Jaclyn, A Profitable Going Private Transaction

For the past few months I’ve held shares of Jaclyn Inc. in the Special Situations Real Money Portfolio. Members of Fat Pitch Financials Contributor’s Corner have been tracking my research on this company since it first announced its desire to go private back in December of 2007.

Jaclyn proposed to go private by conducting a reverse split where 250 shares would become one share. This was then to be immediately followed by a forward split where each share would again become 250 shares. Holders of less than 250 shares before the split were to receive $10.21 in cash per share. The goal of this transaction was to reduce the total number of shareholders of record to less than 300, a requirement for taking a public company private. Since this was a classic going private transaction, I think it makes for good learning example. It’s been a while since I’ve detailed my experience with one of these going private transactions, so for many of my newer readers this will be informative.

I first started tracking Jaclyn after it made its initial going private transaction filing and preliminary proxy on December 21, 2007. The first thing I looked for in those filings was how the company planned on treating holders of shares in street name (shares held at a broker). Companies are not required to reduce the number of street name holders when going private, they only need to have less than 300 holders of record (where the shareholder’s name is actually on the stock certificate). The Special Situations Real Money Portfolio is a Coverdell Educational Savings Account and many of the members of Contributor’s Corner also trade in IRA accounts. These custodial accounts for tax purposes cannot take physical delivery of shares. Thankfully, Jaclyn stated in their preliminary proxy that they intend to treat stockholders holding their common stock in street name in the same manner as record holders. This alone increased the attractiveness of this opportunity, since I would be able to take advantage of this opportunity in a tax efficient way and with lower expenses (no costly stock certificate mailing needed).

Jaclyn was trading at just above $6 on December 21st. On the next trading day, December 24, 2007, shares of Jaclyn had jumped to $6.75. Given the turmoil in the credit markets and my past experience with going private transactions, I decided to not rush into this opportunity. Jaclyn was going to need credit to complete this transaction and it often seems that these companies underestimate the potential number of shares they will have to cash out. I find that the risk that the going private transaction will be cancelled is somewhat reduced if you wait until an actual vote date is announced for the proposed going private transaction. This usually occurs during the next phase of the going private transaction when the definitive proxy is filed.

There were some early positive signs that this going private transaction would go through smoothly. A comment left by member of Contributor’s Corner early on noted that the executive chairman, chairman, president, and vice chairman, who combined control 50.9% of the stock, intend to vote FOR this deal. He also noted that the company estimated it would cost approximately $1,916,000 to complete the transaction, so with $769,000 on the balance sheet at the time, Jaclyn would only need a bit over $1 million in credit. Given that their bank increased their credit line to $3 million in order to purchase shares, it looked like Jaclyn had both the votes and money to complete this going private transaction.

Then in February, Jaclyn issued another preliminary proxy. At this point I thought the rewards were starting to outweigh the risks associated with this going private transaction. The market also was thinking the same thing, and the price of shares climbed from below $7 to over $8.

Members of Contributor’s Corner were getting pretty excited about this deal. In total, there were 33 comments regarding Jaclyn in Contributor’s Corner. Some of the newer members were concerned that this deal looked too good and might contain risks that they weren’t considering. Some of the more experienced members and myself noted that it would probably take 6 months or longer for this transaction to complete. I personally use 6 months as a rule of thumb for most of these going private transactions from the date of first filing. The main risks for me at this point concerned whether Jaclyn might decide not to treat street holders the same as record holders or even decide to shelf the deal due to the market environment at the time.

Several more weeks followed before I took any action. On April 3th, the price of Jaclyn shares declined by 15%. Members of Contributor’s Corner wanted to know if anything had happened. I researched various sources and found no news. It was just Mr. Market getting nervous that there hadn’t been any news. I decided it was time to act. I put in a limit order and bought 200 shares. I got the shares for $7.65 per share, and my total cost was $1,536.95.  Normally, I would buy 249 shares in this situation, but I didn’t have enough cash in the account at the time to do that.

Then just a few days later, Jaclyn issued a definitive proxy for the going private transaction. The proxy indicated that the vote date would be May 7, 2008. This was very good news and shares of Jaclyn promptly climbed back to over $8 per share as the risk associated with this transaction went down.

The next question I started to receive was about when the last possible date would be to aquire shares and still get cashed out.  My personal rule is to buy shares at least a week before the vote date, since shares take a few days to settle and sometimes the effective date for a reverse split can occur on the same day as the shareholder vote if management is real quick. Buying shares after the vote date can be a real gamble unless the company clearly indicates what the exact effective date will be. I’ve heard a few reports of individuals not being cashed out for the Jaclyn deal because they bought too late. Thankfully, none of the members of Contributor’s Corner reported this problem (probably since I warned them).

On May 7th, positive signs started appearing. A delisting noticed appeared in the SEC filings for Jaclyn. By May 9th, most members noticed that the Jaclyn entry at their brokerage accounts changed. The ticker symbol was replaced by a number or other symbol and some even noted that their brokerage entry for Jaclyn stated “contracts”, reorg, or “for cash out $10.21/sh.” The one thing we did not see was the results of the vote, but with these small companies it can take a few days for the voting results to be reported. The company finally reported the results of the vote on May 12th in a release.

In just over two weeks after the vote date (May 22, 2008 to be exact), I received $2042 automatically in my account for the 200 shares of Jaclyn I had. In total, I held these shares for just 49 days. For my initial $1,536.95 investment, I made $505.05. This come out to a total return of 32.9%. The real performance number to focus on is that this little workout produced a 245% average annualized rate of return! Now you know why I like going private transactions so much. If you also find yourself attracted to these type of opportunities, consider joining Fat Pitch Financials Contributor’s Corner where you can review current opportunities and study past deals.

Disclosure: I no longer hold a position in Jaclyn (JCLY).

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