ITC Deltacom Inc.
(OTC:ITCD) has performed extremely well during the past year after
shedding many of its unprofitable businesses while expanding the
profitable ones. The telecommunication company's stock is up from a
52-week low of $0.70 to a high of $7.09. ITC hit a nerve with investors
last week, however, when it proposed a recapitalization that would
provide a massive payday for management while short-changing small
non-controlling shareholders.
H Partners Capital disclosed a 6.4% stake in the company and
detailed their concerns over the recapitalization in a letter to the company's board of directors. According to the company's
8-K filing
with the SEC, the purpose of the recapitalization was to make the
balance sheet more transparent by eliminating the confusing overhang of
convertible preferred shares and warrants. H Partners insists, however,
that this is completely unwarranted and the resulting dilution would
hurt common stock shareholders.
So, why would the company do it?
Well, the recapitalization would enable the company's controlling
shareholder and other interested parties to convert their preferred
shares and warrants to common stock at a more than 50% discount!
According to H Partners, "The recapitalization is nothing more than the
controlling shareholder and those acting in concert with it,
reapprotioning equity to itself at the expense of non-controlling
shareholders to the detriment of the company."
In the end,
ITCD serves as a great example of how powerful shareholders and the
board of directors can work in conjunction to enrich themselves at the
cost of non-controlling shareholders. Rights offerings,
recapitalizations and other financing techniques are often filed deep
within SEC documents in ambiguous terms - rarely are we so lucky to
have an investment firm outline the problems in plain English in a
public complaint. This is something all investors in speculative
companies should watch for on a regular basis as it could have severe
negative implications for the companies involved.
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