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Why Purple Innovation Stock Crashed This Morning

By Rich Smith - May 19, 2021 at 11:35AM

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Insiders are cashing out nearly 13% of company stock.

What happened

Shares of mattress maker Purple Innovation (PRPL -6.16%) tumbled out of bed Wednesday, falling nearly 10% early in the morning, and are still down 8.9% as of 11 a.m. EDT.

Its own shareholders are to blame.

Cartoon man in pajamas falls out of bed

Image source: Getty Images.

So what

Last night, Purple Innovation announced that certain "selling shareholders" -- Coliseum Capital Partners, L.P.; Coliseum Co-Invest Debt Fund, L.P.; Blackwell Partners LLC – Series A; and Coliseum Capital Co-Invest III, L.P. -- plan to sell at least 7.3 million, and potentially as many as 8.4 million shares of common stock in a secondary offering. The shareholders will price their shares at $30 each -- 7.1% below yesterday's closing price -- aiming to cash out $252 million.  

Now what

As with all such offerings, there are pluses and minuses for investors. On the plus side, because it is shareholders selling their holdings, and not the company creating and selling new stock, outside shareholders will suffer no stock dilution from this sale.

On the other hand, the company won't get any of the money from these stock sales, and the stock market is about to be flooded with up to 8.4 million tradable Purple Innovation shares -- nearly 13% of all shares outstanding.

Oh, and those shares will be selling for at least 7.1% cheaper than yesterday, depressing the value of everybody else's shares, too. No wonder investors are upset.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Purple Innovation, Inc. Stock Quote
Purple Innovation, Inc.
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