Monday, April 21, 2014

Momentum Traders and BioFuel Energy

That was quick!  My last post was on Greenlight Capital's proposed transaction to utilize BioFuel Energy's net operating losses (NOLs) in a reverse merger of sorts with a real estate developer/homebuilder the hedge fund controls (JBGL Capital).  I noted at the bottom that I expected a wild ride because it seems like the current crop of momentum day traders had taken notice to this small float stock with a sexy name and were driving up the price without understanding the Greenlight transaction or reading the details of how BioFuel Energy is going to meet the $275 million price tag for JBGL Capital.

On Thursday, BioFuel's share price jumped almost 30% with no news and well above the maximum range of the rights offering:
5. The Rights Offering. Prior to and contingent upon the closing of the Acquisition, the Company will conduct a rights offering for shares of its Common Stock (the “Rights Offering”) to raise at least $70 million. Each right will permit the holder thereof to purchase shares of Common Stock for a price per share equal to 80% of the average closing price per share of the Common Stock for the 10 trading days immediately following the date of filing of the Registration Statement relating to the Rights Offering (the “Filing Date”); provided, that in no event will the price per share of Common Stock be greater than $5.00 per share, or less than $1.50 per share. Subject to certain limitations, the Rights Offering will be backstopped by certain investors determined by Greenlight.
Based on the initial terms of the rights offering above, anyone buying BioFuel Energy above $6.25 (80% of which is the maximum $5.00 of the rights offering) is guaranteed to face massive dilution after the rights offering is completed.  In order to fund the acquisition, BioFuel is going to have to issue 4-5x as many shares as is currently outstanding, at a maximum price of $5 per share, that's going to force the fair market value considerably lower than where its trading currently.  I don't have the trading mindset to participate in this kind of pump and dump, so I exited this morning at $8.15.  Slightly disappointed that I won't be participating in the rights offering unless things change dramatically, but maybe I'll get an opportunity again once the transaction closes.

Disclosure: No Position

5 comments:

  1. Agreed Clark - after seeing some of the comments posted elsewhere about this name, it was clear most of these traders (and I stress TRADERS) have no idea what they are trading. If the float was large enough to short at the $8 valuation, I would. It has nowhere to go but down once diluted by the rights offering. I guess we just take the gain that the idiot traders handed to us and buy back in once they lose their arses on the rights offering.

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  2. To the point in your original post:

    "A rights offering of at least $70 million, with each holder able to purchase shares at 80% of the 10 day average closing price following the official registration statement. Maximum price is $5, minimum is $1.50"

    Is it possible that the 80% is of the maximum $5 price? I have re-read this statement a few times and can see it interpreted either way. If it is 80% of the $5 maximum price, then it implies a $4 maximum value of the rights offering, leaving the people buying at $8 even more diluted. Curious to get your thoughts as this makes the $6.25 price too high as a maximum entry point.

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    1. That's not how I read the proposed transaction, I read it as $5 is the maximum price through the rights offering, but maybe there is some gray area that will be clarified in later filings.

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  3. I hear you guys but the proposal is "non-binding" and subject to adjustments. If the stock is trading at $6 or $7 or whatever, can't you see the possibility of GL adjusting the rights offering price and the exchange shares (for JBGL equity) upward? Either way, he is going to end up with 49.9% ownership, and frankly, the more money they raise via RO, the more they can invest in RE deals. Again, remember the proposal was not a formal one and thereby subject to adjustments.

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    1. Fair point too. It's an interesting situation that I don't think is clearly understood by most people trading the stock currently if you look on Twitter or other message boards. For me, there just wasn't enough information on JBGL (really any information) to not trade out of it once it became a day-trading darling. I'll reevaluate once more is known.

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