Why I'm Thrilled By Axion's Financing Transaction
This morning Axion Power International (AXPW.OB) announced the closing of a $26 million private placement of straight common stock that was sold to institutional and individual investors lead by Special Situation Funds, Manatuck Hill Partners and Narragansett Strategic Master Fund. While some current shareholders will no doubt complain that the private placement price of $0.57 per share represents a $1.01 discount from yesterday's close and seems pretty dilutive, I'm thrilled that my fondest wish has come true a couple days before Christmas. After several months of nagging doubt over whether Axion would be able to obtain required working capital in a difficult market, its financial future is now secure for at least a couple of years. More importantly, the financing will give Axion the ability to significantly expand production capacity for the carbon electrode assemblies that are the heart and soul of its revolutionary PbC™ battery technology, thereby resolving the age old dilemma of which came first, the production capacity or the purchase contract.
To my way of thinking, the most impressive aspect of Axion's financing is sheer size. Axion had roughly 37 million common share equivalents outstanding before the placement and sold 46 million additional shares. Selling 55% of a company without surrendering control is extremely rare. The more telling fact is that the cumulative reported trading volume in Axion's stock for 2009 has only been 6.6 million shares. In other words, these private placement investors bought roughly seven times the annual trading volume in a single transaction. Nobody in his right mind buys that kind of weight with the expectation that he'll be able to resell at a profit in an illiquid market. That tells me this group of investors is taking a long-term view and swinging for the fences with Axion's other large holders. I'm delighted to have the company, even if they did get a better price.
A less obvious aspect is the level of core stockholder support that was necessary to make the transaction happen. Prior to the financing Axion had two series of preferred stock that were beneficial to holders but a serious impediment to future financing. The principal holders of those preferred shares, including me, agreed to give up the benefit of holding preferred shares if it would mean the difference between mere survival and enough cash to take Axion's business to the next level. They were joined in the sacrifice by Axion's largest common stockholder, The Quercus Trust, which apparently made important concessions of its own.
Over the course of a 30-year legal career in small company finance I've been involved in billions of dollars in private placement transactions. While public stockholders can only rely on information presented in SEC disclosure documents, private placement purchasers are given a much freer hand to conduct their own legal, technical and financial due diligence; ask questions of management; engage in frank discussions with vendors, customers and potential customers; evaluate detailed market data and forecasts; and take other steps that will help them make an informed investment decision. When transactions get this large and the lead investors are investment funds that owe a fiduciary duty to their owners, experience tells me that the due diligence investigation is only a little more intrusive than a visit to the proctologist. I'll probably never know what the new investors learned in their due diligence investigations, but I know they learned enough to justify some very big checks and that fact alone gives me substantial comfort that development and testing activities on the PbC™ battery technology are proceeding apace.
I'm no different from other investors and all things being equal I would have preferred to see a higher price for the placement. But my personal preferences have no impact on market conditions during the worst recession in 80 years and when I consider the size of the financing, the level of core shareholder support, the class of investors and the level of due diligence and negotiation that a large private placement invariably entails, I can't help but conclude that it's all good and this transaction is the beginning of a new era in Axion's corporate development. After giving effect to the private placement and the preferred stock conversions, Axion has 82.7 million common shares outstanding and a market capitalization of roughly $130 million. If its capital spending to revenue ratios are comparable to its larger peers in the lead-acid sub-sector, the capital spending facilitated by the placement should represent revenue potential of $100 to $150 million per year within 18 to 24 months. In an industry where other advanced battery developers are considered fairly valued at 2.3x 2012 revenue, Axion's common stock seems attractively priced and I would view any pull back as a buying opportunity.
DISCLOSURE: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.