Mannkind Financing Summary (February 6, 2012)
Al Mann's Investment
Summary: Al Mann gets 31,250,000 shares of Mnkd in exchange for $77.2m debt cancellation (and potentially reducing the revolving debt line by $77.2m).
In short, he is protecting himself from some of the dilution but he remains a debt holder for Mannkind. This debt-to-equity conversion was probably required by the investors as a way for Al Mann to show that he has skin in the game for this round of fund-raising but provides Mannkind with no incremental cash.
External Investment
Underwriters: Jefferies & Company, Inc., Piper Jaffray & Co. and Cowen and Company, LLC
Issuance: 31,250,000 units = 31,250,000 stock + 18,750,000 call options (strike = $2.40, expiry = ~2/2016)
Price: $2.4 / unit
Cash raised net of underwriting expenses: $70,500,000 (@$2.256 / unit that the underwriters are paying to Mannkind)
What is the valuation of stock & warrant in each unit?
1 unit (@$2.4) = 1 stock + .6 of a call option (strike price: $2.40, expiry ~2/2016)
There are no publicly trading options with 4 year expiry dates...without reverting to Black Scholes, the
$2.5 option expiring in 1/2014 is valued at $0.60 (2 years to expiry). Same option expiring in 1/2013 is valued at $0.39.
Additional:
Underwriters have an option, exercisable for 30 days, to purchase up to an additional 4,687,500 shares of common stock and warrants to purchase 2,812,500 shares of common stock to cover any over-allotments.
Dilution
Current Shares Outstanding: 122.34M
New shares added as a result of this deal: 81.25M (assuming the warrants are eventually exercised. If they are never exercised, chances are that Mannkind is out of business and this discussion is moot).
Total Shares Outstanding after Offering: 203.59M
Dilution: 33.5%
Other Fund Raising
Separate private offering of convertible senior secured notes not considered a part of this offering. No details are provided on what these are or to whom.
Conclusion
This deal sounds like it was negotiated with Warren Buffet in terms of extracting an ounce of flesh for financing. While I have confidence in Al Mann it looks like the investors that the underwriters shopped this deal to do not--hence the failure of the original private debt placement and the current valuation for the equity placement. On the other hand, they could just be negotiating from a position of power vis-a-vis Al Mann and thus able to extract these generous terms.
References
http://biz.yahoo.com/e/120206/mnkd8-k.html
http://finance.yahoo.com/news/MannKind-Announces-Proposed-bw-1380749394.html?x=0
http://finance.yahoo.com/news/MannKind-Receives-Commitment-bw-2160821953.html?x=0
Note: I am long MNKD
Al Mann's Investment
Summary: Al Mann gets 31,250,000 shares of Mnkd in exchange for $77.2m debt cancellation (and potentially reducing the revolving debt line by $77.2m).
In short, he is protecting himself from some of the dilution but he remains a debt holder for Mannkind. This debt-to-equity conversion was probably required by the investors as a way for Al Mann to show that he has skin in the game for this round of fund-raising but provides Mannkind with no incremental cash.
External Investment
Underwriters: Jefferies & Company, Inc., Piper Jaffray & Co. and Cowen and Company, LLC
Issuance: 31,250,000 units = 31,250,000 stock + 18,750,000 call options (strike = $2.40, expiry = ~2/2016)
Price: $2.4 / unit
Cash raised net of underwriting expenses: $70,500,000 (@$2.256 / unit that the underwriters are paying to Mannkind)
What is the valuation of stock & warrant in each unit?
1 unit (@$2.4) = 1 stock + .6 of a call option (strike price: $2.40, expiry ~2/2016)
There are no publicly trading options with 4 year expiry dates...without reverting to Black Scholes, the
$2.5 option expiring in 1/2014 is valued at $0.60 (2 years to expiry). Same option expiring in 1/2013 is valued at $0.39.
Using a volatility calculator and daily closing prices for Feb 7, 2011 - Feb 7, 2012 we get a range of volatility values (16%-71%) using 4 different volatility calculations. Than using a Black-Scholes calculator (Inputs: high & low end of volatility, 1004 trading days, stock & strike price of $2.4, risk free rate of 2%), we get the price of the warrant to be in the range of $0.328 - $1.1029.
Value of 1 warrant: $0.328 - $1.1029 (ie. value of .6 warrants = $0.1968 - $0.66174)
Value of 1 stock: $2.20 - $1.73826 (8.2% - 27.6% discount to the $2.4 value of the stock)Additional:
Underwriters have an option, exercisable for 30 days, to purchase up to an additional 4,687,500 shares of common stock and warrants to purchase 2,812,500 shares of common stock to cover any over-allotments.
Dilution
Current Shares Outstanding: 122.34M
New shares added as a result of this deal: 81.25M (assuming the warrants are eventually exercised. If they are never exercised, chances are that Mannkind is out of business and this discussion is moot).
Total Shares Outstanding after Offering: 203.59M
Dilution: 33.5%
Other Fund Raising
Separate private offering of convertible senior secured notes not considered a part of this offering. No details are provided on what these are or to whom.
Conclusion
This deal sounds like it was negotiated with Warren Buffet in terms of extracting an ounce of flesh for financing. While I have confidence in Al Mann it looks like the investors that the underwriters shopped this deal to do not--hence the failure of the original private debt placement and the current valuation for the equity placement. On the other hand, they could just be negotiating from a position of power vis-a-vis Al Mann and thus able to extract these generous terms.
References
http://biz.yahoo.com/e/120206/mnkd8-k.html
http://finance.yahoo.com/news/MannKind-Announces-Proposed-bw-1380749394.html?x=0
http://finance.yahoo.com/news/MannKind-Receives-Commitment-bw-2160821953.html?x=0
Note: I am long MNKD
3 comments:
Nice work. The fact that this gets them only through Aug concern me. Also their inability to partner the oncology compounds is problematic as well, and something I find hard to understand. Molecules with potential in Melanoma are usually snapped up pretty quick.
Cheers,
Sridhar
Al Mann is a very hard negotiator. He wants to maximize shareholder value (since he is the largest shareholder) and is willing to go to great lengths to do so. I suspect that the situation is not that they haven't been able to find a partner for oncology compounds but that they have not been able to agree to terms.
The day Al Mann dies, we will see partnerships materialize. Until then, it will be a rocky road...however, for those of us who survive long enough, the payback will be that much greater.
I hope that is the case. Given the financial position, partnering out Oncology at what ever terms would have prevented some level of dilution, but I guess that's Big Al's call.
Lets wait and see - I am in for the long haul.
Post a Comment