TSX:EIT.PR.A - Post by User
Post by
duskwon Oct 17, 2007 10:24am
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Post# 13586711
Exchange offer accretive?
Exchange offer accretive?I have read through the various threads talking about how the exchange offer is negative for shareholders. While some calculations show that this is true, management could potentially increase the value for existing shareholders. Here is how:
Assumptions:
- Discount to NAV to constant at 10% (Makes calculations simplier)
- Start with NAV of $1,000,000
- Start with 1,000,000 shares
- Assume no commissions or fees for simplicity
Pre-Exchange Offer
==================
Shares = 1000000
NAV = 1000000
NAV/Shr = $1.00
Discount = 10%
Share Price = $0.90
Assume an exchange offer valued at $500,000. The company issues shares worth $500,000 at the current share price ($0.90). It receives stock worth $500,000. New shares issued are 500,000/0.90 = 555555. NAV increases by $500,000.
Post-Exchange Offer
===================
Shares = 1555555
NAV = 1500000
NAV/Shr = $0.9642
Discount = 10%
Share Price = $0.8678
Assuming the discount holds, share price has dropped by 3.3 cents. Now, here is where the management can create some value. Management can then sell the new stock worth $500,000 and use the proceeds to purchase shares at the new discounted share price. Assuming they use $500,000 to buy shares @ now $0.8678. They thus buy and cancel 576169 shares. The NAV decreases by $500,000. The total number of shares decreases by 578169. The result:
Post-Exchange Offer and Share Buyback
=====================================
Shares = 977386
NAV = 1000000
NAV/Shr = $1.023
Discount = 10%
Share Price = $0.9207
Notice the results? Both the NAV and share prices have INCREASED from the pre-exchange offer. The NAV is the same, so presumably the management fees remain the same for the company. But this is accretive to existing shareholders as the NAV/Shr increases.
Comments?