Friday, May 26, 2006

Pacific Ethanol PEIX PIPE deal,

Today Pacific Ethanol (PEIX) has just completed a PIPE (Private Investment in Public Equity) deal, that sold 5,496,583 shares to private investors for $26.38 along with warrants to buy a further 2,748,295 shares at $31.55 in six months.

This deal immediately increases shares outstanding by 17%, and would increase shares out 26% if the warrants are exercised. The stock market took a very dim view of such grievous dilution of the common equity, with shares of PEIX dropping $3.11 (8.79%) in premarket trading today.

The CEO/CFO should be fired for even thinking about using PIPE deal to raise money. PIPE deals have a well deserved reputation for being very dilutive and also as a sign that the company is desperate for cash. As such they tend to cause a rapid decline in the stock price, much worse than that caused by announcing a secondary public offering.

The company claims it will use the net proceeds of $138 million (not including exercise of the warrants) to pay for its goal of finishing five ethanol plants totaling 220 million gallons per year by the end of 2008. This is part of a larger plan to increase total capacity to 420 million gallons per year by the end of 2010.

Selling stock at 10% discount to private investors is a betrayal of the previous shareholders, it is also poor form to do a PIPE deal so soon after 2,719,072 shares were sold/registered on April 20th, 2006. That cash out sale increased shares out by about 9% and went unnoticed by a market stuck on an ethanol binge. Selling stock for 10% less than the going market price also implies that PEIX stock was trading for at least 10% more than its true value.

These dilutive financings may be a reason that Chief Operating Officer and Corporate Secretary Ryan Turner as well as Company directors Charles Bader and Kenneth Friedman resigned on April 24 2006.


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