December 2007
Equity Financing Alternatives
NIRI Atlanta Chapter
2
3
Equity Financing Needs
Many reasons:
Fund acquisitions, projects and subsidiaries
Add working capital for expansion
Debt reduction (at-the-market debt for equity swap)
Adjust leverage ratios to comply with credit facility or regulatory covenants
Manage a Balance Sheet to retain or enhance credit ratings
4
Equity Financing Alternatives
Many alternatives:•Underwritten / “traditional” Secondary Offerings•144A
• QIBs
•Private Investment in Public Equity (PIPE)• QIBs• AI’s
•Equity Line • ATM / CEO / SAFE• S-3 eligible issuers that offer shares for sale from their existing Shelf
Registrations.
•Dutch Auction•Direct Equity
• S-3 eligible issuers that offer shares for sale from their existing Shelf Registrations via modified DSPP
5
Equity Financing Alternatives
Equity Line
N/A
Registered
High
Issuer
Low
2 - 4 weeks
> $10MM
None
High
N/A
1 - 2%
1-2%
Secondary
Institutional
Registered
Very low
Issuer
High
3 - 4 Months
> $50MM
None
High
11%
5%
16%
PIPE
HF / PE / LBO / VC
Unregistered
Medium
Dealer / Investor
Moderate
1 month
$1MM – $200MM
1 month+
Low
10%+
6%
16%+
144a
HNW / HF / PE
Unregistered
Medium
Dealer / Investor
Moderate
2 - 3 Months
Avg $5MM
1 year
Low
5%+
6%
11%+
Characteristics
Investor Type
Security Type
Confidentiality
Sets Terms / Price
Market Impact
Lead Time
Sizes
Investor Lockup
Inv. Legal Protection
Discount
Fees (% of Cap)
Total Issuance Cost
Dutch Auction
Retail
Registered
Very low
Issuer / Investor
High
2 - 3 Months
$35MM – Open
None
High
15%
4%
19%
1
1) Houlihan Lokey “Private Investment in Public Equity (PIPE) 2) Financial Management Association, “The Impact of Rule 144a …” Winter
20023) IT Investors Journal: “Why the pox is on SCOX” August 15, 20044) Overview: Private Investment in Public Equity Friedland Capital White Paper
July 2005) Target price is daily VWAP – not guaranteed6) Tied to VWAP
2 3Direct Equity
Institutional
Registered
High
Issuer
Low
2 - 6 weeks
> $10MM
None
High
0 - 2%
1%
1-3%
4
5 6
6
Documentation Comparison Grid
Documentation
Offering Circular / Prospectus Supp.
Purchase/Sale Agreement between Issuer &
underwriter
Due Diligence
Syndication Group
QIB Questionnaire
Legal Opinion
Reg. Rights Agreement
Reg. Statement
Road Shows (Rule 433)
Credit ratings req.
Press releases
Direct Equity
Plan
NO
NO
NO
NO
NO
NO
NO
NO
NO
OPTIONAL
Secondary
YES
YES
YES
YES
NO
NO
NO
YES
YES
YES
YES
144a
YES
OPTIONAL
YES
OPTIONAL
YES
YES
YES
NO
YES
NO
YES
PIPE
YES
OPTIONAL
YES
OPTIONAL
YES
YES
YES
YES
YES
NO
YES
Dutch Auction
YES
OPTIONAL
YES
OPTIONAL
NO
NO
NO
YES
NO
YES
YES
2
2. Overview: Private Investment in Public Equity (“PIPES”)
Equity Line
YES
YES
YES
NO
NO
NO
NO
NO
NO
NO
OPTIONAL
1
1. File form 8k of Agreement and supplements to prospectus
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Equity Lines and Direct Equity
• Can be implemented quickly (typically 2-6 weeks) with no road shows
• Clients have access to financing to supplement other forms of funding when needed
• Fees and commissions are substantially less than all other avenues of equity financing
• High degree of confidentiality
• Negligible market impact
• Company’s Management controls the selling of shares into the market by setting:
• Amount of shares to be sold
• Timing of sales
• Length of selling period
• Minimum sale (floor) prices
8
Sample Company
Key Fundamentals Key Ratios
Price a/o 12/14/2007 $22.15
Volume on 12/13/2007 2.1 Million
10 Day Avg Volume 2.2 Million
Shares Outstanding 225 Million
13 week Price Range $19.50-$23.25
Market Capitalization 4.9 Billion
Float 211 million
Book Value Per Share $14.98
Short Interest Shares 19.1 Million
Institutional Ownership 77.3%
Price to Book 1.5
Price to Sales 1.0
Price to Cash Flow 6.5
Price to Free Cash Flow -16.3
Price to Earnings 17.3
Debt to Equity 1.3
Return on Equity 8.8
Dividend $0.22
Yield 4.2%
Beta 0.5
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Equity Line & Direct Equity
Features & Implementation
10
Typical Equity Line Features*
The issuer targets the dollar amount (or share amount) to raise. Entering into a Sales Agency Agreement to sell shares.
Shares are sold, with daily reporting, and can be settled T+3 or at the end of a selling period (1-20 days) utilizing securities lending. Funds are wired to the company upon settlement. Regulatory filings are updated when the issuance is deemed to be “material” or at quarter end.
• Efficient and cost effective solution for issuing equity, similar to the operation of a stock repurchase plan or Medium Term Note program.
• Transforms the stock issuance process into an execution service, by selling shares directly on the Exchange (or OTC), exploiting market strength and restraining upon market weakness. Sales methodology designed to minimize pressure on the stock price.
• Issuer determines 1) amount of issuance, 2) timing of issuance, 3) floor price and 4) duration of selling period. Issuer may stop or start issuance at any time intraday.
• No issuance information “leakage”. Discreet selling strategy.• Allows a public company to issue shares, at its discretion, over a period of time (up to 3
years), rather than having to announce a massive sale of shares and be obligated to sell them all at once.
• Sale proceeds based on actual sales price (less commission); VWAP target.• Sales are typically executed through electronic trading systems (i.e., B-Trade, ITG Posit,
SONIC, Anonymous SuperDot, Direct+, or BNY ConvergEx).• Share issuance amount limited only to Shelf availability.
*(modeled on BNYCMI SAFE product)
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Example – Execution Liquidity
DailyVolume Px Last VWAP $Volume Shares $Volume Shares
10/16/2007 2,495,100 $21.44 $21.43 $8,024,429 374,265 $10,699,238 499,020 10/17/2007 1,758,700 $21.51 $21.46 $5,663,603 263,805 $7,551,471 351,740 10/18/2007 1,926,500 $21.35 $21.40 $6,186,550 288,975 $8,248,734 385,300 10/19/2007 3,617,300 $21.02 $21.27 $11,544,360 542,595 $15,392,480 723,460 10/22/2007 2,484,300 $21.19 $21.06 $7,850,400 372,645 $10,467,201 496,860 10/23/2007 2,797,100 $21.10 $21.12 $8,866,499 419,565 $11,821,999 559,420 10/24/2007 3,927,700 $21.04 $20.97 $12,360,708 589,155 $16,480,943 785,540 10/25/2007 6,826,300 $21.86 $21.65 $22,177,830 1,023,945 $29,570,439 1,365,260 10/26/2007 3,737,400 $22.10 $22.05 $12,369,691 560,610 $16,492,922 747,480 10/29/2007 3,093,800 $22.12 $22.14 $10,277,758 464,070 $13,703,678 618,760 10/30/2007 2,939,000 $22.17 $22.26 $9,815,702 440,850 $13,087,602 587,800 10/31/2007 2,372,800 $22.55 $22.39 $7,973,106 355,920 $10,630,808 474,560 11/1/2007 4,046,400 $21.76 $22.02 $13,370,418 606,960 $17,827,224 809,280 11/2/2007 4,453,800 $21.63 $21.60 $14,438,997 668,070 $19,251,996 890,760 11/5/2007 3,899,353 $21.65 $21.55 $12,607,876 584,903 $16,810,501 779,871 11/6/2007 3,625,800 $22.00 $21.71 $11,811,388 543,870 $15,748,517 725,160 11/7/2007 3,734,425 $21.66 $21.81 $12,224,341 560,164 $16,299,122 746,885 11/8/2007 3,668,797 $22.20 $22.06 $12,144,727 550,320 $16,192,969 733,759 11/9/2007 3,462,955 $22.15 $22.16 $11,515,018 519,443 $15,353,357 692,591
11/12/2007 2,820,568 $21.93 $22.14 $9,371,676 423,085 $12,495,568 564,114 67,688,098 $21.72 $220,595,077 10,153,215 $294,126,770 13,537,620
Average Daily Volume
3,384,405 507,661 676,881
Average Price/Share
% of Outstanding Shares
SAFE Commission 1%
Traditional Secondary 4%
$2,205,951
$8,823,803
$2,941,268
$11,765,071
$21.73 $21.73
3.22%2.42%
Sales Agency Financing for Equity ("SAFE")Sample 20-Day Draw-Down
15% 20%
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Equity Line Implementation
Term Sheet
• Defines Material Terms
• Customizes program to meet client needs
Due Diligence
• Management meetings
• Business review• Legal review• Follows MTN model
review throughout life of program
Agreement
• Standardized Agreement
• Comfort Letters• Settlement
Procedures
Regulatory Filings
• File Supplements to prospectus (424B5)
• File Form 8-K with Sales Agency Agreement
Execution
• Adjustable selling terms
• Managed selling of shares
• Daily reporting of executions
• Settlement at end of selling periods
Timeline: 2-4 Weeks
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Direct Equity Features
• An extremely efficient and cost effective solution for issuing equity by leveraging a Direct Stock Purchase Plan vehicle, combined with sophisticated targeting techniques.
• Allows the issuer to place shares with targeted investors.
• Issuer control mitigates volatility, the impact of the artificial negative money flow caused by arbitrage activity and may result in less dilution.
• Allows public companies to offer shares to institutional investors at the companies’ discretion over a period of time, rather than having to announce a massive sale of shares and be obligated to sell them all at once.
The issuer targets the dollar amount to raise. Mellon Securities LLC, as agent for the Issuer, notifies qualified investors that the Issuer will be granting Waivers to the monthly cap detailed in the Plan document. Investors perform due diligence, submit a RFW and state a discount from market price. The plan details the permissible discount level 0% - 3%. Once Waivers are granted, funds are due to the Plan Administrator on the day prior to the commencement of the pricing window (generally 10 business days). A threshold price is set for the window period and the Issuer is not obligated to sell stock below the threshold. At the end of the window period, agent calculates the price of the stock, based on VWAP less the discount granted and shares are issued to the investor.
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Program Implementation
Documentation
• Agreement• Define plan
parameters• Draft / review DSPP
Preparation
• Print & distribute• Investor
identification
Agreement
• File Plan • Register Shares via
S-3
Timeline: 2-6 Weeks
Prior to Pricing3 - 6 Days before Pricing
Notify of intent to activate
Analyzes threshold parameters
Determine investor interest
2 Days before Pricing
Bids due 10am EST
Bids Presented
Issuer Grants Waivers
1 Day before Pricing
Notify bidders
Funds wired by 2pm
Pricing Period (Standard or
Dynamic Duration)
Agent calculates price
Agent calculates share allocation
Pricing Summary 1pm
Funds invested or
delivered - 4pm
DWAC Shares
Pricing Period
15
Targeting Methodologies - Peer Overlay
Selected PeersSignificant Weightings Significant Weightings
Exclude EAS
High Match, No ABC, 2 + Peers
State Street Global Advisors (US) VIPT Franklin Income Securities
ABC Corp T. Rowe Price Associates Inc. iShares Dow Jones Select Dividends Index Fund
Enhanced Investment Technologies Inc. Advisory Research Inc.
DEF Corp American Century Investment Mgmt. Vanguard Equity Income Fund
Vanguard 500 Index Fund Templeton Investment Counsel LLC
GHI Corp JPMorgan Mid Cap Value Fund Franklin Income Fund
Duff & Phelps Investment Management Co MacKay Shields LLC
JKL Corp Vanguard Mid-Cap Index Fund EARNEST Partners LLC
Utilities Select Sector SPDR Fund Epoch Investment Partners Inc.
MNO Corp Vanguard Total Stock Market Index Fund Tradewinds Global Investors LLC
Vanguard Institutional Index Fund David J. Greene & Company LLC
PQR Corp Franklin Utilities Fund T. Rowe Price Mid-Cap Value Fund
Franklin Advisers Inc. Horizon Asset Management Inc.
STU Corp MFS Investment Management David Vaughan Investments Inc.
Geode Capital Management L.L.C. Thompson Siegel & Walmsley LLC
VWX Corp MFC Global Investment Management (US) Franklin Portfolio Associates L.L.C.
Edge Asset Management Inc. Moody Aldrich Partners LLC
YZ Corp Principal Investors Equity Income I Lord Abbett Mid Cap Value Fund
High Match, ABC + Peers
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Potential Investors (Valuation Model Analysis)
Peer Tickers DEF GHI JKL MNO PQR STU VWX YZ ABC Average
Cap ($ mil.) 2,863 5,240 10,899 3,459 5,148 8,266 12,129 3,718 9,044 6,751.78
Historic Beta 0.47 0.53 0.48 0.44 0.42 0.56 0.55 0.42 0.64 0.50
Dividend Yield 4.08% 3.84% 4.83% 4.74% 4.24% 4.37% 5.20% 3.73% 4.27% 0.04
Price/Earnings 15 20.85 17.47 12.49 15.38 10.08 15.36 17.35 17.88 15.76
Price/Book 1.31 1.42 1.64 1.9 3.05 1.4 1.47 2.25 1.5 1.77
Price/Cash Flow 0 0 0 0 0 0 0 0 0 0.00
Price/Sales 0.91 0.59 1.49 1 0.54 0.9 1.23 1.07 0.91 0.96
1 Month Return 4.89 -2.87 3.39 3.72 -1.17 1.32 2.11 6.23 4.51 2.46
3 Month Return 1.2 -3.97 7.12 -4.37 -7.87 0.46 2.76 7.27 5.23 0.87
12 Month Return 7.66 12.04 -0.55 4.98 11.94 16.69 3.24 4.35 4.31 7.18
Peer Tickers DEF GHI JKL MNO PQR STU VWX YZ ABC Average
Cash Plow Back -0.42 -0.79 -0.77 -0.82 -0.37 -0.16 -0.81 -0.71 -0.54 -0.60
Dividend Discount Model -0.73 -0.35 -0.6 -0.69 -0.72 -0.55 -0.67 -0.62 -0.69 -0.62
Earnings Momentum 0.2 0.23 0.58 0.13 0.1 0.9 0.65 0.34 0.21 0.37
Estimate Change 0.42 0.08 0.08 0.08 0.08 0.08 0.08 0.62 0.39 0.21
Estimate Revisions Model 0.2 0.08 0.36 0.24 0.09 -0.02 0.27 0.28 0.27 0.20
Historical Alpha 0.04 -0.06 0.01 0.34 0.12 0.05 0.16 -0.2 -0.47 0.00
Neglect -1.2 -1 -1.25 -1.37 -1.28 -1.49 -2.12 -0.66 -1.51 -1.32
Historical Earnings To Price 0.53 0.34 0.45 0.41 0.55 0.68 0.47 0.45 0.49 0.49
Predicted Earnings To Price 0.44 0.44 0.42 0.42 0.48 0.37 0.37 0.37 0.58 0.43
Relative Strength Model -0.17 -0.08 -0.33 -0.22 -0.08 0.01 -0.25 -0.23 -0.23 -0.18
Residual Reversal 0.11 0.18 -0.01 0.07 0.18 0.25 0.04 0.06 0.06 0.10
Sector Momentum -0.16 -0.16 -0.16 -0.16 -0.16 -0.16 -0.16 -0.16 -0.16 -0.16
Cash Flow To Price - - - - - - - - - 0.00
Yield 1.61 1.48 2.02 1.97 1.7 1.77 2.22 1.42 1.71 1.77
Size 1.07 1.37 1.61 1.12 1.41 1.59 1.69 1.15 1.59 1.40
Trading Activity -0.17 -0.12 0.42 -0.07 -0.06 0.38 0.25 -0.18 -0.08 0.04
Growth / Value 0.61 0.45 0.2 -0.02 -0.55 0.48 0.39 -0.24 0.35 0.19
Valuation Scores: 3 = Highest, -3 = Lowest, 0 = Average-2 -1 0 1 2
Cash P low Back
Dividend DiscountModel
Earnings Momentum
Estimate Change
Estimate RevisionsModel
Historical Alpha
Neglect
Historical EarningsTo P rice
P redicted EarningsTo P rice
Relative StrengthModel
Residual Reversal
Sector Momentum
Cash Flow To P rice
Yield
Size
Trading Activity
Growth / Value
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Investor Targeting Methodologies Valuation Model Analysis
Compatibility Score: 265 Moderately/High
Highland Capital Management L.P., Dallas, Texas
*Source Data Provided by Valuation Technologies
Company Compatability Score
150 - 250 moderate attractiveness
250 - 325 moderately high
325 - 450 high
450+ high attractiveness
$1,713 Million in Equity Assets
Current holdings : $0
Purchase Potential : $32.0 Million
Annualized Turnover : 15%
Owns 1 in Peer Group
Valuation Model Used
Model Match
Sector Momentum Very High
Size Very High
Neglect Very High
Historical Earnings To Price
Moderate
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Threshold Pricing- Market Neutral Design
• Investor selection methodology will help mitigate the impact of the artificial negative money flow caused by arbitrage activity
• Generally recommend laddered approach - combination of:
Established pricing periods
Demand driven dynamic duration pricing periods
Criteria Scenarios Deal Size Shares/Proceeds
Avg. Volume 2,420,000 Daily Volume 2,420,000
Outflow % 15.8% Daily Max. Outflow 381,150
Pricing Period - Days 10 Deal Share Outflow 3,811,500
Avg. Share Price $22.00 Deal Dollars Inflow 83,853,000$ Potential Annual Proceeds: 1,006,236,000$
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Investor SummarySample Pricing Period
Large Fund Managers Hold 56,000,000$ 70% 1.65%Bulge Bracket Investment Bank Sell 8,000,000$ 10% 1.75%Regional Brokerage Firm Hold 2,400,000$ 3% 1.50%Large International Commerical Bank Hold 4,000,000$ 5% 1.80%Various Hedge Funds Sell 8,000,000$ 10% 1.40%Retail Investors Hold 1,600,000$ 2% 1.90%
% of deal estimated Trading 20% Capital % of deal estimated Holding 80% Raised 80,000,000$
Weighted Discount 1.643%
Pricing Period: 80,000,000$ 100%
Date Low High Average Threshold
Day 1 $22.00 $22.78 $22.39 $22.00Day 2 $22.01 $22.45 $22.23 $22.00Day 3 $22.02 $22.90 $22.46 $22.00Day 4 $21.99 $23.04 $22.52 $22.00Day 5 $22.04 $23.29 $22.67 $22.00Day 6 $22.13 $23.38 $22.76 $22.00Day 7 $22.13 $23.47 $22.80 $22.00Day 8 $22.18 $23.67 $22.93 $22.00Day 9 $22.19 $23.32 $22.76 $22.00
Day 10 $22.14 $22.82 $22.48 $22.00225.9759
Average Price (10 days): $22.60 2.716%
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Example:
• December 2004 – filed a Direct Equity Plan with 5 million shares
• January 2006 – initial activation – accepted $10 million from retail and institutional investors through Plan.
• Used opportunistically over 3 quarters, raising $10 - $30 million each time.
Investment requests in excess of $500 million.
Client permitted investments totaling in excess of $125 million.
Discount range 1.35% - 1.75%.
• During credit crunch in September / October 2007 activated twice, raising $150 million at discount of 2%.
Market Cap $3 billion Hybrid thrift/mortgage bank.
Wanted an equity financing tool which would permit them to enter the market opportunistically.
Also wanted to increase retail base.
Avg Daily Vol 1 million shares
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