After completing a share exchange offer that it initiated during the third quarter of 2012, Newark, New Jersey-based Genie Energy Ltd (NYSE:GNE) has renewed a similar offer for another tranche of common and preferred shares. The initial exchange offer involved the swap of about 1.6 million Class B common shares for an equal number of preferred shares in the company. Originally slated to facilitate the swap of as many as 8.7 million shares of Genie’s stock, this exchange ended on October 10, 2012. As a condition of the exchange, the company suspended the issuance of dividends on its common shares until further notice.
Several weeks later, the utility firm announced a new exchange offer that would involve an identical one-for-one swap of common shares for preferred shares. This new offer applies to as many as 7.1 million outstanding shares of the company’s common stock. This represents about 35 percent of Genie’s remaining outstanding shares. Although the offer was scheduled to expire on January 15, 2013, the company announced that it would be extended through February 6, 2013. Fewer than 200,000 shares have been tendered as part of the new offer.
Genie Energy is a small energy company that operates several distinct divisions. Its power-distribution division sells electricity and natural gas to over 500,000 residential and commercial customers in the northeastern United States. Genie’s transportation division is responsible for bringing power-generation fuels like natural gas, conventional oil and shale oil from deposits in Pennsylvania, North Dakota and elsewhere to market on the East Coast. Finally, the company owns significant stakes in two shale oil and natural gas deposits in Israel and Colorado. In 2012, the company lost about $5.2 million on gross revenues of $194 million. It has indicated that it may try to find a buyer for its energy-exploration business.
How the deal is structured
Under the terms of the deal, Genie Energy will facilitate the exchange of its common shares for dividend-paying preferred shares on a one-to-one basis. The tendered common shares will be canceled. With the dividend on both classes of the company’s common stock canceled until further notice, the preferred stock’s 6.2 percent yield looks very attractive.
The preferred shares that are eligible for exchange cannot be redeemed by the company until October 11, 2016. After that date, they may be redeemed for 101 percent of their liquidation value of $8.50 plus the value of any accrued dividends. After October 11, 2017, they may be redeemed for 100 percent of their liquidation value plus accrued dividends.
Crucially, Genie’s CEO will not participate in the renewed share exchange. In fact, the exchange appears tailored to boost the per-share value of the holdings of the company’s senior management team. While the deal will also raise a significant amount of cash for the indebted company, this added perk has not gone unnoticed by shareholders and market-watchers alike.
Complications
There are currently no pending legal or regulatory actions that could have an adverse effect on this exchange. However, the relative lack of demand for Genie’s successive share swaps is illustrative. For starters, it may indicate that the company would face diminishing returns for any subsequent renewals of the exchange offer. This may speak to a relative lack of confidence that the company will be willing or able to pay its bills during the coming half-decade.
As it currently stands, investors who take advantage of the share swap stand to earn a return of at least 6 percent per year. This is because Genie’s share price has been stagnant or falling since the IDT Corporation (NYSE:IDT) spin-off that created the company. IDT spun off Genie in the fall of 2011. Since then Genie has fallen 16% and IDT fell over 60%. Should Genie’s fortunes reverse and cause its per-share price to rise, the exchange could become significantly less attractive.
In addition, the company’s reliance on medium-term debt facilities to fund its current activities is troubling. Although it currently appears unlikely that Genie will face bankruptcy before 2017, another home-market economic disruption like Hurricane Sandy could change this calculus. Investors who wish to take advantage of its ongoing exchange offer should be prepared for the remote but real possibility of a post-bankruptcy preferred-share haircut.
Long-term prospects and outlook
Although price manipulation is not the sole reason for the repeated extensions of its exchange offers, Genie appears to be using the swaps to prop up the sagging value of its common stock. This may be part of a long-term strategy to unlock value for CEO and majority-stakeholder Howard Jonas.
It is important to note that Genie’s stock declined precipitously during the interim between the first exchange offer’s cancellation and the second exchange offer’s initiation. From a high near $7.50 per share in mid-October, the company’s stock had declined by about 30 percent to $5.75 per share by mid-November. After the announcement of the new exchange offer, it had risen above $7 per share within a month. Should the company renew the exchange offer beyond the current February deadline, it could contribute to a momentary price spike from which agile investors could profit.
Although Genie Energy’s common stock is not particularly attractive, its ongoing exchange offer may be a boon to enterprising investors. Those who believe in the company’s long-term solvency would do well to take advantage of the offer before its expiration. Those who wish to play the stock for short-term gains should wait for a renewal of the exchange offer. Others may wish to remain on the sidelines for the time being.
The article Interesting Opportunity With This Stock originally appeared on Fool.com and is written by Mike Thiessen.
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