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alstry (35.38)

SPF's Dilutive Offering

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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.

4 Comments – Post Your Own

#1) On May 27, 2008 at 11:48 AM, StKitt (30.13) wrote:

Imagine the shareholders' class action lawsuit is being drafted as we blog. That'll suck up some of the new cash coming in.

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#2) On May 27, 2008 at 11:58 AM, alstry (35.38) wrote:

Wait 'til you see my next post as I have quickly reviewed the legal filing....:)

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#3) On May 27, 2008 at 12:00 PM, leohaas (32.26) wrote:

You may not like it, but this deal brings the likelihood of SPF going BK down significantly. That likelihood is priced in to the stock price, and since it is way down since before the deal, the stock price is way up.

You may classify what SPF is doing as shenanigans (and I kinda agree with you on this item--one of the few times I agree with you), but this is the only way the company is going to survive. And if SPF survives, no doubt MP Fund will make out like a bandit. But I am not sure that is at the current shareholders expense. Would you rather have undiluted stock in a company that is almost sure to go under, or diluted stock in a company that is almost sure to survive?

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#4) On May 27, 2008 at 12:05 PM, bellard (99.33) wrote:

FB got the equity infusion correct. I stopped out my short a 2.8 for the same reason. I was thinking TOL might come in, but this deal make sense long term for new investors.

I have posted before about someone buying back SPF cheap debt first, then go equity, increasing the value of said debt. This may be what has happened.

I still think we are back to that 3-6 trading range. No BK in 2008. 2009 housing macro-trends are now my focus. Currently it does not look good.

Two points I would like to make. Shorting a 2 dollar stock does not sense.

 Also there will be a housing cyclical upturn, allowing HB's to generate large cash flows. This will happen in the next 2-3 years imho. The sky is falling, but not forever......

Check out my blog on the Flintstones, you may actually agree with it......

 

 

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