The Gyrodyne (GYRO) warrants that were announced and registered with the SEC in August have now been issued. For each share of common stock held on August 15, 2011 one warrant was issued. The warrants entitle the holder to purchase additional GYRO shares on the following terms; a warrant holder who exercises his/her warrants can purchase one common share of Gyrodyne at $53.00 for every 7.5 warrants exercised. Warrant holders who would be entitled to purchase a fraction of a common share under this formula will be able to “round up” to the next full number of shares. Warrants must be exercised by September 22, 2011 or they become worthless. Theoretically the warrants could be sold on an exchange, though the August 5 press release describes them as ‘non-transferable’ and I have not been able to locate a market where they trade (anyone out there know something to the contray?). If not all warrants are exercised, those warrant holders who exercise all of their warrants will be able to purchase additional common shares at the exercise price ($53) on a pro rata basis. There will also be a certain number of over- allotment shares available.
First, one might legitimately ask why GYRO management is raising additional capital ($10 million) when they stated several years ago that they are looking to liquidate the company over the long run. The reason given by management and the Board, and it makes some sense, is that the company may need additional funding for operations and, more importantly, they don’t know how long the appeal process for the lawsuit against NY State will take, and thus they could need funding above and beyond what is currently available to ‘vigorously defend’ stockholder interests. As I said, this does make some sense; As a stockholder I don’t want them to do anything but vigorusly defend my interests in the lawsuit, since the lawsuit represents the majority of the asset value of the company, so I certainly don’t want them to run out of money. However, it is a bit worrying that they may need funds for ongoing operations.
Should a stockholder exercise the warrants or just let them expire? Well, letting your warrants expire makes little economic sense; you are allowing your position to be diluted, even if ever so slightly, if you do. The question is whether you believe the market value of the company today is below the intrinsic value of the company (this boils down to whether the current award will be upheld in the appeal, reduced or thrown out). If you don’t believe this, you should sell out your position in the common right away never mind the question of whether to exercise the warrants or not. If you do believe this and have the funds available you must exercise. Not only have I exercised but I have asked for additional shares in the oversubscription. I continue to be a believer for reasons hereforeto stated.
Note: the intrinsic value per GYRO share will be diluted with the warrant exercise, by about 14%, but my economic interest in the company will remain the same and my average cost per share will go down.