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Jamba in the Blender

Investors weighing Services Acquisition need to consider potential dilution.

Investors trying to get in on the

Jamba Juice

craze that's sweeping Wall Street these days could wind up pureed if they're not careful.

Shares of

Services Acquisition Corp. International


are up 40% to $10.45 since last week's announcement that the so-called blank-check company plans to acquire Jamba, a national chain of smoothie stores, in a deal valued at $358 million. The acquisition is being hailed by some as proof that the blank-check IPOs recently flooding the market can pay off big for investors.

Over the past three years, hedge funds and other investors have sunk more than $2 billion into 47 initial public offerings by blank-check companies -- fledgling businesses looking to raise money simply to acquire other businesses. But to date, only a handful of those blank-check companies have completed a merger with an actual business, and that includes the proposed Jamba Juice merger.

Services Acquisition's deal is the most high-profile blank-check merger in the works. For Jamba, a 15-year-old company with 532 stores in 26 states, it's an opportunity to raise the cash necessary to compete with other national specialty food chains, such as


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But the ones most likely to score big on the deal are the well-connected corporate insiders who cobbled together Services Acquisition. Other big winners are the hedge funds that invested in the blank check's $127 million initial public offering last July -- and a subsequent private placement that will raise an additional $231 million to finance the merger.

Technically, the Jamba takeover is a reverse merger, because it's one in which a private company -- Jamba -- goes public by merging with a publicly traded shell: Services Acquisition.

However, investors currently buying up shares of Services Acquisition in the hope of getting in on the ground floor of a national chain face the risk of getting squeezed once the deal is completed.

For starters, no one really knows just how sound an operation Jamba is. The company, being privately owned, has offered little information about its financial strength.

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So far, all Jamba is telling investors is that annual sales in its most recent fiscal year were $345 million. The company also says that it has had a "compound annual growth rate of 20% per year over the last three fiscal years.''

A Jamba spokeswoman says the smoothie chain will say more about its financial situation when it files a formal proxy statement outlining the details of the merger agreement in the next week.

Another dilemma facing Johnny-come-lately investors is the potential dilution to Services Acquisition's stock once the merger is completed and the company changes its name to Jamba Inc.

Right now, there are about 20.4 million shares of Services Acquisition outstanding, of which it's estimated that 10 million are available for trading on any given day. But if the deal closes, the number of shares outstanding would more than double, to 51.3 million. That's because the company intends to sell 31 million newly minted shares to investors in a private placement to complete the merger.

The investors in the PIPE (a Wall Street acronym for private investment in public equity) will have a strong incentive to sell their shares as soon as they are registered, especially in light of what they're paying. Shares in the PIPE will be priced at $7.50 apiece, a 38% discount to their current price.

Many details of the private placement haven't been disclosed. But investors in a PIPE are rarely bound by a lengthy lockup provision that prohibits them from selling. Generally, a PIPE investor can sell shares once the stock is registered with the

Securities and Exchange Commission


However, it won't just be the PIPE investors looking to cash in on Services Acquisition's juiced-up stock price.

Five managers who make up the brain trust of Services Acquisition together own about 3.19 million shares and will likely push for the company to register their stock for sale soon after the merger is complete. For the company's founders, the merger is a coup, because they each literally paid a few pennies for every share they purchased.

No one on the management team is poised to do better than Steven Berrard, the company's chairman and CEO, who owns 5% of its stock. Berrard, a co-founder of


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, a national used-car dealership, also is an investor in the private placement that's financing the merger.

In addition, Berrard's private equity fund, New River Capital Partners, was an adviser to Services Acquisition on the deal, which must still be approved by Services Acquisition shareholders.

There's more possible dilution. Investors also must keep an eye on 15 million warrants that were sold to investors in Services Acquisition.

A warrant is a special security that gives an owner the right to buy a share at a specified price.

In the case of Services Acquisition, a warrant owner is entitled to covert a warrant into a share of stock if he pays the company $6 for each share. That's good news for the company, because it means an additional source of cash. But it's bad news for existing shareholders because it means new, discounted stock entering the market.

With Services Acquisition's share price well above the exercise price, there's little doubt many holders will look to trade in their warrants following the merger. Indeed, it's one reason Services Acquisition warrants are trading so robustly these days. On Thursday, the warrants rose 34 cents, or 8.4%, to $4.39.

A spokeswoman for Jamba declined to discuss the warrants. Officials with Services Acquisition and Broadband Capital Management, the firm that served as underwriter on both the blank-check IPO and private placement, also declined to talk.

It's possible the proxy statement will outline a plan for dealing with the warrants, which might alleviate the potential dilution issue. But even some of the most ardent supporters of blank-check deals say "warrant overhang,'' is something every aftermarket investor in a blank check deal must be wary of.