Tuesday, July 26, 2011

Yet Another Market Inefficiency ($YRCW)

Trucking company YRCW recently announced a restructuring plan that will exchange some of the company's debt for new equity, which will result in the current shareholders owning 2.5% of the company, or less after accounting for further dilution from a new management incentive plan.

The market cap is currently $47 million, which implies that the new equity will be worth $1.88 billion (=47/2.5%). That is hard to imagine, since the current enterprise value of the company is only $1 billion.

What's funny is that the same thing happened in December 2009 with the previous exchange offer.

It looks like only 16% of the shares are held by institutions, so this must be another situation where retail owners are asleep at the switch. Also, there are daytraders who think that the stock is about to "break out".

Unfortunately, it can't be shorted.

7 comments:

WSM said...

It looks like puts trade a reasonable volume. Did you buy some?

Taylor Conant said...

I love watching retard momos/daytraders get run over by the Reality Bus.

CP said...

The puts are way too expensive -
August $1 puts are 40 cents!

The only way to do it would be to sell calls. You can sell the 50 cent calls for ~50 cents which actually is quite similar in all respects to just being short the stock. Except, you don't have to pay to borrow or worry about getting called in!

Notice there has been a huge volume in the 50 cent calls. Other people must have figured this out.

There are currently 48 million shares outstanding. Assuming conversion of all preferred stock into common stock, and conversion of all Series A notes and Series B notes into common stock - which will happen if approved at the shareholder meeting - there will be 4.8 billion shares outstanding.
http://seekingalpha.com/article/281780-dilution-coming-time-running-out-for-yrc-worldwide-shareholders

There's more information in the S-1
http://www.sec.gov/Archives/edgar/data/71514/000119312511142978/ds1.htm

Eric said...

Admittedly, the company is a train wreck.

But this is a bit of a weird post + comment.

Here you seem to cite a 'market inefficiency', and yet in the comments make the (perhaps not altogether serious?) suggestion to sell e.g. the Aug (?) 50c calls. On a stock that closed yesterday at 98c.

But in order for that trade to pay off, the market in this stock would have to somehow become 'efficient'. Efficient enuf to drive the stock under 50c by latest Aug 19. Right?

Which could happen, I guess. But is that really worth risking money on? Because as you say in the post, markets can be inefficient, and stay that way. Not only that, daytraders are active here.

Maybe you meant later calls.

Anyway, IMO a bad trade idea. There are very many very much greener pastures.

CP said...

The breakeven on selling a YRCW 0.50 call for ~0.50 is $1. Which is where the stock is today.

Anyone who buys YRCW is going to be asking "whydibuy" when the new shares are issued after the conversion.

PD said...

CP when is the conversion date?

CP said...

I think the settlement date for the exchange was Jul 22, which if true would mean that holders already have the preferreds and other securities.

This is like the GGC exchange, where the preferreds carry a punitive coupon if the conversion of preferreds into common is not approved at the shareholder meeting.

The next step is the meeting, which is basically a formality, and then the holders should receive the shares shortly after that.