IN THE MONEY: Mind That 'Mini-Tender' For Energy Shrs
04 Sep 16:48
By Michael Rapoport
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Chester Billingsley says it himself: Tender offers
structured like the ones he made Tuesday for stakes in four energy companies
are usually "scams."
It's just that his aren't, he says. He insists that his company's offers to
buy stakes in Aquita Inc. (ILA), Dynegy Inc. (DYN), Mirant Corp. (MIR) and
Reliant Resources Inc. (RRI) are legitimate, even though they are
"mini-tenders" - those controversial, below-the-radar offers for small stakes
in a company that the Securities and Exchange Commission has criticized as
presenting a host of potential pitfalls for investors.
Billingsley says that while mini-tenders have been roundly abused in the past
by those seeking to prey on unsuspecting investors, there's nothing wrong with
mini-tenders in and of themselves. "In theory, a mini-tender offer is
absolutely a fine thing," Billingsley said.
Well, maybe. But even if you accept that Billingsley's offers are on the up
and up, that still leaves a host of nagging questions about them, particularly
about the offering terms and the financing. They're questions any investor
should want answered before tendering their shares, lest they find themselves
locked into a situation that's distinctly not to their advantage.
Mini-tenders are offers for stakes of less than 5% of a company's shares -
less than 5% because that's the level that would trigger a bunch of disclosure
requirements under SEC rules. Often, the offers are for less than a company's
market price; they typically try to take advantage of unsuspecting investors so
that the tenderer can buy the shares at a bargain and resell them for a quick
profit.
But the offers announced Tuesday by Main Street AC Inc., of which Billingsley
is president, are all for MORE than the four energy companies' market prices -
a 25% premium to the shares' recent trading prices, in fact. Main Street is
tendering for up to 4.9% of the shares of each company - 8.8 million Aquila
shares for $5.45 each, 13.3 million Dynegy shares for $2.88 each, 19.7 million
Mirant shares for $4.97 each, and 14.2 million Reliant shares for $7.32 each.
The premium to the market price is what sets these offers apart from other
mini-tenders, Billingsley says. "The difference between us and the scams is
that we offer a premium."
Read the fine print before you assume that that means shareholders will
benefit by tendering their shares. Because once holders tender their shares,
they can't be withdrawn. And Main Street AC says that while the tender offers
are scheduled to expire Oct. 4, they could be extended - "very significantly"
extended, in fact. Billingsley acknowledged that in theory, the offers could be
extended almost indefinitely (although if that were to happen, he says he'd
need "a good batch of lawyers" to defend his position).
What does this mean? It means that most of the risk here rests with the
shareholders, not with Main Street. Main Street can simply wait for the stocks'
prices to rise above the offering price, so it can actually end up paying a
price that's below the market price. If the share prices don't get to that
level by Oct. 4, all Main Street has to do is extend the offers until they do.
In an investor advisory on its website, the SEC notes that some people who have
issued mini-tender offers have used just such a tactic.
In fact, Main Street acknowledges in its tender offers that the offers could
be extended by "weeks or even months," and it doesn't have to pay for the
shares until the offers close. (The reason Main Street actually cites for the
extension has to do with the financing for the offers as opposed to waiting for
a better price, but we'll get to that.) Meanwhile, shareholders who have
irrevocably tendered their shares into the offers will have lost control of the
shares. They could be locked up, frozen, as the offer gets extended over and
over.
Billingsley says that it's "not our intention" to extend the offer, but he
notes that any shareholders tendering their shares are making a tradeoff - "a
certain price at an uncertain time." And he says Main Street is shouldering
some risk here too, because it can't withdraw its offers. If the shares don't
make it up to the offering prices, "we're still stuck."
Given these issues, if Billingsley's offers are legitimate, why structure
them as mini-tenders at all? Billingsley says that with the companies' share
prices moving, he wanted to act quickly, and the disclosure requirements
triggered by tendering for a 5% stake would slow him down.
Who's Paying?
In addition to the mini-tender issues, investors should recognize that Main
Street's funding isn't 100% secure. The company says it has $170 million in
funding, but that's coming from the expected exercise of Main Street warrants
held by former investors in 15 oil and gas partnerships that Main Street bought
and reorganized.
So what guarantee is there that those investors are going to exercise the
warrants? Billingsley says that if there's significant interest in the tender
offers and Main Street has the chance to acquire significant stakes in Aquila,
Dynegy, Mirant and Reliant, then naturally they'll want to exercise the
warrants. In addition, the warrants are callable by Main Street.
But Billingsley admits that "there's no guarantees on Wall Street," and that
not all of the $170 million is currently in the company's hands. In fact, Main
Street says the potentially lengthy extensions of the tender offers may occur
if "funds are not yet available from the exercise of the warrants to pay for
the shares."
In addition, at these offering prices, Main Street is theoretically committed
to spend up to $288 million to buy all the shares tendered. If there'sa heavy
response to the offers, where would the rest of the financing come from?
Billingsley says he isn't expecting such a heavy response, but he says that if
it happens, Main Street could take out a loan against the value of the tendered
shares to provide the rest of the financing. "We would attempt to buy it all,"
he says.
Mirant recommended Wednesday that its shareholders not tender their shares
into the mini-tender offer, citing Main Street's right to extend its offer
indefinitely. Spokesmen for Aquila, Dynegy and Reliant all said they're in the
process of evaluating the mini-tender offers for their shares.
On top of everything else, Main Street has a history that's worth investors'
knowing about. The company was a California chain of health clubs before it
filed for bankruptcy in 1998; it emerged from Chapter 11 in 2000 as a company
interested in oil and gas assets, although it's currently a shell company. The
company used to be publicly traded on the OTC Bulletin Board; it's not public
now, but intends to apply for relisting once it meets minimum listing
requirements.
So: a once-bankrupt shell company whose financing isn't guaranteed makes
tender offers that: a) are structured in a way that has in the past made the
SEC uneasy, and b) feature terms that seem to place much of the risk with the
shareholder rather than with the company making the offer.
Maybe Billingsley is right. Maybe his mini-tenders are legit even though
other mini-tenders are scams. But before making an irrevocable move that could
make them lose control of their shares, investors should know what they're
getting into.
- Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
(END) DOW JONES NEWS 09-04-02
04:48 PM |
