It's both fish and fowl. It's a cross between a stock and a bond. It's the "frankenfish" of securities, and it's coming to a sleepy stock near you soon.
Income deposit securities are a new hybrid security that trade on the American Stock Exchange (AMEX). They are designed to pay dividends on the stock portion of the share and interest on the bond portion and are generally designed to appeal to income investors.
B&G Foods (AMEX:BGF), the maker of its eponymous pickles, Ortega Mexican food products, and Emeril Lagasse seasonings (Bam!), went public yesterday using the enhanced income security rather than through more traditional offerings. Perhaps it is the IPO market in general, or maybe it's the genetically engineered flavor of the IDS, but it wasn't a smooth sell.
Initially the pickle purveyor was to offer as many as 30 million shares to the public at a price of $14.50 to $15.50 a share. After many iterations, it was set to kick off with 20 million shares in a price range from $15.50 to $17.00 but settled for doling out 17 million shares at $15 a stub, raising $261 million. In addition to the stock, the offering represents $124 million in debt.
Loosely modeled after Canadian income trusts, income deposit securities are billed as a viable means of taking low-growth, cash-rich companies public. The IPO market tends to favor growth stocks, fast movers that could eventually garner the attention of David Gardner in Motley Fool Rule Breakers. Plodding, methodical companies have had a harder sell.
Though they've been around for about a year, IDS offerings have not been burning up the IPO market. Only one other company aside from B&G Foods features the hybrid security. Centerplate (AMEX:CVP), the trade name for Volume Services America, a leading caterer and concessionaire, was the first company to offer them. A number of planned IDS IPOs have been pulled in recent weeks, though more than a baker's dozen remain pending.
Another hurdle may be uncertainty over their tax status. Specialty Foods Group was slated to go public using IDSes, but later withdrew the offering when its auditor resigned because of uncertainty over the tax deductibility of interest paid on the debt. CIBC World Markets, which created the IDS, maintains that they cut corporate tax liability, since the company can deduct the interest it pays on the notes, while individuals pay tax on the interest at the personal, not corporate, rates.
To understand how they work, take a look at Centerplate's recent cash payment announcement. Shareholders of record will receive $0.13 for each IDS share they hold. Each IDS comprises one share of common stock and a subordinated note. The cash payment includes $0.066 in dividends and $0.064 in interest from the note. The notes have a term of 10 years, with two optional five-year extensions. The stock and notes are said to be "clipped" together because they were sold as a unit, but 90 days after the offer closes, the holders may "unclip" them and trade them separately.
Some have expressed concern that since the securities may be unclipped, it will allow for a cheap takeover if there is no "poison pill" plan in place. And because of their complexity, and the fact that companies are essentially borrowing money to pay dividends, the Securities and Exchange Commission is closely scrutinizing IDSes to determine whether they need stand-alone regulation.
Whether it's B&G's "frankenfish" income deposit security or Google's (NASDAQ:GOOG) Dutch auction model, IPOs might be getting too complicated for many investors to understand, despite their benefits over the traditional methods.
For a related Fool article, click to IPOs Getting Too Complex?
Fool contributor Rich Duprey has not received any favors from his brokerage. He does not own any of the stocks mentioned in this article.
