RAVE Rights Offering – Insiders Buying Up to 15% of Company While Squeezing the Shorts

December 23, 2016 at 10:35 am Leave a comment

 

After the close yesterday RAVE Restaurant Group announced a $3 million shareholder rights offering that will allow each shareholder to purchase convertible notes redeemable for Rave stock at an exercise price of $2 per share. These non-transferable rights are being granted to all shareholders as of December 21, 2016, so it appears that the offering and conversion price were set based on a 10% premium to the closing price of Rave ($1.82) on Dec. 20. Shareholders can purchase one $100 note paying 4% interest for every 355 shares that they own. Newcastle, the company’s largest shareholder whose principals include Rave CEO Clinton Coleman and Rave BOD chairman Mark Schwarz announced that they will participate and have essentially already paid in the full amount ($1 million) that they can invest under the deals terms based on their holding of approximately 1/3 of the company’s outstanding shares.

It is important to note that there is also an over-subscription right that will allow holders who exercise their rights to the full extent of their holdings (which Newcastle already did) buy any remaining rights not exercised by existing shareholders. Thus, if existing shareholders do not exercise their right to purchase these notes, Newcastle can exercise its over-subscription rights and essentially buy approximately 15% of the company for $3 million.

This presents an interesting situation, as shorts have sold hundreds of thousands of shares in a bet against Rave. These shares have been borrowed from shareholders who have made their shares available for hypothecation and sold, but the shareholders have just been awarded the right to purchase these convertible notes, be paid the 4% coupon and ultimately convert the notes into 50 additional shares when they choose to do so. Those who were short Rave stock as of December 21 will have to provide those rights or buy shares to replace the ones that they borrow and sold.

It also bears consideration that many short sellers made the bet in anticipation of a capital shortfall for Rave. With the company receiving a capital infusion of $3m as part of this offering, any pressure due to capital concerns will no longer be a factor at least for the next year or so.

The bottom line here is that this offering is giving shareholders an opportunity participate in Rave’s capital raise in proportion to their existing stake in the company. To the extent that some choose not to do so, the largest shareholder of Rave (Newcastle) will be able to increase their percentage stake. And the entirety of the situation will provide some very interesting and not too appealing options for the short sellers who have bet against Rave.

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Entry filed under: fast casual pizza, micro cap, micro cap short squeeze, short squeeze, small cap stocks, Uncategorized.

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