This ought to raise all sorts of red flags for people out there.
Coca-Cola Company (NYSE:KO) began buying 2.8M shares of Keurig Green Mountain Inc (NASDAQ:GMCR) from May 8th to May 12th chasing the price up from 96 to 110. GMCR averages 2.95M shares traded per day meaning KO purchased 2.8M of the 11.8M share traded over that time frame (the 10th and 11th were weekend days) put another way, KO was a partner in 24% of shares traded over that timeframe. There was no way they would do anything but drive the price of the stock up as volume on the 8th was 2X normal and on the 13th ~2.5X normal.
Then, with the benefit of that price rise, on May 12th and 13th GMCR insiders dumped a large % of their holdings in GMCR, here, in many cases converting options years ahead of schedule (there has been a steady stream of insider selling in GMCR).
On May 13th KO filed a 13D/A announcing they held 26M shares, or 16% of the stock in GMCR.
If fact, KO only actually owns 19.5M shares and is actually “agreeing to buy” the remaining 6.5M shares from Credit Suisse on Feb 13,2015. KO cannot vote those 6.5M shares and Credit Suisse is going to hedge their sale to KO between now and then. If this smells (I mean sounds) familiar this is not unlike the HLF deal in which they sold convertible bonds today to “agree” to buy back stock later. Because there is an agreement to buy, they both can book the transaction now. In the case of HLF the convertible does not get counted as dilution until they convert but the “buyback” that has not yet actually happened does (don’t blame me, I don’t make the rules).
From the KO filing on what they are agreeing to buy:
The lesser of (a) 6,548,041 and (b) the number of Shares that, together with (x) the 16,684,139 Shares purchased by Counterparty pursuant to the Stock Purchase Agreement with Issuer dated February 4, 2014 and (y) the 2,805,591 Shares purchased by Counterparty through Agent as agent from, and including, May 8, 2014 to, and including, the Trade Date (such Shares described in clauses (x) and (y) and any Shares received by Counterparty in respect of such Shares as a result of stock splits, stock dividends or similar events, the “Owned Shares”), equals 16% of the outstanding Shares, as reported in the most recent report filed by Issuer with the Securities and Exchange Commission containing such information as of such time (rounded down to the nearest whole number of Shares) (the “Ownership Limit”). If the Number of Shares is less than 6,548,041, then the Calculation Agent may make adjustments to the other terms of the Transaction as appropriate to account for the economic effect of such occurrence. Notwithstanding any other provision of this Confirmation, the Definitions or the Agreement to the contrary, in no event shall the Number of Shares be increased so that the Number of Shares, together with the Owned Shares, exceeds the Ownership Limit
Also, unless KO notifies and gains consent of Credit Suisse (which would require an amended filing), they are locked into their current holdings:
During the Relevant Period, without the prior written consent of CS, Counterparty and its Affiliates shall not, directly or indirectly (including, without limitation, by means of a cash-settled or other derivative instrument with a hedging, averaging, valuation or similar relevant period that overlaps with the Relevant Period) purchase or sell, offer to purchase or sell, place any bid or limit order that would effect a purchase or sale of, or commence any tender offer relating to, any Shares (or an equivalent interest, including a unit of beneficial interest in a trust or limited partnership or a depository share) or any security convertible into or exchangeable for Shares.
Now, I’m not gonna run out here and cry “foul”, but, those who know me know I am not a big believer in coincidence when it comes to this stuff. I typically think if it looks and smells like a pile of crap, it is in fact a pile of crap.
In order for one to believe “nobody knew anything” about KO‘s intention and then acted on this news, one has to believe various GMCR insiders just happened to hit the perfect day to convert their options (years early) and then sell virtually all of them or KO was unaware of the 10b-1 trading plans and just happened to pick the perfect set of days to run the price up and buy shares.
Why did KO have to drive the price up before entering the transaction with Credit Suisse? Why not just enter the same deal for 9.4M share vs 6.5M? KO is required to buy the shares from CS at a price based on the:
The product of (x) the arithmetic average of the Daily VWAPs for the Exchange Business Days in the Calculation Period, subject to “Valuation Disruption” below, and (y) (A) 1 plus (B) the Forward Price Adjustment Factor.
The Calculation Period is 3 day from the trade date (May 13th) to the Termination Date (Feb 13,2015) or earlier at CS’s determination. So, driving up the price prior to entering the agreement served them no benefit, in fact it started the eventual price determination higher that it otherwise would have. Bottom line is their actions in no way helped their eventual cost.
I’ll leave it to readers to draw their own conclusions from this. All I will say is that if i was a shareholder of either company, behavior like this would terrify me. If they do this in plain sight, what is either doing when we can’t see? GMCR seems to be doing anything to drive it’s price up while execs cash out. Remember they originally sold KO a 1.25B stake at 76 only to later announce a 1B buyback at >100. Both action propped up the price but have questionable long term benefits. This is capital allocation at it absolute worst, KO, on the other hand, fresh off Buffett abstaining from voting for its comp package is either a willing partner or oblivious dullard to GMCR‘s actions.
I think either choice is unpleasant for shareholders.