Options – A Flippers Trap

Optionswere once a tool to reward executives and employees, they were not common inequity raisings. Now, they are almost mandatory, but to what ends?

If it’s a straight equity raise then ‘they’ want a call option, if it’s a convertiblethen ‘they’ want a call option with a moving strike, a dilutionary trap, andthen if it’s a hybrid instrument then ‘they’ don’t know what they want and theinstrument will be a mix mash of discounts, call options and some yield thrownin.

And in manycases management probably has no idea, or the structure suits them.

GLN has oneof the best brine assets, positioned very well for the next upturn, which isprobably quite close, and management is good.

But themarket is empty and therefore, for big licks of cash, the book build needs toallow the flippers in, and GLN’s share price is the result.

Twoquestions then:

1. What portion of GLN’s book did the flippers make up, and was it worth lettingthem through? If it was 10% or less, then no, they should have been identified, but are the brokers a bit hungry at the moment, and that 10%, or $1.6m is $96k in fees.

2. In thismarket are options worth it. Lets say 70% of the book were long term holders, they see value, is the option that important to them, at the moment I bet they would prefer no option, hence no flippers, a smaller raise but better conditions for sp appreciation and a future raise in better conditions?

So thisraise, unfortunately for GLN’s management and real shareholders, looks like amassive flippers trap.

On thematter of options, management and advisors don’t seem to be valuing theseproperly, they are viewed as a cheap carrot – think LKE and the bonus optionfor all shareholders - who was their advisor – avoid them.

Optionshave a value, they should be treated as a transaction cost, they cost incumbentshareholders through dilution and they put a cap on the sp.

Therefore,are options that great? They attract the flippers, they are rarely valued properly, they are dilutive to incumbent shareholders, they set the scene for the next raise, i.e. it’s a ‘they got them so we want them too’ scenario. Never ending.

Oddly, inthis market, I expect there will be a flight to quality, and that qualityassets and quality capital structures.

Please share, hope this generates a constructive discussion.