Wednesday, August 1, 2012

Arbitraging Their Own Capital Structure

Just saw this press release from Genie Energy Ltd., (GNE) which announced

"[a]n offer to exchange outstanding shares of Class B Common Stock for a new series of Preferred Stock. The offer will cover approximately one-third of the outstanding common stock, and Howard Jonas will not be exchanging any shares of common stock he owns or controls. The exchange will be on a one for one basis, and the preferred stock will have a liquidation preference currently anticipated to be $8.50 per share, and dividend right that is senior to dividends on the common stock, providing an annual yield in the 7-8% range. Genie anticipates that, following the current quarter, dividends on the common stock will be suspended for an indefinite time. The preferred stock will be redeemable by Genie after a certain period.

Claude Pupkin, Chief Executive Officer of Genie, said 'Genie is a unique combination of our retail energy business, which generates good cash flow, even while investing in steady growth, and Genie Oil and Gas, which requires substantial investment, but offers the potential for fantastic future growth and value. In the nine months since the spin-off of Genie from IDT, we have learned that stockholders have varying investment preferences and objectives. The exchange offer will provide our stockholders with the opportunity to own a security meeting their preferences, while allowing us to continue to benefit from the synergies of having the two operations in one corporate family.'

Ira Greenstein, President of Genie, added 'Our oil and gas projects are long term plays, with risks both known and unforeseen. We are bullish on the long-term prospects of our GOGAS business, but that risk profile and horizon may not be comfortable for all our stockholders. The exchange offer is intended to ensure that a broader range of investors have the opportunity to partner with Genie and reap the rewards of our performance.'"
This is an example of something I've been talking about for a while: firms arbitraging their own capital structures.

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