I have good news and bad news for investors in LCD-panel maker LG.Philips
Good news first: The numbers should look just fine when the company releases its second-quarter earnings report Monday. The reason: LG.Philips declared yesterday that it intends to sell 53.7 million American Depositary Shares (ADS) on the public market, and founding entities LG Electronics and Philips Electronics
This comes hard on the heels of an announcement that existing shareholders will be diluted out of 8.2% of their stake in the company, and news that the individual founders of both parent companies are starting to cash out their personal interests in the investment. So one certainly hopes that Monday's numbers will be good. Otherwise, this stock could get knocked for a loop next week.
And that, of course, is the bad news -- or at least part of it. LG.Philips currently has 325.3 million shares outstanding, which, when divided up into their ADS equivalents (each ADS represents half a share), amount to 650.6 million ADS. The company's bid to raise cash to fund its ongoing capital expenditures on new factories will add 53.7 million ADS to that count.
The flotations of the parent companies' twin 13.4 million stakes (which may not all be floated; the companies are keeping their options open) will not dilute existing shareholders. On the other hand, the sizable cashing out by LG.Philips' individual founders won't do a lot to boost market confidence in the company. Worse, the public flotations aren't the end of this. Both LG and Philips have stated that they may, at the same time as their public sales, sell all or part of the 26.8 million ADS to a private investor. Moreover, they may decide to sell more than those 26.8 million shares in the private placement.
Final thought: However you choose to view LG.Philips' share issuance, get ready to hold onto that view for the long haul. The company intends to make nearly $4.4 billion in capital investments this year. Last year, it generated only $2.7 billion in cash from operations, and the new share issuance will likely raise, at most, $1.2 billion in additional cash. That still leaves a substantial shortfall in the company's cash needs for the year. Unless the company decides to add to its $1.9 billion in debt, all of this suggests that additional follow-on share offerings could be in LG.Philips' future.
Want to learn more about the investment potential of the LCD producers? Read:
- Big Deal for Little Screens
- LG.Philips' Mixed Signals
- LG.Philips Blows a Fuse
- Flat Panels Still Getting Flattened
Fool contributor Rich Smith owns no shares in any company mentioned in this article.