alstry (35.49)

SPF's Dilutive Offering

May 27, 2008 – Comments (4)

MP Fund will buy $381 million of new preferred stock convertible into 125 million shares at $3.05 per share.

A secondary offering will take place for 50 million shares at $3.05 per share.

MP Fund will be able to convert $128 million of senior and subordinated debt(which would have likely been worthless) into about 90 million shares.  Conversion price about $1.40 per share(unless of course the Fund purchased the debt recently in the open market at a substantial discount and then the purchase price to the fund would likely be less than $1 dollar per share).

Let's be clear, this transaction eliminates any threat of bankruptcy in the near future.  It basically wipes out the current shareholders as far as their ownership in SPF.  Current shareholders go from owning 100% of the company to less than 20% if all shares get exercised.

It is very likely that current officers and directors will get new options and/or get old options repriced.  You think current shareholder will get a similar deal....good luck.  As I said, these guys are laughing their way all the way to the bank at current shareholder expense.

EVEN AFTER THIS TRANSACTION, SPF will still be one of the most leveraged HBs after factoring JVs.  If the company actually was forthright in valuing its current land holdings at market value....its leverage ratio would skyrocket.

This deal will do very little to affect SPF's future profitablility as a company.  It will avoid BK in the near future but likely to continue to lose hundreds of millions of dollars in the next few quarters.

This was clearly a creative deal.  It gives SPF a few more quarters of life.  However, management has capped any profitability for the future as now there will be about 300 million shares outstanding.  It also provides a fertile environment for professional to short at opportune moments.  Most benefit except current shareholders who have been holding their shares for any length of time. 

The funny part about this deal is that it really helps the debt holders.  Not the stock holders.  My guess is that the fund was holding a bunch of additional SPF debt that is not evident in the press release. 

The question now is what interest will SPF be paying on the preferred?

Whether the fund will ever convert its preferreds?

Whether the market will ever realize that the fund potentially obtained 90 million shares of SPF at less than $1.00 per share depending on whether they purchased the debt at a discount.

There are a lot more subtle issues to this deal which are not readily ascertainable.  In the end, becareful of initial market reaction based on a corporate press release....remember to look at all sides before making your decision.

Ask yourself this question, why would a company that analysts say is worth upwards of $7 per share issue a convertible offering when netted out at around $2 per share for  80% of the entire company?

Kudos to FB.....he nailed it.  Current long term shareholders.....well that is another story, they just got nailed.