DHTI _ Private Placement
Let's take another look at DHTI. The company traded down another 10% today to 29/32's off from it's highs above $8 per share a mere 12 months ago. One wonders why. But if you call the company you can't get much information from them. Right now they are in a "quiet period." The qualified private placement is still up in the air. So the company can't say anything.
Which is just as well, since it seems that management is so cavalier about their responsibility to shareholders as to make their comments almost as valuable as their stock: which is to say, not very.
The company has (to its credit) announced plans to cut costs by 20%. But even so, it begs the question: Are they are still wasting our assets? Sadly, it appears so. By selling the company now, today, probably 80% of the SG&A costs could be wiped out. If that happened, half (or more) of the company's revenues would fall to the bottom-line. It would become profit. And therein lies the value. You see, that's the reason another company might wantto buy DHTI.
DHTI is trading at a ratio of one half of sales. Competitors are trading at five to eight times sales. If the company was sold at 3x to 4x sales it would be immediately accretive to whoever bought them.
If management was thinking about shareholders, they would sell the company. But they aren't.
Well, maybe they are.
Let's look at the private placement. This market has been treating Mitchell Laskey's position in DHTI like Loreena Bobbit treated her one-time husband. It's cut him. But, he trumpets, we are going to do a private placement and I (along with other high-net-worth individuals, including board members) are going to put our own money into it.
That should signal some hope for investors shouldn't it?
Look closer. Private placements of this nature are usually sold at 66% of face. At the current stock price that puts the private placement at about $0.50 per share. The placement looks to raise $4 million. That translates to 8 million shares. When placements get this cheap, it is not unusual to see huge warrant positions attached to the shares. In fact, the warrants could swell the potential (additional) shares issued by as much as 100%. If Iam half-right, the attached warrants will move the total shares out by 12 million. That means the shares out will move from 18 million shares out to 30 million.
Close to 100% dilution.
The beauty of this private placement is that Laskey and his friends position themselves to take advantage of it. Then (if worst comes to worst) they sell the company at $2.50 to $3.00 a share (about half of what they could reasonably get today). Their existing shares (though diluted) rise into the sale and the shares they bought in the placement move up six fold.
Throw in some management options and the wildly inappropriate pay they award themselves.. Laskey got a raise of 100K this year. for what? Guiding this company to stellar returns? No. More likely, he had to make up what he lost when he bought a chunk of stock at $2.75 a share as a show of confidence and support late last year. Suddenly the horizon looks clear. You won't have to sell the yacht after all. Wellsley is still within reach and theBently won't have to go. It's easy to understand why everyone is in such high spirits at DHTI. (Sigh.)
There are a couple of drawbacks to private placements. The stock us tied up for 12 months. It is restricted from sale. But if I understand it correctly, if the company is sold, the restriction is lifted (especially if language to that effect is included in the prospectus). Now, I've called the company. I've asked if they are selling. The answer I got was an unequivical "NO." (Unless the price is right.) The company says they are not on theblock. That's the official word. But 2Q is expected to repeat the dismal results endured by stockholders in the first quarter. Privately, it is whispered that Laskey will step aside and sell the company if things don't at least break even in the third quarter. If the past is prolog, the board will rubber-stamp whatever Laskey says will happen.
No wonder. By then the deed will be done. The placement will be closed. The dilution will be with us. And Laskey and his friends will be in pretty good shape.
Although it never seems to benefit anyone except the lawyers, it seems to me that a shareholder lawsuit is almost inevitable.
It isn't a pretty picture. And the real question is should you sell or not. The answer? I don't know. When faced with what appears to be, at best, monumental arrogance on the part of management, and at worst, a systematic effort to defraud shareholders, it shouldn't be hard to know what to do. But it is.
In the end, I expect Laskey to look toward his own interest. He seems to be quite full of himself. Thus I expect the stock to rise, but not nearly enough to recover the losses many shareholders have seen. I expect the placement to price near fifty cents with an equal number of warrants following. Each warrant will grant the right to buy another share at a buck, maybe $1.50. (We won't know the specifics until the private placement documents aredistributed.) If I am right, that's how they are going to get out of this rat-hole of a stock and gain the profits they thought they had a year ago. Right now, Laskey appears to be readying the lifeboats for him and the crew. Let the Titanic sink. They got theirs.
If you have the coin*, maybe you should buy a chunk of the private placement.
Art
* Qualified investors required by the private placement must typically have at least one million in assets or income of 200K for the past two years.
PS I'd like to be wrong about this. I've believed in DHTI for a long time and it makes me ill to think that this is what is going to happen.
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