Why Avis Budget Group Stock Veered off Course Monday
Key Points
These will be sold from time to time in a public offering.
Investor fears of dilution were justified, to a degree.
Avis Budget Group (NASDAQ: CAR) is going to the well for new financing, and investors weren't happy about it. On Monday, they traded out of the stock to leave it with a nearly 9% loss that trading session. The main reason why is that the company announced it's planning a new, secondary share issue.
A hard tap on the brakes
Late Friday, Avis disclosed in a regulatory filing that it has entered into an equity distribution agreement to potentially float up to 5 million shares of its common stock. Those sales could take place from time to time, and will be effected in at-the-market offerings (i.e., sales to the public at current market prices).
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The auto rental company said it intends to use its share of the issue's proceed's for "general corporate purposes." Among other uses, this could mean debt retirement, acquisitions, and share buybacks.
The sales agents for the issue include Bank of America Securities, and Morgan Stanley. They will be compensated up to 2% of the gross sales price for the shares they transact.
Dilution worries
Avis, which has been aggressively promoting a springtime discount deal lately, is probably eager to capitalize on the recent chaos at U.S. airports to push the idea of driving as an alternative. Yet the recent fix that ensures Transportation Security Administration officials get at least their back pay is relieving the mess; meanwhile, rising oil prices mean higher pump prices. So the "airport chaos effect" might not end up benefiting Avis so much, after all.
Any secondary share issue raises fears of shareholder dilution, of course. There's some justification for that here, as Avis's current outstanding share count is a bit over 35 million. Going forward, it'll be important for the stock's investors to keep a watchful eye on how those new funds are deployed.
Bank of America is an advertising partner of Motley Fool Money. Eric Volkman 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.