Income Planner

Cash Cow Centerplate provides a good starting point for our case studies. The shares in our concession and food service company--each one of which is half bond, half common stock, or income deposit security (IDS)--have also been sold off.

The dilemma is whether to continue to buy while others are dumping or to bail out and seek alternative investments. The first step is to understand the factors that may be driving the selling. Second, we want to know the reasons why we’d to buy the company and its shares all over again at the current market.                       

Two behind-the-scenes transactions may well be stoking the market’s desire to sell this high dividend paying company.

Some of the recent movement can be explained by the fact that two institutions are raising cash by selling big blocks of shares. Private equity behemoth Blackstone Group and financially challenged GE Capital have sold blocks of Centerplate shares amounting to about 18 percent of the outstanding common stock.

There are problems with Blackstone’s and GE’s sales. They owned common stock, not IDS shares, so they had to swap portions of their common stock with Centerplate for notes to make IDS shares. The conversion left them with a collective 2.5 million new IDS shares to sell on the open market.

The transactions didn’t have a dilutive effect per se because those common shares were accounted for on Centerplate’s books, but they did increase the available supply of IDS shares. Those new IDS shares were also priced below the current market price (coming in at $12 per share) for quick sale. It doesn't take an accountant or a stockbroker to do the math on the effect of 2.5 million shares hitting the market priced $2 below current share prices.

Another point of concern is that GE Capital has been intimately involved in providing credit for Centerplate’s day-to-day operations. It seems odd that one of the company's largest creditors seemingly needs to lighten its load of shares issued by a regular client.

And current CEO Jan Steinmayer is also going to receive a cut of the proceeds of the sale because she holds Blackstone partnership interests. Blackstone’s complete liquidation of its Centerplate shares has also led to the resignation of Peter Wallace from the company’s board of directors; Wallace held his seat through an arrangement with Centerplate.

It’s fair to say Blackstone and GE both have billions of dollars’ worth of debt securities draining their capital because of the credit market crunch. And both have yet to take the hefty charges many of their peers have absorbed.

The respective sales may be intended to raise needed capital to forestall troubles on their books, and Centerplate is a liquid asset on which they’ve made a pile of profits.

Do we still like the company and its coast-to-coast collection of business operations? Do we like the revenues, which have been affirmed, and the distribution they support, which continues at more than 13 percent? Do we value the security of owning debt, half of each IDS share?

The answer to all those questions is a qualified yes.

From an operational standpoint--as reflected by rising revenues, solid franchise assets and a history of paying shareholders well--we’re more than comfortable with it.

But Centerplate is on watch while we take a little more time to study its recent deals with Blackstone and GE Capital.