Dilution
http://seekingalpha.com/article/291653-dilution-on-september-19-sell-off-coming-for-yrcw-shareholders
Dilution On September 19: Sell-Off Coming For YRCW Shareholders
9 comments | by: Studioso Research September 5, 2011 | about: YRCW
In our first article discussing YRC Worldwide (YRCW), we discussed the implication of the company’s restructuring plan, and the dilution resulting from the issuance of billions of additional shares.
In our second article discussing YRCW, we outlined the progression of the restructuring plan, given milestones surpassed on 22 July.
We reiterate our price target of $0.28 per share, based on the calculations in those two articles.
This article previews the upcoming shareholders’ meeting, and also looks at the options market’s strong suggestion that YRCW shares will decline significantly once that meeting takes place.
1. Review: details of balance sheet restructuring completed
On 22 July, YRCW announced that it had closed its financial restructuring plan.
As a result, 4,999,999 preferred shares were issued to holders of the company’s debt and to the IBT Employee Stock Trust. These shares will convert into 1,910,131,449 common shares once shareholder approval for the Charter Amendment Merger is received.
Furthermore, $240 million face value of convertible notes were issued, and these notes convert into common stock at prices below $0.12, as discussed below.
2. Details of upcoming shareholder meeting and conversion of preferred stock into common stock
The preferred shares will only convert into common stock after shareholder approval is received for the Charter Amendment Merger, as described in the company’s S-1 filing of 17 May. This shareholder meeting is scheduled to take place on Friday 16 September at 11am New York time.
It is highly likely that shareholders will give this approval, given that holders of the newly issued preferred stock will be able to vote on an “as converted” basis – representing about 97.5% of the company. A vote to approve the Charter Amendment Merger will also allow preferred shareholders to sell their (converted) common stock – the preferred stock is not listed on any exchange.
It is also highly likely that holders of the Series A and Series B notes will convert their debt into common stock, given that the conversion prices are extremely low compared to the 2 September closing price of YRCW shares of $0.7440.
Description of convertible debt
Conversion price
Series A notes
$0.1134
Series B notes
$0.0618
Once the company receives shareholder approval for the Charter Amendment Merger, the following securities will be converted, or will become convertible:
Description of debt or equity
Size of holding
Number of common shares this converts into
When conversion will take place
Preferred stock issued to debt holders
3,717,948 shares
1,384,832,389
Automatic conversion upon shareholder approval of the Charter Amendment Merger
Preferred stock issued to the IBT Employee Stock Trust
1,282,051 shares
477,528,410
Automatic conversion as above
Series B notes
$100 million face value
1,618,122,977
Will become convertible upon shareholder approval as above
Series A notes
$140 million face value
1,234,567,901
22 July 2013
(two years after issue date)
The following table describes the increase in the number of YRCW shares outstanding based on probable future events:
Current shares outstanding
47,770,650
Shares outstanding after conversion of preferred stock into common stock
1,910,131,449
Shares outstanding after conversion of preferred stock into common stock and after conversion of Series B notes into common stock
3,528,254,426
22 July 2013, assuming conversion of all preferred stock into common stock, and conversion of all Series A notes and Series B notes into common stock
4,762,822,327
Once shareholder approval is received on 16 September, over 1.9 billion shares will be available for sale, compared to the current shares outstanding of less than 48 million. A more probable share count will be 3,528,254,426 shares, which includes the conversion of the Series B notes.
3. Valuation guidance from options market
The options market also provides a great indication of market expectations of the value of YRCW stock following the completion of the restructuring. As at the close of trading on 2 September, the September $0.50 and $1.00 calls were trading with time value of close to zero. Whereas the September $0.50 puts were bid at $0.24, despite being $0.24 out of the money. Likewise, the October $0.50 puts were bid at $0.39, suggesting a possible decline as low as $0.11 before the October expiration.
This skew suggests that most investors expect a significant decline in YRCW shares as a result of the impending dilution, which should take place on or about 19 September, the trading day after the shareholders' meeting.
We reiterate our price target of $0.28 for YRCW, as calculated in our first article about YRCW.
The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any stock you should conduct your own research and analysis, and seek advice from an independent financial adviser. We have a short position in YRCW and will profit if its share price declines.
Disclosure: I am short YRCW.
Additional disclosure: The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any stock you should conduct your own research and analysis, and seek advice from an independent financial adviser. We have a short position in YRCW and will profit if its share price declines.
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