Western Sizzlin Rights Offering Experience

Western Sizzlin (WSZL) hit my limit price of $10.00 Wednesday, March 7th as a result of  Sardar Biglari’s letter to Friendly Ice Cream (FRN) shareholders and Friendly’s decision to consider selling the company, so my 600 shares were sold. As many of you have probably noticed, Western Sizzlin has been part of the Special Situations Real Money Port since last November. I first posted the Western Sizzlin rights offering opportunity on November 22, 2006 in Fat Pitch Financials Contributor’s Corner for subscribers. This was a rather experimental trade for me, but it turned out well and I learned a lot about rights offerings.

So how well did I do?
I initially purchased 1,200 Western Sizzlin rights at $0.52 a piece for $630.95 on November 27, 2006.  I exercised my rights on December 8, 2007 for a $25 fee and an additional $4,200 for 600 Western Sizzlin shares at the $7.00 price the rights entitled me to.  Today, I sold my 600 shares for a net $5,993.05.  My net return from this trade was $1,137.10.  That is a 23.4% gain on my investment.  Since this deal took 100 days to complete, my average annualized return was 85.5%.

Rights Offering Details
The Western Sizzlin rights offering was basically an experiment on my part.  I wanted to learn more about rights offerings, so I thought I would dip my toe in this one and try it out.  Joel Greenblatt had great praise for rights offerings in his book, You Can Be a Stock Market Genius.  I’ve never really spotted one in action before, so I decided that this would be a fairly low cost learning experience. I was also interested the Western Sizzlin rights offering because I know Bill Mann of the Motley Fool also has been a long term holder of the Western Sizzlin common stock.  He usually has a pretty good knack of finding value.

The details of this rights offering are provided in the Western Sizzlin rights offering prospectus.  In a nut shell, the Western Sizzlin rights offering provided every shareholder at the close of business on November 9, 2006 with 2 transferable subscription rights for every share they owned of the common stock.  Every 2 rights would allow you to “subscribe” to the Western Sizzlin stock offering at $7.00 per share. On November 8, 2006, Western Sizzlin’s stock was selling for $9.00 per share.

Since the rights were transferable, the could be bought and sold.  The rights traded on the OTC Bulletin Board under the symbol WSZLR.  The rights would then expire on December 8, 2006 unless the period was extended by 15 days.

Since I bought my rights for $0.52 per share, I essentially bought 600 shares of Western Sizzlin for a total price of $8.04.  Let me break that down.  To subscribe to one share of Western Sizzlin I needed 2 rights, which I bought for $0.52 a piece.  It also cost $7.00 a share for Western Sizzlin at the discounted subscription price.  Therefore, the total was $1.04  ($0.52 x 2) plus $7.00, which is equal to $8.04.

I assumed at the time that new holders of the rights would likely dump them.  This did not really happen right away.  I got impatient so I ended up kind of overpaying at $0.52 per right.  The market for the shares of Western Sizzlin drifted down in price rather dramatically at the beginning of the rights offering to where it was actually cheaper to buy the stock outright without buying the rights and subscribing to the offer.  My theory was that this might have happened because the rights might have been easier to buy into because they were more liquid at the time. My estimate at the time was that WSZL was worth somewhere between $9 and $11.  I was betting that $8.04 was an artificially cheap price and that I would soon sell it for some price closer to $9.00 per share.

The price of the rights drifted down to $0.45 shortly after I made my purchase.   A week or so later I believe the rights traded down to around $0.15.  Now, that would have been a great price to purchase rights.  As we often observe, patients usually pays off.

To excersize my rights, I had to send my broker instructions.  I believe I sent my request in at the beginning of December.  You want to make sure you give your broker enough time before the expiration date to complete the transaction.  Most brokers need at least three full day before the expiration date to complete a request.  My broker recommends a week to be on the safe side.

Part of the instructions to your broker should also involve addressing any oversubscription privilege associated with the rights.  The oversubscription privilege entitles you to subscribe for and purchase additional shares of common stock not purchased by other rights holders through their basic subscription privileges. The Western Sizzlin rights provided an oversubscription privilege.  However, the prospectus said the following:

“You will be entitled to exercise your oversubscription privilege only if you are a stockholder on the record date and exercise your basic subscription privilege in full.”

The record date was November 9th, so I figured I missed out on the oversubscription privilege.  I was also out of cash in the Special Situations Real Money Port at the time, so this was no big concern.  However, I noticed that the price of the rights trading looked as if buyers anticipated having the ability to oversubscribe.  One of the members of Contributor’s Corner, morning son, actually did request to purchase any shares that were oversubscribed even though he bought his rights after November 9th and he still received 84 shares during the oversubscription period along with the 400 shares he aquired by excersizing 800 rights. This really did not make sense to both of us unless maybe his broker transferred the rights internally. Does anyone else have any insight to shed on the oversubscription privilege process that might shed light on this apparent inconsistency?

Another strange thing occurred with my rights.  It took me much longer to receive my shares than it took another member of Contributor’s Corner to receive.  I only got my shares of Western Sizzlin on January 30, 2007.  That is well over a month after the rights offering was completed.  I think my broker caused some kind of delay and that delay caused me to miss out on some initially better prices for Western Sizzlin.  Luckily, Sardar Biglari is really pushing hard to generate value for Western Sizzlin and the price has spiked up recently.  Actually, today WSZL even reached $11.30.

Lessons

I learned quite a few lessons from this experience. I think it would have been better to be holding WSZL before the rights issue, because then I would have been given one right for free for every two shares that I held.

One thing to note, Greenblatt only recommends rights offerings for spin-offs in his book. I didn’t remember that when I first jumped in on this deal. I guess my memory of the book had faded a bit. I think I’m going to stick to spin-off rights offerings unless I develop a better understanding of recapitalization rights offerings like the Western Sizzlin one or I get the rights for a significant bargain when the market is not being efficient at pricing the rights relative to the common stock.

I discovered that I like the management of Western Sizzlin.  They are very straight-forward and Sardar Biglari appears to be a top notch value investor that might turn Western Sizzlin into a mini restaurant Berkshire Hathaway.  If the price of Western Sizzlin drops in the future, I might even add this stock as a permanent holding.  I did not keep Western Sizzlin because all the event driven activity on this stock is pretty much over now and the Special Situations Real Money Port is not the place for my long term holdings.  Maybe someday, Western Sizzlin might end up appearing in the Fat Pitch Financials Port instead, where my long term picks reside.

Full Disclosure: I no longer own shares of Western Sizzlin.