In a move it admits is designed "to discourage any person from becoming a 5% shareholder, thereby reducing the risk" that anyone might want to buy it, Krispy Kreme Doughnuts announced something Tuesday that it is calling a "tax asset protection plan" -- but that is for all intents and purposes a poison pill.
According to the company, Krispy Kreme currently has $240 million worth of federal "net operating loss carryforwards" (NOLs) -- accounting losses from unprofitable years past, which can be used to cancel out profits earned in future years. These are valuable assets for Krispy Kreme, which is once again profitable and would have to pay significant taxes on its profits but for the NOLs. They're also potentially valuable to any company that might want to buy Krispy Kreme and use its NOLs to offset the acquirer's own taxes.
IRS regulations, however, state that if shareholders owning 5% or more of Krispy Kreme's shares increase their ownership stake by 50% in total over a three year period, this could limit the company's ability to use its NOLs. To prevent this from happening without its prior consent, Krispy Kreme's board is granting existing shareholders "rights" to purchase 1/100 of a share of preferred stock for each common share they own, and the rights kick in upon the announcement of a potential buyer's tender offer for the company's shares. The effect of this plan is to dilute the ownership stake of an acquirer, making it more expensive to buy the company and dissuading purchases of Krispy Kreme for the purpose of acquiring its NOLs.
With the potential for an attractive buyout offer now reduced, Krispy Kreme shares finished the day down 3.21%, to $11.44 per share.
The article Krispy Kreme's New Filling: A Poison Pill originally appeared on Fool.com.Rich Smith and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.