Secondary Deals Can Be Primary Concerns

SodaStream (Nasdaq: SODA  ) hit an all-time high on Friday, but the fizz had fizzled by yesterday. Shares of the water carbonator tumbled nearly 9% yesterday after the company announced a secondary offering.

Investors love IPOs. Secondaries? Not so much.

SodaStream will only issue 1.2 million freshly minted shares -- a dilution of just 6%, based on its recent count of 20.3 million shares outstanding. It certainly doesn't seem fair for a stock to shed more than the value of its new shares, especially when SodaStream's coffers will be roughly $50 million heavier after the sale.

But the other part of the deal is spooking investors. In all, SodaStream's secondary offering encompasses 5 million shares, with 3.8 million being sold by existing shareholders. Instead of insiders selling in drips and drabs as SodaStream approaches the end of its lock-up period, investors are facing a deluge.

Secondary offerings aren't evil. They raise money, grease underwriter relationships, and provide an orderly exit strategy for large shareholders. SodaStream's stock has more than doubled since going public at $20 five months ago, so it's more lucrative for pre-IPO investors and less pungent in terms of dilution.

SodaStream also showed momentum by barreling to new highs last week. It sold 712,000 of its namesake beverage carbonation systems in its latest quarter, and it's blown past Wall Street's profit targets in its first two quarters as a public company. Initial comparisons to Green Mountain Coffee Roasters (Nasdaq: GMCR  ) were overblown. This isn't necessarily the next Keurig. However, it's clear that SodaStream is starting to catch on with stateside soda sippers the way it has in Europe for years.

SodaStream not the only company raining on Mr. Market's parade with an unwelcome secondary offering. High-end grocer The Fresh Market (NYSE: TFM  ) took a hit two weeks ago when it announced its own secondary sale. The Fresh Market's filing with the Securities and Exchange Commission says that only certain shareholders will take part in the sale. Though it won't dilute existing shareholders, it does represent another case of insiders cashing out just months after a hot IPO.

NXP Semiconductors (Nasdaq: NXPI  ) pulled off a massive 30 million-share secondary from bailing insiders last week. Alliance Holdings (Nasdaq: AHGP  ) cleared nearly 3 million shares in its secondary last week. What do SodaStream, The Fresh Market, and NXP have in common? They're all fresh IPOs. None of them was trading a year ago.

SodaStream's fundamentals will ultimately determine whether it can bounce back. If it comes through with a third consecutive blowout quarter, investors will no longer fear that those cashing out saw something that retail investors failed to catch.

SodaStream is no Keurig, but investors can still take heart. Green Mountain shares took a hit two summers ago, after the java heavy pushed through a secondary offering. The darling stock has gone on to more than triple.

No one likes secondary offerings, but are they sell signals? Share your thoughts in the comment box below.

Green Mountain, NXP Semiconductors, SodaStream, and The Fresh Market are Motley Fool Rule Breakers picks. Motley Fool Alpha LLC has opened a short position on Green Mountain. Motley Fool Options has recommended a lurking gator position on Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a fan of diet soft drinks. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On April 05, 2011, at 12:22 PM, LQM2 wrote:

    Very thoughtful and timely article Rick, thank you. At least readers now have a yellow flag about SODA and will look at the original F1 page 28 to see how many insider shares are waiting to unload even after the 3.8m special you described.

    The jury is still out on SODA. Yeah they sold lots of units but marginal opex was higher than marginal net rev over the period you describe only proving people will buy stuff if you pump it out at a loss. The concept is only proven when there is sustained sales of profitable follow up consumables.

    My concern is insiders want to get out before investors can answer that question. I hope SODA doesn't use that follow up IPO cash and do some non-economic distribution deal to boost the short term stock price. Hope for the best, plan for the worst.

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