The Upside of a Vertro Reverse Split
– Higher stock price should increase institutional and retail interest
– Backdoor share repurchase as all “odd lots” will be paid in cash/repurchased
– Lower number of shares following reverse split will increase EPS
-Extremely low float will make VTRO more difficult to sell short
As most of our members are probably aware, Vertro’s shareholders approved a resolution allowing the BOD to implement a 1-for-10 reverse split any time prior to December 31, 2009. This resolution was offered to allow the company the flexibility to take steps to maintain its Nasdaq listing in the event that the company were to receive a non compliance notice as a result of its stock price trading below $1.00 per share. This Nasdaq requirement had been suspended in late 2008 due to the “extraordinary market conditions” that resulted in many listed company shares trading below $1 for an extended period of time. The rule was reinstated in late July and the company received a notice of non-compliance on Sept. 15.
While we are very bullish on Vertro’s prospects – we expect the company to report double digit sequential revenue growth for Q3, and we also expect some upward pressure on the shares due to purchases by new Groove members; we do not know if these factors would be enough to cause the shares to move beyond the $1 minimum within the timeframe that will likely be needed to regain compliance with the Nasdaq rule before the shareholder approved reverse split deadline passes.
Reverse splits are often greeted with great skepticism by investors due to the fact that many companies have undertaken a reverse split when their company’s fortunes are flagging – it often seems to be the last ditch effort of companies that have real operational and/or financial issues that have put them into the “death spiral” that usually leads to delisting and ultimately, bankruptcy. Such companies will do a reverse split to forestall the inevitable delisting, but it does nothing to solve the real issues and they often see their shares continue to fall, sometimes even faster. Because of this, it is not uncommon to see short sellers target companies when they implement a reverse split. As such, one might think that Vertro could be in danger of losing its Nasdaq listing even if the reverse split is implemented. With the current trading range well below $1 one could surmise that a wave of selling following the reverse split could push the shares back below $1.00 after a reverse split, causing the company to fail in its bid to regain compliance with the Nasdaq.
We do not believe there is risk of such a scenario. Management has indicated that the low point for their cash position will be in the $4 – $5 million range. If the company completes the 1 for 10 reverse split, there will only be approximately 3.5 million shares outstanding. If short sellers or others try to push the shares below $1, the company need only implement a stock buyback/repurchase program and set a price in the low $1‘s to take as many shares as they can. Conceivably, the entire float minus insider holdings could be repurchased at levels about $1.00 without exhausting the company’s available cash resources, so we could see that ultra low float reduced even further. With the company likely only a few months away from reporting their first profit in years, Groove VC shareholders could be rewarded quite handsomely when the Q4 profit report is released, as the reduced number of shares outstanding following such a buyback would significantly increase the profit per share figures.
The more likely outcome if Vertro management decides to move forward with the reverse split is that there will be greater demand for Vertro shares, as more institutions and funds would be able to buy Vertro shares and we would likely see greater retail interest as well. Any post split increase in demand could have an disproportionate impact on the stock price as the very small supply of shares would make it difficult to meet the increased demand without the price moving higher.
In summary, we feel that a Vertro reverse split could ultimately be a positive catalyst for the shares.
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