Late yesterday, TW Telecom (NASDAQ:TWTC, news, filings) announced they have adopted a rights plan designed to protect their Net Operating Losses (NOLs). The reason given is that unprecedented market volatility and unclear reporting requirements make it possible that a technical change of control could occur accidentally, and the company’s access to its NOLs could then be restricted. Companies in the telecom space are no stranger to NOLs. If they aren’t an RBOC, they probably have them. Why? Because they lost money for a long while before making money (or hope to someday!), and most of those who overspent in the bubble have billions of NOLs still waiting to offset future earnings.
TW Telecom has about $1.1B of NOLs, and since they recently started generating positive earnings they are now using them – hence what had potential value now has real value. So it is natural for TW Telecom to want to protect them. On the other hand, despite all the tax justifications, this rights plan still acts just like a poison pill. Basically, anyone becoming a 5% shareholder will get substantially diluted if the company doesn’t waive action under the plan – they have veto power over moves by large shareholders. Losing the NOLs would be bad of course, but maybe they also don’t want to get bought out at the bottom either.
Is TW Telecom trying to stop hostile bids? Actually, I doubt there is much risk of that right now but I guess one never knows. Well, I’m sure there are people out there who would do it if they could, but those people would need financing that isn’t there. And if the financing were there, then the stock wouldn’t be this low anyway.
Actually, I think it’s more likely that TW Telecom might be seeking stability in its stable of large owners so it can tap them for cash. Right now, they say large owners hold a percentage of the company in the mid 30s. Suppose they wanted to sell converts to a large holder in order to fund an acquisition, enough to push it near 50%? Market volatility would then be a real danger to their access to those NOLs, and it would require such a move in advance. Hmmmmm……
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