Bill, found this article on the trepidations of financing. I think this is the article in question, but open to correction.
Regards,
(reprinted from WSJ Interactive edition)
Able Telcom, Smarting From Deal
To Buy MFS, Draws Short Sellers
By CARRICK MOLLENKAMP
Staff Reporter of THE WALL STREET JOURNAL
Short sellers sometimes can talk in pretty dramatic terms; with so much to lose, they don't mince words when it comes to bashing a stock. So when a short knocks a company for an acquisition it made, a heavy dose of skepticism is in order.
But when several portfolio managers say they sold all their stock in that same company because its management seemed to be unsure about how to pay for acquisitions, investors might start to give the shorts a bit more credence. And when the company's lawyer concedes that a financing move was hastily made because it didn't have enough cash, investors should really pay attention.
Such is the case with Able Telcom Holding, a West Palm Beach, Fla., provider of telecommunications infrastructure. Short sellers, betting the share price will drop, have driven the short position to three million shares. The stock fell last year to a 52-week low of $2 in September from $20 in June. It's risen 72% to about $8, partly as a result of strides Able has made in hiring new management. But some of the increase is also a result of the short sellers themselves. Caught in a "short squeeze" as the stock ticked up, the short sellers have had to buy shares and cover their positions, in the process bidding up the stock even more.
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Able Telcom Holding Corp.
Business: Provider of telecommunications infrastructure
Fiscal year (Oct. 31) 1998 1997
Revenue: $217,500,000 $86,300,000
Net Income: -5,800,000* 2,857,000
Share earns (diluted): -0.59 0.16
Fourth quarter
Share earns (diluted): 0.16 0.02
Trailing P/E: 35.9
Dividend yield: Nil
*The fiscal year results include a charge of $8 million to the conversion of preferred stock and other one-time adjustments related to the purchase of MFS Network Technologies.
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Investors who go short sell borrowed shares in the hopes of making a profit by replacing the shares with ones bought later at a lower price. If the price goes up, shorts either have to post more collateral or close out their positions by buying the rising stock.
Bull vs. Bears
To be sure, not everybody buys the gloomy outlook. In fact, amid all the pessimism and short selling, there is a lone voice saying the stock is a winner. That's analyst Vik Grover at New York-based Kaufman Brothers.
Mr. Grover says the company has hired new management and that a new financing agreement will allow Able to stabilize a shaky financial situation. In fact, Mr. Grover believes that much of the recent price rise has been fueled by the shoring up of its finances.
"Take a deep breath, take a step back, and what do you have here?" Mr. Grover says. "This is about a major play in telecommunications. They are looking to bring in new management and additional board representation. They want to take this to a new level."
Able was founded in 1987 in Colorado and moved its operations to West Palm Beach in 1991. Through an acquisition in 1994, the company began to focus in the U.S. on its main business of building telecommunication infrastructure such as digging long trenches for fiber-optic lines and then making sure the communication system operates correctly. Until then, the majority of Able's business was in the Venezuelan telecommunications business.
Trouble started in April, when it bought MFS Network Technologies, then a subsidiary of Jackson, Miss.-based telecommunications provider MCI WorldCom. One of MFS's biggest projects was building and operating a computer system that allowed motorists on the New Jersey roadways to pay tolls without stopping. The system would deduct the toll electronically from a prepaid sticker on a car.
Initially, the news sent Able's stock up, from $12 to $20 within two months. But problems were lurking.
Able didn't have enough cash to pay for the $58 million acquisition. In fact, the company said in securities filings that it didn't have "the assets and liabilities of a company the size of MFS, and [that] this integration process will require substantial time and attention of our management."
So it issued a quick but risky form of financing: convertible preferred shares, or so-called death spirals. The nickname comes from the way the transaction can drive down a stock price. A company sells newly issued preferred shares that can be converted later into common shares. The problem arises when the stock price falls. As the owners of the preferred stock convert their shares at a lower price, the company has to issue more and more common shares, driving the stock price down further.
Several money managers said they were left wondering whether management knew what it was doing in financing the MFS acquisition, which gave the buyers of the preferred stock the right to buy Able stock at a price much cheaper than the value of the stock at the time. Robert Kern, president of New York-based Kern Capital Management, says it wasn't long before he sold his stock. He declined to say when or at what price he dumped his holdings. "We could sense some controversy developing" among holders of the company's common stock, he says.
Able's attorney, Edward Pollock, now concedes, "It was a terrible deal. The company was negotiating under pressure. It didn't have the cash necessary."
Deal Is Questioned
Then top executives started departing MFS. According to some analysts, the departures left Able with an inexperienced staff to handle the New Jersey project.
Mr. Pollock declined to say how many managers left. "More have stayed than left," he says. "We've replaced everybody that was necessary to replace." He disagrees that the project was left with inexperienced staff, saying, "We have a strong enough staff [now] to do the work under that contract."
But the New Jersey project has been hobbled by delays. On one part of the project that's been completed so far, cars can zip through without being detected for not paying the toll. Able is incurring a $25,000 daily fine by the state for not getting the project done on time.
Those missteps have given short seller Manuel Asensio plenty of ammunition to critique the stock. A well-known short seller at a New York firm that bears his name, Mr. Asensio began attacking Able on July 16 -- which just happened to be the birthday of Mr. Grover, an Able fan. ("It was a hell of a birthday," Mr. Grover says.)
In his report, Mr. Asensio wrote that MFS "owns unprofitable operations in a capital intensive, low margin, highly competitive construction contract business. MFS possesses no valuable proprietary product or technology."
Mr. Asensio predicted Able stock would fall to $3 -- and he was right. The stock actually hit $2.50 in September.
Now, even though the stock has surged back, Mr. Asensio still is blasting the company. He predicts the company will post a first-quarter loss.
Mr. Pollock declined to comment on Mr. Asensio's prediction. He did say that the company's business in the first quarter is traditionally weaker than in other quarters because of the holidays around the start of year.
Like Mr. Asensio, Kip Rupp at Birmingham-based Sterne, Agee & Leach is less than thrilled with the stock. His rating: "hold."
"For the past three to six months, management has really been distracted trying to dig themselves out of a hole," Mr. Rupp says. "They still have a lot of problems they need to fix. They need to beef up their management."
Positive Outlook
But both Mr. Pollock and Mr. Grover say the company is getting back on track.
Mr. Grover also cites a $1.2 billion backlog at the company, a chunk of which comes from pacts with MCI WorldCom to help build and maintain local telecommunications networks. Additionally, Mr. Grover says, Able has the potential to win a lucrative contract in Brazil. That could represent $300 million in revenue, Mr. Grover says.
Mr. Grover says a key reason to like the stock is its cheap price. "The stock is significantly undervalued," he says. "I wouldn't want to be short" now. Mr. Grover on Friday reiterated his "buy" rating on the stock and raised his 12-month price target to $26.
That comes after Able said last week that after a previous deal fell through earlier this year, it found another way to exit the convertible stock deal it used to pay for MFS.
In the latest agreement, Able said a major customer, which the company declined to name, agreed to give it a loan. Able in turn lent that money to an unnamed friendly investor who agreed to buy the preferred stock and not seek to convert it. In effect, Able is biding time. Mr. Pollock says the company hopes to find another investor to buy the preferred stock from the unnamed investor. At that point, it will set more stringent rules on what price the stock can be converted.
Mr. Asensio remains nonplussed. He raises questions whether Able's latest financing pact will fall through just as an earlier one did. "This is a game," he says.
On Tuesday morning, Mr. Pollock was on his way to the printer to pick up Able's annual report, which has been delayed while Able worked to finalize the recent financing agreement. Mr. Pollock says the latest financing is a solid agreement and that the annual report will provide more details about the financing. The annual report is expected to be filed Wednesday.
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