Is the deal good or bad for the stockholders? That's the question investors are asking about MNC Financial's plan to sell financier Alfred Lerner and other MNC board members $180 million worth of preferred stock.
It is not an easy question to answer.
On one hand, the $180 million sale seems to be a straightforward way of easing a nasty cash crunch at MNC, the Baltimore-based parent of Maryland National Bank, American Security Bank and Equitable Bancorporation.
But on the other hand, some observers are asking whether MNC, despite its heavy losses on real-estate related loans, really needs to raise the $180 million.
Analyst John A. Bailey of Ferris, Baker Watts in Washington thinks that MNC does not truly need the money to meet cash needs -- or at least does not need to raise it with a stock issue.
"We believe that Lerner's contribution is not strictly necessary and therefore should be seen as primarily a control move," Bailey said. In any event, Bailey noted, MNC would be better off with a hefty line of credit from a New York bank -- which MNC is now trying to obtain.
Like most events in the financial world these days, there are things about MNC's proposed deal with Lerner that are clear and things that are obscure.
What is clear is that MNC is the region's largest financial institution, with $27 billion in assets, a credit card operation that is the "crown jewel" of the company and heavy exposure to commercial real estate problems.
What is clear, too, is that if Lerner buys all of the $180 million in preferred stock, he would increase his stock from 8.9 percent to almost 24 percent, enough to give him functional control over MNC.
That means that Lerner, if he wants to, could shake up the management at MNC or even try to sell MNC.
Indeed, Bailey suggests that Lerner "is consolidating control in the executive offices." Bailey added, "We believe this news implies there will be management changes, an accelerated restructuring of the lines of business including aggressive asset sales. These moves should be a prelude to shopping the company and eventual sale."
What is still uncertain is whether the Lerner deal will come to pass. MNC has left itself a loophole that it can use to cancel the preferred stock issue if somebody else comes along with a better offer. It is possible MNC will cancel, but not likely.
Lerner, meanwhile, has agreed that other directors can join him and take up to 50 percent of the $180 million of preferred stock. So his block of stock may be smaller than 24 percent.
A number of MNC directors already have agreed to step up to the plate and take some of those shares. And why not? The shares are a good deal.
The shares will pay 12 percent interest. And they can be converted on a one-to-one basis for common stock at a price of $10.75 a share.
MNC has been trading at $8.75, meaning that Lerner could buy control of MNC for a very small premium over the current price of the stock. It is heart-thumping to realize that only about a year ago, MNC was trading for $29 a share.
As several analysts have pointed out, MNC shareholders will pay a price for the $180 million infusion of capital. At $10.75 a share, the preferred will be convertible into 16.7 million shares, a 20 percent increase in total shares outstanding.
A sharp increase in the number of shares means a sharp decrease in the earnings per share. MNC says that if you refigure last year's $2.84 earnings per share to allow for the new shares, the earnings would drop 13 percent.
Normally, that idea would hurt any stock, but in the present climate, where bank stocks have been hit so hard for so long, it may be hard to tell why any stock is where it is.
And what of the cost of the 12 percent interest payments on the $180 million of preferred stock? Unlike interest on bonds, it won't be tax deductible. So the bank will bear the $21.6 million interest cost. But analysts figure MNC can invest the money well enough to break even or make a profit.
So is it a good deal or bad deal for stockholders?
Analyst David S. Penn at Legg Mason in Baltimore said there are several ways to look at the question. While the cash infusion would be helpful, he said, the fact that MNC felt it needed the money did not help the bank's image. But there are some silver linings, Penn suggested. Those benefits include allowing MNC to strengthen itself in the eyes of the bank regulators and improving MNC's standing with the agencies that determine the company's credit worthiness.
At a time when uncertainty about the health of banks is doing as much damage to the banks as their bad real estate loans, any effort to build confidence may be worth a try.
How does it feel to lose $6.3 million when your bank stock becomes worthless? Not good, admits John J. Mason, who tried briefly and unsuccessfully to turn Washington Bancorporation around before it became the first major bank in Washington to fail since the 1930s.
Mason, the bank's chief executive officer, wasn't the only shareholder to lose money but, with 450,000 shares, he was one of the largest. Many other board members and major investors in Washington Bancorporation -- parent of National Bank of Washington -- also lost considerable sums of money.
One of the smaller shareholders who lost out was Lew Sosnowik, a long-time trader of bank stocks in Washington, now at Koonce Securities in Rockville.
Sosnowik had Washington Bancorporation shares in his pension account and although he acknowledges that he should have known better, he never sold those shares.
Toward the end, Sosnowik said, he thought that Mason, who had run National Savings & Trust Co. in the mid-1980s, would be able to resurrect Washington Bancorporation, founded in 1809. So Sosnowik watched his investment melt away. And he is not happy about it.
Mason said that when he moved into management at Washington Bancorporation recently, he tried not to mislead anyone about the chances for the bank's survival. But he acknowledged that some investors probably stayed with the stock because of his involvement.
"Some people did indicate I might be able to turn it around," he said. "In fact, it was not to be." The "dreadful" financial condition of the bank made it impossible to do so, he said.
Mason's 450,000 shares, for which he paid an average price of $14.11 each, represented 6.4 percent of the company's stock. But Mason said he did not come rushing in to buy the stock as the bank was going down the drain. Indeed, he had held a 4.9 percent position for about two years.
As for his loss, Mason noted that investment losses can be used to offset gains on one's tax returns. Fortunately, he said, he has gains that will offset his losses.
Steve Newby, stock picker par excellence, has departed from Koonce Securities in Rockville and moved across the road to open his own brokerage firm. It's called Newby & Co. A major revenue producer at Koonce, Newby said it was time for him to build his own company. "I'm 43, and if I don't do it now, when will I do it?" he said.
Newby, who has a knack for finding out-of-the-way stocks that make a big splash, recently won $50,000 in USA Today's National Investment Challenge. He said he plans to donate the money to Project Excellence, a program for Washington area students.
Before joining Koonce six years ago, Newby was a broker at Wheat, First Securities in Richmond and at Shearson Lehman in Washington.
At the moment, Newby is leading the field in another stock picking contest, the U.S. Trading Championship. Using $50,000 in real cash, Newby created a stock portfolio that is up 417.5 percent so far this year. Among the stocks that helped his portfolio rise were Penril Corp. of Potomac and PHP Healthcare of Alexandria.endquad