Aastrom Cleans Up Capital Structure
By Jason Napodano, CFA
On June 27, 2012, Aastrom Biosciences (ASTM) issued a release announcing its intent to offer to exchange any and all outstanding warrants to purchase the company’s common stock issued in connection with the December 2010 public offering.
There were 10 million (no par value) five-year warrants issued in December 2010 with a "cashless" exercise price of $3.22 per share. These were dilutive derivatives that provided no future value to Aastrom. In fact, they added significant potential future dilution if exercised. The warrants contain anti-dilution provisions that adjust the exercise price (down) if Aastrom were to issue or sell new shares of common stock at a lower consideration. They also contained a right that allows the holder to put the warrants back to the company and receive cash in the event of a fundamental transaction, such as a change in control or a sale of all or substantially all of its assets.
The cashless exercise price, the anti-dilutive reset provision, and the "Black-Scholes Put" made these 10 million outstanding December 2010 warrants a noticeable stain on Aastrom's capital structure. The existence of warrants also presented the opportunity for warrant holders to hedge with a short stock position. As of last week, 2.66 million shares of Aastrom were held short (6.9% of the float).
In an effort to extinguish these warrants, Aastrom offered the holders 1 share of common stock (at market value) for every 2 warrants. The company negotiated the exchange of 7.666666 million warrants in return for 3.833334 million shares of common stock prior to the announcement. Aastrom plans to commence a tender offer for the remaining 2.333334 million warrants. If exchanged, Aastrom would issue another 1.166667 million shares. We expect the tender to commence in the next few days and last approximately three weeks.
Removal of these warrants should do four things. Firstly, it removes the future dilution of net 5 million shares of common stock (if all warrants are tendered). Secondly, it removes a meaningful overhead with respect to a change in control. We do not believe Aastrom is "for sale" right now, nor do we think a take-out prior to the release of the phase 3 REVIVE data in 2014 makes sense. However, the opportunity for a future change in control (exit strategy) should attract new investors to the story. Thirdly, the removal of the anti-dilutive reset opens the door to future unencumbered financings for the company with these potential new investors. And finally, it removes the incentive for the warrant holders to enter into a common stock short hedge.
Impact On Our Model
As noted in the past, our valuation for Aastrom Bio is derived by discounting our projections for future cash flow to the company. Our model projects a net present value for Aastrom at $426 million. Prior to the warrant exchange, as of April 30, 2012, there were 38.8 million basic shares outstanding. The fully diluted share count includes the 10 million warrants noted above, plus 2.5 million exercisable stock options (at $3.01 per share), 4.5 million Class-A warrants (at $2.52 per share), and 12.3 million Series B-1 non-voting convertible preferred stock (at $3.25 per share), bringing the count to 68.1 million. That yields a target price of $6.26 per share.
Our published target as of our most recent report (May 1, 2012) was $6 per share. Our DCF model can be found in the back of this report.
Removing the 10 million warrants from our model and adding in 5 million basic shares, the fully-diluted count drops from 68.1 million to 63.1 million. This has the impact of raising the calculated fair-value based on our DCF model to $6.75 per share (+$0.49 as a result of 100% exchange). We plan to update our model for publication following the completion of the tender offer.
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