Why should you short Carrington here at $7-8?
WARNING: My rantings here are somewhat simplified in interest of conserving space, but read the S-3 on EDGAR. Some of the quotes below are taken out of context.
Take a look at the Registration Statement dated 12/10/96 for Carrington Labs.
sec.gov
In October, Carrington announced a financing deal (a so-called Reg S) with some offshore investors. These investors put up $6.6 million, just a week or so before the announcement that the colitis drug did not work. So they were screwed right? WRONG.
As typical for one of these Reg S deals, the $6.6 million was not for common stock, but essentially for the right to buy stock at a 13% discount to the market. In other words, the number of shares they receive will be dependent on the stock price at the time.
So figure it out,
Say the current stock price is $8. The buyers of this reg S deal receive stock at a 13% discount or $7 AND CAN IMMEDIATELY SELL IT AT THE MARKET PRICE. If they convert at $8, then they receive $6.6 million/$7 or 940,000 shares. Currently there are about 9 million shares outstanding. After conversion, there will be about 10 million. Now think about Econ 1A and law of supply and demand. Suddenly supply goes up at least 10% (actually more because only a fraction of the CARN shares outstanding actually trade).
But you say, maybe these investors are true believers in CARN. If so, they could have bought on the open market. When these fine offshore firms convert, do you think they are going to wait around for their 13%. Not likely, they will sell as fast as they are able, WHICH IS ON Dec. 20, 1996. (This does not mean it will all be sold on Dec. 20. These firms are pros and do not want to depress the price, but they will gradually peel it off).
Now what was in it for the offshore investors. Well, if they are able to capture the entire 13%. Then they will receive and effective annual return of 13 x 4 = 52%. (The deal was done on Oct. 21 or one quarter of a year). Not bad.
What is truly interesting is what the S-3 reveals about CARN in the next few quarters.
Read it. I will summarize it later.
Kafka666 |
