Remember that $7.2 billion equity deal Washington Mutual (WM) brings up every time someone suggests it’s on the verge of going bankrupt? As the firm proudly said in a press release at the time, it sold the stock to TPG in April, for $8.75 a share.
What it didn’t say in the release is that there is a “price protection feature” that will force WM to compensate TPG if it sells stock at a lower price within 18 months of that deal. So let’s hope WaMu management is right and that it isn’t one of the 25 financial companies that Oppenheimer analyst Meredith Whitney thinks is still hallucinating about its asset values and will soon be returning to the markets for more capital.
If the Company engages in certain transactions involving common stock or other equity-linked securities within 18 months from the closing date of this equity issuance, the Company will be required to compensate the TPG investors and certain other investors (solely for issuances within 9 months from the closing date) in the event that the effective sales price of a future common stock or other equity-linked securities transaction is less than $8.75 per share (the “Price Protection Feature”).
Here are the details from the company’s proxy statement, filed on 4/11/08:
In the event that, within eighteen months of the closing of the transactions under the Investment Agreement, the Company (i) sells more than $500 million of common stock or other equity-linked securities at a price less than $8.75, or (ii) the Company engages in a change of control transaction wherein the implied value of the Company’s common stock is less than $8.75, upon the occurrence of each such event the Company is required to pay to those Investors whose shares are subject to transfer restrictions an amount sufficient to compensate them for the dilution suffered by them as a result of the above-described actions of the Company.
And here are the full details. If someone wants to explain in English, we would be grateful. As best we can tell, the company essentially has to reset the stock price of the $7.2 billion TPG deal to the level of the new deal, meaning that the potential dilution is almost unlimited.
(a) If, from the date hereof until the date that is eighteen months after the Closing Date:
(1) the Company issues or sells, or agrees to issue or sell, more than $500 million of Common Stock (or other securities that are convertible into or exchangeable or exercisable for, or are otherwise linked to, Common Stock) at a purchase (or reference, implied, conversion, exchange or comparable) price (the “New Issuance Price“) per share less than the Reference Purchase Price (a “Reset Issuance“), or
(2) there occurs any Fundamental Change in which the Underlying Security Price (together with the New Issuance Price, the “Reset Price“) is less than the Reference Purchase Price (a “Triggering Fundamental Change” and, together with a Reset Issuance, a “Reset Event“).
then, on the earlier of (A) the second business day after the closing of any Reset Issuance and (B) the date of the occurrence of a Triggering Fundamental Change (or, if later, on the Closing Date, or, if later, on the second business day following the later of (x) the average price calculation specified below in this Section 4.11 and (y) the shareholder approval specified below in this Section 4.11, if and as applicable), the Company shall make a payment to each Investor (the “Reset Payment“), equal to the product of (i) an amount equal to the (z) Reference Purchase Price minus the Reset Price, divided by (y) the Reference Purchase Price multiplied by (ii) the aggregate amount paid by such Investor pursuant to Article I (including, (1) if any Warrant has been exercised by such Investor prior to such date, the aggregate exercise price paid by such Investor for the Warrant shares and (2) if any Warrant has been exchanged for convertible preferred stock by such Investor prior to such date, the value of Warrant as calculated pursuant to the terms of the Warrant), grossed up as required to compensate each Investor for any diminution in value in the Securities resulting from such Reset Payment; provided that the Company may, at its option and as an alternative to making all or any portion of such Reset Payment, instead pay the Reset Payment due each Investor by delivering to such Investor shares of Common Stock valued at the lower of the Market Price of a share of Common Stock as of (x) the last trading day prior to the date on which this payment occurs or (y) the first date of the announcement of the Reset Issuance or the Preliminary Fundamental Change that resulted in a Triggering Fundamental Change, but solely to the extent that any such issuance of shares of Common Stock would not result in (A) such Investor owning or being deemed for applicable regulatory purposes to own 25% or more of the voting securities of the Company (or the surviving corporation resulting from such Triggering Change of Control), (B) unless the OTS shall have issued a written acceptance of a rebuttal of control submission by such Investor pursuant to 12 C.F.R. §574.4(e), such Investor owning or being deemed for applicable regulatory purposes to own 10% or more of the total number of voting securities of the Company Common Stock then outstanding (or the surviving corporation resulting from such Triggering Change of Control) or (C) the Company failing to comply with applicable New York Stock Exchange requirements or the requirement of any other Governmental Entity (provided that, in the case of this clause (C), the Company shall, at its election, have a reasonable period of time in which to seek any shareholder approval required to satisfy such requirements and the Company’s payment obligation pursuant hereto shall be postponed until such time as such shareholder approval shall have been obtained or denied).
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