Looks like the dilution was greater than 25% to the common holders.
AOL says the total outstanding common is now 16 million+
The dilution is LESS than 20%. Prior to the offering, the company had between 16.1 and 16.3 million shares outstanding (the '98 R&A says 16,291k; the last quarterly says 16,152k). The company has now issued 4 million new shares. The new proportion that a shareholder owns is therefore -
16.2 / (16.2 + 4) = 80.2%
Since shareholders previously owned 100% (of what they owned) and they now own 80.2%, they have been diluted by less than 20%.
However, this "Dilution" overlooks the cash injection provided by the 4m diluting shares. This has raised the book value of the company by about $39m or about $1.93 per share (for the 20.2m new total).
The stock was worth about $11 prior to the fundraising, which gave the company a market cap of around $178m. Due to the "dilution" each shareholder now owns only 80.2% of the larger company, so their shares should now be worth about $8.82. However, the company is now "worth" $1.93 more per share than it was (due to injection of the cash). Add this back to the $8.80 and you get a new figure of $10.75 per share. (In case you think this is cheating, then just check the new market cap - 20.2m x $10.75 = $217m - i.e. the market cap has increased by $39m, which is the amount of cash injected).
The actual effective dilution to shareholders is therefore around 2.5%. (Assuming that the stock again trades at $10.75! - which it EASILY will).
The net result is that the company has improved it's financial position in a way that should significantly increase future growth. We may now each own a slightly smaller part of the company, but it is a bigger company with better liquidity and far better growth potential.
Now, what is really neat, is that the company has simultaneously raised a whole stack of cash through a debt offering. This dwarfs the cash injection from the equity, and gives the company significant growth potential. The new cash massively increases the gearing of the company (not always a good thing), but does so at a time when it is probably a sound strategic move. We are entering an up cycle in the NG/Oil industry, and it is far more sensible to increase your gearing at this time than during the down cycle - which is what so many companies did a couple of years ago! Oil seems likely to stay around $20 over the medium term, and NG prices seem likely to rise due to the disparity with oil. We also have a particularly favourable long term outlook for NG due to it's low emission properties.
What I find amusing is that at the top of the last cycle, so many companies increased their debt to levels that were unsustainable, but everyone at the time thought this was a good move - until the bubble burst. SFY didn't do this and was actually in a sufficiently strong position at the bottom of the cycle to make some bargain acquisitions. We are now at a stage in the cycle where it is prudent to increase gearing, and this is what all the schrewd players are doing. Now is a great time to be spending money in the industry - drilling costs are low, and weaker players are still keen to sell properties at bargain prices. SFY has again shown excellent timing. Somehow though, the small investors seem to think there is something wrong with this. I guess that's why the company has such a high institutional holding and such a good reputation amongst professionals.
Mark |
