Aastrom Cleans Up Capital Structure
By Jason Napodano, CFA
On June 27, 2012,
Aastrom Biosciences (
issued a release
announcing its intent to offer to exchange any and all outstanding
warrants to purchase the company's common stock issued in
connection with the
December 2010 public offering.
There were 10 million (no par value) five-year warrants issued in
December 2010 with a "cashless" exercise price of $3.22 per share.
These were dilutive derivatives that provided no future value to
Aastrom. In fact, they added significant potential future dilution
if exercised. The warrants contain anti-dilution provisions that
adjust the exercise price (down) if Aastrom were to issue or sell
new shares of common stock at a lower consideration. They also
contained a right that allows the holder to put the warrants back
to the company and receive cash in the event of a fundamental
transaction, such as a change in control or a sale of all or
substantially all of its assets.
The cashless exercise price, the anti-dilutive reset provision, and
the "Black-Scholes Put" made these 10 million outstanding December
2010 warrants a noticeable stain on Aastrom's capital structure.
The existence of warrants also presented the opportunity for
warrant holders to hedge with a short stock position. As of last
week, 2.66 million shares of Aastrom were held short (6.9% of the
In an effort to extinguish these warrants, Aastrom offered the
holders 1 share of common stock (at market value) for every 2
warrants. The company negotiated the exchange of 7.666666 million
warrants in return for 3.833334 million shares of common stock
prior to the announcement. Aastrom plans to commence a tender offer
for the remaining 2.333334 million warrants. If exchanged, Aastrom
would issue another 1.166667 million shares. We expect the tender
to commence in the next few days and last approximately three
Removal of these warrants should do four things. Firstly, it
removes the future dilution of net 5 million shares of common stock
(if all warrants are tendered). Secondly, it removes a meaningful
overhead with respect to a change in control. We do not believe
Aastrom is "for sale" right now, nor do we think a take-out prior
to the release of the
phase 3 REVIVE
data in 2014 makes sense. However, the opportunity for a future
change in control (exit strategy) should attract new investors to
the story. Thirdly, the removal of the anti-dilutive reset opens
the door to future unencumbered financings for the company with
these potential new investors. And finally, it removes the
incentive for the warrant holders to enter into a common stock
Impact On Our Model
As noted in the past, our valuation for Aastrom Bio is derived by
discounting our projections for future cash flow to the company.
Our model projects a net present value for Aastrom at $426 million.
Prior to the warrant exchange, as of April 30, 2012, there were
38.8 million basic shares outstanding. The fully diluted share
count includes the 10 million warrants noted above, plus 2.5
million exercisable stock options (at $3.01 per share), 4.5 million
Class-A warrants (at $2.52 per share), and 12.3 million Series B-1
non-voting convertible preferred stock (at $3.25 per share),
bringing the count to 68.1 million. That yields a target price of
$6.26 per share.
Our published target as of our most recent report (
May 1, 2012
) was $6 per share. Our DCF model can be found in the back of this
Removing the 10 million warrants from our model and adding in 5
million basic shares, the fully-diluted count drops from 68.1
million to 63.1 million. This has the impact of raising the
calculated fair-value based on our DCF model to $6.75 per share
(+$0.49 as a result of 100% exchange). We plan to update our model
for publication following the completion of the tender offer.
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