Here is a table of the impact on BV/Share at varying levels of
conversion price. Look how dramatic the change is the lower the
price goes. Obviously, Cityscape didn't think in their wildest
dreams that these Preferred stock issues would be flirting with
this kind of dilution.
7,580 Preferred Shares still outstanding
2,420 Preferred Shares Converted
$230,000,000 Book Value at June 30
34,000,000 Existing plus est conversion of 2420 Pref.
$6.75 Current Book Value per Share given the above
Assumed
Conv Conversion of Fully Diluted
Price Pref. still out Common BV Change
-----------------------------------------------------------------
$1 75,800,000 109,800,000 $2.09
$2 37,900,000 71,900,000 $3.20 1.10
$3 25,266,667 59,266,667 $3.88 0.68
$4 18,950,000 52,950,000 $4.34 0.46
$5 15,160,000 49,160,000 $4.68 0.33
$6 12,633,333 46,633,333 $4.93 0.25
$7 10,828,571 44,828,571 $5.13 0.20
$8 9,475,000 43,475,000 $5.29 0.16
$9 8,422,222 42,422,222 $5.42 0.13
$10 7,580,000 41,580,000 $5.53 0.11
$11 6,890,909 40,890,909 $5.62 0.09
$12 6,316,667 40,316,667 $5.70 0.08
$13 5,830,769 39,830,769 $5.77 0.07
$14 5,414,286 39,414,286 $5.84 0.06
$15 5,053,333 39,053,333 $5.89 0.05
$16 4,737,500 38,737,500 $5.94 0.05
$17 4,458,824 38,458,824 $5.98 0.04
$18 4,211,111 38,211,111 $6.02 0.04
$19 3,989,474 37,989,474 $6.05 0.04
$20 3,790,000 37,790,000 $6.09 0.03
In my mind, if someone were smart & rich, they could accumulate a
large number of these shares at these price levels, and then
eliminate the diltution affect to drive the price back up. I
believe CTYS was brought down to the $6-8 level because of the UK
issues, lawsuits, earnings concerns, ratings downgrades,
liquidity risk and Freddie Mac concerns. From that point on, I
believe it is the dilution concern that has driven the price down
to the levels we are seeing now, based on the compounding effect
shown above. If the dilution affect is the primary driver of the
stock falling to these levels, then all you need to do is buyout
the Convertible Preferred stock.
Lets assume that some big institution has spent $15 million
accumulating 5 million shares. In addition, they go to Bear
Sterns and tell them they'll loan Cityscape the money it needs to
convert the remaining portion of the Preferred issued in April,
and agrees to provide the same deal, if necessary, before the
Sep'97 Preferred becomes convertible in March of '98. [The April
'97 preferred issue is allowed to be converted 1/3 at a time in
Oct, Nov & Dec of '97; the Sept '97 Preferred issue is
convertable in Mar, Apr & May of '98.] Seems to me that without
the effect of the potential dilution, CTYS would quickly climb
back up to that $6-8 level described above, thus, at a minimum,
doubling the $15 million investment, and having a nice income
stream from the money they loaned Cityscape. To further round out
this scenario, Bear Sterns could possibly negotiate a private
placement, with far less dilution that would eliminate the
liquidity risk.
On the other hand, Bear Sterns may find a White Knight that can
come swooping in to rescue Cityscape shareholders from a
disastrous dilution of their investment. The Preferred would be
wiped out, and the liquidity risk would be gone. I would think
potential suitors would find Cityscape quite a bargain now, but
what price would be agreeable to both sides? Majority holders
have to weigh the prospects of massive dilution against what
losses they may have to take on their original investment in
CTYS. To me, a price that would be agreed on is much higher than
the closing price of $2.75 !!
In a nutshell, having Bear Sterns in the line-up, with their
expertise, I feel very confident that all of the significant
issues will be taken care of, and we'll see CTYS trading much
higher in the near future.
Time to go watch the World Series! Best of luck to all!! |
