Nicholas Financial’s Dutch Auction

A year ago, I decided to drop Nicholas Financial ($NICK) from the Buy List, and I’m glad I did. The company eventually ended its buyout deal with Prospect Capital, but that wasn’t NICK’s fault.

Today the company announced that it will be conducting a modified Dutch auction. I’ll explain this in the simplest terms I can, but I apologize since it may sound a little confusing.

NICK wants to buy back a massive block of NICK stock. They’re giving all NICK shareholders the option of writing down how many shares they want to sell, and at what price. Then all the offers will be sorted by price, lowest to highest.

NICK will then fill all the orders until they exhaust their tender amount, which will be between $50 million and $70 million. Not matter what you bid, all the orders will be filled at the highest price. That way, no one will get tendered at a price below what they requested.

The company estimates that the tender price will be between $14.60 and $15.60 per share. The stock rose $1.37 today to close at exactly $14.60 per share. That’s a one-day gain of 10.36%.

I really have no idea what NICK’s planning here, and the whole plan leaves me disappointed. If they fill $70 million at $14.60, that’s about 40% of the outstanding shares. What’s the point? Why not simply give a cash dividend? I imagine they’re going to saddle the company with a lot more debt. They should be able to manage, but why punish the balance sheet this way?

NICK seems to have the ability to churn out $1.50 per share in earnings without much difficulty. Given that, the tender range seems to be taking advantage of a low price. Couldn’t they try to sell themselves to a large bank? NICK isn’t that big. Or why not go all the way and LBO themselves? Other companies have done that.

If I still owned NICK, I’d probably take advantage of this offering. The sad fact is that I’ve simply lost faith in the company. I don’t see how this auction is in the interest of shareholders. A buyback funded by existing cash flow is one thing. This is something else.

By the way, this sounds like a textbook example of a classic business philosophy issue: Does a board serve the interests of present or future shareholders? What if the interests of those two groups conflict?

Posted by on December 23rd, 2014 at 5:16 pm


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