Canceled Reverse Split
In a surprising turn of events, Advant-e has announced it will not proceed with its planned 1 for 10,000 reverse stock split. This is excellent news for small shareholders, who will no longer be forcibly cashed out at a large discount to fair value. Advant-e cited delays in regulatory review and approval, the timing of its special dividend (more on that down the page) and “other factors” as the reasons for the cancellation. The company still intends to discontinue as an SEC reporting company as soon as possible.
The rationale for the reverse stock split was dubious from the beginning. In its 14C filing on November 30, the company described the reverse stock split as intended to “ensure that the number of record holders of [Advant-e’s] Common Stock…remains below 500 so that [Advant-e] will remain eligible to terminate the public registration of our Common Stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).”
Thing is, in the same filing Advant-e professed to have only 289 holders of record, a far cry from 500. The company is already eligible to cease filing.
Special Dividend and Share Repurchases
Advant-e has declared a special dividend of 2 cents per share to be paid on December 28 to shareholders of record on December 18. This dividend is likely motivated by the same tax considerations that have lead so many other companies to move up distributions. CEO Jason Wadzinski will receive about $730,000 from the dividend, and paying 15% in tax sure beats paying upwards of 40%!
The company has also updated investors on its share repurchase plan, saying it has repurchased 4.3 million shares at a cost of $1.1 million as of December 11. These 4.3 million shares represent 6.4% of shares outstanding prior to the repurchase. Though the company still has a $900,000 repurchase authorization, the company will forgo additional purchases in favor of the special dividend.
Valuation and the Future
Advant-e’s dividend and share repurchases only stand to make the company more attractive from an investment standpoint. Here are actual and pro forma valuations for the trailing twelve months.
Through the special dividend and share repurchases, the company will return about $2.4 million in excess cash to shareholders. Advant-e will remain strongly capitalized, as $2.4 million represents less than half of the cash on its balance sheet. Disregarding any interest forgone on that cash, the company’s trailing P/E ratio will decline to 8.18 after the share price is adjusted downward for the dividend.
Despite my pleasure in hearing the company has decided to abandon the reverse split, the entire episode leaves a bad taste in my mouth. I prefer to invest alongside management, not against. Fair treatment of all shareholders, no matter how large or small, is a hallmark of good corporate governance. I will not be selling out, but I will be keeping a close eye on management to see if they will try to pull another trick.
Disclosure: An account I manage holds Advant-e shares.