Steel Partners has been accumulating shares this week. The result was a 13d filing today. Schedule 13D is an SEC filing that must be submitted to the US Securities and Exchange Commission within 10 days, by anyone who acquires beneficial ownership of more than 5% of any class of publicly traded securities in a public company.
They now own 7.1%. Hostile? Friendly? Any thoughts?
In instances such as these, I think the SEC should require a disclosure of who got to purchase a debt issuance. A 10% coupon is ridiculous. I don't care if the debt was rated Caa. The risk of default is, for example, a lot less then some of the recent bond issues from energy companies leveraging to exploit the fracking boom. Don't think we'll ever know who was the lucky ones to get on the other side of this transaction.
Just wonder if this makes sense. If you go and buy shares now for Nathans and for example your price is $73. Hold for the dividend of $25. Price drops post distribution by $25. Dividend is $15 taxable and $10 capital return (just a guess). Then you sell your shares at the new market price, say $48. You have a taxable dividend of $15 at a 15% tax rate. You also have a short term capital loss of $15 taxed at ordinary income rate (say 35%). Does this arbitrage make sense?
A special dividend and a regular dividend are essentially the same. You are correct that if you are a shareholder as of March 20th, you will get the $25 per share dividend. But note that once that date passes, anticipate a steep decline in the share price. One would theorize that the price will drop $25 but then you have all the other market forces coming into play. So the share price might decline less or more from this level. Anyone's guess at this point.
I agree with your sentiment. They hopefully had a lot of smart guys looking at some detailed spreadsheet projections and determined that shareholders will like this deal in the long term. But faith in today's corporate managements is always a little dicey. They are often self-serving to the detriment of the shareholders. I don't think this is the case here because of the sizable shareholding of the management. Should they have taken some hedge fund or private equity deal that was coming across the transom? Not knowing the terms, I'm unable to weigh in. But like you, will just have to trust that they are doing the right thing. Not selling any shares for now.
So it looks like they will pay out about M$118. With the M$135 they raised and the M$40 of cash and securities they had on their balance sheet at year-end, when the dust settles, they will have M$57 of cash, etc.
If one was to project M$20 of pre-tax earnings for the current year and now deduct the M$13.5 in interest expense, pro-forma after tax earnings would be reduced to about M$4.0 assuming a 40% tax rate. So with an EPS now below a buck, (my guess is $0.85) not sure where the stock will trade. If one takes the current share price ($72) less the excess cash ($12 per share) less the special dividend ($25) equals $35. That means a multiples of 40 for 2016. Sure hope they have some real growth in earnings in the pipeline. Otherwise the lunacy of this deal will sting for a long time.
I think it speaks to how marginal the deal that Nathan's is doing that these two officers sold shares to cover their tax obligation. If the deal is so good, they could have used the impending dividend to be paid out to cover future taxes. Alternatively, they could have found some other source of funds for this. I hate this deal.
You are correct on the dividend dilemma for a new investor unless the distribution is deemed a "return of capital distribution." Then you would simply reduce your cost basis on the share purchase. But we don't know at this point although I suspect Nathan's CFO has this info. You raise a good point on why it might be crazy to go and buy shares right now. So if there are no "natural" buyers, the price of the stock just might continue to slip. Another #$%$ result of this craziness.
I'm not a tax accountant but I don't see how this is anything but a taxable dividend. There is sufficient stockholder equity from past earnings to ensure that this is not a return of capital. But again, just guessing.
It looks like vested Nathans stock options will be exercised. Yesterday a board member (Charles Raich) exercised 22,500 shares at an average price of around $15.00. Makes sense. With a M$116 dividend about to be paid out, you would be crazy not to cash out your options. I think there were about 176,000 exercisable shares outstanding as of December 2014. So there is likely to be about 4,700,000 shares that will be beneficiaries of the dividend.
Regarding the tax treatment, I think it will be treated as a non-qualified dividend distribution. In such a case, you would reduce your tax basis (cost) of your shares. Where this brings the cost to zero (my case), the balance would be a capital gain (long term) and taxed at the preference rate.
I wish there was an upcoming shareholder meeting but these are held in September. Never been to their meeting but this year it will be on my calendar. I've got loads of questions that I'[m sure they won't take over the phone.
I'm a bit confused on this issue. If the dividend is not "qualified", it will be taxed at ordinary income rates (an awful thought) versus the preference rate. Alternatively, if it a capital distribution, doesn't this than mean you have to reduce your cost basis in the stock? Can someone have a negative basis?
I'd love to know who will be the lucky buyer of the Nathan's debt offering. How this got priced at 10% is a mystery. Yes Nathan's is a junk credit. But a credit analyst can also see that the Morrell deal secures the cash flow to service the financing. We will unlikely ever know who the lucky party is to this deal but it would be sure nice to know how this was placed.
The low volume is a result of a few factors. Not many shares outstanding and insiders control a meaningful number of those shares. As a result, the bid/ask is exceptionally (and annoyingly) wide. So if you want to sell (or buy) a thousand shares for example, you will move the market price. So traders and institutions have an aversion to this type of situation. As for why no research analyst coverage, a stock with such limited float and roster of shareholders is not a good fit for this effort. Personally, I don't really care about this since typical research reports don't guide my investment decisions. Prefer to do it myself. I also don't think they help support a stock price. Not sure there is much institutional research being done on any micro-caps these days.
Just happy today that I don't own Lumber Liquidators. Am a very happy shareholder of Home Deport since 2007. Now if they would just put a Nathans in each of their stores!
The decline in Nathan's price today is beginning to reflect the sentiment of shareholders to the latest news of financial engineering. I've yet to understand how shareholder value is enhanced with a debt offering of M$135 at a 10% coupon and 5 year tenor. Maybe this makes sense if they used the proceeds to buy back shares. But to trigger a big tax event by a dividend and then use all free cash flow to service the debt is hard to understand. Since my cost basis on my shares is $3.50, if I sell shares (head for the exits), nearly all of the proceeds are taxed at capital gains rates. So a dividend or share sale both are costly. I would have thought the insiders (Lorber and company) would be staring at the the same phenomenon.
The only other wrinkle I see is that management anticipates some significant earning growth in the next few years from the Morrell deal. A raider was going to steal the business so this poisons the trade. To capture the big gains in the 2015 to 2020 that they project, this bit of engineering makes sense for long term shareholders. I am just guessing here and don't really know the motivation or the analysis that was performed. Just fastening the seat belt and watching this all play out. Hoping this is not a train wreck.