Rose Glen info 2
How to Raise Money at the Wrong Time
By Aram Fuchs
Since my last article on TELIGENT (TGNT) (The Sell Report, The Telecomm Analyst, Oct. 31, 2000), the stock is down 58% based on its closing price of $2.88 on Jan. 3, 2001. Back in October, the company was saying that it was about to raise cash to "secure additional financing to fund the company's operations." While some investors got excited, I cautioned that any cash infusion would dilute current shareholders substantially. On Dec. 8, 2000, TELIGENT finally announced the transaction, and it was even uglier than I expected.
Let's get right to the central features of the deal so you can realize how awful it is for shareholders:
TELIGENT gets the right to "put," or sell, up to $250 million worth of stock to Rose Glen Capital Management over the next 18 months. Rose Glen is a financial firm that specializes in making private investments in public companies. One reason a publicly traded company like TELIGENT sells shares to a firm like Rose Glen is that it is usually able to get the investment firm to hold the shares for an agreed upon period of time. By preventing the investment firm from immediately selling the stock, the public company helps to maintain a balanced supply of its shares.
But TELIGENT was unable to secure a lock-up period for the shares to be purchased by Rose Glen, although the investment firm still gets to buy the stock at a 5% discount to the public market price. In addition, Rose Glen gets warrants to buy more TELIGENT shares. (Warrants are typical features of these kinds of deals.) So, hypothetically, TELIGENT can force Rose Glen to buy TELIGENT shares at a 5% discount at some point in the future. Then Rose Glen is free to turn around and sell the stock immediately — earning a few percentage points for its one-day investment. Obviously, a few percentage points per day produces an awesome annualized return.
If TELIGENT puts most of the stock to Rose Glen for less than $5 a share — remember, TELIGENT closed at $2.88 on Jan. 3 — Gerard Klauer Mattison figures that dilution will approach 90%. In layman's terms, the company will essentially have sold 90% of the company to Rose Glen, leaving current shareholders with only 10% of the company.
Now, you might be thinking to yourself, if it's so awful then why did TELIGENT do it? Essentially, the company had no other choice. It put itself in this bind by building out its network so quickly that it remained completely dependent on the capital markets.
Shareholders have a right to be angry with management, led by Alex J. Mandl, the former president and chief operating officer of AT&T (T), for failing to raise the capital it needed back in March 2000, when the shares changed hands at $100. If TELIGENT had done so, it would only have had to issue 2.5 million shares, and current shareholders would still own approximately 96% of the company.
What's the lesson learned from the TELIGENT debacle?
Knowing when to raise equity is a skill that management of TELIGENT simply did not have. Next time, I'm sure Mr. Mandl will know how to take advantage of the stomach-churning volatility in this absurd stock market, and he will raise money when the company's stock hits such a high level.
thetelecommanalyst.com
Entity that signed other docs, managing entity, is in PA.
1) Names of Reporting Persons; I.R.S. Identification Nos. (entities only)
RGC International Investors, LDC
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2) Check the Appropriate Box if a Member of a Group (See Instructions)
(a) X
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(b)
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3) SEC Use Only
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4) Citizenship or Place of Organization Cayman Islands |
