How Metro-Goldwyn-Mayer Beat the Shorts

The stock jumped early last week on a seemingly minor change in fundraising plans.
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Last month,


(MGM) - Get Report

announced plans to sell 36 million shares, hoping to raise as much as $750 million. The company planned to use the cash to pay down debt and finance new films, but the move got the attention of short-sellers, who figured the company's stock was sure to drop with such a large sale of stock. (Short-sellers sell stock they don't own, hoping to buy it back later at a lower price.)

MGM says the offering was fully subscribed, meaning that it had already found buyers for all the new shares. But last week, the company decided to cancel the share sale and replace it with a rights offering. During the next month, every MGM shareholder will get the chance to buy one MGM share for $14.50 for every three shares he already owns. If all the rights are exercised, MGM's share base will increase by 50 million.

As a practical matter, the success of the rights offering is assured, since majority shareholder Kirk Kerkorian has said he will exercise all his rights. So MGM is certain to raise as much money in the rights offering as it would have in the secondary sale.

But instead of increasing MGM's "float" of shares publicly available to trade by 36 million shares, the rights offering will put only 5 million new shares in public hands, with Kerkorian keeping the rest. The limited supply left shorts scrambling to cover their positions, leading to a big move in MGM's price last week.

Short End of the Stick
Short-sellers lose out as MGM shifts to a rights offering from a stock sale

Source: BigCharts