An interesting investment that caught our eye (from stockspinoffs.com) was Genie Energy’s (GNE) exchange offer for its common shares.
Figure 1 Genie Energy (Source Genie Energy)
Genie Energy was spun-off of IDT Corp on October 28th 2011. It is compromised of two major segments:
- IDT Energy is a “retail energy provider (REP) operating in the Northeast U.S.”. It “purchases electricity and gas in the wholesale markets for resale to end users.” The “delivery, billing, collections remain responsibility of the incumbent utility.” It is the only segment of the company that generates revenue.
- Genie Oil & Gas (GOGAS) has “exploration agreements in two of the top three global oil shale deposits” in Green River Formation (Colorado-US 1.4 Trillion barrels) and Shefla Basin (Israel ~250 Billion barrels). “Oil shale generally refers to a sedimentary rock that contains solid hydrocarbon materials called kerogen. When oil is heated to ~650F the kerogen generates hydrocarbon liquids and gases.” GOGAS estimates that the production cost to generate a barrel of oil will be $40/barrel. GOGAS is years from generating any kind of revenue (See chart). If (big if) they are able to actually get meaningful production, the company could be worth billions are dollars.
Figure 2 Timeline for GOGAS subsidiaries (Source: Genie Energy)
Here are the details of the exchange offer taken from Genie’s investor presentation.
Holders of Common Stock Can Exchange for Preferred:
- Holders of Genie Class B common stock may exchange shares for shares of preferred on 1 for 1 basis
- Up to 8,750,000 shares of common may be exchanged
- Tender closes October 10, 2012, unless extended
- Company has no position on tender nor recommendation to shareholders Genie’s controlling shareholder, Howard Jonas, will not tender his shares.
Preferred stock details:
- $0.6375 annual dividend plus 7.5% of EBITDA generated by REP business in excess of $32 million per year, divided by 8,750,000. Base dividend is payable quarterly. Additional dividends, if any, are paid annually
- Genie has option to redeem at $8.585 per share after 4 years, $8.50 per share after five years, in either case, plus payment of accrued dividends
- Liquidation preference of $8.50 per share
- Common stock cannot receive dividends unless all accrued preferred dividends paid
Exchange Offer Analysis
- The price of the stock is at $7.43, so the dividend yield is around 8.6% (not factoring in any extra dividend from REP business). In today’s environment that is fair for a company like Genie. Currently, there are safer REIT preferred shares that yield above 7%. If Genie buys back the preferred after the five years at $8.50 then the yield to maturity is 10.9%. It is important to note that Genie has the option to buy back the shares, but they are not obligated.
- Common stock ownership will increase proportionally to the number of shares are exchanged.
- Genie has two classes of shares Class A and Class B. Class A have 30 times more voting power than Class B shares.
- As of August 1st, there were 21.42 million Class B shares and 1.57 million of the Class A shares.
- Mark Jonas and his various trusts (Jonas Group) hold 18% of the Class B shares and all of the Class A shares. They control 74.5% of the voting power.
- Jonas Group is not participating in the exchange offer.
- If all the shares were exchanged, Jonas Group interest in our Class B Common Stock will increase from 18% to 31%
The most important note is that the controlling shareholder is not participating in the exchange offer. This exchange offer is a way for the Jonas Group to get a bigger stake in the company without paying any money. If you look at insider transactions, Jonas and other insiders also have been putting their money on the table by buying shares on the open market. Jonas made a $.5 million purchase of Genie at $9.90/share in March of this year. All signs point to the insiders believing in the future of oil shale deposits and the company.
Should you buy Genie or participate in the exchange offer? Our analysis coming soon…
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Disclosure: I do not own share of GNE.