, the publicly traded Web site that searches the Internet for travel-related deals, just completed a very special deal for a group of hedge funds.
In the space of two weeks, the company locked in a minimum $14-a-share profit for the 26 hedge funds and other institutional investors that purchased 750,000 shares from Travelzoo in a Sept. 30 private placement.
In a corporate filing late Wednesday, the online travel firm registered the same shares for sale in the open market at a price of $54.67. The registration price represents a 37% improvement over the $40-a-share price these investors originally paid for the stock.
But with shares of Travelzoo, one of the hottest stocks of the year, most recently trading around $60, the gains for the investors should be even larger.
Of course, the $30 million placement -- a type of transaction known on Wall Street as public investment in private equity, or PIPE -- had all the earmarks of a sweet deal for investors. At the time it was announced, Travelzoo shares were selling for $58.07. So the PIPE investors purchased their shares at a 31% discount to the going price in the open market.
However it is sliced, the private investors are coming out far ahead. The deal is a good example of why the $14 billion a year PIPEs market is becoming increasingly popular with hedge funds eager to bolster their returns.
The biggest winner is Alexandra Investment Management, a New York hedge fund with nearly $2 billion in assets, which bought 200,000 shares in the PIPE offering. An attorney for Alexandra declined to comment on the deal.
Other participating hedge funds include Staro Asset Management, a $2 billion Wisconsin hedge fund that purchased 75,000 shares through an affiliated investment entity called SF Capital Partners, and Dallas-based Gryphon Partners, which bought 50,000 shares. Many investors bought blocks of stock of 10,000 shares or less.
"You usually don't see more than 10 investors in a deal of this size," says Robert Kyle, executive vice president of PlacementTracker, which keeps tabs on the $14 billion-a-year PIPE market. "It was a pretty attractive deal. It was attractive because of the discount."
George Mihalos, a Gilford Securities analyst, says the transaction "reeks of quick profit," noting that the PIPE investors will have hung on to their shares for less than a month. Mihalos has a sell recommendation on Travelzoo, noting that the stock trades at 241 times trailing earnings.
A Travelzoo spokeswoman wasn't available for comment. Officials with Wedbush Morgan, the investment bank that arranged the deal, could not be reached for comment.
From the PIPE investors' perspective, the filing of the registration statement couldn't have come at a better time. Early Tuesday, Travelzoo reported a 240% gain in the third-quarter earnings. The company, which generates revenue from online advertising spots sold to travel companies, earned $2.1 million, or 12 cents a share, in the most recent quarter, compared with $617,000, or 3 cents a share, in the year-ago period.
The surge in earnings fueled another big run-up in Travelzoo's stock. The stock rose $7, or 11%. For the year, Travelzoo's shares are up over 600%. The stock has become a favorite of the momentum crowd because it has just 2 million shares available for trading. The scarcity of shares has made it difficult for traders to short the stock and made the stock incredibly volatile.
But with a flood of 750,000 new shares coming into the market, Travelzoo's stock should become a bit easier to short, providing more ammunition for traders who contend the stock is grossly overvalued. The additional shares also could dilute the current value of Travelzoo's stock.
A drop in the stock caused by any dilution probably is probably of no concern to the PIPE investors, however. The registration statement permits them to enter into "hedging strategies" to protect themselves, including shorting the company's stock.