What is more natural than the desire to exploit success? It is also a very Israeli quality. It even appears in the Israel Defense Force's war principles handbook. It is therefore easy, to a certain extent, to understand the motives behind Given Imaging's (Nasdaq: GIVN) secondary offering.
But at second glance, the company's announcement yesterday of plans to raise capital by issuing 3.2 million shares alongside a shareholders' sale offer of another 3 million shares, is a little problematic.
The company, maker of a disposable imaging capsule for diagnosing small intestine disorders, filed the prospectus for its Wall Street IPO on August 22, 2001. In retrospect we know that date was just three weeks before the terror attacks on the US.
But the company's product, which offers an effective, painless, non-invasive solution to patients who previously suffered a pipe with a camera on the end threaded through their digestive system to the small intestine, excited investors so much that the company managed to successfully complete the offering just three weeks after the attacks. Given Imaging will be written about in Wall Street's history books as the first company to go public after September 11.
In the October 3 pricing, Lehman Brothers set the share at $12. The five million shares the company offered put $60 million in its pockets.
The offering hung a $300 million price tag on the company, quite an achievement since the prospectus included the company's Q2 2001 financials, financials in which the revenues item was empty. That's right, long after the dot.com bubble burst, a company with zero income and a $7.4 million loss in the first half of 2001 raised $60 million at a $300 million market cap. And an Israeli company at that.
Given Imaging didn't have any income in the first half of 2001, but it was already clear in October that revenues would not be long in coming. The company already had FDA approval to market its capsule in the US.
Not surprisingly, the company ended 2001 with $4.7 million in revenues, $3.5 million of which came in Q4. The revenues beat analyst expectations, but analysts' expectations are largely the direct result of management's expectations.
Given Imaging ended 2001 with a net loss of $18.7 million. That is a lot of money, but nonetheless, Given had $61 million in the bank.
The company will continue to lose money in 2002. Analysts are divided only on how much money the company will lose. Lehman Brothers wrote in a December 11 report that the company will end 2002 on a $9 million loss, while Robertson Stephens wrote on January 14 that the loss will amount to $11 million.
The loss will finance the company's efforts to penetrate the market as well as investment in expanding production capabilities from 30,000 capsules a quarter to 240,000.
The company will burn a lot of cash in 2002, but 2003 will see a turn around. Lehman gives no projections for 2003, but Robertson Stephens estimates profitability in Q2 2003 and an annual net profit of $2 million.
Let's do the math. In December 2001, after a loss of nearly $20 million, the company has $60 million in cash. If we are twice as pessimistic as Robertson's pessimistic projections and assume the company will lose another $20 million in 2002 and $10 million in 2003, then the company will burn half its cash reserves or $30 million in the next two years when it starts posting those profits.
If that analysis is true, why did the company yesterday announce plans to raise capital in a secondary offering of 3 million shares? In today's market, 3 million shares are worth $43 million. Why does the company need $43 million if it has $60 million and is expected to reach profitability a long time before it runs out of cash, if it ever does?
The answer apparently lies in the second half of the offering plan. While the company sells 3 million shares, its shareholders plan to sell 3.2 million. In other words, of the $90 million in the offering, the shareholders will pocket $50 million.
And who are these infamous shareholders? Discount Investment Corporation (TASE: DISI ) will sell 510,000 shares and Discount's subsidiaries Elron and RDC will sell another 1.2 million shares. In other words, if the offering goes as planned under more or less today's market conditions, the Discount group will pocket $25 million.
It is no secret that the Discount group is thirsty for cash. The pressure comes from the bottom, mostly from cable company Tevel's losses, but also from on high. Leon Recanati and Kardan undertook massive financial commitments in their recent takeover of IDB, the top of the Discount pyramid.
In fact, fundraising now could actually damage Given as it could hurt institutions and individuals that bought into Given's initial offering. In post-bell trading after Given announced the secondary offering, the share dropped $1.36 to $13, just one dollar higher than its IPO price.
Even if the share stabilizes now at $14-15, that is still a pretty narrow margin for those who believed in the company during Wall Street's toughest period in many years.
The timing also seems to indicate the pressure from IDB ¿ the offering is planned for right after the shareholders' 180-day lockup period ends.
Given Imaging doesn't need cash. IDB does. IDB needs cash so badly it is willing to risk being seen as greedy and unperturbed by hurting other investors ¿ those same investors who gave Given a chance in the first place. IDB needs cash so badly it is even willing to sacrifice Given's image on the altar of that cash.
It is entirely possible that Given has plans to acquire another company ¿ Given hinted in the past at plans to buy a local distributor to help penetrate the US market. This would justify the offering to some extent although the company would have to examine acquisition strategies that include a share swap component. And the company would certainly have to reveal such plans during the road show if not before.
It is hard to shake the feeling that the entire offering is a smoke screen designed to hide pressure from IDB and the other, as yet unnamed, shareholders who will sell off their Given stakes.
Given Imaging's management, underwriters and controlling shareholders will soon set out on a road show. They will be asked a lot of tough, embarrassing questions and they may hear scathing criticism. This offering could prove to be one of the greater challenges we have seen recently. Maybe more than just challenging.