”, if the stock had come from where it was and it had never gone to 40 pence but instead was sitting at 1.60, then 1.60 represented a new low, down from whatever previous higher price it had used to have been at, I don’t even think you would be considering selling equity at this point. And — and so, I think the mere fact that the stock went to some lower price is not reason to — to dilute the — to dilute the equity in a substantial way, you know, at this time. The — the next point would relate to, I guess, the amount, and I guess that would look — you could look at that two ways. I suppose if it was a very small amount of equity being raised it would not be all that dilutive, and so there wouldn’t be a reason to have a very big concern about it. But, on the other hand, if there was a small amount of equity that was being raised, it wouldn’t really solve any of the company’s intermediate or longer term risks. And if there’s a large amount of equity to be raised, well, then it’s massively dilutive, then it — it will dramatically — I — from my perspective, worsen the risk/reward from — from owning the stock. So, I — I would — I would suggest continuing executing what you’re doing right now, which seems to be doing very well. I agree with you, it seems like there’s going to be a lot of debt in different parts of the capital structure that seems like it’s going to be available at attractive prices, and I — and I wouldn’t allow myself to get browbeaten by convertible bondholders or, excuse me, Merrill Lynch investment bankers or whatever else, you know, that — that is more transaction oriented. I think we create a tremendous amount of value by selling, you know, by selling pubs at reasonable multiples of EBITDA and then repurchasing debt at big discounts, and we’re hoping as equity participants not to make 10 or 15 percent of a year, you know, as market equity, but we’re looking for a significant revaluation of this company on the basis that at some point the world looks at it and says, “Yes, you are — you — you — you have — you are clearly solvent, and you clearly deserve some kind of a multiple,” and — and the thing that would cut that off would be issuing so many equity shares that, you know, that – that — that the upside disappears.

PUNCH CEO: Yeah, David. That’s very — very helpful. Just in terms of — firstly I completely agree with you in terms of the — the option, the – the effective implied value attributed to the — to the equity, the option versus the debt side of the capital structure. And therein lies the conundrum in a — in a sense that — that of course that — that option value at 40p was pure option value. Now, there is at least some expectation that we might survive despite people’s better expectations back in, say, January February.

DAVID EINHORN: Right, right.

PUNCH CEO: In terms of – in terms of [overspeaking].

DAVID EINHORN: I — I would — sorry. I would say as a — I would say as a rule of thumb, if the market capitalisation of the equity is less than half of the face value of the debt, the — the stock remains sort of in an option area.

PUNCH CEO: Well, the only – the only challenge to that is — for the entirety of our value – of our time as a public company, that has been the case.

DAVID EINHORN: Mm hmm. I don’t know if that’s really true. Is that really true?

PUNCH CEO: Yeah, yeah, I mean even — even when our share price was, you know, just over 2, 2.5 billion, you know, the mark — the market cap value of the debt was over 4.5 billion.

DAVID EINHORN: Yeah, and that’s about — then you’re right. Then — then you had just crossed through the — the cusp which is of course why — the stock was at risk to go down, you know, much more than [overspeaking] as it changed.

PUNCH CEO: Well — well — well, I don’t necessarily disagree with that either –

DAVID EINHORN: Yeah.

PUNCH CEO: — because at that time, I was one of the few shareholders, and in fact I was challenged by somebody who said that I thought that there was, you know, considerable — there was too much hype in the — in the share prices at the time, but in — in terms of just a couple of the other points you made –

DAVID EINHORN: We weren’t –

PUNCH CEO: [overspeaking].

DAVID EINHORN: — we weren’t involved at that point, so I really don’t – honestly, I don’t really know.

PUNCH CEO: I — I totally appreciate that and I, you know, I appreciate your — your — your involvement as a shareholder. In terms of the — in terms of the — the point about the share prices… the 40p versus the 1.60 or something, I think I — I slightly disagree there because — I mean, to be honest, the — the — the — the key point is whether – when’s the right time to de-risk the balance sheet, and to be honest, that’s not a function of the share price. The — the option value is — is fine. The prin — principle of — of — of valuing it on an option basis is perfectly fine, and I — to be honest, you know, we have always managed the capital structure on a — on a minimal amount of equity relative to — to the debt. We’ve always looked to the debt side of the equation as the more important part of the capital structure from use of cash. On the other hand, I mean, what I don’t want to do is be in a position where we take it too fine, and that — that you trip over a — a hurdle that creates a series of problems, which means that the option value of the equity really is that, and the op — the equity disappears. Well, whilst in — in share price terms, the magnitude of the problem might be significant in terms of the overall value terms relative to the debt the magnitude of the — of — of the difference is very small. And — and if you can — if you can see your way through to a path which allows the re-rating of the stock to compensate for that and also to take into account the fact that you can use the cash to buy back debt at a substantial discount — to continue to buy back debt at a substantial discount, any use of cash is very creative from a shareholder point of a view immediately.

DAVID EINHORN: Well, this comes – I mean, this [overspeaking].

PUNCH CEO: I know, just — just — just one other point on the convertible. We have not spoken to any convertible holders other than our efforts to buy back the convertible in the market. So, this is not a — this conversation is not motivated by a conversation with convertible holders, and nor for that matter actually is it driven by investment banks. Having been a poacher turned gamekeeper, I’m as sceptical as you are, I’m unsure about their — their motives.

DAVID EINHORN: Yeah. What I would ask you then is — then the question comes down to, because maybe we’re just looking at it from a different perspective, it comes down to a question: well what do you think the stock is worth?

PUNCH CEO: Well, I’ll be honest with you. The stock is worth either very little or — or a lot more than it is now depending on –

DAVID EINHORN: Okay.

PUNCH CEO: — on the expectation of — you know, of the next couple of years.

DAVID EINHORN: Yes.

PUNCH CEO: And — and I don’t mean — I don’t mean it from my personal perspective of what it’s actually worth, but I’m talking about what the market reaction to that will be.

DAVID EINHORN: No, no, no. No, no, then you’re making a mistake. Then you’re letting the market dictate to you [overspeaking].

PUNCH CEO: I’m sorry, [inaudible].

DAVID EINHORN: Then you — you don’t let the market dict — my advice to you is, don’t let the market dictate to you. You figure out what you think it’s worth, and then use the market as a opportunity to create value, which is something that I think you’ve been doing instinctively, if not explicitly, on — on the debt side of the balance sheet, and — and actually with some of the asset sales. You’re letting the market tell you what the opportunity is and taking advantage of it. So, why — why throw that aside for the purpose of — of figuring out what to do about the equity.

PUNCH CEO: Oh, sure. But then — then — then — then that’s the same in terms of looking at the opportunity in terms of the equity. If there is — if there — because –

DAVID EINHORN: Of course.

PUNCH CEO: — to your point — to your point, there is, yeah looking at — looking forward in terms of our position and now I’m talking in general terms rather than specifics –

DAVID EINHORN: Right.

PUNCH CEO: — you know, there is a risk profile to the strategy that we’re taking. That risk profile must have an effect on the — on the value that you would ascribe to the — to the underlying equity, yeah?

DAVID EINHORN: Right, um. Yes, of course.

PUNCH CEO: Yeah. So — so, therefore, what I don’t want to do is perhaps to have a conversation with you at some stage and say, “Look, this left field event”, which is in — in and of itself relatively minor –

DAVID EINHORN: Mm hmm.

PUNCH CEO: — has caused a sort of domino effect on all of the activities we’re doing.

DAVID EINHORN: Mm hmm.

PUNCH CEO: Or that we’ve done very well, for example, on — we’re meeting the conv — the convertible, but in doing so, we’ve had to push the securitisations to the limits, and there has been a technical breach on the securitisations, and that in turn takes – takes the equation there. So, I’m — you know, I’m naturally — we have — we have — despite everything, we have acted, I — I mean, whether it’s instinctively or — implicitly or explicitly, we’ve been — we’ve been very clear in terms of our strategy of realising cash to and – and buying back debts at a discount, as we did back in — in the autumn of last year. On the other hand, as I said in the beginning, the number of moving parts in that does put yourself in a position where there is a – there is a high risk profile to that, and there has to be a value to the question to — to removing that risk or at least alleviating that risk.

DAVID EINHORN: Yeah.

PUNCH CEO: And that’s — that’s all I’m trying to — I’m trying to evaluate, and –

DAVID EINHORN: Sure.

PUNCH CEO: — and also there’s another key point which is the timing of that, because 11th hour, 59th minute is brilliant in terms of — in terms of theory, but in reality the — the process that you have to go through to have a discussion about equity or — or quasi-equity-type transaction is much longer than that, the legal process you have to go to, document, etc., seek approvals. And therefore, you don’t have the privilege of being able to sort of leave it until the last minute and then pull the trigger.

DAVID EINHORN: Yeah. Well, let me ask you this. You still — you sort of ducked the question about what you think the value of the — of the stock is with — with — without a — without a deal.

PUNCH CEO: Um… Well…

DAVID EINHORN: It’s — it’s important to have a view to make a — to make a reasoned decision.

PUNCH CEO: I — I think — I think the — the valuation is — is fair at the moment. On the other hand, I don’t think necessarily that the market fully understands the extent of, the pluses and minuses to get us to the position we are faced in 2010.

DAVID EINHORN: Yeah.

PUNCH CEO: And so, therefore — therefore, if I was putting a risk factor on that I would discount it.

DAVID EINHORN: Mm hmm.

PUNCH CEO: But at the same time, I just — you know, I’m not — I’m not setting a market price for the — for the equity. I’m just running the business. I’m actually, frankly, not looking at the equity price; I’m looking at it from the point of view of maximising the value for shareholders, long-term.

DAVID EINHORN: Right. Well, I think its fine to run the business not looking at the equity price, except when you’re considering doing a transaction relating to the equity. Then — then — then it’s — then you can’t run the business without considering the equity price. When you’re doing it — when you’re transacting in the equity you have to think about the equity price.

PUNCH CEO: Well, yes — yes and no. Because the way I look at our business and I’m — I’m — I’m being simplistic, I know that it’s far more detailed than this, but it is that we have a fixed asset value of port – of the portfolio at a number, and at the last valuation, the number was 6.5 billion pounds. Now — now, the enterprise value of the business today — sorry, the — the — the value of the debt on a gross basis is around 4.5 billion pounds, so that would imply — so there is a — roughly a 2 billion-pound asset value that is attributable to the equity.

DAVID EINHORN: Right, now, what’s the value of — of the debt at market?

PUNCH CEO: Right, the market value of the debt is around 3.5 billion pounds so that’s a 3 billion implied value to the equity.

DAVID EINHORN: Okay. Then — and — then we –

PUNCH CEO: So that [overspeaking] — so that compares to a, you know, a position today of just over 400 million pounds market cap. It seems like a very large delta which is worth — worth preserving and that’s my — so my view on that basis is it’s, you know, the valuation is grossly undervalued. On the other hand –

DAVID EINHORN: Mm hmm.

PUNCH CEO: — if I trip over some further issue and the house of cards, you know, you know, takes effect and we lose all of that –

DAVID EINHORN: Mm hmm.

PUNCH CEO: — we won’t have time to turn around and say, “Let’s fill in the gap today”, because it will have gone, it won’t be attributable to us in a direct form. It will be very difficult to extract.

DAVID EINHORN: Mm hmm. So — so how much equity do you think you need to raise to protect the situation?

PUNCH CEO: Well, I — I think — I — I think the market sort of dictates this. I don’t think it’s a matter for the market to dictate that. We — our view is simple, that is, that, you know, we have to make sure that we can preserve a sensible headroom to the covenant from a securitisation and — and take out the convertible as the — the maximum and minimum requirement of any discussion. But there’s absolutely — if you go back over the history, and I know — I — and I — and I perfectly respect that you’ve not been involved from the beginning, but when we originally floated the company, we did an initial public offering of 116 million pounds. We have only done since that time –, that’s 161 million pounds. We have only done, since that time, 175 million pounds [inaudible]. So, to be absolutely clear, I don’t — I don’t look at the business from an equity perspective and if — you know, and it’s not my intention to over-equitise this business whatsoever. The transactions that we’ve done, for example, we’ve shown, pretty substantially dispassion in what we’ve sold to ensure that we maximise value on the debt and, so this — so it’s merely about making sure that — and we can turn around to the shareholders and say, “Actually, anything that we do is sufficient to give ourselves a – headroom for a considerable period of time into the future and also addresses the convertible”. That’s the maximum and that would be the minimum that would be worth considering.

DAVID EINHORN: Mm hmm. So, would you — as you pencil that out, what do those amounts turn out to be?

ANDREW OSBORNE: Something like 350 sterling.

DAVID EINHORN: 350 million sterling?

ANDREW OSBORNE: If you were — if you were to roughly sort of work on the basis that you kinda took out the — the converts, and that’s something that gives you, say, 10 percent headroom in within both of the covenants, filed covenants.

DAVID EINHORN: Wow, wow. That would be shockingly horrifying from my perspective. Can you sell half the company just at a buck and a half — a Euro — a pound and half? Oh, no.

ANDREW OSBORNE: So those proceeds are applied to buying back debt at say 60 in the pound and remember any –

DAVID EINHORN: Who cares –

PUNCH CEO: — [inaudible].

DAVID EINHORN: — who cares, who cares, after a year of going through this, now we’re going to dilute ourselves like this. Oh, no.

ANDREW OSBORNE: Why do you get diluted?

DAVID EINHORN: Because you doubled the share capital almost.

PUNCH CFO: Yeah, but [overspeaking].

DAVID EINHORN: And this is –

ANDREW OSBORNE: You know, and on a pre-emptive basis.

DAVID EINHORN: We’ve done — we’ve done all of this. We get to double our investments and have basically still highly levered thing, subject to all the same operating risk, just so that you guys don’t have to follow through and, you know, deal with the converters. We’ve been discussing with you for the last year and a half, where, at worst, it was gonna get very close to some small amount.

PUNCH CEO: Dave — Dave — David, but we’re sorry, we’re — we are acting on the basis of the current plans so you — today, we announced the transaction to sell 11 sites to Greene King.

DAVID EINHORN: Right.

PUNCH CEO: We’re not done, you know, that is — that is the priority and we’re carrying on business as usual. On the other hand, I would be — I would be at fault if I did not, sort of at least identify the — the risk profile of the issue.

DAVID EINHORN: Right, I don’t — I — I don’t think –

PUNCH CEO: I’m – I’m not –

DAVID EINHORN: — if there is — if there is risks that we don’t understand, we should talk about them some more, but, I mean, we’ve — we have spent a fair amount of time kinda going through this; and we understand it’s — it’s a — and it’s not that we’re callous towards the risk that the company might — you know, faces. We’ve survived watching the stock go all the way to 40 pence, for crying out loud. But, man, this sort of like validates the worst fears, and it seemed to me like you’re –

PUNCH CEO: [overspeaking].

DAVID EINHORN: — it seems like — it seems like you guys were really on a course towards figuring out how to manage the securitisations, manage the liquidity, manage the covenants, sell assets, you know appropriately, take advantage of discounts where available in the market, and, you know, this doesn’t — I don’t see that this gains us anything. I mean, you’re gonna be able to pay out unless you — if there is some reason why you’re not gonna have any money to upstream to pay the convert that you need to pre-fund and fully fund that now because the thing is that if you do this offering the — the price of the converts, the majority is going to go straight to par. So you’re not gonna get to buy it back at any discount at all, maybe 95 or some thing like this.

PUNCH CEO: Sure, well just [overspeaking].

DAVID EINHORN: You know, in — in — in fact — in fact — in fact you lose the opportunity also within the securitisations to buy a lot of the debt back at a discount because the market – the debt market will better revalue to reflect the higher solvency of the company and the equity market will say, “Jeez, that’s all well and nice, but there’s twice as many shares outstanding”.

PUNCH CFO: Okay, just [overspeaking].

DAVID EINHORN: I wanna — I would rather — I mean, if I were a bondholder, I would love this.

PUNCH CEO: Okay. To me — to me this — just a couple of fill-in points, in turn. Firstly, that we very much preserve — process — progress this business as usual. This is — is not a, you know, this is not a, uh, we can’t – we’re not going to carry on unless we do this — this — that, you know, unless we contemplate some alternative. We are operating on that basis and we have disproved the market for a very long time, specifically on that basis by — by moving ahead or being ahead of the curve on the disposals, and on our ability to buy back debt.

DAVID EINHORN: Right, but we haven’t yet [overspeaking].

PUNCH CEO: You know, it’s very –

DAVID EINHORN: But — but as equity holders — we — as equity holders we have not — we, in our minds — in Greenlight’s minds we think that that’s true, and in your mind I think you think that it’s true, but we just haven’t seen it in the stock price.

PUNCH CEO: Well, let me just come back — just come back to that, okay, because there is this more compared — more to that. We have — we have cash that we could — to spend on the convertible right now. We have cash to spend on the convertible. The convertible is trading at the levels that you were just talking about so therefore, that isn’t readily avail — the convertible isn’t readily available to discount already. And that’s just a function of the fact that it is small, relatively illiquid, tightly held and also has a relatively short period of maturity. So, therefore, [overspeaking].

DAVID EINHORN: Well, and — and also — and also because the market is judging it to be likely to be repaid.

PUNCH CEO: Correct.

DAVID EINHORN: Correct.

PUNCH CEO: Correct. See — so, therefore, if we – if we are – if we’re at fault for anything, we’ve done too good a job on affecting the market expectations. On the other hand, on the securitised debt, there is 4.5 billion pounds on the securitised debt, there are 21 tranches, and despite the fact that at the interim we gave a clear indication of the magnitude as to which we’ve been able to buy debt in the market, as I said earlier, we have continued to be able to buy debt in the market and we will continue to do so, and we do not believe that whilst I — that the market will close — that the market arbitrage pursuant to that will close down and — in — to the same extent. So, to the point – from the point – at the moment what we are doing is we are – we are risking – increasing the risk on the securitisation at the cost of the securitisation for the sake of paying off the convertible at — at or close to par. That’s what we’re doing at the moment because that’s the short-term requirement. Now, that is inefficient. If you can redirect your resources that you’re doing to buying back securitised debt at a — at a continued discount, then that is more efficient use of shareholders funds. It comes to the same thing. By 2010, we have to have generated 208 — 212 million pounds or 220 million pounds including accrual to meet the secure — to meet the convertible. But, at the same time, what I don’t want to do is to do that and then to be at a position where we trip to default on any of the securitisations.

DAVID EINHORN: Well…

PUNCH CEO: The — there is of course — there is of course another factor which is, as we get to the year-end this year, when — when we get to within 12 to 15 months of the — of the repayment date on the convertible, then we have to have debates with the accountants about going concern, emphasis of matter type of conversation. And then of course, if the market perceives this to be a risk then we go back to the sort of [inaudible] — you know, analysis on share price that we had back in January.

DAVID EINHORN: I — I didn’t understand what he said.

PUNCH CFO: When we get to the August [overspeaking].

DAVID EINHORN: I’m sorry, I didn’t — I didn’t understand what you just said.

PUNCH CFO: Yeah, at the year-end, clearly our accounts are audited –.

DAVID EINHORN: Yeah.

PUNCH CFO: — and the auditors are required to look at least 12 months forward to ensure that there are no events in that time horizon that would give any kind of questions or — or concerns around a — a going concern type of deliberation. And — and clearly at the year-end, when we look forward 12-15 months, there are a couple of events on the horizon that – that the auditors will have to get their minds around. First of all, the convertible, and I — I think we talked about that one at length. The second one is the — the securitisations themselves following upstream are very tight on their covenant default test. By –[reference to Punch CEO’s] point is taking the cash out to deal with convertible, does take the securitisations very tight for their default test, and actually one of them, Punch B, starts to amortise which makes achieving the DSCR default test that much more difficult. So, the two events on the horizons of the auditors will have to deliberate on and — and — and take into consideration that have real risk attached is the extent of the company to repay — to repay the convertible in full and — and — and, you know, based on the kind of conversations we’ve had before, you could see a potential shortfall of up to 50 million for — for that. The second thing they’ll have to have a look at is — is the tightness of the covenants within the securitisations, particularly within Punch B as it starts to amortise and — and whether again there is comfort there that no default will happen in that time horizon. So, actually, the bulk of the — yeah, the bulk of the cash that we’ve been talking about is all about creating headroom within the securitisations on an ongoing basis, uh, to — to a default, a potential default. Now, if the auditors can’t get themselves comfortable with all of those things then they are required under UK accounting practices to comment specifically on that and then – and that itself will adversely affect market sentiment, that’s the point that is being made.

DAVID EINHORN: Look, you know, if you think that the company is gonna default on the debt and go — become worthless, of course you should sell equity. Not only that, we should sell our equity and — because then the equity just isn’t gonna do so well. Even if you raise equity, you know, it – it unwinds so many of the things that we’ve been believing for the last year and a half, we will need to reassess. And that’s unfortunate because I’ve been feeling very good about this investment.

PUNCH CEO: Yeah, I mean, I am — to make it quite clear, you know, and we’re — you know, I’m the largest private shareholder in the business and I’m very, very clear in terms of my responsibility –

DAVID EINHORN: No, I’m pretty sure — I’m pretty sure I’m the largest private shareholder.

PUNCH CEO: Well, I wouldn’t — got it, sorry. I have got something like Greenlight as any financial institution rather than — rather than an individual, but, I mean, given that your name is ascribed to — to the holding collectively, I will accept that. The — so — it — it, you know, I — I’m trying to balance out the various — the various components of the — of the risk, that’s all I’m trying to do. Happy to have a more detailed conversation with you about some of those — those issues, but it — it is not possible to do that without having to — having to require — having to have you sign an NDA. That’s just a legal requirement and – and we’re happy to do that at short notice. And, you know, we’ll take it from there. As to the — as for the business, I think — actually we’re still, you know, we’re still trading in line with expectations and we, you know, we’re working very hard, as I said, on the — on with the activities that we could — we outlined when we saw [reference to Greenlight Analyst] in New York a couple — a month and a half ago.

DAVID EINHORN: Yeah. That’s good.

GREENLIGHT ANALYST: If you’ve done so well through the first half and since then at buying back debt, why are, in particular, the Punch B securitizations still going to amortise over the next year when you — those tranches could be easily prepaid? Have you been buying back other debt?

PUNCH CEO: Yes, I mean, the answer is — specifically on Punch B, [reference to Greenlight Analyst], the — the — it’s the Punch B amortising debt, the A7, been trading at virtually — virtually at par. So — so actually there’ll be — the — the — the advantage of buying back that tranche of debt is marginal compared to other tranches of debt that are available in the marketplace.

GREENLIGHT ANALYST: Isn’t the advantage of buying back that tranche of debt the ability to avoid a potential cash trap or default?

PUNCH CEO: Of course — of course and that’s why when we measure that…

DAVID EINHORN: [overspeaking].

PUNCH CEO: –when we measure any of the debt that we — we — we do look at, we look at it in terms of its DSCR impact, not just its absolute value. So, of course that’s the fact and as you said, you know, we do not believe that there’s any reason why we would not up — upstream Punch B this year, but we’ve got to look forward beyond that. We’ve got to look at the impact of that. We looked at — look at the trading performance of that portfolio and the — the quantum of debt that we would have to repay to ensure that we don’t trigger a default in due course and then, you know, those are factors that we have to keep in mind. You know that’s as a general point.

DAVID EINHORN: Yeah. Well look, we’re — obviously we’re not in favour of you defaulting on the debt.

GREENLIGHT ANALYST: Is the problem that you’ve sold so many pubs that your cash generating ability is notably lower than historical?

PUNCH CEO: No, no, but it is a function of course. When we’re looking at disposal of pubs, we obviously got to take into account the reduction in EBITDA versus the reduction in debt and the interest and all the – sorry, the DSCR cost of that.

DAVID EINHORN: Right.

PUNCH CEO: And of course — of course what we’ve been doing has been highly accretive, and that’s why we’ll continue to do that because we’ve been buying back debt that is disproportionately more expensive than the loss of the EBITDA from those sites, and that is very much part of the core strategy and we will continue to do that come what may.

GREENLIGHT ANALYST: We appreciate that. I think that the difference in we do not want you to default is that we do not think that the math follows, that it is accretive to sell low priced equities to buy back debt at a discount. We just don’t think that math works unless the equity is of course high priced, which we disagree with.

PUNCH CEO: Yeah, but I — I mean, I think on pure maths — on the pure maths of that trade, you’re right. There — there is — you know, there is a point at which that’s not worthwhile. It is a question of what we do with that, and what would be the consequences if we didn’t do that. Those are the — those are the factors we have to take into account. And also for that matter, the quantum, because I mean, if we were suggesting a quantum that was completely out of line, then, you know, which would over-equitise the company, then I of course would understand that that was completely unnecessary.

DAVID EINHORN: Right.

PUNCH CEO: The point I tried to make earlier was that’s never been the way we’ve approached the business.

DAVID EINHORN: Right, and that’s the — that’s the issue. The issue is — is that the equity is trading still as an option, at least in my opinion, and whether it’s a £1.60 option or a 40-pence option, or even a 2 or 2.5 pound option, it’s really an option on a very highly levered capital structure. And so, you know, it seems to me that raising the kind of equity you’re talking about, it doesn’t put the company into a situation where everybody will agree that it’s de-risked. People will still look at it and say it’s a very highly levered capital structure. And so it’ll still have the basic economic risk of the — you know, the UK consumer, and so on and so forth, that is there. It’ll still have the risk of a — you know, of a highly geared capital structure. And I think what you’ll wind up with is some re-rating of the debt but not really much of a re-rating of the equity, and really all we’ll have done is sort of validated, you know, the criticisms of the company that — you know, that we’ve been hearing for a long period of time. Now, obviously, if a company looks at the math on the maturity of the convert and says, “Jeez, we’re gonna be , you know, 20 million pound short or 30 million pound short”, it makes all the sense in the world to not run that right up to the wire in year-end 2010, but to decide that one needs to prepay the entire — pre-fund three — 300 – 400 million pounds of — of stock to give, you know — you know, headroom at such a — at such a dilutive time – Um…Mmm…I’m not really sure that you’re gonna to get the re-rating from whatever risk that you’re [overspeaking].

PUNCH CEO: I think [overspeaking] sort of implies that there would be the ability to do a two-stage process, and of course, markets don’t necessarily like that, but — but be that as it may, I mean, I think, the problem we have we keep — we’re going around in circles. I mean, you know, these — these are talking in principles, and you know I — I – I totally respect your view, you know, our — our approach to the business has been exactly that basis. But, at the same time, you know, we’ve done significant analysis, and we come — you know, we — we have to consider those — that, that analysis is to determine, you know, where that takes us strategically.

DAVID EINHORN: Yeah, I agree with you. You’ve done [overspeaking].

PUNCH CEO: Hear about it more detail, and that detail goes beyond where we can go, so –

DAVID EINHORN: Of course. So, if you’re — if you’re now — look I mean the thing is that we’re not gonna make this decision, you’re gonna make this decision. You guys are the managers, you guys are in charge of the company; we’re shareholders, and we prefer to be passive shareholders and not run the company. If we wanted to run the company, we should be doing something different. We want to run our company, not your company. If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done — signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the — you know what’s going on here. And — and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. Its’ — it’s — it — it really is some — it really is okay, it’s not what we’re looking for, and I’m not trying to browbeat you into doing something that’s going to bankrupt the company because there’s a lot of reasons the company shouldn’t want to go bankrupt. But that — that — that is how I –

PUNCH CEO: 6,000 employees worth, yeah.

DAVID EINHORN: No, no, no, I’m — no, I’m — I’m totally serious.

PUNCH CEO: Yeah, yeah — no, I — I — listen — I appreciate that David. And — don’t get me wrong. As a major shareholder, we have to give you the opportunity to have the conversation and we’re just simply trying to sort of give you that opportunity. I totally appreciate that we’ve had a very good dialogue with [reference to Greenlight Analyst] throughout the time as shareholders and yourself and so, you know, I’m just – we can take that conversation as far as we can on this basis or we can take you further if you want to on – on a different basis. You know, clearly, if we decide to do something and it comes in a, a, — and it’s in the public domain, then we can have further conversations at that time.

DAVID EINHORN: Sure that’s — you know, but that’s — you know that that’s fine. You know, if there’s something that you think, you know, can be explained to us, you know, without crossing any lines, we would — uh, we would love to come to a full understanding, and see the — you know, see the sensibility of what you’re saying. If — if that can’t be done, then unfortunately we’re probably left to, you know, to just draw our own – our own conclusions.

PUNCH CEO: [overspeaking].

DAVID EINHORN: And I – I don’t mean that — I don’t mean that in a negative way, it’s just that it’s just what we have to do.

PUNCH CEO: What I would ask you — I will ask you to do that in fact — if that’s the case, then don’t draw conclusions right now on the basis of this conversation because it’s it is a slightly sort of — sort of a — in-concept conversation rather than one that we’re, you know, than — than anything else.

DAVID EINHORN: Okay, fair enough.

ANDREW OSBORNE: You know, I was gonna say, David, I mean look — and clearly, you know, we’ve — we’ve — there’s a whole lot of analysis sort of behind this and there’s a sort of presentation, if you wanted to, but I mean, we would need to kind of talk your counsel about an NDA if, you know, if you wanted to go down that route which [overspeaking].

DAVID EINHORN: Well, I look at — I don’t — I don’t mind — I don’t mind the concept of an NDA in the sense that we’re not going to, you know, pass on information to others that could, you know, be competitively harmful to you and so on and so forth. I — I am uncomfortable with an NDA that is going to, you know, restrict our ability to, you know, to transact.

PUNCH CEO: We’re — we’re well aware of that, and to the extent anything, we ever did anything like that, we would have to be — give you the — a clear understanding of the timescales, which that — that covers and the, you know, to the fact that the company will cleanse any — any conversation to allow you to trade in due course.

DAVID EINHORN: Yeah, that’s — that’s right.

PUNCH CEO: Well, we’re absolutely aware of that and — and if that’s, you know, and if you want us to consider that on that basis, I’m happy to do so.

ANDREW OSBORNE: We can give you a timeframe.

DAVID EINHORN: So, what would — what — what would that be?

ANDREW OSBORNE: Well, within less than a, kind of a week.

DAVID EINHORN: Within a week? Yeah, we can [overspeaking] we could probably do something with –

PUNCH CEO: We — we have a [inaudible].

DAVID EINHORN: Well, I mean, let me ask you this. Is the decision basically taken? I mean, have you basically decided and it’s just a question of discussing it with people and, you know, having these kinds of conversations and the analysis is done and the decision has, you know, effectively been made; or has the decision not really been taken and you’re just kind of thinking things through and haven’t really determined what you want to do?

PUNCH CEO: No – I mean huge analysis has been done.

DAVID EINHORN: Right.

PUNCH CEO: But no — no formal decision has been making – been made and we’re — we’re consulting with various people of the consequences of that — of that analysis. There — there are — there are other external factors that we have to take into account, as you said, about, you know, 11th hour type decisions and — and things like that which — which mean that, at some point this conversation, you know, we — we were going to have to contemplate this. You know, in the list of things that we would have to we would be — we would be remiss, if we did not consider this in the list of things we have to consider as — as running the company.

DAVID EINHORN: Okay, fine.

ANDREW OSBORNE: Really, it’s fair to say like, consulting with all of the — the major shareholders in terms of taking, you know, taking into account, their views.

DAVID EINHORN: Okay. Is there a — I mean — do — what do the other shareholders you talked to say?

ANDREW OSBORNE: I think, I mean, a num — a number of people have sort of signed NDAs because we had a bit more open conv — conversations. I think it’s fair to say that, you know, broadly, most of the other shareholders are supportive.

DAVID EINHORN: Supportive of what?

PUNCH CEO: Well, I – stuff that’s in the NDA –

DAVID EINHORN: Oh, I see. All right, look, if it’s a question of – let us – let us think this through. Let us — let us — let us think this through whether it makes sense to sign an NDA or not. I’m — I’m not sure that it does.

PUNCH CEO: Look — well, it’s a — I do — I really appreciate the time; I really appreciate the frankness of the conversation and – hopefully we can have further conversation in due course.

DAVID EINHORN: Very good. Thank you guys for — for spending the afternoon with us.

PUNCH CEO: Thanks very much.

DAVID EINHORN: Bye now.

GREENLIGHT ANALYST: Thank you.

PUNCH CFO: Bye.

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