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Power-One pays price for $60M infusion

By   /   Sunday, May 17th, 2009  /   Comments Off on Power-One pays price for $60M infusion

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Thanks to a $60 million capital infusion on May 8, Camarillo-based Power-One now has the cash it needs to continue restructuring and to push into renewable energy markets. But the move spurred a public outcry from some shareholders over what they see as the potential for massive dilution to their investments.

The power supply maker’s shares trade on the Nasdaq and have plunged more than 50 percent from a year ago, down to the $1.30 range from more than $3. It secured $60 million from Silver Lake Sumeru to help refinance debt it issued last year and to give it more cash and flexibility to restructure around cheaper manufacturing locales. The funds will also help Power-One  pursue new opportunities in the solar and wind energy markets.

For its cash, Silver Lake is getting two board seats, up to 19.9 percent voting power and a mix of convertible preferred stock, debt and stock options. If the firm were to convert everything it could to Power-One’s common stock, existing investors could take a dilution hit of 84 percent, Todd Cooper, managing director of investment bank Stephens Inc., wrote in a note analyzing the deal.

Power-One, which declined to comment for this story, has said it is unlikely shareholders will take that much of a hit. In the company’s quarterly earnings call, Chief Executive Richard Thompson said that if the company can buy back all of the $75 million in debt it issued in 2008 and notch a few operational successes, existing shareholders stand to take hit of only about 15 percent.

Bel Fuse, a New Jersey electronics firm that owns 8.4 percent of Power-One’s common shares, sent a letter to the Camarillo company’s board expressing alarm over the deal. Colin Dunn, vice president of finance at Bel, said Power-One should have sold off part of its business rather than refinance its debt with more debt.

“It’s a sweetheart deal for Silver Lake,” Dunn told the Business Times. “We think [Power-One] should have restructured the company that they’ve got and focused on running the business rather than diluting the existing shareholders’ equity.”

But Cooper, the analyst, said that the move was probably Power-One’s best option because its cash reserves were running low enough to risk triggering agreements in debt it took out last June that would have meant big dilution for existing shareholders. The Silver Lake deal will cause only about 10 percent more dilution than setting off those agreements, he wrote.

“Since the company was essentially within a whisker of potentially being placed into bankruptcy, shareholders should feel reasonably good about the new capital infusion,” Cooper wrote.

But Cooper – whose firm has done investment banking with Power-One, consulted on its acquisition of a European power supply maker and has a hold rating on the stock – said there’s no getting around the fact that longtime shareholders are getting a raw deal.

“[I]f you were a [Power-One] shareholder last May before any of the two financing deals were done, we believe you have a right to be angry,” Cooper wrote. “In our opinion, [Power-One] could probably have sold the company at that time for $4 to $5 a share. Instead, the board and the new management team decided to make a go of it.”

Bel’s Dunn makes no secret of why his company is fuming. Though its stock has taken a beating similar to Power-One’s, Bel Fuse has $100 million of cash on hand and has tried to buy part of Power-One’s direct-current-to-direct-current power supply line, Dunn said.

Bel has made Power-One aware of its interest, Dunn said, but negotiations never got as far as naming a price. Still, Dunn thinks it would have been better for Power-One’s efforts to become leaner if the Camarillo firm sold some of its business lines.

“We’re not beating around the bush here,” Dunn said. “From a company point of view, we think they have some very interesting lines of business. We think some of them would fit well in our portfolio, and we’d like to have them.”

For its part, Power-One has already bought back $17 million of the debt it issued last June and plans to use part of the Silver Lake investment to buy back another $22 million at a 30 percent discount. The company notched a net loss of $61 million on $98 million revenue in the first quarter, but that includes a $57 million non-cash hit to goodwill because of the firm’s tumbling stock price.

In the company’s earnings call, CEO Thompson said Power-One is still pushing to become leaner and take advantage of wind and solar energy power supply lines it bought in Europe. The company cut nearly 1,400 workers since its peak headcount of about 4,900 last summer, Thompson said.

Cooper, the analyst, called the Silver Lake deal a “a positive for shareholders.”

“[Power-One] can now concentrate on its turnaround strategy and fund the necessary restructuring projects in order to return to profitable growth in the near term,” Cooper wrote. “[W]hen you analyze this new $60 million financing, we believe it depends on whether you want to dwell on A) what could have been or B) what is the best thing to do going forward.”

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